Topics Covered. Funding An Early Stage Technology Company

Transcription

1 Funding An Early Stage Technology Company Terry W. Smith TFG Entrepreneur in Residence 1 Topics Covered PreparaBon for funding Funding sources Types of value proposibons Stages of company maturity Funding presentabons and business plans Funding deal terms Stock opbons Boards of directors and advisors 2 1

2 PreparaBon For Funding A valuable solubon meets a high- value need Bold compebbve differenbabon Defensible IP, trade secrets, complexity as a barrier (being first rarely mapers ) Customers who recognize and value the proposed solubon Easily explained value proposibon Scalable business model Ask yourself honest and tough quesbons 3 Funding Strategy Guidelines Match the stage of your company, your value proposibon, and the type of funding source Raise enough to get to a milestone that supports a next funding, plus a safety margin (more money is beper) Some funding sources preclude others Some investors and most corporate funds usually only follow Focus on finding a lead investor early (help with syndicabon) Corporate relabonships can provide validabon and funding Market and technology references are essenbal Incomplete strategies are difficult to fund A complete enough team is essenbal depends on deal risk 4 2

3 Founders, family, friends Incubators Revenue, pre- sales via crowdfunding Angel investors Seed funds Equity crowdfunding Corporate partners: NRE & equity Venture capital firms 5 Founders, family, friends Limited amounts and ability to do mulbple rounds NegaBve events damage important relabonships DiluBon, modified rights, inability to maintain stake Revenue Good if the product is robust and support is ready Crowdfunding (kickstarter, indiegogo, etc.) Equivalent to pre- selling product before deliverable, at a discount to planned retail price Creates an obligabon to ship Fits consumer products best (broad appeal) Works if development & producbon costs and risks are low 6 3

4 Angel investors Small investments typically $25K to $100K per person Group or syndicate must be formed Market and technical due- diligence shared Structured as converbble debt with discount on next equity round (typical: 20%) Becomes a debt that must be re- paid with interest if next round delayed This makes an equity round very difficult because debt must be repaid using the new money Lists and forums AngelList, Keiretsu, Band of Angels, SV Angels, 7 Seed investors Seed funds invest up to ~$1.5 Million per round Typically $250K to $500K per fund Typically 2-3 co- investors split a seed round Occasionally partners in a VC firm will personally seed a deal Structured as Series A preferred equity rounds Money from seed funds within bigger venture firms does not guarantee follow- on investment If you are early stage, with a good quality deal, validated adopbon, product Proof of Concept, seed money may be easier than angel money 8 4

5 Corporate partnerships Ideal model is payment of NRE for delivery of a product or service (payments for milestones) No equity, no claim on IP, condibonal exclusivity Counts as revenue Use performance triggers to release exclusivity in licenses Corporate venture funds Typically coupled with a strategic interest They want to use, make, or re- sell your product Typically will not lead a syndicated round, usually follow VC as lead May make a solo investment if really strategic technology 9 Venture capital firms Each fund will typically need to invest a minimum of $1m to $3m in a Series A round Reserve 2X to 4X for future rounds, depending on fund size Will only co- invest with one or more other funds whose interested partner is known and acceptable If interested, will have a clear decision about offering a terms sheet (leading) or following another lead Leads want to syndicate (control) who else gets in Leads do most of the due diligence work Followers need to be convinced by an enthusiasbc lead Most Silicon Valley funds need to start at Seed or A round and will conbnue to invest Some funds only do later stage, larger investments 10 5

6 Types of Value ProposiBons Slight Improvement Too close to exisbng solubons, subtle benefits More like a new feature, less like a whole new product Valuable Improvement AdopBon proven or obvious BePer performance, lower cost, more complete solubon, easier to use Paradigm Shin AdopBon needs to be validated EnBrely new way of solving a recognized problem Solves mulbple problems with one new solubon Boil the ocean Too broad, too many buying decision makers, too much technology or market risk, taking on large established compebbon 11 Stages of Company Maturity Concept, idea, architectural proposal Proof of concept demo Working product, incomplete, not validated Working product, validated Revenue- ready product Revenue or adopbon started Cash generator You are rebred and living on a tropical island 12 6

