US Investors: From Early Stage to Series A

David ShenLaunch CapitalOctober 2014

SEED FUNDING TRENDS

Startups are Raising a LOT More Before Series A

Source: https://www.cbinsights.com/blog/series-a-seed-funding-companies/

Startups are Raising a LOT More Before Series A

Source: https://www.cbinsights.com/blog/series-a-seed-funding-companies/

Funding round $ vs. Runway

• Too many raising not enough

– Seed rounds going $1+M, upwards of $2-3M+

• Acquiring customers take too long

– Consumers deluged by apps; B2B sales cycles taking longer – 12+ months

• Takes 24-30 months to develop an idea.

– Get to breakeven or metrics worthy of the next round.

Early Stage Bubble

Source: https://twitter.com/DanielleMorrill/status/493255099846647808/photo/1

Early Stage Bubble

• Bubble exists in early stage only

• Risk vs. reward does not match– Estimate 1 in 20-40+ for

hit, most die

• Early stage VC doesn’t have great incentives with this kind of data

• Angels can still make some money if valuation is good enough but VERY hard to pick

• Acquihires are a great way to lose money –Entrepreneurs reap most of the winnings

Source: http://berkerynoyes.com/publication/trends/online/2014H.aspx

ANGELS

What Do Angels Invest In?

• Internet still dominates % of deals and dollars invested.

• Healthcare has less than half of deals of Internet but nearly same amount of money invested!

Source: http://www.svb.com/halo-report-q2-2014-infographic/

Where Do Angels Live and Invest?

Source: http://www.svb.com/halo-report-q2-2014-infographic/

About Angels

• High net worth individuals– Can be family offices

• Except in CA, NYC, Boston, angels:– Can be very conservative.

– May require revenue and traction

– Are not used to investing in startups with less defined business models

• Angels can invest in all amounts, ranging from 25K to millions.

Reasons for Investing

• Make money!

• Fame

• Supporting something they are passionate about

• Relationship

– Friends and family?

– Worked together before?

• Building a portfolio to raise a fund with

What They Like

• You!

• “Show me the product”

• Normal investor requirements like traction, business model, revenue.

CROWDFUNDING AND NORMAL NOT SO RICH PEOPLE

Rise of CrowdfundingAllows more access to startups which were previously only seen by those in the right networks

Mostly you must be accredited to participate. Some are allowing non-accredited investors under the not-entirely-implemented JOBS Act.

Crowdfunding Part II: Kickstarter/Indiegogo/Medstartr

JOBS Act• July 2013 Title II General Solicitation came into effect

– You can solicit funds publicly.– Many rules to follow. If you break them, you could be banned from

fund raising for a year.– Only accredited investors can invest– http://www.forbes.com/sites/chancebarnett/2013/09/23/the-

crowdfunders-guide-to-general-solicitation-title-ii-of-the-jobs-act/

• Title III Crowdfunding – get investment from non-accredited investors– Limits to what non-accredited investors can invest each year.– Many information disclosure rules for companies– http://www.forbes.com/sites/chancebarnett/2013/10/23/sec-jobs-

act-title-iii-investment-being-democratized-moving-online/– However Title III is still being discussed:– http://www.crowdfundinsider.com/2014/05/40308-crowdfunding-

bell-tolls-title-iii/

ACCELERATORS/INCUBATORS

Accelerators vs. Incubators

• Accelerators– Join up for small investment, often at low valuation– Get lots of help: mentorship, advice– Demo Day for investor intros

• Incubator– Similar to accelerator– Often ideas are generated internally – Ownership/investment vary from accelerators

• Generally startups will all sit together in a single space.

Rise of the Accelerator

422 Accelerators in the US

Souce: http://www.f6s.com/programs/united-states?type=accelerator

Accelerator/Incubator Pros and Cons

• Pros– Get lots of help– Meet/interact with other startups– Exposure to investors at Demo Day– Valuation may jump simply because you graduated

from a certain accelerator/incubator

• Cons– Giving up that much ownership may not be acceptable

to you– You may be forced to move to the accelerator’s

location

Accelerator Trend

• Seeing more startups go through more than one accelerator program

– Ex. 500startups and Ycombinator

• Giving up ownership in exchange for brand association and exposure to more investors

• Valuations typically get raised when going through 2 programs, especially if the final one is YCombinator.

