Funding for innovative startups - Part 4 of 5

SESSION FOUR:
INVESTOR READINESS
Benno Groosman MScBA – www.groosman.co –Athens, May 24, 2016 –

MASTERCLASS FUNDING FOR
INNOVATIVE STARTUPS
Benno Groosman MScBA – www.groosman.co –Athens, May 24, 2016 –

THE SLIDES ARE ONLINE ALREADY!
www.slideshare.net/benno_groosman
FUNDING MASTERCLASS www.groosman.co

MASTERCLASS SCHEDULE
 Session 1: Introduction to funding language + business
planning;
 Session 2: Determining funding need + milestone-based
funding;
 Session 3: Building your financial investment plan;
 Session 4: Investor readiness;
 Session 5: Advanced funding and wrap-up.

INTHIS PRESENTATION
Scope
Preparation
Valuation
The process (with important clauses)
After the investment

SCOPE
This is not a presentation on negotiation tactics, but:
Preparation and understanding of the process will help
you in the dealmaking and negotiation
You can only start negotiations if you meet the
minimum requirements (the investor has to be
interested, you have to be prepared)
The better you present your case, the better the deal
you can get

PREPARATION (1/2)
Business plan with financial plan
 http://www.slideshare.net/benno_groosman/funding-for-innovative-startups-part-1-of-5
Know your funding need
Presentation / pitch deck

PREPARATION (2/2)
Lawyer and accountant
 Build your relation before you have to review your contracts or guide the negotiations: this
will save time and improve quality
Other experienced entrepreneur
 Before and during the investment process, find somebody with experience that can help you
Timeline
 When do you need the money? How do you want to go through the process?Take control!
Contact multiple investors
 Don’t bet on one horse
 More investors can share the risk and increase the funding
 Make sure they all have the same information and know the timeline

VALUATION
Science, art
or random?

VALUATION
Valuation of startups is not just a numbers game. It’s
more about expectations, feelings, investment limits etc.
But, start to quantify your value by:
Discounted cash flow;
Real option pricing;
Comparing to other startups.

VALUATION
DISCOUNTED CASHFLOW
 Take the total cashflow for each year
 In the 5 year prognosis at
http://www.groosman.info/#!funding/cbvu this is
€18.800; € 153.500; € 87.615; -€ 14.963 € 113.460
in year 1, 2, 3, 4 and 5
 The discount rate is 0,15 (15 percent)
 =18800/1,15+153500/(1,15^2)+87615/(1,15^3)+(-
14963)/(1,15^4)+113460/(1,15^5)
 So, the DCF is €237.878 in 5 years
 This number is not totally fair, as it also includes
the funding in these 5 years

VALUATION
REAL OPTION PRICING
NPV = -1000 + 0.7*0.3*100 + 0.7*0.5*3000 + 0.7*0.2*6000 + 0.3*0 = 1471
investment
1000
succes
low
1000
medium
3000
high
10000
failure
0
0.7
0.3
0.5
0.2
0.3

VALUATION
COMPARINGTO OTHER STARTUPS
 Find comparable startups (stage and market) and look for
(public) data on the investments they made, talk with them
or people in their circle.
 Check websites like www.crunchbase.com for this too
 Valuation also depends on the investor’s previous
investments, if you find that an investor takes 20-30%
equity for €250k-350k this investor might look for valuations
from €833k to €1.75M
 Serial entrepreneur: look at your previous comparable
startups (stage and market) and add a premium valuation
for experience and network

VALUATION
OTHER
Investor policy, e.g. “the maximum post-money
valuation for seed money is $2M”
Investor divides the numbers the entrepreneur
provides by 10
… entrepreneur knows, so multiplies by 10, etc.
Profit times 5, revenue times 2 (or any number),
industry multipliers, β
Tens of other methods

THE INVESTMENT PROCESS
GO / NO GO decision after every stage in the deal making process:
 First contact, pitch
 Personal connection
 Business plan and/or presentation
 Term sheet
 Negotiations
 Signing term sheet (exclusivity phase investor)
 Due diligence
 Participation contract
 Deposit of money and changes of legal structure

THE PROCESS
1/9 FIRST CONTACT, PITCH
You can pitch when you meet an investor at
an event
Get an introduction from somebody who
knows the investor
Or select the right investors for your startup
and send them an introduction email
Do not send your full business plan at first
contact!

