How to Attract Venture Capital and Work with Venture Capitalists

FINANCE 101 FOR START-UPs April 18, 2008 Robert S. Smith Principal – Bridgepoint Consulting, LLC April, 2008 1 AGENDA Potholes to Avoid When Building Your Company       Relying on advice from neighbors and college buddies Take money from just anyone No need to understand differences in equity transactions Accounting/finance is not important to an early-stage company Financial Section of Investor Pitch is not important Deal Terms Are Not Important April, 2008 2 Potholes to Avoid When Building Your Company  Relying on advice from neighbors and college buddies (unless you live next door to John Thornton or went to college with Jimmy Treybig!)  Get quality advice on all aspects of your business • Legal • Financial  Seek advice from someone other than your investor to structure your investment  Find a mentor who can help you April, 2008 3 Potholes to Avoid When Building Your Company  Take money from just anyone  Different investors have different motivations, know what your investors are looking for!  Early-stage financing options Friends & Family PROS • Less valuation sensitive • Can be more reliable CONS • Not as much business help • May want to be more involved • Can be less reliable funding source • Can be uncomfortable at Thanksgiving if investment does not work out April, 2008 4 Potholes to Avoid When Building Your Company  Take money from just anyone  Different investors have different motivations, know what your investors are looking for!  Early-stage financing options Angels PROS • Can provide business help • Can intro to follow-on investors CONS • Pockets aren’t as deep • Rolodexes may be limited • Can be emotional investors April, 2008 5 Potholes to Avoid When Building Your Company  Take money from just anyone  Different investors have different motivations, know what your investors are looking for  Early-stage financing options Venture Capital PROS • Significant business help • Professional investors, so they can stick with you thru the difficult times • Extensive rolodexes CONS • Valuation sensitive • They have high expectations so management must deliver • Their only goal is to make money April, 2008 6 Potholes to Avoid When Building Your Company  Take money from just anyone  Different investors have different motivations, know what your investors are looking for  Early-stage financing options Corporate investors PROS • Can provide strategic help •Can be less valuation sensitive • Can bring credibility in market CONS • Can influence product direction from broader market to their application • Often investment is tied to an individual within corporation and if something happens to that champion enthusiasm can wane April, 2008 7 Potholes to Avoid When Building Your Company  Take money from just anyone  Different investors have different motivations, know what your investors are looking for  Early-stage financing options Boot Strap PROS • Hold onto ownership until more value is created • Less time spent on money raising activities CONS • Growth can be much slower due to cash constraints • Miss advice from “smart” investors • Obtain potential customer input during product development April, 2008 8 Potholes to Avoid When Building Your Company  No need to understand differences in equity transactions  Common stock vs. Preferred stock  Authorized shares vs. outstanding shares  Founders’ stock  Right of first refusal Keep good documentation of all equity transactions April, 2008 9 Potholes to Avoid When Building Your Company  Accounting/finance is not important to an early-stage company   Business model is very important to investors Budget should be conservative  Budget should be based upon timing future fundings at appropriate inflection points Keep accurate accounting records  April, 2008 10 Potholes to Avoid When Building Your Company  Finance Section of Investor Pitch is not important  Don’t inundate with information (Executive Summary and PowerPoint to start with) – they won’t read the full plan until much later  One slide addressing funding history, current headcount and cash burn, and current cash balance  One slide address forecasted P&L, cash flows – preferred format is Q1’07, Q2’07, Q3’07, Q4’07, FY’07 total, FY’08 total, FY’09 total – nothing more than 3 years out  Always have backup detail available supporting market size, statistics, competition, etc.  Don’t be overly optimistic – don’t over-promise and underdeliver. 11 April, 2008 Potholes to Avoid When Building Your Company  Deal terms are not important  Avoid setting valuation too early in your history – use convertible bridge debt and warrants  Set option pool percentage high enough to attract team gaps – be honest about gaps in team  Try to avoid liquidation preference above 1x  You don’t have to surrender control on Series A round, but that shouldn’t be the driving factor  Anti-dilution protection unavoidable, but aim for pro rata rather than full ratchet  Founders’ stock will typically vest over 3-4 years April, 2008 12 Potholes to Avoid When Building Your Company Thank you for your attention April, 2008 13