Funding a start-up: How to raise your first round

Jayan RamankuttyFounder/CEO YuMe NetworksBITSAA.org, June 25th 2006

Outline

Investment SourcesState of the VC IndustryFunding Process & Decision MakingSeed-Stage ValuationEntrepreneur’s checklistPreparing for the next step

Investment SourcesAngel Investors– Wealthy individuals with industry background– Usually a small investment (< $1M) in a very early-stage

company (demo, 2-3 employees)

Financial VCs– Most common type of VC, an investment firm, capital raised

from institutions and individuals– Fund sizes: ~$25M to 10’s of billions– Exit through - IPOs, Mergers and Acquisitions (M&A)

Strategic VCs– Typically a (small) division of a large technology company.

Examples: Intel, Cisco, Siemens, AT&T– Corporate funding for strategic investment– Not exclusively or primarily concerned with return on

investment

Sources of Funds

Source: Ten3 Coach

State of the VC Industry

Source: PWC NVCA Report Q1 ‘06

$0

$100

$80

$60

$40

$20

Tota

l In

vestm

en

t in

Billion

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Investment # of Deals

1999-

8000

6000

4000

2000

Q1 2006 Investment of $5.6B for 761 deals

2000 2001 2002 2003 2004 2005

Investment reaches a state of equilibrium

State of the VC industry

Life Sciences

$1.5B

$5.6B, 716 deals in Q1 06

Software

$1.2B

Internet

$0.8B

Telecom

$0.6B

Media & Entt

$0.4B

$1.3B, 215 first-time financing deals

Source: PWC NVCA Report Q1 ‘06

Stages of fundingInitial Funding Stages

Pre-Seed A small amount of capital is provided to entrepreneur to prove a concept for a potentially profitable business opportunity.

Seed Financing is provided to newly formed companies for use in completing product development and in initial marketing.

First Financing is provided to companies that require funds to initiate commercial-scale manufacturing and sales.

Growth & Expansion Funding Stages

Second Working capital is provided for the expansion of a company to support growing accounts receivable and inventories.

Third Funds are provided for the major expansion of a company which has increasing sales volume.

Later Financing is provided for a company expected to "go public“ within six months to a year.

Investment Criteria

Criteria Ranking by Angels

Ranking by VCs

Trustworthiness of the entrepreneur (s) 2 1

Enthusiasm of the entrepreneur (s) 1 3

Expertise of the entrepreneur (s) 4 2

Sales potential of the product 3 5

Growth potential of the market 6 6

Perceived financial rewards 8 4

Investor liked entrepreneur (s) upon meeting 5 9

Quality of product 7 10

Track record of the entrepreneur 9 8

Expected rate of return 10 7Source: Ten3 Coach

Opportunity Evaluation

6 in 1000 business plans get funded on an average5% of business plans are read beyond the executive summary10% of proposals pass initial screening10% of pre-screened proposals pass due diligence & receive funding

2. Initial Screen2. Initial Screen1. Opportunity Introduction

1. Opportunity Introduction

StartStart

3. Due Diligence3. Due Diligence

•Management Team•Business Plan

•Management Team•Business Plan

•Valuation•Ownership•Control•Mgmt•Legal Contract

•Valuation•Ownership•Control•Mgmt•Legal Contract

4. Negotiation4. Negotiation

•Presentation•Exec Summary•Milestones•CF forecast

•Presentation•Exec Summary•Milestones•CF forecast

FUNDINGFUNDING

•Mgmt, Personnel•Marketing•Production•Financials•References

•Mgmt, Personnel•Marketing•Production•Financials•References

Seed Stage Valuation

Historically seed stage funding is limited to $1M+ (higher risk – lower funding)Seed valuations tend to be subjective– Quality of the leadership– Strength of intellectual property– Time-to-market expectations– Cap-ex and burn rates expectations– Sector volatility

Financial Chronology of Amazon.com

Source: Ten3 Coach

Entrepreneur’s checklist

Understand short-term and long-term financial needs of the companyProvide accurate forecasts of revenue, market share and marginsHave clear milestones for developmentUnderstand selling and buying processUnderstand competition and market trends

Preparing for the next step

First “big” round of financing (> $3M)Financing dependent on progress made with seed capitalBefore Series-A– Assemble a quality team– Meet development milestones and

targets• Develop “proof of concept”

Upcoming BITSAA events

Plan E Educational Events

Mission– Provide a forum for building relationships

between aspiring and successful BITSian entrepreneurs

– Stimulate entrepreneurial thinking amongst BITSians

Objectives– Conduct ten or more educational cum networking

events by May 2007 – Attract five BITSian startup ideas for an idea

pitching event by May 2007

Plan E Educational EventsEvent Format– Each event will have one theme/topic and will have one

to two speakers or three to four panelists to cover enough breadth as well as potentially differing viewpoints

Next Event– Topic

• From idea to success: The Pinnacle Systems Story: From start to $350 million and a successful exit

– Speaker• Ajay Chopra, Venture Consultant - Trinity Ventures,

Founder - Pinnacle Systems– Date

• Jul 15, 2006