Exploiting fundraising opportunities for entrepreneurs

The Women’s Foundation June 2015 Fritz Demopoulos

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Fundraising is not for every business

Do you have a business (or idea) worth funding?

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We have an array of funding sources available

Venture Capital – Early GSR, IDG, KP, Horizon, Sequoia, Qiming

Venture Capital – Growth GGV, DCM, Sequoia, Softbank

Angel Funds Zhen Fund, SV Angels

Corporate Funds Qualcomm, Intel, CKH, Google, Softbank

Private Equity Hillhouse, Dragoneer, TPG

Hedge Funds Maverick, Brookside, Janchor, Farallon

Super Angels William Bean

Accelerators 500 Start Ups, TechStars, Cocoon, Next

All these firms are dabbling in early stage. Some more than others.

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Let’s not forget alternative sources of capital, albeit they may not be ideal

Seed and angel – Mostly our friends & family (avoid your in-laws)

Debt – May not apply to early stage businesses

Project financing

Receivables

Payables, employees – Not recommended

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Companies go through a financing life-cyle

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We’ll try to focus on venture capital, angel, seed, & PE; the most common funding sources for early and mid-stage high-growth businesses

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Early stage investors have a few basic financial and psychological needs

Naturally, they want to make a lot of money

Hit & miss nature means they need to earn 10 x on a successful deal

Of course, investors always want to take credit for your success

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That means . . .

Scalable business models

Theoretically, should reach massive returns

The addressable market needs to be big enough

And, your expected market share needs to be reasonable enough

Valuable and unique strategy

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Dell is valuable but not unique

Chrysler Viper was unique but not valuable

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Timing? Game of probability

Possible to raise money on a PowerPoint

But normally, we need to see some traction

Traction – Management team, MVP, revenues, usage traction, unique technology

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Commitment is crucial

Did you put up some of your own money? . ..”skin in the game”

Were you capable enough to convince other capable people to join you?

If you are not full-time, no one will ever take you seriously. .. unless you have a track record, but you wouldn’t be listening to me then

Never say, “only if I raise the money, I’ll be full-time, hire people, get going, etc. . .”

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The deal …

Financial issues

Non-financial

issues

Negotiation / tactical

issues

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Financial issues

Valuation? Multiples or comparable companies

No one uses CAPM, DCF except as a reference

Investors’ thinking is different

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$6 mln for 1/4th of your company

$3 mln for 1/4th of the same company

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Non-financial

Control of Board

Control of decisions, CFO & other

Co-sale rights, drag-along rights, first rights

Anti-dilution provisions

Preferences

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Negotiations / tactical issues

Sequence, more or less

-> Tease-> Preliminary-> Additional tease-> Heating up & partner involvement-> Detailed conversation & partial DD-> Partner meeting-> Term sheet-> Comprehensive DD-> Closing-> Funds wired & money in the bank

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Myth – Providers of capital are indeed more intelligent

Reality – Providers of capital think they are more intelligent

Can’t listen to everything VC’s say

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No one will ever say no to you…or very rarely

Why would VC’s limit their options in case for some reason your vision, no matter how asinine it is, actually materializes

Instead, they’ll say .. ..”you are too early for us, but we’re interested”

“we focus on expansion capital, but we’re interested”

“we are in the process of raising a new fund, but we’re interested”

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Most of the time, no one is interested

That’s fine…even for experienced entrepreneurs, you are only as good as your last project..and VC’s still forget

….you’ll definitely know if a VC eventually becomes interested

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Be aware of the types of people you meet

Dangerous

Opportunity

High potential

Waste of time

Expert / Knowledgeable

Inexperienced / Uninformed

InterestedUninterested /Other agenda

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Can’t underestimate the power of influencers

Influencers

Media

Analysts

EventsService firms

Peers

- Trade, bloggers, pundits

– Industry analysts, investment banking analysts, research firms

– Conferences, forums– Legal, accounting, bankers

– Related companies

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You’d be surprised how naïve some people are

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NDA’s are lame. ..

There are no real secret ideas

Only things worth keeping confidential are client lists, source code, names of key engineering talents. ..so never share the entire picture

Anything you provide, whether or not you sign an NDA, will definitely be floated to the VC’s portfolio companies

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“Image is everything”-- Andre Agassi

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You need to look like a CEO/entrepreneur

Every industry is different

Two strategies…fit perfectly with expectations, or do the opposite of what is expected. …

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How to find venture capitalists or seed investors?

Well, it’s their job to talk to companies and read business plans…it should be pretty easy to get in front

Needless to say, personal recommendations are very important

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It is very competitive

A top-tier VC will be reviewing 500-800 business plans per month

And maybe make 1 investment per month

And as an asset class, VC is underperforming over the past 10 years

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Remember, people & process

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Thanks & good luck!

Fritz Demopoulosfritz@queensroadcapital.com