Download pdf - Heavybit Speaker Series: Mike Miller - From Seed to Series B

From Seed to Series BMike Miller

General Partner Liquid 2 Ventures

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My Background

• Particle Physics

• Y Combinator (S08), Cloudant, IBM

• Liquid 2 Ventures

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3

“Universal” startup trajectory?

–Graham from Cendana Capital

“Our job is to help you keep your startup alive long enough to realize its potential”

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“Universal” startup trajectory?

5Data taken from Pitchbook

Industry Trends

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Industry Trends

In truth, graduation rates vary wildly on starting population. Who did the seed, how big, when?

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–Anon (Top 5 seed fund MD)

“We find 65-70% get Series A funding, 40-45% get to Series B.”

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Why deals really get done

Quantitative

Market, Team

“Coverage” (aka FOMO)

3 Types of Investors9

“What do I have to do to get funded?”

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What you cannot control

• Your competitors

• Geopolitics and macro-trends

• VC dogma

• The outcome of any given deal (highly stochastic)

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What you can control• Product

• Team

• Revenue

• NPS

• Messaging around raise (pre-seed, seed, seed’, seed+…)

• Timing

• Optimizing the raise:

• Establish the market

• Who you pitch first, what feedback you get, etc

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Aside: Why investors care so much about Marketing

• Measure twice, cut once

• Have you really identified the core business problem that you solve?

• How easy is your sale

• Is your sale repeatable

• Cloudant example: it’s not the tech, or scaling, its the time time market. => make it faster to build new revenue

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Series A: SaaS• Pre-A Funding: $2.5MM-$3.5MM

• MRR: $100k - $250k

• ARR: $1.2MM-$2MM

• 15-20% MoM,

• 12 months in the market

• Wide range, dependent on the actual GP14

Series A: Infra• Pre-A funding: $4MM-$5MM

• “Prepare yourself for a seed prime/seed extension/seed plus/seed convertible raise…”

• $1MM - $3MM ARR

• 3-5 “marquee” customers: “thought leaders associated with New IT, devops, digital transformation and the like”

• “Beefy ACV to demonstrate you’re solving an important problem”

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Series B• Estimates vary even more wildly.

• “5x your A numbers in <2 years”

• “Be like Gitlab!”

• MRR: $500k - $1.2MM

• ARR: $6MM - $9MM

• Quantify: churn, CAC, LTV

• Team size 40-60, significant non-eng

• 2-3X YoY strong B (*)

• 5-10% MoM rev growth(*) Hmm, where does that come from?

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IMHO: To achieve Series B, prove you are going to be a “meaningful exit” for your VCs.

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https://medium.com/jme-venture-capital/meaningful-vc-exits-2bb5702776e2#.usqs1a7h6


A Typical Early Stage VC Fund

• 2/20 Fund Structure

• ~20 core investments per fund

• Goal: 3x gross returns

• Expected outcomes:

• 7 zeros, 7 money backs, 6 wins

• 5 “meaningful exits” and one “home run”18



What’s “meaningful”?

Return GoalHomerun

Money Back

Meaningful Exits

Meaningful Return = 1/3 of Fund Size

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What’s “meaningful”?

Assumes 20% ownership (Series A goal) Larger funds do have more GPs, but this is LP math

Your Goal

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Revenue Requirements

Know your asymptote. I didn’t.21



Revenue Requirements

You’ve got 5-7 years to hit ~$20MM ARR

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Growth Requirements: t2d3

Triple: 10% MoM Double: 6% MoM

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What to do if your round isn’t happening

• Be honest with yourself and investors

• Grow both revenue & margin

• Extend runway: (Burn <$100k month)

• The dirty secret of the bridge round, and how to do it

• Venture debt (Banks & Funds)

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How bridge rounds really work

• Almost everyone has to do a bridge rounds.

• Bridge rounds are always insider rounds.

• Try to secure 50% commitment from your anchor investors before picking up the phone.

• Don’t expect much/any bump in terms.

• If you are executing extremely well, you may be able to do an uncapped note with 20% discount to the next round.

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HerculesTechnologyGrowthCapital,Inc. SiliconValleyBank-TermLoan SiliconValleyBank-WCFacility GoldHillCapital2008,L.P.

LoanAmount $7,000,000 $3,000,000 $4,000,000

$3,000,000,minimumadvance

of$1,000,000.

FundsAvailability

$4MatClose,and$3.0M

availableQ12014upon

achievementof85%ofrevenue

intheBoardapproved2013

Plan.

Upto$3Mavailablefrom

closingthroughendofdraw

period,or6/30/14.

300%ofMRRxannualized

CustomerRetentionRate(CRR).

CRR=(100%-lostcustomer

percentage)x12.MRR=

monthlycontractuallyobligated

recurringrevenuefromSaaS

customers,excludinglicense,

advertising,andusagebased

processing.

$3,000,000availablethrough

March31,2014,minimum

$1,000,000advance.

MaturityDate 42months 48months,orJune1,2017 364daysfromClosing 42months

Interestonly 12months 12months 12months 6months

Amortization 30months 36months

PrincipaldueatMaturity.

OutstandingPrincipalshall

conformtoBorrowingBase

Formula,andanyamounts

exceedingFormulashallbepaid

immediately. 36months

PrepaymentPenalty

Prepaymentfeeof3%ofthe

advancedamountifprepaid

priortothefirstanniversaryof

thefunding,reducingto2%

betweenthefirstandsecond

anniversariesand1%thereafter. None None

Prepaymentfeeof3%ofthe

advancedamountifprepaid

priortothefirstanniversaryof

thefunding,reducingto2%

betweenthefirstandsecond

anniversariesand1%thereafter.

