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

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    24-Jan-2018

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  • From Seed to Series BMike Miller

    General Partner Liquid 2 Ventures

    1

  • My Background

    Particle Physics

    Y Combinator (S08), Cloudant, IBM

    Liquid 2 Ventures

    2

  • 3

    Universal startup trajectory?

  • Graham from Cendana Capital

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

    4

  • Universal startup trajectory?

    5Data taken from Pitchbook

  • Industry Trends

    6

  • Industry Trends

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

    7

  • Anon (Top 5 seed fund MD)

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

    8

  • Why deals really get done

    Quantitative

    Market, Team

    Coverage (aka FOMO)

    3 Types of Investors9

  • What do I have to do to get funded?

    10

  • What you cannot control

    Your competitors

    Geopolitics and macro-trends

    VC dogma

    The outcome of any given deal (highly stochastic)

    11

  • 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

    12

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

    13

  • 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 youre solving an important problem

    15

  • Series B Estimates vary even more wildly.

    5x your A numbers in

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

    17

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

    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 run18

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

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

  • Whats meaningful?

    Return GoalHomerun

    Money Back

    Meaningful Exits

    Meaningful Return = 1/3 of Fund Size

    19

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

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

  • Whats meaningful?

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

    Your Goal

    20

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

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

  • Revenue Requirements

    Know your asymptote. I didnt.21

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

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

  • Revenue Requirements

    Youve got 5-7 years to hit ~$20MM ARR

    22

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

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

  • Growth Requirements: t2d3

    Triple: 10% MoM Double: 6% MoM

    23

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

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

  • What to do if your round isnt happening

    Be honest with yourself and investors

    Grow both revenue & margin

    Extend runway: (Burn

  • 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.

    Dont 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.

    25

  • 26

    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 42monthsInterestonly 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%PIKinterestWSJPrime+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

  • Venture Debt (Funds)

    27

    -Top 5 venture debt partner

    25-40%

  • Venture Debt (Banks)

    28

    -Top 5 venture bank

  • Conclusion

    Focus on what you can control

    Revenue growth is your #1 measure of success

    If your round isnt happening, know your options

    Lean on your existing investors for advice

    29