How Your Startup Can Raise Venture Capital in the COVID-19 Era

Agenda
• Background information: Greg Chin/Duane Morris
• Is venture capital the right capital model for your business? If
so, should you be raising venture capital now?
• Preparing to raise
• Executing during the pitch process
For veterans and new entrepreneurs
Interactive – please!
2

Introduction: Greg Chin
• Over 20 years as startup lawyer in Silicon Valley
– Corporate and securities law – financings, M&A & IPO’s
– Represent entrepreneurs, VC’s and investment banks
– Outside general counsel – IP, option plans, employment, litigation
• But this presentation isn’t all about the law?
– Role of startup lawyer as business advisor
– 26 years in the tech community
 Business experience in sales and marketing before law school
 6 years of writing about Silicon Valley for 50,000 Japanese engineers
 Hundreds of VC financings; many IPO’s
3

Introduction: Duane Morris
• Over 800 attorneys
• Offices in 29 cities across the US and world
• International emerging companies and tech practice
• Industry expertise – industry groups including
technology/media/telecom, education/edtech, energy,
fintech, cannabis
4

Should You be Raising VC Financing?
• Institutional venture capital, like movies, is hits business.
– Can you achieve $100 million in revenue in fewer than 5-10 years?
• Even if you believe that your company can grow into a $100
million revenue business, is the evidence there NOW?
– Have you hit key milestones?
– Numbers of users?
– Reference customers for SaaS companies?
• Have you achieved product-market fit?
– The degree to which a product satisfies a strong market demand
• If not, can you raise angel or friends and family funding to reach key
milestones?
5

Angel/Friends-and-Family Financing
• Convertible Notes or Simple Agreements for Future Equity
• Not Common or Preferred Stock
• Typically neither company nor investors is ready to set
valuation yet
• Selling Common or Preferred Stock complicates cap table,
voting rights
– Angels with blocking rights?
– VC’s will feel like they have to “clean up”
6

Current Environment
• Investments still happening
• Valuations are definitely lower
• Great companies are still getting term sheets
• Focus on speed, not price; close the deal and get back to
executing
– Don’t get lost in short-term fluctuations or trying to game the system
– Take the money and go
7

Some Sectors which VC’s May Avoid
• Travel
• Retail
• Hospitality
• Luxury
• Cleantech
• Real Estate Tech
• Oil Focused
• Non-essential SaaS products
• SMB focused
• Consumer discretionary and DTC e-commerce
• Brick and mortar
* Ewing Marion Kauffman Foundation, COVID-19 Survey, May 7, 2020
8

Particularly Well-Positioned Businesses (Rare?)
• Decreased customer acquisition costs (CAC) – maybe
because of a shift in customer behavior (Peloton) or
because you have identified a new marketing channel.
• Increase in retention and usage (online games, Zoom),
which means higher customer lifetime value (LTV).
• Ability to increase prices with little impact on retention
(NetJets???).
• Talent level – “hired star from AirBnB who was laid off!”
9

Marketing Documents
• Detailed business plan
• One to two-page executive summary
– Key to getting in front of investors
• Presentation
10

Business Plan
• Problem/solution; business model; simplify; must be able to
capture crisply
• Target market
• Financial projections and assumptions
• Team
11

Target Market
• VC’s complain about top-down analyses
• Not a marketer, but have had experience seeing bankers put
together this analysis for IPO’s
• Top down– estimate total market, estimate your percentage;
can be misleading – what will it cost to achieve that percentage?
• Bottoms up – more granular/realistic/demonstrates
understanding of costs of reaching market; for example,
evaluates particular distribution channels where products can
be sold, the sales of comparable products in those channels,
and the slice of current sales you can carve out.
12

Business Models/Target Markets in the New Environment
• How has the pandemic affected your industry and your business?
• Reconsider product-market fit
• Certain metrics still matter even in this environment: big market, strong unit
economics, efficient growth.
• If possible, show why “recession proof”– megatrends
– Larger remote workforces?
– Are you a must have?
13

Financial Assumptions in the New Environment
• Budget for a long enough runway to carry your company
through a slow economic recovery.
• Show that you understand “burn mechanics,” can conserve
cash and demonstrate extreme fiscal responsibility.
– Bessemer’s Efficiency Ratio – how much are you burning for each dollar
of additional revenue
– Detailed analysis of cost levers.
• Identify most important steps for growth.
• Assume you won’t be able to raise as much as you wanted.
• Do projections reflect any anticipated decrease in demand?
14

Team
• What is your background and experience?
• Demonstrate resilience of team!
• Who has joined the team? Who may join the team?
– Complementary skill sets
• Equity of team members?
– Sweat equity/money in the company
– Is everyone incentivized?
– Equity is a company asset and should be allocated to achieve
results
15

Advisors
• Board members
• Attorneys
• Accountants
• Professional investors
• Industry executives
• Tap into this network to build a better data set and run
scenarios
• Data and diverse experience are your friends
16

Know Your Target Investors
• Know your potential investors
• Industry sector
• Investment stage (i.e., Seed, Series A, B, C, etc.)
• Geographic proximity
• Amount to be raised
• Comparable/competitive portfolio companies
• Potential investor contacts
• Check out VC Twitter
17

Pitch and Presentation
• This environment is more dynamic, so know your stuff cold.
• Practice in front of audience who can provide feedback,
ideally with some relevant experience in investing or
seeking investment.
• Practice! From word choices to nonverbal communication.
• Have a 30-second version, a three-minute version and a
fifteen minute version.
• Space presentations out so you can incorporate feedback.
18

New Best Practices for Zoom Pitches @drogier
• Be upfront about the awkwardness
• Acknowledge that you haven’t pitched on Zoom before, and ask for lots of
questions
• Try to incorporate discussion as much as possible – reading from slides is
even harder on Zoom than it is in person
– Consider ditching the slides
– Be able to ditch the slides!
– Consider a socially distanced walk!
– A digital demo!
• Work on transitions with other members of the team – practice!
• Use shared connections with investors, because it’s even harder to get
someone to write a check
19

Q&A
• Prepare for hard questions
• Know your competition
– “We have no competitors” is the wrong answer.
– Maybe the answer is that customers will stick with the status quo.
20

Prepare for legal due diligence
• Cap table
– Understand exactly who owns what in your company.
– Be careful about oral promises to allocate percentages of your
company.
– Some entrepreneurs have lost track of who owns what after
numerous SAFE issuances.
• IP
– Make sure all consultants and employees have signed invention
assignment agreements.
• Have competent counsel on board.
21

Conclusion: Great Companies are Still Getting Funded
• Should you be seeking institutional venture capital funding?
• These companies are the ones getting funded
– Big market
– Strong unit economics
– Efficient growth
– Strong teams
• Can we help? gchin@duanemorris.com
22

How Your Startup Can Raise Venture Capital in the COVID-19 Era

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How Your Startup Can Raise Venture Capital in the COVID-19 Era