Investor readiness: Startup fundraising by Startups.be

Investor Readiness:Startup Fundraising

1

Thibaut Claesthibaut@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

FUNDRAISINGwww.startups.be

3

Reviewed by

Patrick PolakPartner

FUNDRAISINGwww.startups.be

Frank MaenePartner

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)

FUNDRAISINGwww.startups.be

5

Alternative to fundraising

0,1 - 2%Of startups will raise from VC

FUNDRAISINGwww.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

=> INDEPENDANCYFUNDRAISINGwww.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

FUNDRAISINGwww.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

FUNDRAISINGwww.startups.be

9

Time before being profitable with 1 customer

A16ZFUNDRAISINGwww.startups.be

10A16Z

Your lost is bigger if you grow faster

11

After funding

12

Why raise funds

•Survive until profitability and sustainability

FUNDRAISINGwww.startups.be

13

Stages of investment

•Pre-seed (<50-100k€)

•Seed (100k€-1M€)

•Growth (>1M€)

FUNDRAISINGwww.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)

FUNDRAISINGwww.startups.be

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

FUNDRAISINGwww.startups.be

17

Growth (1M€)

•Business Model validated•Extension to international markets

•Serie A, B,…•Equity•Venture Capital, Business angels, governmental funds, Seed funds

FUNDRAISINGwww.startups.be

18Carlos Espinal

19Mark Suster

20

Those are indications there are no fixed rules

Thomas Wisniewski

21

Those are indications there are no fixed rules

22

Sources of capital

• FFF• Accelerator/Incubator• Business angels• Seed funds•Governmental funds• Venture Capital

FUNDRAISINGwww.startups.be

23

Sources of capital

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)

FUNDRAISINGwww.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

FUNDRAISINGwww.startups.be

26

Accelerator/Incubators

•Advices and funding•25-50k€•Equity or (convertible) loans

•Pre-seed funds (Wing, iMinds, Idealabs, Corda Campus, Leansquare, Leanfund,…)

FUNDRAISINGwww.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

FUNDRAISINGwww.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)

FUNDRAISINGwww.startups.be

29

Seed funds

•Funds writing smaller tickets (100k€-1M€)

•Specific for seed rounds

•Governmental funds, university funds and few private funds

FUNDRAISINGwww.startups.be

30

Seed funds

•Advice on technical and business problems

•Focus vs « Spray and pray »

•Goals : returns or employment (if public)

FUNDRAISINGwww.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)

FUNDRAISINGwww.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

FUNDRAISINGwww.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

FUNDRAISINGwww.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

FUNDRAISINGwww.startups.be

35

Venture Capital

•Different people in a fund• Partner (GP/MP)• Principal / Investment manager• Associate / Analyst

FUNDRAISINGwww.startups.be

36

Even by being very picky, VC’s still struggle to have decent returns => chose the best ones / the most focused

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)

FUNDRAISINGwww.startups.be

39

Road show(VC’s point of view)

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

FUNDRAISINGwww.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

FUNDRAISINGwww.startups.be

42Mark 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

FUNDRAISINGwww.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 gameFUNDRAISINGwww.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

FUNDRAISINGwww.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?

FUNDRAISINGwww.startups.be

47

How to chose investor

• Added Value• Brand• No extra costs• Fair treatment of employees• Post-transaction• Investor location• Track record• Reputation

FUNDRAISINGwww.startups.be

48

Valuation

•1st rule : there is no rule•Rule of thumbs•More mature more rational• From people/potential to metrics

FUNDRAISINGwww.startups.be

49FUNDRAISINGwww.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

FUNDRAISINGwww.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

FUNDRAISINGwww.startups.be

52

Dilution

•Pre-money• Value of your company before investors’ money

• Investment

•Post money valuation• Value of your company after investment

FUNDRAISINGwww.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%

FUNDRAISINGwww.startups.be

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%

55Dries Bruytaert

56Sarah 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

FUNDRAISINGwww.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

FUNDRAISINGwww.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!

FUNDRAISINGwww.startups.be

60

Want to get investor ready?

• Www.Startups.Be/fundraisingThibaut Claes

thibaut@startups.be@thibclaes