Investor readiness: Startup fundraising by Startups.be
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The document outlines a comprehensive guide to startup fundraising, detailing types of funding stages (pre-seed, seed, growth), sources of capital, and what investors seek in startups. It emphasizes the importance of careful preparation and relationship-building with potential investors while discussing valuation and dilution intricacies. Additionally, it highlights alternative funding methods and key factors to consider when choosing investors.
Investor readiness: Startup fundraising by Startups.be
- 2. Agenda • Startup definition • Alternative to fundraising • Why raising fund? • Stages of investment • Sources of capital • The process of fundraising • What are investors looking for? • Choose your investor • How to calculate valuation & dilution • Valuation is not the only important measure 2 FUNDRAISING www.startups.be
- 4. Startup • Company designed to grow fast • Technology enabled • High growth potential • <5 years old • <10M€ revenue • Everything else we associate with startups follows from growth (i.e. funding) 4 FUNDRAISING www.startups.be
- 5. Alternative to fundraising 0,1 - 2% Of startups will raise from VC 5 FUNDRAISING www.startups.be
- 6. Alternative to fundraising • Savings • Bootstrapping • Service • Revenue generating product • Customers pay for product development • (Grants) • Ideally combined with investment • Non-dilutive but time consuming => INDEPENDANCY 6 FUNDRAISING www.startups.be
- 7. Why raise funds •Net cash burn •Opportunity to • Develop a killer product • Earn market shares •Want to grow faster than you can grow autonomously 7 FUNDRAISING www.startups.be
- 8. Why not raise funds (The bad reasons to raise funds) •Pay wages and not grow (employee of your investors) •Sustain moribund company •Others : Time consuming & lack of focus 8 FUNDRAISING www.startups.be
- 9. Time before being profitable with 1 customer 9 A16ZFUNDRAISING www.startups.be
- 10. A16Z Your lost is bigger if you grow faster 10
- 11. 11 After funding
- 12. Why raise funds •Survive until profitability and sustainability 12 FUNDRAISING www.startups.be
- 13. Stages of investment •Pre-seed (<50-100k€) •Seed (100k€-1M€) •Growth (>1M€) 13 FUNDRAISING www.startups.be
- 14. Pre-seed (<50-100k€) •Business plan validation •MVP development •Convertible loans, subsidies, equity •FFF, Incubators/Accelerators, Business angels •High failure rate (2/3) 14 FUNDRAISING www.startups.be
- 15. 15 It’s becoming less expensive to start a startup but more expensive to grow one because need to go faster Ralf Schwartz
- 16. Seed (100k€-1M€) •Product development •First real clients’ traction and test market •Equity or convertible loan •Business angels, governemental funds, Seed funds, University funds 16 FUNDRAISING www.startups.be
- 17. Growth (1M€) •Business Model validated •Extension to international markets •Serie A, B,… •Equity •Venture Capital, Business angels, governmental funds, Seed funds 17 FUNDRAISING www.startups.be
- 19. 19Mark Suster
- 20. Those are indications there are no fixed rules 20 Thomas Wisniewski
- 21. Those are indications there are no fixed rules 21
- 22. Sources of capital • FFF • Accelerator/Incubator • Business angels • Seed funds • Governmental funds • Venture Capital 22 FUNDRAISING www.startups.be
- 24. Friends, Family and Fools •People • who know/trust you • who (sometimes) understand your business •Emotional investment, early support •Main goal is support (not return) 24 FUNDRAISING www.startups.be
- 25. Friends Family and Fools •Dangers • Mix business & personal life • Not always smart money • Be clear, they can lose their money! •Fools • Ex-colleagues • Advisors 25 FUNDRAISING www.startups.be
- 26. Accelerator/Incubators •Advices and funding •25-50k€ •Equity or (convertible) loans •Pre-seed funds (Wing, iMinds, Idealabs, Corda Campus, Leansquare, Leanfund,…) 26 FUNDRAISING www.startups.be
