an entrepreneur’s guide to fundraising · an entrepreneur’s guide to fundraising fundraising...

AN ENTREPRENEUR’S GUIDE TO FUNDRAISING

- Russ Armstrong

An Entrepreneur’s Guide to Fundraising

RUSS ARMSTRONG• Head of Sales - Eastern Canada, Boast.AI • Cofounder, Limelight (>$10M raised) • 11 years @ RBC Capital Markets


FUNDRAISING 101

ACCELERATOR (SELL 5% FOR $50-100K)

SEED (SELL 20% - $3MM @ $15MM)

SERIES A (SELL 20% - $10MM @ 50MM)

Here’s what everyone thinks it’s like

An Entrepreneur’s Guide to FundraisingAn Entrepreneur’s Guide to Fundraising

Convertible debt, venture debt, revenue financing, govt grants?

Friends and family,

accelerators, incubators, angels?

REALITY IS MORE LIKE…

An Entrepreneur’s Guide to FundraisingAn Entrepreneur’s Guide to Fundraising

DATE TYPE INSTRUMENT PRE MONEY VAL RAISE MULTIPLE MRR

Aug 2014Friends & Family

- Equity Common $1,500,000 $150,000 12.50 $10,000

Oct 2014 Angel - Equity Common $3,000,000 $150,000 7.58 $33,000

Feb 2015Accelerator -

Convert Note

Convert

Common $3,000,000 $50,000 7.14 $35,000

May 2015Convert

Debenture

Convert

Common $5,000,000 $250,000 7.58 $55,000

Aug 2015Convert

Debenture Convert Pref $8,000,000 $300,000 7.84 $85,000

Oct 2015SR&ED

Financing S-T Debt 9% $350,000 $85,000

Nov 2016 Seed Equity Preferred $10,000,000 $1,700,000 7.94 $105,000

July 2017SR&ED


July 2017

Seed Bridge

Equity +

Warrants Convert Pref $11,700,000 $600,000 8.13 $120,000

Aug 2017 Gov't Debt Debt 13% $500,000 $120,000

Dec 2017 Series A - Equity Preferred $15,000,000 $4,700,000 6.94 $180,000

Feb 2018Venture Debt +

Warrants Debt 7% $1,300,000 $180,000

Mar 2018Royalty

Financing Debt 3% Sales $1,000,000 $230,000


FUNDRAISING IS HARD



VC INVESTMENTS IN CANADA

39%


STARTUP GROWTH

2015 2016 2017 2018

Number of active startups in Canada

0

2,000

4,000

6,000

8,000


VC ACTIVITY BY DEAL SIZE

$100-500K $500K-$1M $1-5M $5-20M $20-50M

81

210

120

18%

CVCA: 7 out of every 10 deals in 2018 were under $5 million ⅓ of the deals were under $1mm

<$100K $50M+

109

20 23 15


TOP 20% HAVE AN EASY TIME FUNDRAISING

(42)

210 DEALS > $1 Million

MIDDLE 60% HAVE TO WORK VERY HARD

(126)

BOTTOM 20% HAVE JUST GOT FUNDED

(42)


FUNDRAISING STRATEGY



• How do I put a valuation on my company?



• What are the key drivers of my valuation?




• How will certain milestones impact my valuation?





• Adjust milestones to match cash on hand





• Adjust milestones to match cash on hand

• Raise additional cash to hit milestones


BE STRATEGIC TO AVOID “CASH OUT” DATE

$ in bank

Cash Out Date

Milestone: Product shipped

Milestone: Capital raised

Time

Post-money val

Pre-money val

Valuation


VALUATIONS



• Monthly Recurring Revenue. Rule of thumb: 6-9X



• Total Addressable Market




• Team




• Team

• Timing




• Team

• Timing

• Sector




• Team

• Timing

• Sector

• Growth Rate




• Team

• Timing

• Sector

• Growth Rate

• Logos


VALUATION IS NOT LINEAR

18%Ex

citin

g liq

uidi

ty o

ptio

ns

Time (7-10 years)


FUNDRAISING PROCESS



RUN A TIGHT PROCESS

• 100+ investors in the funnel

• Setup a drip

• Always be prospecting

• Work backwards from metrics

• Have your FOMO story

• Term sheets get term sheets

• Plan B


SETUP A FUNDRAISING FUNNEL

100

5

1

20

AWARENESS

INTEREST

DECISION

ACTION

• 100+ investors in the funnel

• Investors make intros

• Keep records - Gsheet

• Manage your growth over

your raise timeline

• Ask VCs the right Questions


FUNDRAISING JOURNEY





- Equity Common $1,500,000 $150,000 12.50 $10,000



Convert Note

Convert

Common $3,000,000 $50,000 7.14 $35,000

May 2015Convert

Debenture

Convert

Common $5,000,000 $250,000 7.58 $55,000

Aug 2015Convert


Oct 2015SR&ED



July 2017SR&ED


July 2017

Seed Bridge

Equity +





Warrants Debt 7% $1,300,000 $180,000

Mar 2018Revenue

Financing Debt 0.5% Sales $1,000,000 $230,000


1. Clean up your Cap Table - It needs to reflect those that are going to carry the company into the future. I.e. ESOP, Founders, Vesting, Restricted Shares.

