A little book about funding

– from scratch!

Written in collaboration with the investors: Mette Fløe Nielsen, Søren Starup-Jensen and Jesper Hart-Hansen

Do it yourseІf – together with us

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Dear start-up This is a very quick D-I-Y guide on how to fund your start-up –starting from scratch all the way to serious business. This DIY guide will take you through the funding hassle, from the pre-seed phase to the seed round.We’ve put together some of our most important knowledge about funding and a couple of our greatest tools for moving forwards – in a book you can put in your pocket and share with your team.Feel free to contact us for independent advice and a second opinion on how you can change the world with your business ideas, obtain funding to make it happen or become even biggerAll the best,

Your business friends in Vaeksthus Copenhagen

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In general, what kind of start-ups can raise funding?

You have a great idea; a solid team and you have already worked hours and hours to realize the potential of your idea. You have come far enough to know that not only do you have a great idea – you also have a solid proven business concept. You have already come a long way – in what we call the five phases of funding:

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1. Idea: You have found a new way to solve a problem.2. Concept: You have interacted with your target group

regarding your idea, and they want to use and buy your future product or service.

3. Product or service: You have a product or service you can sell or the prototype for one.

4. Business: You have proven that you can make money by selling your product or service.

5. Scale: Your business is ready to scale up on the global markets.

Get moving with the knowledge, tools, tips and tricks you need to go from the concept/proof of service phase – You are in now moving on to funding and scaling.

When do you realize the need for external funding?Pursue your start-up journey for as long you can with your team’s blood, sweat and tears. Do it for yourself (it’s a great feeling!), do it for your team (realize the potential of excellent teamwork), and do it for your business (the value of your start-up will only increase the more you do on your own to begin with – and money from people other than customers is never for free). Utilize your own funds first, then seek funding from people close to you (Friends and Family)

– all things considered, use:

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When do you realize the need for external funding?BOOTSTRAPPING: usually refers to starting a business on a shoe-string; stretching resources -both financial and otherwise – as far as they can go without external funding or resources

Only when you have gone through a period of bootstrapping, and your start-up has come to the point where it can’t squeeze all the potential out of your idea / concept / product / business without money to realise it, is it time to embark on the journey of outside funding.

Realize that it takes money to make money.

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“ Don’t worry about fun-ding if you don’t need it. Today it’s cheaper to start a business than ever.”

- Noah Everett, Twitpic Founder

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Are you ready to seek money?If you can say yes to most of the questions below? Then you may be ready for funding:1. Does your idea solve a problem in a new way or realize

unseen potential in an area already implemented?2. Do you have a solid concept for how to build your idea

into a unique product/service?3. Have you tested your concept on your target group? 4. Do you have a Minimum Viable Product (MVP)?5. Do you have a great team who can build your concept

or product into a new business? 6. Do you have a strong business model for how to make

money from your product/service?

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Are you ready to seek money?7. Do you have a strategy / plan for how to run your

start-up with money from outside? 8. Do you know how much money you need to take your

start-up to the next level? 9. Do you have an idea about the value of your company?10. Do you have an idea about what a potential investor will

demand from you and your business once the funding has materialized?

11. Is it necessary to get money from outside to take your start-up to the next level, i.e. have all means that do not involve you losing shares in your company been utilized?

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Ownmaturity

Organizational readiness

Product readiness

MVP

Red or blue

ocean

Businessvalue

Businessmodel

yourthoughts

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What are investors looking for in early stage start-ups? Only start-ups with a long-term growth potential have a chance of raising professional funding. Investors both public and private are usually looking at these core areas:

• The Team – do you, as the founder, and your team have the ambition and qualifications to honor your vision? Remember that your ”Team” not only includes those directly engaged in the daily life of your company but also people you are asso-ciated with e.g. via Advisory Boards, Mentoring or others.

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What are investors looking for in early stage start-ups?

• The (Product) vision – how can your product make a deep impact on your target group – and how will you realize this potential?

• The Market – what market do you operate in and how large a realistic market share can you get?

• Traction – what have you accomplished so far – not only on a financial basis but also regarding branding and market penetration and partner/vendor agreements

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“ When looking for funding, don’t just look for cash. Look for the right people.”