- 27. Business Angels • (Ex-)entrepreneurs, (ex-)executives • Advice > money • No typical ticket size (from 10-15k€) • Emotional or rational decision • Hobby project vs professional • Individuals • Main goal : return on investment 27 FUNDRAISING www.startups.be
- 28. Business Angels •How to make money? • Selling shares (few via dividends) => exit strategy •Individuals, groups or network •Difficult to find (under the radar) 28 FUNDRAISING www.startups.be
- 29. Seed funds •Funds writing smaller tickets (100k€-1M€) •Specific for seed rounds •Governmental funds, university funds and few private funds 29 FUNDRAISING www.startups.be
- 30. Seed funds •Advice on technical and business problems •Focus vs « Spray and pray » •Goals : returns or employment (if public) 30 FUNDRAISING www.startups.be
- 31. Venture Capital •Tickets > 500k€ •Sometimes VCs have a seed fund •Raise funds from LPs (Limited Partners) •Remuneration : 2% management fee & 20% carry (profits from investments) 31 FUNDRAISING www.startups.be
- 32. Venture Capital •Goal : return for their investors (LP’s) and themselves • 20% IRR at fund level • X10 or 40% IRR at deal level •On 10 deals : 1-2 will make return, 5 will be dead and 2-4 will be ok 32 FUNDRAISING www.startups.be
- 33. Venture Capital •Goal : return for their investors (LP’s) and themselves • 10X or 20% IRR •On 10 deals : 1-2 will make return, 5 will be dead and 2-4 will be ok 33 FUNDRAISING www.startups.be
- 34. Venture Capital •Really selective (they invest in 1 out of 100-1000 startups that get in touch) •Really agressive regarding growth and returns 34 FUNDRAISING www.startups.be
- 35. Venture Capital •Different people in a fund • Partner (GP/MP) • Principal / Investment manager • Associate / Analyst 35 FUNDRAISING www.startups.be
- 36. 36 Even by being very picky, VC’s still struggle to have decent returns => chose the best ones / the most focused
- 37. 37 ISAI Capital (French VC) in 2014
- 38. Fundraising process (startup’s point of view) •Preparation (1-2months) •First interests / tests (1 month – 6 weeks) •Road show (3-6 months) •Closing (2-6 weeks) 38 FUNDRAISING www.startups.be
- 39. Road show (VC’s point of view) 39
- 40. Road Show • Contacts with selected investors (industry, stage, geography, portfolio, reputation) • Setting up meetings • Feedbacks from first investors • Adaptation • Contact with new investors • Meetings with old and new investors • Follow-ons 40 FUNDRAISING www.startups.be
- 41. Closing •Term sheet • First proposition •Due diligence • Verification of all legal/commercial/financial/ technical/HR documents • Contact with last clients •Shareholder agreement 41 FUNDRAISING www.startups.be
- 42. 42 Mark Suster
- 43. What investors are looking for • People • Smart, ambitious, vision • Reliable • Achieved • Product • Innovation • Market • Big • They/you understand • New or to be disrupted • Dynamics of it 43 FUNDRAISING www.startups.be
- 44. What investors are looking for •Competition •Business model • Revenue model & margins • Strategy • Value proposition vs Perceived Value (validated?) •Traction (metrics&unit economics) / growth It’s a figures/money game 44 FUNDRAISING www.startups.be
- 45. How to chose investor • Your ideal investor? • Do you want to work with her/him the next 5-10 years? • Role of investor • Help recruit • Strategic decision • Help next rounds • Available and empathic 45 FUNDRAISING www.startups.be
- 46. How to chose investor • Make your own due diligence • Current portfolio • Ticket size • Fund life time • Return for LP’s (past and current) • Geographic, industry • Team & network • Follow-on investments? • Their references? 46 FUNDRAISING www.startups.be
- 47. How to chose investor • Added Value • Brand • No extra costs • Fair treatment of employees • Post-transaction • Investor location • Track record • Reputation 47 FUNDRAISING www.startups.be