SEED/MICRO VC (OR SEED+) FUNDS

135+ Micro VCs (aka Seed Funds)212 Capital Partners500 StartupsAccelerator VenturesAdvancit CapitalA-GradeAIB Seed Capital FundAmplify PartnersArcus VenturesBaroda VenturesBase VenturesBaseline VenturesBee PartnersBlume VenturesBOLDstart VenturesBoston Seed CapitalBullpen CapitalCaixa Capital RiscChicago VenturesCincyTechCollaborative FundCommonAngelsConnect VenturesContour Venture PartnersCostanoa Venture CapitalCowboy VenturesCrossCut VenturesCrunchFundCue Ball CapitalCultivation CapitalDace Ventures

Data Point CapitalDeep Fork CapitalDetroit Venture PartnersDorm Room FundDouble M PartnersDraper AssociatesDundee Venture CapitalEarlybird Venture CapitalElaia PartnersENIAC VenturesExpansion VCFelicis VenturesFenox Venture Capitalff Venture CapitalFireStarter FundFirst Step FundFloodgateFlywheel VenturesForerunner VenturesFortify.vcFounder CollectiveFounders Co-opFreestyle CapitalGolden Gate VenturesGolden Venture PartnersGreat Oaks Venture CapitalHarrison MetalHigh Line Venture PartnersHigh Peaks Venture PartnersHyde Park Venture Partners

IA VenturesIllinoisVENTURESIlluminate VenturesInitial CapitalInitialized CapitalInventus Capital PartnersInvereadyK9 VenturesKae CapitalKapor CapitalKaszek VenturesKepha PartnersKibo VenturesLaunchCapitalLearn CapitalLerer VenturesLifeline VenturesLool VenturesLowercase CapitalLudlow VenturesMentorTech VenturesMerus CapitalMESA+Metamorphic VenturesMHS CapitalMidvenMorado Venture PartnersMoscow Seed FundMucker CapitalNeu Venture Capital

NewSchools Venture FundNextView VenturesOCA VenturesOkapi Venture CapitalO’Reilly AlphaTech VenturesPassion CapitalPivotNorth CapitalPlug and Play VenturesPoint Judith CapitalPoint Nine CapitalPROfounders CapitalPromus VenturesQuest Venture PartnersRaptor VenturesReal VenturesRed Dot VenturesRed Swan VenturesResolute.vcRincon Venture PartnersRomulus CapitalRothenberg VenturesS3 VenturesSarsia SeedScout VenturesSEED CapitalSherpa VenturesSiemer VenturesSignia Venture PartnersSilverton PartnersSK Ventures

Social LeverageSoftTech VCSOSventuresSubtraction CapitalSV AngelTEEC Angel FundTribeca Venture PartnersTugboat VenturesUnitus Seed FundValar VenturesVast VenturesVegasTech FundVenture51Version One VenturesXG Ventures

Source: https://www.cbinsights.com/blog/top-micro-venture-capital-firms/

Top Seed/Micro VC 2011-2014

Source: https://www.cbinsights.com/blog/top-micro-venture-capital-firms/

Which Micro VCs Yield the Biggest Series A Rounds?

Source: https://www.cbinsights.com/blog/micro-vcs-seed-series-a/

Which Get to Series A the Fastest?

Source: https://www.cbinsights.com/blog/micro-vcs-seed-series-a/

Seed/Micro VC

• The range of funds raised varies from $5M to $100M.• Usually are first or second money in.• New funds are OK with notes. Older funds only do equity

rounds.• Older, larger funds almost always demand traction metrics,

ie. At least $25K-50K/month• Have ownership strategies, ie. Must capture 10% at seed

round.• Larger funds tend to be less sensitive to valuation as long as

their ownership rule is met.• Larger Seed/Micro VC will have raised follow-on funds• Looking for multi-billions in market size.

Seed/Micro VC Pros and Cons

• Pros– Often have huge portfolios to network and do

business with– Can help you find money for the next round– Can support you if you need bridging– Less signaling issues if they do not follow on– Have a lot of experience to help you

• Cons– Your metrics for success can change once a

professional VC is involved, even at seed– Huge portfolios can mean no time to help

LARGE VC DOING SEED

Top 20 Most Active Seed 2013

If you look at everyone who is doing seed, it includes many big VCs

Most Active Seed Investors 2013(includes Seed + VC doing seed)

Source: https://www.cbinsights.com/blog/2013-seed-venture-capital-investors/

Big VC Doing Seed

• Started when a ton of innovation began during this technology cycle.

• Didn’t want to miss out on early look at big opportunities.

• Started allocating funds to do seed.• Many pulled back because they are not staffed to

manage so many investments.– LPs expect management of their bigger investments

• Amount of funding can vary from 50K, to 250K, to leading the whole seed round.

