“Determining Need vs. Greed”
October 6, 2009
Determining Funding Need
“Crossing the River”
Seed Round
Series A
Series B
Profitability & Beyond
Page 2
Determining Funding Need
How much financing should you aim to raise for your business? • Fundamentally raise sufficient capital to reach next logical stage
• Dependent on the core capital efficiency of the model • Web 2.0 vs. CapEx intensive or long R&D cycle businesses
• Enough to cross substantial risk-reducing milestones
• Technology (R&D), product development, customer wins, strategic partners inked, consumer update and adoption of new service
• Prove out that you can build it, customers will want it, business can scale, competitive response won’t crush new players
• General rule of thumb in the current environment
• 18 months on runway (start fundraising again after 12 mos) • Ideally ample cash cushion so can “go heads down” + focus on building biz
Page 3
Determining Funding Need
Seed Round
$250k – $750k
Series A
$3MM – $6MM
Series B
$8MM - $15MM
Profitability & Beyond
$15MM+
•
Marathon and not a sprint, requires energy for the entire journey
•
• • • •
Think ahead about funding needs over the life of the company
Overpriced early rounds set up for difficult and down round later rounds Early stage valuations are art & not science, market will set clearing price Early stage valuations = equation with three variables
Don’t be fixated on optimizing company valuation today
(1) investor ownership %age (2) funding needed (3) founder dilution appetite
Page 4
Understanding Investor’s Math
Investor expectations dependent upon their own profile (fund size & stage focus), but most are operating under the following guidelines:
• Sufficient ownership stake to justify time & energy
• Typical early stage investor targets 15% < X < 60%
• Investors expect to get diluted over time as more $$$ is raised
• But need to maintain meaningful %age at the time of exit event
• Options pool in place to provide ample available shares to incentivize new and existing employees
• Potential lever during pre-money valuation discussions
• Founder Re-vesting may be required by investors
• Ensures team remains engaged + incentives aligned while at the company
Page 5
Protecting Your Ass(ets)
Entrepreneur’s interests should naturally be aligned with investors in most scenarios, but several areas where founders and management will want to ensure their own interests.
• Investor’s control rights should be commensurate with investment (i.e., a small amount of $ should not buy a veto, maybe not even a board seat) • Liquidation Preference should make sense (early stage investors’ proposals frequently don’t) • Pay attention to protective provisions, don’t allow control to be “backed into” • Option pool should be reasonable given stage of company
Page 6
Alternative Financing Options
Venture Capital is only one of many options to obtain the capital that your business needs to get off the ground:
• Boot Strapping • Via cash flow from existing revenues, evolution from “project to product”, typically slower growth path, but required without external financing • Friends & Family • How 95%+ of business do it every day! • Angel Investors • equity or convertible note, typically $250k to $750k • Debt - Small Biz Loan • Fit depends on business type, typically requires tangible assets • risk of personal liability, reminder it’s a loan and not equity • Strategic Agreements • Prepaid royalties, advance purchases, etc.
Page 7
In Summary
• At each stage raise what you need in order to reach the next stepping stone • Don’t be fixated on valuation, but raise sufficient capital at a reasonable price and move on • Try to get the right investors • Make sure terms are win-win, not contentious • Fully consider alternatives to investment capital
Page 8