- Jodie Fox, Founder of Shoes of Prey

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How to do it Tip #1: Be mentally prepared

When making the decision to start a fundraising campaign for your business there is one central thing you need to be prepared for:

• Inmostcases,ittakestimetogetaninvestment agreement closed – lots of time!

No matter whether you decide to seek public funding (compe-titions, grants and public funds) or go private (funds or business angels) prepare yourself for a lot of meetings, presentations, debates and questions. ”Date” a lot of investors

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How to do it How to do it at the same time and build up strong relationships, before you ask them to marry you. It’s all about the right match, both for you and the investor.

Be prepared for the strain, your efforts to raise funding will stress your business (you will be away from the office a great deal) and for the questions, critique and feedback potential investors will direct at you. Make sure that your business can run smoothly even when you are not in place at all times and, most importantly, make sure you are ready for the challenge of meeting investors.

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Elevator pitch

Tip #2: Train your elevator pitch

You do not always get the chance to sit down with potential investors for hours and hours. You will typically bump into investors at entrepreneurial events, competitions, social gatherings or places you never thought of, such as Sport events, private parties or even a random meeting in an airport. For this reason, you need to be prepared to talk about your start-up in 30 seconds. You don’t have time for details, so talk about:

HOW TO DO IT

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• Your team – who are you, when you met, what your roles are in the company, how the shares are distributed between you, who do you listen to outside your company (for advice).

• The vision behind your start-up - where do you see your start-up in 1, 3 and 5 years – and how will you get there?

• The problem you solve with your product or service – what are the irritations for your target group?

• Your product’s unique selling points – why is your product better than the rest?

• Your funding needs – how much do you need, where is the money going and how much of your business do you want to sell?

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Investor pitch

Tip #3: Create a great pitch

If an investor shows interest in you and your company you need to be prepared to deliver a great pitch. The best pitches answer a lot of questions about your vision, the product, your business, the team – but in a very brief way! Remember: • Train your pitch before a meeting. Again, and again.

Video it, watch it, ask for comments. • Talk to the investors’ hearts and heads; both are essential

for a great story. Investors are people too and will sympa-thize more with you and your idea if you can touch them where their heart beats. Prepare for a pitch meeting by

HOW TO DO IT

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Investor pitch investigating the potential investors previous investments and

the results of these (Google, Linkedin and company web-sites are good for this – for financial numbers see virk.dk) his/her or the organization’s profile and whether they have causes they hold dear to their heart, such as sustainability.

• Make slides with pictures and text – but not too much. You can narrate the rest and they can ask questions.

• Be likeable, be you on a great day! Show them you can do this, it’s YOU they are investing in.

Link to pitch: www.highspark.co/startup-pitch-deck-examples/

HOW TO DO IT

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investigate the funding market HOW TO DO IT

Tip #4: Investigate the funding market thoroughly

Before you get involved in a funding exercise, do your home-work. Not all money is wise for you to take into your company and it is difficult to maneuver in the jungle of seeking and obtaining funding. Decide upon the funding market you want to attack – local or global, public or private, organization (VCs) or private (Business Angles) and make broad searches for possibilities via the search engines on the Internet. Ask around in your network or seek advice from publicly funded advisory organs and thoroughly evaluate the type of funding that would suit you and your business the best.

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Sources of funding HOW TO DO IT

Tip #5: Methods of funding

Extended credit, loan, convertible debt (a loan to start with and, later, either a call for shares or for money) or direct equity.What you target when seeking funding depends on your readiness to take in funds, the risk a potential investor is willing to take and the timing of your fund-raising campaign.If you are interested in keeping shares in your company for yourself and/or your team, direct yourself at funds connected to loaning. Whether you seek loan-based funding via your bank, private persons or VCs, be sharp when

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Sources of funding HOW TO DO IT

negotiating terms and conditions. As the founder of a seed company, you might need to take loans at high rates of interest due to the higher risks the loan giver must take. If you choose to take in funding via a convertible note, be aware of the conversion rate (from money to equity) and the timing of this. The valuation of your company might be one at the time of the debt activation and an entirely different one at the time of conversion. Be willing to take the risk that the value of your company might be something quite different than you expected upon conversion and the dialogue this might lead to with your investors.