Pros and Cons of Seed Funds from VCs

• Pros

– Provides potential for future funding

– Often is a large sum of money

– Access to VC’s personnel for help

• Cons

– Signalling issue if VC does not participate in next round or leads next round

– Actual help may vary greatly, often is zero

STRATEGICS/CORPORATIONS INVESTING

Corp VC Sees 38% Growth Between 2010 and 2013

Source: https://www.cbinsights.com/blog/strategic-intent-corporate-venture-capital/

Corporate VC Goals

• Extend/Enhance Corporate capability– Sysco Ventures – invests in food related startups

• ROI– Hearst Ventures – as long as they are making

money, parent doesn’t care what they invest in

• Strategic learning

• Foster innovation in their industry– Intel Capital – leads to more sales in computers

and their chips

Corporate VC Pros/Cons

• Pros

– access to information, help, and partnerships

– Provides potential future exit

• Cons

– May limit your exit options

– Could limit who invests in you later

• Ex. Competitive corporate VC may not invest

• Signaling issues if previous corporate VC doesn’t re-invest

SERIES A FUNDS

Series A

• First round after the seed round.

• Typically can be $4M-$10M

– Recent years Series A funds struggled with funding lower than $4M

– Want/need to put more money to work

• Try for 20%-33% of the company at this funding.

There are a LOT of Series A Options.406 Ventures2B Angels500 StartupsABS Capital PartnersAccel PartnersAccess IndustriesAccess Venture PartnersAeris CapitalAlsop Louie PartnersAndreessen HorowitzARC Angel FundAtlantic BridgeAtlas VentureAugust CapitalAuriga PartnersAustin VenturesAvalon VenturesBain Capital VenturesBalderton CapitalBanexi VenturesBarwell PlcBaseline VenturesBattery VenturesBayern KapitalBen Franklin Technology Partners of Northeast PennsylvaniaBenchmarkBertelsmann Digital Media InvestmentsBessemer Venture PartnersBlumberg CapitalBorealis VenturesBoston Seed CapitalBright CapitalBullpen CapitalBusiness Development Bank of CanadaCambridge Capital GroupCanaan Partners

Cardinal PartnersCarmel VenturesCatamount VenturesCayuga Venture FundCedar FundCharles River VenturesContour Venture PartnersCrosscut VenturesCrosslink CapitalCrown Venture FundCrunchFundCultivation CapitalData CollectiveDCMDeep Fork CapitalDell VenturesDelta PartnersDetroit Venture PartnersDigital GarageDN CapitalDraper AssociatesDraper Fisher Jurvetson (DFJ)DreamIt VenturesEarlybird Venture CapitalEaston CapitalEdison VenturesElaia PartnersEmergence CapitalEnergy Technology VentureseVenture Capital PartnersExport Development CanadaFairhaven Capital PartnersFelicis VenturesFF Angelsff Venture CapitalFidelity Biosciences

First Round CapitalFirstMark CapitalFLOODGATEFlybridge Capital PartnersFM ManagementFounder CollectiveFounder's Co-opFoundry GroupFreestyle CapitalGeneral Catalyst PartnersGenesis PartnersGlengary VenturesGlobespan Capital PartnersGoogle VenturesGrandBanks CapitalGreat Oaks Venture CapitalGreycroft PartnersGreylock PartnersGreylock Partners IsraelGrotech VenturesGRP PartnersHallett CapitalHigh-Tech GruenderfondsHighland Capital PartnersI2A FundIA VenturesIDEA Fund PartnersIDG Capital PartnersIDG VenturesIDG Ventures IndiaImperial InnovationsIndian Angel NetworkInfocomm InvestmentsIngenious VenturesInnovation VenturesiNovia Capital

Insight Venture PartnersIntel CapitalInterWest PartnersInvesco PerpetualIris CapitalJAFCOJafco VenturesJavelin Venture PartnersKapor CapitalKhosla VenturesKima VenturesKinetic VenturesKite VenturesKleiner Perkins Caufield & ByersLaunch CapitalLearn Capital Venture PartnersLerer VenturesLife Sciences Greenhouse of PennsylvaniaLightspeed Venture PartnersLongworth Venture Partnerslool venturesLudlow VenturesLumira CapitalLux CapitalMadrona Venture GroupMagma Venture PartnersMangrove Capital PartnersMatrix PartnersMayfield FundMentorTech VenturesMercury FundMeritech Capital PartnersMHS CapitalMitsubishi UFJ CapitalMizuho Venture Capital

Monashees CapitalNEW Capital FundNew Enterprise AssociatesNew Markets Venture PartnersNewSchools Venture FundNextstage CapitalNextView VenturesNexus Venture PartnersNorth Coast Angel FundNorth Coast Technology InvestorsNorthgate CapitalNorthwater CapitalNorthwest Energy AngelsNorwest Venture PartnersOctopus InvestmentsOhio Tech Angel Fund IIIOMERS VenturesONSET VenturesOpen Prairie VenturesORIX VenturesOsage VenturesPangaea VenturesParkwalk Advisors LtdPartners Innovation FundPassion CapitalPelion Venture PartnersPiton CapitalPoint Judith CapitalPoint Nine CapitalPolaris PartnersPrincipia SGRPROfounders CapitalQED InvestorsQualcomm VenturesRand Capital

