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Startup Fundraising: A Love Story

  1. Based on sessions that took place at Google Campus (Tel Aviv) on Dec 14 & 15, 2014 Startup Fundraising: A Love Story By Gil Ben-Artzy, UpWest Labs These are summary slides of a 2.5-hour presentation aimed at discussing major aspects of fundraising for high growth, capital intensive tech startups. It is a supplement for those that attended the presentation, and is not meant to serve as a comprehensive guide for fundraising.
  2. 2 Life Work EDU 46 Alumni Startups >$50M in total funding >70% raised follow-on funding >20% of teams have a female founder Acquisitions by Google, Priceline, Gartner, etc Dozens of Fortune 500 customers and partners Largest community of entrepreneurs innovating between Israel and Silicon Valley
  3. 3 VC Funds Do VCs Meet Investor Expectations? VC Returns Top 20 VC Funds Other VC Funds <1x 1-2x 2-3x >3x 50% 33% 10% 7% VC ReturnsVC Funds 98% 95% 2% 5% Investor Mindset Source: The Kauffman Foundation
  4. 4 Fund* VC Economics (illustrative) Returns Exits $200M $600M $3B 3X 20% Equity *Few Investments per Partner Investor Mindset
  5. 5 How Do The Best VCs Reach 3x? Option A Option B Exit 1 Exit 2 Exit 3 Exit 4 Exit 5 Exit 1 Exit 2 Exit 3 Imagine you made 30 investments…. Returns = $600M Returns = $600M Investor Mindset
  6. 6 Implications * VC could agree to smaller exits if you are not going to be big as they had hoped, IRR & fundraising considerations, founding team really insist, etc Startup “I need to show potential for $50M in Revenues in Year 5 (or >100M users)” VC Partner “Should I bet part of my career on this startup?” Investor Mindset
  7. 7 VC Economics Impacts All Investors Large Funds Micro-Funds Angel Investors “I need large exits” “I’m ok with small exits, but as they are unlikely, I need the micro- funds to invest in my startups” “I’m ok with medium-size exits, but as they are unlikely, I need the large funds to invest in my startups” Investor Mindset
  8. 8 Market 1. Size of Addressable Market 2. Level of Competition 3. Distribution Channels 4. Timing (e.g., Mobile Advertising) • Recent investments in this market: when, how much, by whom • How many have tried this before You can tell a lot by… Startup Evaluation
  9. Momentum = f * “Perceived Momentum” has some value as well :-) Users / customers (number, engagement) Partners IP Advisors (industry, domain) New Hires Investment Commitment Thought Leadership (conferences, blogs) Press (credibility, not traction) etc Momentum Startup Evaluation
  10. Team 1. Domain knowledge 2. Previous success 3. Team dynamics 4. Personal definition of success 5. Smart / Coachable / High Integrity / etc “Do I want to work with them for the next 5-7 years?” Startup Evaluation
  11. 11 When Am I Attractive Enough? Attractive to Investors = Market Momentum Team “Market always wins” Cold/Lukewarm Market Super-hot Market When in doubt Show momentum (or find a new idea…) Strong team is the key (can raise with little proof) Examples? Startup Evaluation
  12. 12 Key Principles No right way, many strategies The process is about building trust… …But aim to do it quickly, don’t waste time Investors want to invest! • See many, invest in a few • Dislike saying “No” • Option value Psychology is a big component (losers vs. FOMO) Courtship
  13. 13 Finding The Right Investor for You Form Strategy Prepare Showtime 1-2 months 1-2 months 3-6 months 1. Decide to fundraise 2. Identify your time window 3. Begin “Beta investors” engagement 4. Complete materials to share 5. Practice the pitch 6. Create investor list & referrals 7. Test the waters 8. Approach investors 9. Manage the process 10.Complete due diligence on investors Courtship
  14. 14 Other People’s Money Time Commitment Opportunity Cost (PT vs FT) Personal Sacrifice Lifestyle Business? Need to Move Fast? Aligned Incentives? Understand The Risks… … Align Expectations 1. Do Not Fundraise Before… Courtship