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Sources of funding HOW TO DO IT

When accepting direct equity for shares, focus on the shares distributed to your investors and whether you can get something more than money from these e.g. valuable advice or an opening in a network or sale activities. Obtain clarity about the require-ments for involvement of the investors hereunder reporting demands from your investors and make sure that your organi-zation can comply with the requirements from day one.

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Sources of funding Tip #6: Valuation

No matter what kind of funds you are seeking for your business, you need to have a realistic idea of the value of your business. Putting a price on your “baby” is not easy but having a realistic idea of what to offer potential investors prior to engaging in dialogue with them will give you an advantage.

HOW TO DO IT

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A couple of tips when putting a price tag on your business: • Matureness of your idea/product/service• Financial numbers – top and bottom lines, realized and planned for• Red or blue ocean business • Market size and potential market share• Market attack plan• Amount and size of recent exits• Is the investor ready to pay a premium

to get into the business early?• How desperate are you for the funds?

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Types of investment – early stage It can be a jungle out there, when you are trying to find a) an investor and b) the right investor. Often, it’s a matter of networks and who you know, so please get out of the garage and go out and meet people! But, before we look at where to find investors, we want to give you an overview of the different kind of categories of investors available at the early stage: • Bootstrapping

(e.g. customer pre-payments)• Friends, Fools and Family (FFF)• Co-funding • Crowdfunding

• Banks • Public funds • Business Angels • Risk willing VCs

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Types of investment – early stage DEFINITIONS

BOOSTTRAPPING Never forget the most attractive way for your start-up to finance its growth: paying cus-tomers. If possible, create a minimum viable product and get some traction on your own. Investor money is not for free and you will only become more valuable in the eyes of investors, if you can show a real business instead of just visions, ambitions and ideas.

FFF Friends, fools and family who believe in you personally and are willing to lose their money to show how much they love or trust you. Mostly they don’t demand anything in return for their money, which can make this kind of funding very attractive.

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Types of investment – early stage DEFINITIONS

CO-FUNDING Finding a peer – who is a customer, a part-ner or even a competitor (becoming a partner) who wants to share the financial risk of building your start-up – can be a good idea. You might gain access to a more mature organization if you team up with another company and you will have the strength, both in terms of manpower and financially, to build your company. Your company will also gain credibility on the market thanks to legitimating your idea by this method. Taking in a ”partner in crime”, however, implies that you lose shares from day one, so weigh the pros and cons thoroughly before choosing to take this route.

CROWDFUNDING The use of small amounts of capital from a large number of individuals to finance a new business venture. Crowdfunding takes advantage of the easy accessibility to vast networks of friends, family and colleagues thanks to

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Types of investment – early stage platforms such as Kickstarter etc. as well as social media websites such as Facebook, Twitter and LinkedIn to get the word out about a new business and to attract investors. Crowdfunding has the potential to increase entrepreneurship, by expanding the pool of investors from whom funds can be raised beyond the traditional circle of owners, relatives and venture capitalists.

BANKS Good old-fashioned bank lending is another invest-ment option. Banks work just like investors in that they want to know what your business plan is and want some sort of proof that you’ve thought about the challenges ahead and problem- solving techniques if problems should arise.

DEFINITIONS

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BUSINESS ANGELS Wealthy individuals or groups, who like to invest their personal funds in start-ups. Although it’s easy to explain what an angel investor is, their role can vary quite a lot. Some angels are happy with a percentage of return on their investment while others demand a share in the ownership of the company. Angel investors often demand continued insight in the business’s progress – even offering their own intellectual capital via advice/mentorship/board positions in your company.

PUBLIC FUNDS Public funds invest in projects, start-ups and companies with a great potential that find themselves, nevertheless, in a very difficult (financial) phase, where funding can be a matter of life or death for the company. For a country to invest in new, potentially very successful, companies can mean new jobs in the long term, therefore public funding might be an option for your start-up in the early stage funding phase.

