Transcript TLC Core - 406 Ventures

How to Get Funded
20 July 2015
Why take funding
Growing an early stage company requires capital
Entrepreneurs are faced with tough decisions about when
and how to finance this growth…
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PROPRIETARY AND CONFIDENTIAL
Getting Started
Bootstrap: Fund primary development through internal cash flow and forgone
paychecks
Positives
- Maintain ownership and control
- Customer becomes king
- Forced rationalization
- Able to more effectively channel $$$
Internal Cash Flow
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PROPRIETARY AND CONFIDENTIAL
Getting Started
Bootstrap: Fund primary development through internal cash flow and forgone
paychecks
Negatives
- Sub-optimize opportunity
- Loss of market share
- Unable to rapidly expand product offering
- Prisoner to economic cycles
Internal Cash Flow
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PROPRIETARY AND CONFIDENTIAL
Getting Started
Not to mention the personal risks…
“Forget the wheel. Invent diapers.”
Internal Cash Flow
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Alternative Capital Sources
As a result, most ventures at some point seek capital from outside sources
In addition to $$$, outside investors can bring with them:
 Strategic partnerships

Talent networks

Management expertise

Etc.
Founders,
Friends &
Family
“I call it ‘The Wheel’, but so far I’ve been unable to
attract any venture capital.”
Angels
Venture Capitalists
Banks
Acquisitions &
Equity Markets
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PROPRIETARY AND CONFIDENTIAL
Which can in turn…
Take a business from…
… to
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PROPRIETARY AND CONFIDENTIAL
Is it possible to create a large business without outside capital?
Sure, but…
(Lifecycle Dynamics of Venture Capital report, Duke University)
VC backed firms avg. 6X the number
of employees compared with non
VC-backed firms, ten years after
inception
VC backed firms avg. 5X total sales
compared with non VC-backed firms,
ten years after inception
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Where? When? How?
Where to get this capital, when to raise it, and how much to
raise are critical in determining a new venture's success
 Like shifting gears in a car
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Where? When? How?
As a company matures, risk diminishes, and the universe of
potential backers increases
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Where? When? How?
Although there is no “right” way to finance a venture,
different financing sources focus on the various stages of a
business’s lifecycle
Acquisitions &
Equity Markets
Banks
Venture Capitalists
Angels
Founders,
Friends &
Family
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PROPRIETARY AND CONFIDENTIAL
Developing Concept and Proving Technology
Risk Profile:
HIGH
Investment:
$50-$500K
Characteristics:
No product, no customers, primary risk is R&D
Sophistication:
Low
Founders,
Friends &
Family
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PROPRIETARY AND CONFIDENTIAL
And again,
Not to mention the personal risk of mixing business with
family…
Founders,
Friends &
Family
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PROPRIETARY AND CONFIDENTIAL
Engaging the Market
Risk Profile:
High
Investment:
$100K-$1M, might take board seat
Characteristics:
Beta product, no or limited revenue, primary risk is market acceptance
Sophistication:
Medium
Angels
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PROPRIETARY AND CONFIDENTIAL
Venture Capital
Risk Profile:
Moderate to High
Investment:
Varies by round, will take board seat, detailed term sheet
Characteristics:
Varies by round
Sophistication:
High
Venture Capitalists
Late
Middle
Early
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PROPRIETARY AND CONFIDENTIAL
Venture Capital: Series A
Risk Profile:
High
Investment:
$1M-$10M, first institutional round, intended to capitalize company
for 6mths – 2 yrs or breakeven
Characteristics:
Further develop products, sales, marketing, team build out, go to
market
Sophistication:
High
Focus of .406
Initial Investment
Venture Capitalists
Late
Middle
Early
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PROPRIETARY AND CONFIDENTIAL
Venture Capital: Series B and C
Risk Profile:
Moderate
Investment:
Typically follow-on rounds, higher valuation (hopefully)
Characteristics:
Operations, growth, new markets, etc
Sophistication:
High
.406 Follow-on
Investments
Venture Capitalists
Late
Middle
Early
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PROPRIETARY AND CONFIDENTIAL
Raising Venture Capital
Prepare
Find the Right VC
Raising Venture Capital is a long,
resource intensive process…
Make sure you’re
ready!!!
Approach
Pitch
Due Diligence
Per VC
1-8 weeks
Per VC
3-15 weeks
A long time…
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PROPRIETARY AND CONFIDENTIAL
Raising Venture Capital
Prepare
Find the Right VC
Approach
Pitch
Due Diligence
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PROPRIETARY AND CONFIDENTIAL
Make sure you’re ready
• Are you credible – do you know someone who is?
• Show, don’t tell – no excuse in today's environment

