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Investor Readiness: Startup Fundraising 1 Thibaut Claes thibaut@startu ps.be

Investor readiness: Startup fundraising by Startups.be

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Page 1: Investor readiness: Startup fundraising by Startups.be

Investor Readiness:Startup Fundraising

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Thibaut [email protected]

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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

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Reviewed by

Patrick PolakPartner

FUNDRAISINGwww.startups.be

Frank MaenePartner

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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

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Alternative to fundraising

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

FUNDRAISINGwww.startups.be

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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

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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

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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

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Time before being profitable with 1 customer

A16ZFUNDRAISINGwww.startups.be

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Your lost is bigger if you grow faster

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After funding

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Why raise funds

•Survive until profitability and sustainability

FUNDRAISINGwww.startups.be

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Stages of investment

•Pre-seed (<50-100k€)

•Seed (100k€-1M€)

•Growth (>1M€)

FUNDRAISINGwww.startups.be

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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

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It’s becoming less expensive to start a startup but more expensive to grow one because need to go faster

Ralf Schwartz

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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

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Growth (1M€)

•Business Model validated•Extension to international markets

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

FUNDRAISINGwww.startups.be

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18Carlos Espinal

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19Mark Suster

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Those are indications there are no fixed rules

Thomas Wisniewski

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Those are indications there are no fixed rules

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Sources of capital

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

FUNDRAISINGwww.startups.be

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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

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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

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Accelerator/Incubators

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

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

FUNDRAISINGwww.startups.be

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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

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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

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Seed funds

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

•Specific for seed rounds

•Governmental funds, university funds and few private funds

FUNDRAISINGwww.startups.be

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Seed funds

•Advice on technical and business problems

•Focus vs « Spray and pray »

•Goals : returns or employment (if public)

FUNDRAISINGwww.startups.be

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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

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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

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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

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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

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Venture Capital

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

FUNDRAISINGwww.startups.be

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

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ISAI Capital (French VC) in 2014

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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

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Road show(VC’s point of view)

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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

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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

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42Mark Suster

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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

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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

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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

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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

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How to chose investor

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

FUNDRAISINGwww.startups.be

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Valuation

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

FUNDRAISINGwww.startups.be

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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

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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

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Dilution

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

• Investment

•Post money valuation• Value of your company after investment

FUNDRAISINGwww.startups.be

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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

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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%

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55Dries Bruytaert

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56Sarah Frier

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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

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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

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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

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Want to get investor ready?

• Www.Startups.Be/fundraisingThibaut Claes

[email protected]@thibclaes