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7/31/2019 Founder Institute - Fundraising-1
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Founder Institute
Fundraising
May 23, 2012
Jim ShermanFounder & Chairman, ShermansTravel Media
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1. The Process
2. The Story
3. Deal Terms
4. Lessons Learned
Fundraising for your new business
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The fundraising process is daunting, time-consuming, and
tiring. Are you ready?
What You Need
Persistence The process & the substance
Typically 6 months or more A lot of networking
Business contacts Alumni contacts Conferences
Cold Calls A dedicated full-time job Management presentation
Phone discussion first (often) Innumerable follow-up calls Term sheet negotiations
Due diligence Legal & closing
Prospecting
Presenting
Term Sheet
Deal Close
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A myriad of money sources exist for prospecting more than
ever before.
- Angel List, New York Angels, CommonAngels, The Angels Forum, TheWashington Dinner Club
- Events/Conferences networking opportunities- Crowd Sourcing (Kickstarter)- Customers- Friends, Family & Fools(!)- Start-up Incubators- Alumni Boards/V.C. Groups
V.C.s & Private Equity- Top tier funds- Lesser known
Strategics/Corporations
Narrow down by industry focus, size ofdeal ($1-3M, $3-10M, $10M+), location,stage of investment (seed, venture,growth), etc.
Seed Round
Series A or B
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Getting your foot in the door is no different than an actor
getting his/her audition in front of a talent scout.
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To open doors, you need to start the process of raising
capital 6 months before you need it.
How much? Focus on tangible results/milestones for phase I Assess the amount you need (development cost, marketing/business
development, hardware/systems, legal, etc.) and tack on 25%
Timing?Seed Round
If multiple investors, may have a longer term window of availability (1year?)
0-3 months
Networking
Initial outreach
Pitch meetings
3-6 months
Second meetings
Term sheet
Closing
In general
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Finding the right investor is as important as finding themoney.
Seed Round Start by relationship building; provide updates; ask for money later
after demonstrating progress
Sizing up a professional investor Industry experience Portfolio experience Support services beyond money General reputation
Likely board partner who Outreach to at least 3 CEOs they backed
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After determining whom to approach, the story needs to be
persuasive and you need to be inspiring.
1. The Team Qualifications (industry experience; education)2. The Idea supporting data to validate
3. The Passion presentation style/communications4. The Business Model customers and pricing metrics; marketing data;
industry comps; etc.
The Team(include yourself as
entrepreneur)
The Business
Model
The Passion
The Idea
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Rejection is par for the course but understand key areas of
weakness.
Typical reasons to say No1. Inadequate business plan or idea
Fill a need that no one is doing or find something that can be donebetter
Innovation vs. Imitation2. Inexperienced team3. Business domain is high risk4. Opportunity is not large enough or growing5. No sustainable competitive advantage6. Financial projections appear flawed
Too conservative or too optimistic Need $20M revenue, at minimum, in five years, but not $2B
Common Answer: Keep in touch1. Show a finished product, some customer validation, commerical
partnerships, etc.2. V.C.s often say this; for seed investors you may want to propose this
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Lets say youve enticed one or more potential investors
Negotiating good deal terms is both art and science/math.
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Nothing will generate better deal terms than a competitive
process and/or being in a hot industry.
Founder/Owner as lead negotiator
Hire a banker? Outreach Aid with investment memorandum Warm up prospectus Run a professional process Advise on terms Part psychologist
SeedRound
$2M +
$250K - $2M
Market willset price
You can setprice?
Giving up equity in exchange for $General Rule: 20 30% per round
(5% to 40%)Thus, within two rounds, likely lose control
SeriesA or B
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The key deal terms include valuation, structure, and control.
You cant have it all (unless youre Mark Zuckerberg)!
Deal Structure As valuation goes up, investors will want more protections But you may remain in control of the board (board control/Equity vs. economics/proceeds
share)
Protections include:
1. Multiple liquidation preference in the waterfall- Standard is 1x vs. 1.5x, 2x, or 3x
2. Participation- Participating preferences mean investors get their liquidation preferences
AND their % of whats left (equity portion)3. Cumulative Dividends
- Some preferred shares have a cumulative dividend (e.g. 10%)- Some have a cumulative dividend that converts info shares at a fixed price- Some have both
4. Ratchets- Weighted average anti-dilution protection (protects against a down round)
- Full ratchet all shares reset to the new price
Bells &Whistles
A CleanDeal
vs.
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A clean deal may be best for the entrepreneur, but there are
risks.High valuation/
Bubble but ugly
terms/structure(retain control)
Lower valuation &clean deal (but losecontrol of the board)
vs.
If hit a downturn
Much harder to raise follow on rounds;preference stack; need to recut cap table
Misaligned interests in potential sale;requires high price
Pigs get fat but hogs get slaughtered.- Dont get greedy
Miss the numbers, youre out
(especially after honeymoon period)
Fewer impediments on future capitalraised with a clean deal, even if adown round
Moral of the Story:choose a valuation that is sustainable over the whole lifecycle of the company
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Lessons Learned
Strategics take longer but better deal (avoid right of 1st refusal) A smart banker or financial advisor is critical (esp. if its your first deal) Look forward at the control economics (amount raised, quality of team,
progress made, and the idea/market appeal)
Push back hard on participating preferred Engage good lawyer, especially in regards to board seats and minority
shareholder rights Tough to raise money without proven revenue (and tough to entice a
good banker) Evaluate exactly what you need and ask for the right amount (articulate
the near term) CEOs are always in a fundraising mode Choose your investors carefully
Stay positive. Stay focused.
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Thank you!
ShermansTravel Media
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