Leverage SaaS and open recourses (S3) to put together a small beta on a
small budget
• Focus on the things that matter

Market, team, innovation, value proposition, competitive advantage

And not – Business cards, branded merchandise, catchy slogan, etc.
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PROPRIETARY AND CONFIDENTIAL
Make sure you’re ready
Do you have a business capable of delivering venture grade
returns?
•Operational leverage – highly scalable business model
•High margins and profits
•Active 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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PROPRIETARY AND CONFIDENTIAL
Raising Venture Capital
Prepare
Find the Right VC
Approach
Pitch
Due Diligence
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PROPRIETARY AND CONFIDENTIAL
Finding the right VC
Use a systematic approach – Rifle, not shotgun
Fit with
Portfolio
Funds to
Invest
Match of
Size, Stage,
(geography)
In Network
Industry
Focus
Target
VC
Track
Record
Do your homework… Lots of VCs out there
848 VC Firms in US
Investments by Sector
• IT – 561 firms
• Healthcare – 382 firms
• B/C/R – 388 firms
• Cleantech – 161 firms
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PROPRIETARY AND CONFIDENTIAL
Finding the right VC
Not all VCs created equal – A good VC should provide both
monetary and non monetary support
• Operational experience
• Profile and PR
• Hiring contacts
• Exit optimization
• Service provider contracts
• Experience throughout process
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PROPRIETARY AND CONFIDENTIAL
Raising Venture Capital
Prepare
Find the Right VC
Approach
Pitch
Due Diligence
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PROPRIETARY AND CONFIDENTIAL
Getting a meeting
Website drop box or out of the blue emails DO NOT WORK!!!
Build relationships at target VCs or with their friends
• Network like crazy
• Blog
• Attend events and conferences
• Create buzz
Find connections anyway you can!!! – portfolio company, neighbor, friend
of a friend of a friend
406 Stat
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PROPRIETARY AND CONFIDENTIAL
Preparation and Execution
Pre 1st Meeting
Don’t send a business plan
• Nobody will read it and your business
will be different by the time you’re
done writing it
Have a killer Executive Summary and/or
PPT
• This is the first thing a potential
investor will see – and if not done
well, will be the last
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Twitter’s original plan, circa 2000.
Credit: Jack Dorsey
Raising Venture Capital
Prepare
Find the Right VC
Approach
Pitch
Due Diligence
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PROPRIETARY AND CONFIDENTIAL
The Pitch
INTRO
Team
Opportunity
Solution
Business
Model
Competition
The Ask
Intro: 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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The Pitch: Excite! don’t educate
Presentation
Do:
Don’t:
• Be organized
• Take longer than 30
minutes on your
presentation
• Be on time
• Leave ample time for
Q&A
• Know exactly what you
need and why you need it
• Use more than 12 slides
• Use jargon
• Make assumptions
VCs Like to Hear:
“We’re just nerds working out of a garage”
“I don’t know”
“I don’t have to be CEO”
“We’re going to pick the best partner”
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PROPRIETARY AND CONFIDENTIAL
“Never invest in any idea you
can’t illustrate with a crayon.”
Raising Venture Capital
Prepare
Find the Right VC
Approach
Pitch
Due Diligence
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PROPRIETARY AND CONFIDENTIAL
Expectations and Diligence
Pre Term sheet
Post Term sheet
Lots of dialogue
Additional reference calls
Due diligence calls
Personal reference calls
Team build out
Legal, accounting, and audit
Strategy
Draft legal documentation
Formal partnership presentation
Background checks
Be honest – The due diligence process is intense
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Expectations and Diligence
Typical Deal Terms
•20-50% ownership
This hardly
seems fair.
•Board representation
•Liquidation Preference
•Option pool
•Exclusivity period
•Participation rights
•Certain control and veto
rights
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Key things to consider, if you’re one of the lucky few
It’s a two way street…
• References – Speak with other founders/CEOs in port
• Portfolio – Right community for you, synergies with portfolio
• Relationships – Are these VCs people you want to work with
• Valuation – Right partner at fair price vs. any partner at best
price
…think of it as a
marriage.
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This is HARD
One last thing…
Prepare
Find the Right VC
.406 looked at over 1,200 deals
in 2008… and funded 4!
Approach
Listen, learn, accept it,
bake learnings into your
next pitch.
Pitch
Due Diligence
Don’t give up!
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Questions?
To your new venture’s success.
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