TLC Core

How to Get Funded

29 September 2009

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Why take fundingGrowing an early stage company requires capital2

Entrepreneurs are faced with tough decisions about when and how to finance this growth

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Building a company takes $$$

Seed Capital to create and test productsWorking Capital to bring product to marketExpansion Capital to build a real business

When and How to raise capital is one of the greatest challenges entrepreneurs face2Getting StartedBootstrap: Fund primary development through internal cash flow and forgone paychecksPositivesMaintain ownership and controlCustomer becomes kingForced rationalizationAble to more effectively channel $$$

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Internal Cash Flow

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Most ventures start out by bootstrapping in some form or another

Typically through sweat equity

Many positives associated with bootstrapping3Getting Started4

Internal Cash FlowBootstrap: Fund primary development through internal cash flow and forgone paychecksNegativesSub-optimize opportunityLoss of market shareUnable to rapidly expand product offeringPrisoner to economic cycles

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But also negatives4Getting Started5

Internal Cash FlowNot to mention the personal risks

Forget the wheel. Invent diapers.

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5Alternative Capital Sources6As a result, most ventures at some point seek capital from outside sourcesIn addition to $$$, outside investors can bring with them:Strategic partnershipsTalent networksManagement expertiseEtc.

Founders, Friends & FamilyVenture CapitalistsAngelsBanksAcquisitions &Equity Markets

I call it The Wheel, but so far Ive been unable to attract any venture capital.

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6Which can in turnTake a business from

7 to

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Note animation7Is it possible to create a large business without outside capital?Sure, but8

VC backed firms avg. 6X the number of employees compared with non VC-backed firms, ten years after inceptionVC backed firms avg. 5X total sales compared with non VC-backed firms, ten years after inception(Lifecycle Dynamics of Venture Capital report, Duke University) PROPRIETARY AND CONFIDENTIAL

And this avg. sales figure is even with the recession8Where? When? How?Where to get this capital, when to raise it, and how much to raise are critical in determining a new venture's successLike shifting gears in a car9

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9Where? When? How?As a company matures, risk diminishes, and the universe of potential backers increases10

Risk PROPRIETARY AND CONFIDENTIAL

10Where? When? How?Although there is no right way to finance a venture, different financing sources focus on the various stages of a businesss lifecycle11

Founders, Friends & FamilyVenture CapitalistsAngelsBanksAcquisitions &Equity Markets PROPRIETARY AND CONFIDENTIAL

11Developing Concept and Proving TechnologyRisk Profile: HIGHInvestment: $50-$500KCharacteristics: No product, no customers, primary risk is R&DSophistication: Low12

Founders, Friends & Family PROPRIETARY AND CONFIDENTIAL

12And again,Not to mention the personal risk of mixing business with family13

Founders, Friends & Family PROPRIETARY AND CONFIDENTIAL

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Engaging the Market14Risk Profile: HighInvestment: $100K-$1M, might take board seatCharacteristics: Beta product, no or limited revenue, primary risk is market acceptanceSophistication: Medium

Angels PROPRIETARY AND CONFIDENTIAL

14Venture Capital15

Risk Profile: Moderate to HighInvestment: Varies by round, will take board seat, detailed term sheetCharacteristics: Varies by roundSophistication: HighEarlyMiddleLateVenture Capitalists PROPRIETARY AND CONFIDENTIAL

15Venture Capital: Series A16

Risk Profile: HighInvestment: $1M-$10M, first institutional round, intended to capitalize company for 6mths 2 yrs or breakevenCharacteristics: Further develop products, sales, marketing, team build out, go to marketSophistication: High

Focus of .406 Initial InvestmentEarlyMiddleLateVenture Capitalists PROPRIETARY AND CONFIDENTIAL

16Venture Capital: Series B and C17

Risk Profile: ModerateInvestment: Typically follow-on rounds, higher valuation (hopefully)Characteristics: Operations, growth, new markets, etcSophistication: High

EarlyMiddleLateVenture Capitalists.406 Follow-on Investments PROPRIETARY AND CONFIDENTIAL

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Raising Venture Capital18Prepare

Find the Right VC

Approach

Pitch

Due Diligence

Raising Venture Capital is a long, resource intensive processMake sure youre ready!!!1-8 weeks3-15 weeksA long timePer VCPer VC PROPRIETARY AND CONFIDENTIAL

Note animation18Raising Venture Capital19Prepare

Find the Right VC

Approach

Pitch

Due Diligence

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19Make sure youre readyAre you credible do you know someone who is?

