First Steps of Fundraising

Angel Labs

• Buying shares in an unquoted private company in exchange for a cash injection

• Unsecured but permanent• Not a loan, an investment

• Angel Investing, Venture Capital, Private Equity, Crowdfunding

What is Equity Capital?

# of angel investments in the US

60,000 businesses

get funded by angels each

year in the US

An Angel investor is…

Angel funded companies

• Seed: product is in development. Usually in business less than 18 months.

• Early: product in pilot production. Usually in business less than 30 months.

• Expansion: product in market. Revenue growth.

• Late: new product or product improvement. Continue revenue growth.

• Buy-out: a fund investment strategy involving the acquisition of a product or business, from either a public or private company, utilising a significant amount of debt.

Business stage defines type of capital need

Source: The Australian Bureau of Statistics’ 2001

Financing cycle

Venture Capitalists

Funding profileAm

ount

in $

b

Angel investments in 2013 Venture Capital in 2013

$24.2b64 000 deals270 000 individuals

$28.8b3 600 deals840 VC firms

Angels vs VCs

What are the key benefits and downsides for an entrepreneur?

Angels vs VCs• Lengthy diligence process. Venture capitalists take

too long to decide whether or not they want to invest because they are set up to take large risks and have complex processes to evaluate those risks. 

• Too much capital. Venture capitalists need to put too much capital to work – often a VC will want to invest a minimum of $3M. If you only need 4 people to build the product and get it into market, this likely won’t make sense for your business.

• Board seat. Venture capitalists often require a board seat and, for that matter, a board of directors be formed. If 100% of the company is building the product and the team knows how to do that, then a board of directors may be overkill. In addition, it may be too early to decide who you want to be on the board. 

Fundraising Process

Only 2% of those who submit a business plan to Business Angels get funded

It will be difficult

The Four Key Steps

• The first call and/or first meeting• Evaluates the risks of the investment, the

market size, and the industry• Determines if it’s a fit with the

angel/group • Roughly 15% of startups continue on the

next stage

Screening

• The angel will share their knowledge with other angels or members of the group

• Second meeting• Pitch to a broader group• 5% of startups move on to diligence

Socialization

• Evaluates the team, the market, product roadmap, and sales pipeline

• Investors call contacts in industry to refine their point of view

• Volley questions back to the startup• Focuses on defensibility, regulatory risk,

or competition• Outlines deal terms• 3% of the startups move onto the

“Decision” phase

Diligence

• The deal team briefs the entire angel on all the diligence materials & deal terms

• One last pitch • Granted an approval and a term sheet in

hand, investors then must convince an entrepreneur to work with them

• 2% of the deals are signed

Decision

Why raise money?

• Acquire credibility to land contracts?• Salaries? Need of a large team?• Research & Development? • Up-front investment needed?• Marketing? Catch first mover advantage?• Gain the skills/connections/advice to the

table of an investor?

Alternative: Bootstrapping

Why raise money?

Bootstrapping

“Refers to the starting of a self-sustaining process that is supposed to proceed without external input.”

- Wikipedia

Bootstrapping

• PROS– Fundraising is time consuming. More time to

concentrate on your business. – No equity dilution– Lean startup mentality: iteration, iteration,

iteration...– Focus on profitability for survival– No investor management

• CONS– Slower growth– Fewer staff– Focus on cash management (time consuming)– No investor support (network, knowledge...)

Bootstrapping

Your relation with investors

How to attract investors?

It is a dating process:

attractiveness vs neediness

• Actively asking money can come across as “needy”

• Meet for advice, not for money• Have a sales funnel process

How to attract investors?

1. Always be pitching

2. Over-deliver

3. Keep on the radar screen

4. Find ways of helping the investor

5. Schedule a follow up meeting

6. Rinse and repeat

6 Steps to building relationship with investors

How long to raise money?

• Typical time frame: 3 months to 6 months• But aim for 1 year from planning to

raising an equity investment:– Negotiation power– Don’t be needy!

How long to raise money?