THE PROCESS
2/9 PERSONAL CONNECTION
Be clear in your goals and expectations
Listen to the investor’s perspective and ask
questions
First agree on mutual interest on your
business
Do not start to talk about valuation
immediately
Set goals for a next meeting

THE PROCESS
3/9 BUSINESS PLAN / PRESENTATION
Give a 10-15 minute presentation highlighting the
most important parts of your business plan, but
also working on the relationship with the investor
and discussing questions together.
Send your business plan. Only ask to have a NDA
signed in case you disclose technology that is not
patented/public yet.
Propose a date for the next meeting with a clear
agenda immediately. Keep in control, don’t loose
momentum.

THE PROCESS
4/9TERM SHEET
Investor will send a term sheet in case the
investor wants to proceed with the process.
In the termsheet the most important
investment critera and terms are defined, like:
Valuation
Preferred stock and influence rights
IP claims
Obligations founders

THE PROCESS
5/9 NEGOTIATIONS:VALUATION
• WithVCs it’s easier to ask more money than to
give away less shares, with informal investors
it’s the other way around.
• Investment in multiple stages (one contract)
can lead to better valuation. E.g., $200k at once
will come at lower valuation than $100k upfront
and $100k after first customer.
• More risk for you: what if the customer comes
too late?

THE PROCESS
5/9 NEGOTIATIONS: SHARE HOLDERS
• Drag-Along right
• If big shareholders sell, small shareholders are forced to sell too
• Tag-Along right
• Like the previous, but small shareholders are not forced, they have the
right
• Pre-emption right
• Before another shareholder comes in, the existing shareholders get the
right to buy new shares
• Right of first refusal
• Like the previous, but also for existing shares and at the price offered by
the potential buyer

THE PROCESS
5/9 NEGOTIATIONS: GENERAL
Preference rights, exit options, and penalties
• What if it goes very good?
• More important: what if it goes bad?
• Will you lose your shares?
• Will you lose your management position?

THE PROCESS
5/9 NEGOTIATIONS:TAKE CONTROL
• It is your business
• Don’t get controlled and sucked up by the game
• Be hard on the content, but soft on the relationship
• Don’t get intimidated by negotiating tactics
• If you don’t like the deal, take time to negotiate
• Use an experienced and trusted advisor/mentor/lawyer
 … and dare to walk away and cease the deal. Be nice though,
it gives you credits

THE PROCESS
6/9 SIGNINGTERM SHEET
Be aware: after signing, the startup and
investor go in an exclusivity phase:
founders can not make a deal with another
investor for a period of time
Make sure there’s a deadline on the due
diligence process defined in the term
sheet: you don’t want to be exclusive a
long time and not have a deal.

THE PROCESS
7/9 DUE DILIGENCE
In the due diligence the investor will research the
founders, the books, contracts, IP and all that is or can
be relevant for continuing or ceasing the deal.
Make sure that all info is complete and searchable for
the investor.
You can also do a form of due diligence on the investor.
Due diligence can be used for renegotiating by the
investor in case you forgot to share something
important, or can cancel the deal completely.
So, be honest about the risks and difficulties before.

THE PROCESS
8/9 PARTICIPATION CONTRACT
In the participation contract all aspects of the
investment are defined, including agreements for future
events.
Get your own lawyer, preferably paid from the future
investment capital (not your current account)
This contract takes most time to review and negotiate.
After signing the deposit of money and changes of legal
structure can be done.

THE PROCESS
9/9 LEGAL AND FINANCIAL WRAP-UP
Deposit of money (only then the deal is
completed!)
Changes of legal structure
Changes of management freedom and
board structure

AFTERTHE INVESTMENT
• Keep working on the relationship with your investor
• Get used to an extra decision maker in your team
• Prepare for more financial and strategic reporting
• Use the network and time of the investor wisely
• Keep looking for additional funding and investors: your
investor will help with contacts and negotiating with
them or provide even an additional round of funding

YOUR NEEDS?
What do you want me to
cover in the final session?

FOLLOW ME
Benno Groosman MScBA
Experienced startup entrepreneur
www.groosman.co

Funding for innovative startups - Part 4 of 5

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Funding for innovative startups - Part 4 of 5