Redpoint VenturesRelay VenturesRembrandt Venture PartnersRho CanadaRibbit CapitalRobin Hood VenturesRoche Venture FundRockPort Capital PartnersRothenberg VenturesRRE VenturesRuna CapitalSAP VenturesSBD Global FundSchooner CapitalScottish Enterprise, Investment ArmSequoia CapitalShasta VenturesSiemer VenturesSierra VenturesSilicon Valley BankSJF VenturesSofinnova VenturesSoftBankSoftbank Ventures KoreaSoftTech VCSouthern Cross Venture PartnersSpark CapitalSpectrum EquityStage 1 VenturesStorm VenturesSummit PartnersSunstone CapitalSV AngelT-VentureTech Coast AngelsTekton VenturesThe Social+Capital Partnership

Source: http://www.daniellemorrill.com/2013/04/119-investors-actively-doing-series-a-deals-since-march-1st/

Seed is the new Series A?

• As mentioned before, seed rounds are approaching normal series A levels.

Series A Crunch is Real:Explosion of Seed Startups…

2009: 472

2010: 770

2011: 1065

2012: 1749

Source: https://www.cbinsights.com/blog/seed-investing-report

…Leads to Not Enough Series As

2009: 418

2010: 515

2011: 703

2012: 692

…leading to more bridge rounds or death of startups who can’t land their A… Number of Series A VCs has not increased; if anything it has decreased.

Source: https://www.cbinsights.com/blog/seed-investing-report

2013 Estimated “Series A Crunch”

45

Notes:

• Entire venture industry is now shifting due to this crunch.

• Companies raising much larger seed investment rounds to extend runway

• Seed investors forced to support companies longer

• Seed investors forced to proactively shut down underperforming cos.

Source: CrunchBase

Funding Gap 177 113 336 635 1681

799 821

1205

1558

2510

622 708869 923

829

0

500

1000

1500

2000

2500

3000

2009 2010 2011 2012 2013 YTD

Pending Series A Funding Gap

Seed + Angel Series A

Series A Funds

• Want startups ready to scale.

– Proven product/market fit

– Must have your metrics prepared well

– Marketing channels researched, discovered, costs known. Must be scalable channels.

• Search for 10X return potential

• Market size in the multi-billions

Some Current Series A Requirements

• Ecommerce - $1M/month

• Consumer – 50K/DAUs

• B2B SaaS – $1-1.5M Annual Run Rate

• The “bars” are rising – minimal requirements are getting harder

– Too many startups coming up for series A, filters keep getting more difficult to pass

HOW TO MEET INVESTORS?

How to Meet Investors?

• Network with entrepreneurs– Ask for intros to their investors

– Referrals are best

• Attend conferences– Premoney, Post-Seed, TC Disrupt

• Angellist– Send messages

– Look for similar startups and generate target list of investors

How to Meet Investors?

• Reaching out through website email addresses can work

– Associates are often tasked with looking at emails

– Don’t be surprised if no one answers your email

• Join an accelerator

– Demo days are some of the best ways to meet investors

HOW TO SELECT INVESTORS

How to Select Investors?

• Research them

– What investments have they done in the past? Anything competitive to you?

– How are they helpful?

• Call references

– Ask for references in entrepreneurs who have worked with them before

– Are they *really* helpful?

How to Select Investors?

• What are their investment criteria?

– Do you fit their criteria? If not it may be a waste of a meeting

• Are they investing actively now?

• For more traditional venture funds:

– How young is the current fund? Younger the better.

– Have they made an investment in the last 6 months?

– Are they busy fund raising?

– Are they only re-investing in their current portfolio?

How to Select Investors?

• Alignment in vision

– Do you and he agree on the direction/vision for the company?

• Alignment in personality

– Would you be OK spending a lot of time with this person (because you will be)?

• Alignment in style

– Would you be OK working with this person?

INTERNATIONAL STARTUPS

Raising Money for International Startups

• If you are based internationally, it can be very hard to raise money from US investors

– US investors like to be close to their startups

– Fund charters may limit/prevent investment outside US

– Tax laws discourage US investors

– Fear of bad things outside their normal areas of influence

Move to the US?

• First try: move the parent corporation to a DE corporation

– International company owned by US DE parent corporation

– Investment from US goes into DE corporation

– This is better than being fully international, but if you don’t move here physically, it still may limit investment

Move to the US?

• Second: Move some of your team to the US– This is better from an investor standpoint.

– But if your business is still overseas, can you effectively do business while over here?

• Third: Move some/all team to US, do business in the US– This is the best case, even if initially most of your

business is back overseas

– Investors see that you are serious about being in the US and staying here.

Accelerators

• 500startups is well known in its international strategy.

– Consider applying to 500startups where you will meet investors who have invested in international startups in the past.

QUESTIONS? COMMENTS?