Types of investment – early stage DEFINITIONS

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Types of investment – early stage

RISK WILLING VC’S Venture funds with high risk investment profiles. An investment fund that manages money Due to the political and financial landscape, where it is hard to profit from old fashion investments in stocks and bonds, more and more venture funds are seeing the light of day around the world. Most of these have a non-risk profile, meaning that they do not want to invest in early-stage businesses. Many, however, are looking more and more into the area of seed investment and some have already made the decision to create an ”ultra-high” risk strategy directed at the start-up market. A venture fund is driven by its return on investment results and will, in most cases, demand fast rates of return and a high degree of reporting and documentation from your busi-ness. On the other hand, many venture funds also have the expertise and knowledge to aid in the day-to-day progress of your business e.g. via a Board of Directors or Advisory Board.

DEFINITIONS

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Where do I meet investors? It can be a jungle out there, when you are trying to find a) an investor and b) the right investor. Often, it’s a matter of networks and who you know, so please get out of the garage and go out and meet people!

Tips for places to meet investors: • Anywhere, actually :0)• Entrepreneurial Events e.g. “matchmaking” events, start-up boot

camps and advisory agencies, where fund raising is central.• Social gatherings.• Network’s network. Once you have met your first person, who

invests money in start-ups, always remember to ask for an introduction to other investors, who may benefit from being aware of your start-up.

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Can you speak venture-lingo?

Are you familiar with all the terms used in funding and venture capital? Go to Investopedia.com and familiarize yourself with all the words, abbreviations and terms, before you go out and meet investors of all types.

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Rules for the funding process

The cardinal rule, when raising capital is to secure a competitive market for your investment efforts:

• Research relevant investors – don’t use a scatter-gun approach, when approaching investors.

• Make sure you get a warm introduction or recommendation to these investors – use your network and network’s network.

• Pursue your fundraising with many investors simultaneously and practice your pitch constantly

• Build a sense of demand in the eye of the beholder

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Rules for the funding process

• Don’t hesitate to communicate your campaign if appropriate. Make a LinkedIn campaign where you, by the means of digital marketing, attract potential investors, do a Spring Board on your Fund Raising or write your needs openly in your public profile. At the stage your business is in at the moment, you have nothing to lose in communicating your needs.

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5 secrets for you – don’t tell anyone… 1. Investors are humans too 2. Investors care (and not only about

their financial interests in your company)3. The chemistry between you and your potential investor is more

than essential, so do your homework on the investors you talk to 4. Don’t oversell your idea – honesty, even if this involves talking about

the negative sides of your start-up, is always the best way forward 5. Keep in touch with potential investors on an ongoing basis – they

might be relevant in a later round of funding. A brief status, up-date every 3 months or an invitation to a cup of coffee and a chat about your business is always seen as a sign of goodwill

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Contact us

Lasse SørensenMobile: 3010 8085lso@vhhr.dk

Kaspar GanerMobile: 3168 4100kga@vhhr.dk

Hans C. AndersenMobile: 4034 9054ha@vhhr.dk

Mette SandgaardMobile: 2619 2652 msa@vhhr.dk

Need more independent advice about funding?

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Where to go?Obtain a quick overview of events, competitions, crowdfunding platforms, accelerator programs, boot camps, shared offices, venture funds, public funds and grants, business angels etc. at: inno-overblik.dk/

About fundinginvestopedia.com/exam-guide/cfa-level-1/alternative- investments/venture-capital-investing-stages.asp

Looking for fundingGeneral overview: • dvca.dk/

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Where to go?Public funding: • innovationsfonden.dk• vf.dk Financial advice for free • vhhr.dk • connectdenmark.com

Private funding• nordicmakers.vc• bluestarcapital.dk • seedcapital.dk • sunstone.eu • alliedcrowds.com• byfounders.vc/

This is a very quick guide ...… to how start-ups can raise funding in the early stage.

We’ve put together some of our most important knowledge about funding and a couple of our greatest tools for moving forwards - in a book you can put in your pocket and share with your team.

Get the online version here: www.vhhr.dk/a-little-book-about-funding-from-scratch