7 Investor Due Diligence Process Team credibility Personal interacbons, references Market adopbon Proof that decision makers will buy your product at the planned price Either actual referenceable adopbon or TesBmony of credible customer references Technology risk reduced Proof of concept prototypes, demos TesBmony of third party technical experts 13 Funding PresentaBons & Plans Important fund- raising tools A two- page company summary A <25- slide presentabon (topics on next slide) A short video demo (excellent if applicable) References (personal, market, technology) Backup materials Technology due diligence presentabon CompeBBve analysis (detail) Financial operabng plan (Excel) A corporate enbty (C- Corp), web page, business cards Most important A complete(!) business strategy The ability to describe and discuss your business with other experts 14 7

8 Funding PresentaBons & Plans Slide presentabon topics: Management Team Explain your team s experiences that are relevant to the success of your current venture. Mission Statement Explain your company s posiboning and charter (scope) in clear high- level terms. Opportunity PAIN: what painful issue are you addressing and how extensive is the issue (e.g., paper cut vs. bleeding artery)? Your Solu5on Why your venture will not only solve the pain, but will also make a ton of money for your investors in the process. Market Clearly define the addressable market for your pain reliever, which is a subset of the total number of people who are feeling the pain; the total market size is not so relevant. Product What does your pain reliever look like, how is it implemented by the customer and what future products do you expect to roll out? Distribu5on and Sales How do you profitably get the pain reliever to the consumers experiencing the pain? Channel strategy. Patents and Trademarks Describe any defensible intellectual property associated with the pain reliever. Compe55on Who else offers similar pain relief and why is yours so much beper? Financials Revenue, expenses, and cash consumpbon for first 3- years. Capitaliza5on How much money are you looking for, what will you do with it and what other funding sources (if any) do you already have secured? If a valuabon has been established by investors, what is it? Summary Slide List the 4 key strengths that make this a great investment. Video of demo 15 Financial OperaBng Plan An Excel spreadsheet model 2- years by month, 3 rd year by quarter Income statement Revenue, COGS, warranty cost >> net income Expenses (parbal list): Headcount (salaries, taxes, benefits) Contractors, outsourcing, services FaciliBes, telecom, hosbng, non- capital expenses Monthly depreciabon of capital expenses Cash flow statement Financing assumpbons (Cash- In: equity, debt, NRE) Uses of cash (operabons, capital expenses) Cash balance (each month or quarter) 16 8

9 Funding Deal Terms A terms sheet is a negobable proposal from an interested lead investor It is NOT a financing unbl the enbre syndicate has accepted the lead s proposed terms Things to watch carefully LiquidaBon preference: may determine whether employees get anything in a liquidabon or low- value acquisibon RedempBon or buy- back provisions Non- standard terms make future rounds more difficult Reserved opbon pool Typically 20 25% of total, does not dilute the investors, covers all hires unbl next round Includes refresh grants 17 VC Funding: OpBon Pool Impact Crea5on of the pool only dilutes the founders Issuance of pool shares dilutes everyone to the levels shown Saving pool shares helps everyone 18 9

10 Stock OpBons & CompensaBon Stock is the most valuable resource Use as a long- term incenbve Build a stock opbon budget by posibon VP (2 3%), Sr. Engr (1 2%), Jr. Engr ( %), etc. Avoid using stock as compensabon for part- Bme or non- permanent employees (contractors) Err on the side of under- sizing inibal grants; use re- fresh grants to correct and reward proven contribubon 48- month vesbng with 12- month cliff is tradibonal Pricing of opbons is very important (tax and legal issues) Founder s stock Only for 2 4 key founders; balance amounts by expected future contribubon Impossible to take back vested shares Some vesbng accelerabon is OK (for pre- funding contribubon, on change of control, terminabon without cause) Get founder s stock issued before you get a terms sheet! 19 Boards & Board MeeBngs Board of directors Usually the CEO plus major investors (Seed, Series A, B, C, etc.) Only one other co- founder if right personal skills Keep it small; usually an odd number of directors Monthly meebngs: 2- hours maximum, wripen material Investors will want to approve an outside director American investors depend on management to make decisions and run the company (not the board) Board of advisors Not a good fit for all startups Advisory relabonships best if kept flexible Keep stock grants small, with 1- year vesbng 20 10

11 Conclusions Work closely with mentors and advisors to determine an opbmal funding strategy for your company It might be a sequence of funding amounts and methods Refining your business strategy is key to fundability Success with investors is the result of A fundable team A differenbated business strategy A technology advantage Carefully choose who you approach as investors Domain knowledge, individual s focus, non- conflicbng investments Screen them before you schedule a meebng Personal referrals by someone who knows you and your deal will get you meebngs with the right investors 21 11