Show, dont tell no excuse in today's environmentLeverage SaaS and open recourses (S3) to put together a small beta on a small budgetFocus on the things that matterMarket, team, innovation, value proposition, competitive advantageAnd not Business cards, branded merchandise, catchy slogan, etc.

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Who would you give money to?20Make sure youre readyDo you have a business capable of delivering venture grade returns?Operational leverage highly scalable business modelHigh margins and profitsActive acquisition market

Can your company make an investor 10X returns one day??

Why will it work? Why will people buy it? Why is it defensible?

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21Raising Venture Capital22Prepare

Find the Right VC

Approach

Pitch

Due Diligence

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Finding the right VCUse a systematic approach Rifle, not shotgun

23Do your homework Lots of VCs out there

Investments by SectorIT 561 firmsHealthcare 382 firmsB/C/R 388 firmsCleantech 161 firms

848 VC Firms in US PROPRIETARY AND CONFIDENTIAL

23Finding the right VCNot all VCs created equal A good VC should provide both monetary and non monetary support

24Operational experienceHiring contactsService provider contractsProfile and PRExit optimizationExperience throughout process

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24Raising Venture Capital25Prepare

Find the Right VC

Approach

Pitch

Due Diligence

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Getting a meeting26Website drop box or out of the blue emails DO NOT WORK!!!Build relationships at target VCs or with their friendsNetwork like crazyBlogAttend events and conferencesCreate buzz

Find connections anyway you can!!! portfolio company, neighbor, friend of a friend of a friend406 Stat PROPRIETARY AND CONFIDENTIAL

26Preparation and Execution27Pre 1st Meeting

Twitters original plan, circa 2000. Credit: Jack DorseyDont send a business planNobody will read it and your business will be different by the time youre done writing itHave a killer Executive Summary and/or PPTThis is the first thing a potential investor will see and if not done well, will be the last

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27Raising Venture Capital28Prepare

Find the Right VC

Approach

Pitch

Due Diligence

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28The Pitch29Intro: Define the company, business, service, or product in a single sentence.Team: Identify the core group of talent that can execute the milestones.Opportunity: Why is your company relevant? Who are your customers? Are they rich?Solution: Demonstrate your solution and differentiation.Business Model: How will you make money? What have you accomplished to date?Competition: Who are your competitors? How are you defensible?The Ask: What do you need and why you need it. BE SPECIFIC.

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29The Pitch: Excite! dont educateDo:Be organizedBe on timeLeave ample time for Q&AKnow exactly what you need and why you need it

Dont:Take longer than 30 minutes on your presentationUse more than 12 slidesUse jargonMake assumptions

30Presentation

Never invest in any idea you cant illustrate with a crayon.

VCs Like to Hear:Were just nerds working out of a garageI dont knowI dont have to be CEOWere going to pick the best partner PROPRIETARY AND CONFIDENTIAL

30Raising Venture Capital31Prepare

Find the Right VC

Approach

Pitch

Due Diligence

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31Expectations and DiligenceLots of dialogueDue diligence callsTeam build outStrategyFormal partnership presentationAdditional reference callsPersonal reference callsLegal, accounting, and auditDraft legal documentationBackground checks32Pre Term sheet

Post Term sheet

Be honest The due diligence process is intense PROPRIETARY AND CONFIDENTIAL

32Expectations and Diligence33Typical Deal Terms

20-50% ownershipBoard representationLiquidation PreferenceOption poolExclusivity periodParticipation rightsCertain control and veto rights

This hardly seems fair. PROPRIETARY AND CONFIDENTIAL

33Key things to consider, if youre one of the lucky few34Its a two way streetReferences Speak with other founders/CEOs in portPortfolio Right community for you, synergies with portfolioRelationships Are these VCs people you want to work withValuation Right partner at fair price vs. any partner at best pricethink of it as a marriage.

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Note animation34One last thing35Prepare

Find the Right VC

Approach

Pitch

Due Diligence

.406 looked at over 1,200 deals in 2008 and funded 4!

Listen, learn, accept it, bake learnings into your next pitch.This is HARDDont give up! PROPRIETARY AND CONFIDENTIAL

Note animation353636Questions?

To your new ventures success. PROPRIETARY AND CONFIDENTIAL

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