raising vc

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Iain McDougall

December 11, 2012

Raising Your First Round of Capital

Tech & Biotech

CONTEXT

Gloves translate sign language into speech

OK YOU’VE GOT A BIG IDEA

DECEMBER 11th 2012

BUT HOW TO GET FUNDED

3-OPTIONS

Bootstrap Customers Raise $$+ =

Angel or VC

Finding Investors

How to Pitch Them

Valuation Math

Negotiating Deal Terms

Demystify the VC Angel World

GOAL FOR TODAY

VC’S vs ANGELS

Will want some control (voting, board, veto)

Will want to own 20-30%

Actively engaged (they get paid to do this!)

Can add tremendous value and be great business partners

Can be total disasters

Typically rational actors, commercially-driven, but if inexperienced…

May want some control (“send me an annual email”)

Will want to own 1-10%

Maybe engaged or not (often a hobby, sometimes a personal mission)

Can add tremendous value and be great business partners

Can be total disasters

Typically rational, but if unsophisticated: naïve irrational, emotional

Deep Pockets:High risk tolerance and additional funding for

follow-on rounds

WHY RAISE VC

Value-Add:VCs provide domain experience, industry

contacts, and strategic planning

Experience Matters:VCs have “seen the

movie” over and over again and can help avoid

pitfalls to find the path to success

Swing Big:VCs don’t invest in niches,

they invest in transformative ideas that can build large companies

1Does my business fit?

Typical Investment Criteria

  Tangible things investors like to see:   Very big market (> $500m)   Unfair advantage (why you? why now?)   Attractive business model (recurring, high gross margin)   Unique technology or business model approach

  Intangible things investors like to see:   “Pied Piper” – an ability to recruit and retain a great team,

partners   Interpersonal chemistry   Movie, not a snapshot

Great Idea

Huge Markets

Massive Gross Margin

Unique & Protectable

But People Trumps Everything

PEOPLE MATTERS

PEOPLE MATTERS

Ideas are a dime a dozen

Having a world-class team is golden

Laser focus of the young entrepreneur is very powerful

2Am I Prepared?

Raising Money is Really, Really, Really Tough

300 : 1LONG ODDS

12months - 2 years..!

Prospect List

Executive Summary

Investor Deck

Business Plan

Financial Model

3Getting the 1st Meeting

FIND THE SWEET SPOT

Scope out the firm – size matters, as does the individual

Arrange for a warm introduction

Prepare, be brief (VCs Blink)

Don’t downplay risk

Mutual due diligence is fair play

  Most VCs and Angels have ADD – operate on “BLINK” instincts  Want to SEE everything, but DO very, very few

deals  Make their decision within the first 10-15 minutes

  Typical VC and angel will invest in one out of every 300-500 deals they see  Long odds – you need to really stand out  Like college applicants – triage quickly

Context About VCs and Angels

Investor’s Decision Tree

Worth 3 minutes (email, phone)?

Worth 30 minutes (phone, in person)?

Worth 60-90 minutes (in person)?

Worth 2nd mtg (in person)?

Ignore

Pass gracefully

Pass but stay In touch

Serious due diligence Pass but be helpful

No

No

No

No

4The Pitch

3 MUST DO’S

1 2 3Be gracious, personable

Be crisp & on point

Personal intro should take < 5 minutes. Team introduction 10 minutes

Make it relevant – don’t go off on tangents

If you can’t show good summarization skills, how will you handle a board room?

Know your stuff

You will be pushed and tested

DO NOT...

1 2 3Exaggerate

Everything you say will be verified in due diligence

Assume the listener is a cynic and a professional Bull-shit detector

This is about Team not You

There is no I.

If you are self-aggrandizing, investors will assume you can’t build teams

Name Drop

No one is going to be impressed with who you know unless the relationships are both realand relevant.

5Another Meeting

So You’ve Had a Good Meeting… Then What?

  Treat fundraising like a sales process – build a pipeline, work people through the pipeline, build up to crescendo

  VCs get distracted – typically only pursue 2-3 high priority new investment opportunities at any given time

  Stay connected, top of mind, build a sense of momentum   Need to sell the individual “champion”, then the help

them sell the partnership   Address objections with specific data

  Make the investment case for them   Give them tools/materials to share with their partners

13#

6Full Partner Meeting

7Term Sheet - Finally

Term Sheet Time Frequently Asked Questions…

  Should I include VCs in my first round or just angels?   How big should the option pool be?   How should I think about valuation?

  “Promote” definition - http://bit.ly/8NpdM   Should I do a convertible note with a cap, no cap or a

priced round?   How should I think about control?

15#

Aligning Interests

ECONOMICS CONTROL

PRICE

A + B = CPre-MoneyValuation

Investment Post-MoneyValuation

PRICE

£400k + £100k = £500k

Pre-MoneyValuation Investment

Post-MoneyValuation

EQUITY

C Post-MoneyValuation

Investment

%age Equity

B=

EQUITY

£100k= 20%£500k

£400k + £100k = £500kPre-MoneyValuation

InvestmentPost-MoneyValuation

Looking to Raise For X% of my

business

You Value your business as

What Is Market?

Rough Numbers (vary slightly by coast and sector):  Seed: $500k-$2m raise on $3-5m pre-money (or cap)  Series A: $3-6m raise on $6-10m pre-money  Series B: $8-12m raise on $15-20m pre-money

Option pool: 10-20%  The smaller the pool, the more confidence in the

founding team  Do an “option pool budget” to determine the right pool

17#

8MONEY IN THE BANK

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Who’s Ready to Raise Money?

THANK YOUFeel free to ask questions

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