InterestRate 9.5%+1%PIKinterest

WSJPrime+2.25%,floating

(WSJcurrently3.25%)

WSJPrime+1.25%floating.

WSJPrimeiscurrently3.25% 11%fixed

FacilityFee/OtherFees1%,orupto$70k,andadue

diligencefeeof$30k

$5,000paidatclosing,$5kgood

faithdepositatstartofdue

diligence,refundableifnot

approvedbyBank.Ifapproved,

appliedtocommitmentfee,but

retainedbybankiftransaction

doesnotproceed.

$10,000paidatclosing,$10k

goodfaithdepositatstartof

duediligence,refundableifnot

approvedbyBank.Ifapproved,

appliedtocommitmentfee,but

retainedbybankiftransaction

doesnotproceed.

Finalpaymentof2%ofamount

advancedattheendofthe

amortizationperiod,orupto

$60k

WarrantCoverage

6%,or~208,955sharesor>1%

offullydiluted,pricedonthe

loweroftheSeriesBpreferred

stockpriceorthepriceofthe

nextroundoffinancing,includes

registrationandanti-dilution

rightsinparitywiththeseriesB

investors.

3%ofline,or$90,000worthof

sharesattheseriesBprice

(~45ksharesorlessthan1%of

fullydiluted).

2%oftotallineamount,or

$60,000ofsharesofSeriesB,or

approx.29,850sharesor<1%of

fullydiluted.

Uponclosing,130,000sharesof

commonstockat$0.32per

share,and43,333sharesof

commonstockpereach$1.0M

advanceat$0.32pershare.

Collateral

Perfectedfirstliensecurity

interestinallassetswitha

negativeIPpledge.

Firstlieninallcorporateassets,

excludingIP,withanegative

pledgeonIP.

Firstlieninallcorporateassets,

excludingIP,withanegative

pledgeonIP.

Blanketlienonallcorporate

assetsexcludingIP,with

negativepledgeonIP.

Covenants/ConditionsofClosing:Contingentuponclosingatleast

a$10MMseriesBequityround.

Nodiscoveryofmaterialfacts

thatwouldchangeinvestment

decisionafterduediligence,no

reps,warrantiesordisclosures

shallbefalseormisleading,

signaturesrequired,borrower

payslegalcosts.

Allcollectionswillflowthrough

acashcollateralaccountor

Lockbox,Nodiscoveryof

materialfactsthatwould

changeinvestmentdecision

afterduediligence,noreps,

warrantiesordisclosuresshall

befalseormisleading,

signaturesrequired,borrower

payslegalcosts.

Transactionmustbecompleted

45daysfromexecutionofterm

sheet.Subjecttosatisfactory

duediligence,callswithventure

capitalinvestors,satisfactory

loandocumentationandno

materialadversechangesprior

toeachadvance.

FinancialCovenants None None

MinimumTNW(TangibleNet

Worth)plusdeferredrevenueof

$2,800,000. None

ReportingRequirements

Monthlyandquarterlyfinancial

statements,includingbookings

andbillingsreports,audited

financials,BODmaterialsand

otherLenderrequests.

AnnualCPAauditedfinancials,

andCompliancecertificate

within180daysofFYE.Monthly

companyfinancialsand

compliancecertificatewithin30

days.Annualapproved

projectionsandanymaterial

projectionchanges.

AnnualCPAauditedfinancials,

andCompliancecertificate

within180daysofFYE.Monthly

ARaging,APAging,deferred

revenuereport,recurring

revenuereport,renewalrate

report,andBorrowingBase

Certificatewithin30days.

Annualapprovedprojections

andanymaterialprojection

changes.

Quarterlycompanyfinancials

andmonthlycompliance

certificate,BODslidedeck

within30daysofmeeting,

annualauditedconsolidated

financialswithin180daysof

FYE,operatingbudgets,updated

captablesasmodified.

Reportingrequirementsbecome

quarterlyuponrepaymentof

loanandexpireuponexpiration

ofthewarrant.409avaluation

reportwithin30daysof

completion,management

representation(audit)letterand

CFOquarterlychecklist.

RighttoInvestinfuturefinancing

Upto$500,000inSubsequent

EquityFinancingundersame

termsasexistinginvestorson

futureround. None None

Borrowershallgrantrighttoa)

investthelesserof$500,000or

5%ofeachofBorrower's

subsequentequityroundson

sameterms,conditionsand

pricing,orb)convertupto

$500,000intheBorrower's

subsequentequityroundonthe

sameterms,conditionsand

pricing,conversionatLenders

solediscretion.

BreakupCharge:

IntheeventBorrowerdoesnot

gothroughwithHercules

financing,Borrowertopayall

expenses,DueDiligenceCharge

andLoanFacilityFee. None None None

Expiration:April15,2013,loanclosingMay

31,2013 6/21/13 6/21/13 6/23/13

• Debt is complicated: CFO territory

• Banks: WSJ’ + 1.25-2.25%

• Funds: ~11% fixed

• Interest, warrants, right of first refusal

• Amortization, prepayment, fees, collateral, covenants, breakup charge…

Venture Debt

Venture Debt (Funds)

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-Top 5 venture debt partner

25-40%

Venture Debt (Banks)

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-Top 5 venture bank

Conclusion

• Focus on what you can control

• Revenue growth is your #1 measure of success

• If your round isn’t happening, know your options

• Lean on your existing investors for advice

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