• issue additional shares

• issue new class of shares


1. Clean up your Cap Table - it needs to reflect those who will carry the company into the future. I.e. ESOP, Founders, Vesting, Restricted Shares.

• issue additional shares

• issue new class of shares

2. Get your IP in order - think facebook




- Equity Common $1,500,000 $150,000 12.50 $10,000



Convert Note

Convert

Common $3,000,000 $50,000 7.14 $35,000

May 2015Convert

Debenture

Convert

Common $5,000,000 $250,000 7.58 $55,000

Aug 2015Convert


Oct 2015SR&ED



July 2017SR&ED


July 2017

Seed Bridge

Equity +





Warrants Debt 7% $1,300,000 $180,000

Mar 2018Revenue



PROS CONS

• Easy, Cost Effective

• Maintain control for longer

• Less Due Diligence

• Ownership not defined

• Raise what you want, when you want

• Can use caps/discounts as incentives

• Investors are less “invested”

• Bad corporate governance

• No “Lead” Investor

CONVERTS/ SAFES


Tranche Convertible Debt offering approach



Link MRR and Convert Cap $50k MRR = $5mm Cap, Raising $250K $80k MRR = $8mm Cap, Raising $250K



Link MRR and Convert Cap $50k MRR = $5mm Cap, Raising $250K $80k MRR = $8mm Cap, Raising $250K

RULE OF THUMB: <$1MM RAISE, USE CONVERTS/SAFES




- Equity Common $1,500,000 $150,000 12.50 $10,000



Convert Note

Convert

Common $3,000,000 $50,000 7.14 $35,000

May 2015Convert

Debenture

Convert

Common $5,000,000 $250,000 7.58 $55,000

Aug 2015Convert


Oct 2015SR&ED



July 2017SR&ED


July 2017

Seed Bridge

Equity +





Warrants Debt 7% $1,300,000 $180,000

Mar 2018Revenue



SR&ED FINANCING

210

Over $4 Billion returned to 27k companies in 2017 under the Scientific Research & Experiment Development program


HOW SR&ED

FINANCING WORKS?

• Operating Line (trailing quarterly

drawdowns)

• 9-15% interest rates

• Claims as small as $50k

• 75%+ advance rate

• 1-2 week turnaround

• Short form legal docs

• Claim prepared by a reputable firm

• Interest capitalized and paid upon

refund




- Equity Common $1,500,000 $150,000 12.50 $10,000



Convert Note

Convert

Common $3,000,000 $50,000 7.14 $35,000

May 2015Convert

Debenture

Convert

Common $5,000,000 $250,000 7.58 $55,000

Aug 2015Convert


Oct 2015SR&ED



July 2017SR&ED


July 2017

Seed Bridge

Equity +





Warrants Debt 7% $1,300,000 $180,000

Mar 2018Revenue



PROS CONS

• Valuation and Ownership Defined

(VCs like that)

• Investors likely to provide more

guidance

• Time consuming and high legal

expenses

• Control given up (Board Seats)

• Lengthy DD process

• Lots to negotiate

EQUITY




- Equity Common $1,500,000 $150,000 12.50 $10,000



Convert Note

Convert

Common $3,000,000 $50,000 7.14 $35,000

May 2015Convert

Debenture

Convert

Common $5,000,000 $250,000 7.58 $55,000

Aug 2015Convert


Oct 2015SR&ED



July 2017SR&ED


July 2017

Seed Bridge

Equity +





Warrants Debt 7% $1,300,000 $180,000

Mar 2018Revenue



OPTIONS WARRANTS

• Usually in the form of an ESOP

• Employee Stock Option Plan

• Negotiating chip used to New Hires/

Advisors

• Generally 15% of Fully Diluted Float

set aside for ESOP

• VC will ask to top it up upon new

financing rounds

• Terms - 10 yr expiry, 3 yr vest, 1y cliff,

expire upon termination

• L-T Options that are generally used as

sweeteners on rounds

• Can be used with an equity or debt

deal

• Share in upside of company growth

• Typically <.5% Float

OPTIONS & WARRANTS




- Equity Common $1,500,000 $150,000 12.50 $10,000



Convert Note

Convert

Common $3,000,000 $50,000 7.14 $35,000

May 2015Convert

Debenture

Convert

Common $5,000,000 $250,000 7.58 $55,000

Aug 2015Convert


Oct 2015SR&ED



July 2017SR&ED


July 2017

Seed Bridge

Equity +





Warrants Debt 7% $1,300,000 $180,000

Mar 2019Revenue



NON-DILUTIVE

FINANCING BENEFITS

• No equity, no board seats, no

PGs

• Extend runway before an equity

round

• Bring forward cash-flow to hire

for growth

• Optimize capital structure

(minimizing cost of capital)