- 48. Valuation •1st rule : there is no rule •Rule of thumbs •More mature more rational • From people/potential to metrics 48 FUNDRAISING www.startups.be
- 50. Valuation •(Net) Burn rate for the next 18-24 months • Achieve milestones for next round •Investors want to have 20-35% of the company to have substantial returns/ impact/attention •Multiples regarding your industry / your company 50 FUNDRAISING www.startups.be
- 51. Valuation •Prefered shares & exits influence •Prefered shares with 6-9% dividend •Participating or not •Milestones •Exit value •Timing => It’s a balancing act. You give, they give. Not simple 51 FUNDRAISING www.startups.be
- 52. Dilution •Pre-money • Value of your company before investors’ money •Investment •Post money valuation • Value of your company after investment 52 FUNDRAISING www.startups.be
- 53. Dilution •Example : • Company worth 1M€ before investment (Pre) • Investors invest 250k€ • Post Money valuation : 1M€ + 250k€ = 1,25M€ • Ownership after investment : • Founders : 1M€/1.25M€ = 80% • Investors : 0.25M€/1.25M€ = 20% 53 FUNDRAISING www.startups.be
- 54. 54 Pre-seed Angel round/ Seed Round Shareholder Shares Percentage Shareholder Shares Percentage Uncle 50 5,00% Uncle 50 4,17% Founder 1 250 25,00% Founder 1 250 20,83% Founder 2 250 25,00% Founder 2 250 20,83% Founder 3 250 25,00% Founder 3 250 20,83% Option pool 200 20,00% Option pool 200 16,67% TOTAL 1000 100% Angel 200 16,67% TOTAL 1200 100% Pre-money 1.000.000,00 € Angel invests 200.000,00 € Post Money 1.200.000,00 € % angel 16,67%
- 56. 56 Sarah Frier
- 57. Term sheet •Pre-agreement of investor’s before due diligence • Expenses are paid by the startup •Non-binding contract but 1-2month(s) exclusivity 57 FUNDRAISING www.startups.be
- 58. Attention points in Term sheet •Valuation •Voting rights •Board members/seats •Class of stocks (prefered vs common) • 6-8% prefered dividends •Employee pool •Warranties 58 FUNDRAISING www.startups.be
- 59. Attention points in Term sheet •Anti-dilution protection •Good leaver / Bad leaver •Vesting •Preemptive rights / Rights of first offer •Drag along / Tag along =>Make sure that all (!) items are in the TS! 59 FUNDRAISING www.startups.be
- 60. Want to get investor ready? • Www.Startups.Be/fundraising 60 Thibaut Claes [email protected] @thibclaes
Editor's Notes
- #33: 15-20% IRR on fund level; this requires > 40% IRR per company on average to cover costs and failures. (if here is no chance based upon our analysis that VCs cannot make 5x on their investment (i.e.: 2 million investment, so 10 million exit and a 30 million company valuation at exit) they will not invest! How many exits are there (in the Benelux) that have exit > 30 million? ……..
- #51: Patrick Polak Valuation is in essence a reflection of (future) profitability. This includes components as growth, risk and time. i.e. a pre-revenue seed investment with a huge market potential: no validation, super opportunity: risk versus upward. Or a stable 0-growth firm with a 25% EBITDA margin in a stable market: low risk versus a low upward potential (no growth, no improvement in EBITDA margin). The more validation of the value proposition, the less risks, the higher valuations, and better terms and conditions (no Preference shares etc.) Entrepreneurs always (and rightly so) think about the upside, the opportunity. The investors think in risk/returns.
- #52: Patrick Polak VC’s can structure ANY deal. It is way more complex than “1 million for 25%”= post money 4 million. My advice is: always make a calculation on distributions to shareholders I certain conditions: i.e. exit value at 5 million, 10 million, 15 million, etc. (and sometimes also with a time factor: 4 years, 7 years, 9 years): i.e. with preference shares a VC with 25% stake can have 80% of the distributions if the exit is after 10 years with a “low” valuation….. and still make 12% IRR…..