Raising Venture Capital

							Raising Capital:
MICHAEL SHERIDAN MIKE@GDEXAUTO.COM 310-866-5103

An Entrepreneur’s View
or How you are going to get screwed by Venture Capitalists

Three Core Principles
 More cash is preferred to less cash  Cash sooner is preferred to cash later  Less risky cash is preferred to more risky cash

Bargaining Power
 Burn rate  Time to OOC (Out Of Cash)  TTC (Time To Close)  Competition for Funding  Your Team’s Pedigree  Your Idea (Disruptiveness Factor)

Factors Affecting Financing
• • • • • • • Accomplishments and performance to date Investor’s perceived risk Industry and technology (protection/differentiation) Venture upside potential and anticipated exit timing Venture anticipated growth rate Venture age and stage of development Investor’s required rate of return or internal rate of return • Amount of capital required and prior valuations of the venture

Factors Affecting Funding
• Founders’ goals regarding growth, control, liquidity, and harvesting/exit • Relative bargaining positions • Investor’s required terms and covenants

Types of Investors
• • • • • Bootstrap (You and Chase) FF&F Angels ($10K-$250K) Super Angels ($250K to $5M) Private Equity
– – – – Seed Funds ($50K to $250K) Early Stage VCs ($250K to $5M) Growth-Stage VCs ($2M to $20M+) Late Stage VCs ($10M to $50M+)

How it Works
• • • • • • Idea Incubation (Seed Stage Capital) “Build” (Seed Stage Capital) Beta (Seed Stage Capital) Go-To-Market (First Stage Capital) Growth or No Growth (Second Stage Capital) Sale/Continuation/Exit or Liquidation (Third Stage Capital)

Funding Rounds
• FF&F (Seed Round) • Angel Round or Series A (First Round: Money Infused by Outside Investors)
– Outside “Professional” Investors

• Series B-Z
– Subsequent Rounds of Preferred Stock offerings

Term Sheets
• The terms of an investment agreement are spelled out on what is called the term sheet. (Non-Binding) • Key Terms
– – – – – – Lead Investor Pre-Money Valuation Post-Money Valuation Dilution Preferred vs. Common Stock Conversion Rights

Pre and Post Money Valuation
• Pre-Money Valuation= $1,000,000 • Seed Round Investor Raise= $250,000. • Post-Money Valuation= $1,250,000

• If I own 100% of the Company Pre-Investment, how much of the company do I own after investment? • How much does this investor (s) own?

Calculations Even Lawyers Can Do!
• Entrepreneur Ownership
– 1,000,000/1,250,000 = .80 or 80%

• Investor Ownership
– 250,000/1,250,000 = .20 or 20%

Amount of Investment/Post-Money Valuation= Ownership %.

Dilution Example (Crude Example)
• • • • • Pre-Money Valuation= $2M Raising $1M Post-Money Valuation= $3M Owner: 2,000,000 Shares Investor purchases 33% of the company:
– – – – New Shares Need to be Issued X=New Shares Needed to be issues x/(2,000,000+x)=.33 or 33% x=985,075

• Owner is Diluted Down to 67% ownership even though he still owns same amount of shares.

Price per Share
• Investor Shares= Investment/Share Price • 985,075=1,000,000/Share Price • Share Price = $1.015

Preferred vs. Common & Conversion
• All Outside Investors want Preferred Convertible Stock
• Liquidation Preferences • Dividend Preferences

• Conversion Rate is usually 1 to 1 with Common Stock
• Converts whenever an investor wants to or upon specific events (i.e. acquisition or most exit strategies)

Valuation Determination
• More Art than Science • Clearly State Assumptions • Clearly Define Revenue Model
– Related it to other companies

• Financial Models to Use
– DCF Model – Comparables

Biggest Mistakes
• I’ll take any investor. No…. • Instead of pay for my employees, I will just handout a bunch of equity. • Having that guy on my Board of Directors will look really good. • Not negotiating

Key Terms to Know
• • • • Free Cash Flow Operating Working Capital Burn Rate Syndication

Breakeven Point
•Total Sales=Total Costs •Usually determined as a point in time (i.e. “we expect to breakeven in Month 16 when our sales exceed our burn rate or total costs)

Free Cash Flow
• The cash flow generated by a company or project is defined as follows:
– Earnings before interest and taxes (EBIT) – Less tax exposure (tax rate times EBIT) – Plus depreciation, amortization, and other non-cash charges – Less increase in operating working capital – Less capital expenditures

Operating Working Capital
• Operating working capital can be defined as follows:
– – – – Transactions cash balances Plus accounts receivable Plus inventory Plus other operating current assets (Not short-term Investments or land, but Pre-Paid Services) – Less accounts payable – Less taxes payable – Less other operating current liabilities (Accrued Salaries)

Good Source of Info
• http://www.venturehacks.com