• Capital expenditures

• Secure financing options for

bargaining leverage


NON-DILUTIVE

FINANCING OPTIONS

•Secured Debt (Bank Debt)

•Venture Debt

•Revenue Financing

•SR&ED Financing

•Govt Debt (SOFII, FedDev)

•Other Gov’t Grants


SECURED DEBT

• Operating Line

• Prime+ interest rates (5-9%)

• $100k MRR = 4-7x multiple LOC

($400k-$700k)

• GSA, ICA Required

• 2-4 week turnaround times

• No Personal Guarantees

• Red Flags: <50% B2B, <15%

Client Concentration, <65%

Gross Margins, Churn >15%

• Backed by Institutional Capital


VENTURE DEBT

• Operating Line (minimum

withdrawals)

• Interest rates (13-20%) + Warrants

• $100k MRR = 4-7x multiple LOC

($400k-$700k)

• Subordinate (2nd, 3rd)

• 2-3 week turnaround times

• Secured by IP, 20% YoY growth

• Red Flags: <50% B2B, <15% Client

Concentration, <65% Gross Margins,

Churn >15%

• Backed by Institutional Capital


REVENUE FINANCING

• $500k - $3mm

• Royalties up to 4% of Revenue

• >$100k MRR

• Close to operating break-even

• ~3x Cost of Capital

• 1x Principal, 1x buy-out, 1x

royalties


VENTURE CAPITAL

PRIVATE EQUITY

REVENUE FINANCING VENTURE DEBT SENIOR DEBT

Cost of Capital 40-80%, >10X 20-30%, >3X 15-25%, ~3X 15-25% 4-8%

Dilution High High Light Light No

Security Liquidation

preference

51% control Subordinated,

few covenants

Subordinated,

few covenants

Senior, no

covenants

Duration Permanent Permanent Entrepreneur

controlled

2-4 years 2-4 years

Control Board rights,

investor rights

Board rights,

investor rights

Few covenants,

no board rights

Substantial

covenants,

sometimes

board rights

Security,

substantial

covenants,

restrictions

Return Sales, IPO,

dividend, return

principal

Sales, IPO,

dividend, return

principal

Royalty,

buyouts,

warrants

Sales, IPO,

dividend, return

principal

Return principal

COMPARABLES


GOVT DEBT

• Fed Dev Ontario - $1b fund for

innovative and globally-oriented

businesses to accelerate their

growth. No-interest, repayable

contributions from $500,000 up to

$10 million per project.

• SOFII - loan program for high-

growth SMEs, $40m evergreen fund,

interest bearing loans of $150,000 to

$500,000, 7 year term loan, interest

rates 11-15%


GOVT GRANTS &

TAX CREDITS

• SR&ED - 63%+ of Canadian R&D

spend as a cash back

• IRAP - funds 50-80% of innovative

project costs upfront

• Top grant programs at boast.ai >>

resources


DEBT PROVIDERS

Venture debt

Revenue financing

SR&ED financing

Mezz/ Venture debt

Loan Guarantee

Senior Debt




- Equity Common $1,500,000 $150,000 12.50 $10,000



Convert Note

Convert

Common $3,000,000 $50,000 7.14 $35,000

May 2015Convert

Debenture

Convert

Common $5,000,000 $250,000 7.58 $55,000

Aug 2015Convert


Oct 2015SR&ED



July 2017SR&ED


July 2017

Seed Bridge

Equity +





Warrants Debt 7% $1,300,000 $180,000

Mar 2019Royalty

Financing Debt 3% Sales $1,000,000 $230,000


WHY LEVERAGE BOAST FOR SR&ED?

THE ONLY SR&ED AUTOMATION SOFTWARE AVAILABLE. JOIN OVER 300 OTHER COMPANIES THAT HAVE SWITCHED TO BOAST.AI TO INCREASE CLAIMS, INCREASE

REFUNDS, FOR LESS TIME AND MONEY.


Q&ARuss Armstrong 416-520-8551 [email protected]

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