  15. 15 Feb June Sep Nov 2. Fundraising Window Your “shelf life” = 3-4 months* * Everybody talks…. Courtship
  16. 16 3. Engage with “Beta investors” 3-5 relevant, friendly investors to engage Get feedback, know when you are ready Could pre-empt your round… Courtship
  17. 17 4. Required Materials • How much to raise • Deal terms Financials Materials Online • Paragraph • Deck • Exec Summary • Website • Social Media Courtship Know Your Story Your fundraising story needs to make sense, capturing your unique style: • Team: Why you, why this team • Market: Why this venture, why now • Momentum: Can you prove you may be right? What will you prove with this money? – Users, revenue, small-scale economics, vision Source:
  18. 18 The Deck (And What Investors Are Looking For) Problem: What are they trying to solve?1 Vision: Does this matter? Is this interesting/big enough?2 Product/Demo: What are they doing? How does it work?3 Tech: Is there anything unique here?4 Momentum: Do they any proof that this is working?5 Source: Market: Is this a big enough opportunity?6 Competitors: Do they know them? Are they different?7 Biz Model: How will they make money?8 Distribution: Is this credible? Do they have proof?9 Team: Why them?10 Milestones/Ask: Will they be in a good place in 1 year?11 Courtship
  19. 19 (personal estimation) Israel ($M, % equity) Silicon Valley ($M, % equity) Pre-seed 0 - 0.3 15 - 25% 0 - 0.5 10 - 15% Seed 0.5 - 1.5 30 - 40% 1 - 3 20 - 25% Series A 2 - 7 25 - 40% 5 - 15 20 - 30% Cap Table Management: Remain in Range, Don’t Over-Optimize $ Needed % Equity Valuation = % Equity = { negotiations, # of offers,…}f Courtship
  20. 20 What Would a Series A Investor Think? Other & Future employees CEO CTO VP R&D Pre-seed & Seed investors50% 12.5% 12.5% 12.5% 12.5% Courtship
  21. 21 Verbal pitch: 7 + 30 + 120 Practice with existing investors and entrepreneurs Who speaks? CEO 70%, others 30% Focus on weak points 5. Practice the Pitch Courtship
  22. 22 Identify & prioritize relevant investors: • Domain expertise • Partners vs. Non-Partners • Lifecycle of fund • Completion of a recent deal Track all investor engagement: 6. Create Investor List & Referrals Fund Name Relevant Investments Contacts First intro Notes Next Steps? Priority Money VC Mary Smith Ring, Flippr, ReStore Mike M John R 1/1/14…. Reach out Q2 High … Courtship
  23. 23 Before spending 3 months on fundraising, try the following: 1. Identify and reach out to 4 relevant investors 2. If all 4 meet you once and say “No”  reconsider the round 3. If 2 meet you multiple times and only then say “No”  Kickoff the round 7. Test the Waters Courtship
  24. 24 Never ever cold-call + no NDA Parallel-process “Second tier” investors, escalate with traction Target people investors know and trust: current / previous investments, colleagues, business friends Use paragraph; Exec summary / deck as requested 8. Approach Investors How have you done it? Courtship
  25. 25 Focus on lead investor; Keep list of “follow-on” Iterate on your pitch and materials Reach potential customers Remember: everyone talks to everyone How do you know if the meeting is going well? 9. Manage The Process Courtship
  26. 26 Will they care about their investment? (e.g., size of fund) Do they know the market, customers, partners? What is their follow-on record? Did top investors participate in their rounds? Ties to US? How have they treated founders of previous investments? (both failed and successful ones) Given their engagement style, do you want to work with them? 10. Interviewing The Investors Courtship

Notas do Editor

  1. * Topic I’m passionate about * Like you, I have had to fundraise, as well as guide dozens of startups in their process * Why Love Story? Passion, courtship, long term commitment with no way out (no divorce)