1. Management Team- Execution- Workable

2. Exit opportunity- Innovation - Fits portfolio - Solid exit strategy

3. Revenue potential- Robust economic model- Scalability

Top 3 investment criteria

Source: Inter Trade Ireland May 2011

• Executive summary• Business Plan

• Financial projections

Investors’ preferred documents

Executive summary

• The #1 document• Summary of the main points• Attract attention• 1 or 2 pages

The best business plans have a great summary

Executive summary

Example of an Executive Summary

Business Plan

“We like business plans that present a lot of information in as few words as possible”

- Sequoia Team

• Mirror of the proposed business endeavor• Many templates on the internet:

www.rockford.edu/resource/resmgr/docs_communityed/samplebusinessplan.pdf

Business Plan

Financial projections

• 97% of projections are wrong

• Very valued by investors – show understanding of business and numbers:– Show the metrics of the business - labour

wages, marketing spend, revenue growth – Demonstrate your ability to make fair and

reasonable projections - projected profit and loss

– Don’t forget founders salary

Financial projections

• Business Angels admit that 80% of documents they receive are bad quality

• Doesn’t reflect the quality of the business opportunity

Document quality

Presentation

10 short & precise slides:

1. Purpose2. Problem3. Solution (Demo)4. Why now?5. Market Size6. Competition7. Magic / Expertise8. Business Model9. Team10.Financials

Presentation slides

• 30 sec / 2 min / 20 min ?

• What problem does your company solve?• What is the solution?

• How large is the market?• Who are the competitors?

• What is your product development plan?• What does your financial plan look like?• What is your sales and marketing plan?• How much capital do you need to raise and what is the

use of proceeds?

Pitching

Show momentum

Show momentum

Applies to every pitch you ever do.

Seeing is better than hearing.If you haven’t built it yet, show an example.

Show, Don’t Tell

Meeting with investors

I am the Best!

They love me!

I can’t tell you about my idea because you can steal it from me

I want a salary of $15,000 + car + objective

bonus + dividends !There is no

competition, this technology is unique!

The total needed investment is $300,000

and I will put $1,000

I have all the skills to manage the company, I don’t need anybody in

the board.

I want 95% of the shares! I didn’t test the idea

because the prospects could steal my idea!

Meeting with investors

These guys will help me succeed!

I don’t only need the money, I also need your knowledge.

I don’t only need the money, I also need your knowledge.

I want a salary of $1, 500. In my actual job I

earn 3x more but I believe in this project.

I want a salary of $1, 500. In my actual job I

earn 3x more but I believe in this project.

There is competition, but I know them well! I have

identified their weaknesses and

strenghts

There is competition, but I know them well! I have

identified their weaknesses and

strenghts

The total needed investment is $300,000 and I am ready to put

$100,000

The total needed investment is $300,000 and I am ready to put

$100,000

I don’t have skills A and B and I will hire co-

founders with those skills.

I don’t have skills A and B and I will hire co-

founders with those skills.

I am not opposed to give away 40% of the

company.

I am not opposed to give away 40% of the

company.I talked with several

clients and here are the results. I already got a paying beta customer.

I talked with several clients and here are the results. I already got a paying beta customer.

Conclusions

I need to emigrate to

the US!

There are no BAs in this country!

Grants are only for

government’s friends!

Investors gave me amazing feedback!

Investors gave me amazing feedback!

I am in talks with 6 Business AngelsI am in talks with 6 Business Angels

Red flag if… • You can’t explain product or service• The business has no competition• Unrealistic projected market share• Unrealistic business model• Major growth in business without identified

triggers• Pay off past debt instead of financing growth

Time management

1. Begin by creating relations with angels2. Get your documents prepared3. Have a credible team

To sum up

• How they want you to communicate? – Every month? Every week? Every day?– Financials? Cash? KPIs? Strategy?

• Can the BA help on getting more sales? Do they have relevant connections? Will they introduce me to people?

• BA availability? Willing to support? • Knowledge on industry and business model? Do they

ask the right questions?• Deep pocket BA?• Do I get along with? Do I want to work with them?• Will the BA provide references?• BA’s track record? Investments in similar companies?

Success rate of these companies?• BA’s exit timing and strategy?

Do the due diligence of the investor

• Talk with other entrepreneurs; reference check– Ask (politely) to the investor to supply with

contacts– Find companies in the investors portfolio that

didn’t succeed

• Stick with your instincts• Check for digital fingerprints

How to do it?

What questions should entrepreneurs ask angels?

•Can the investor afford to lose the money if the startup goes under? An entrepreneur should affirm that their reputation won’t be in jeopardy if the startup fails.•How available is the investor to offer advice? How much time will they commit?•How much capital are they willing to put in now? How much do they keep in reserve?•Beyond the funding, where’s the value ad? How entrepreneur-friendly are they? Will they be supportive and offer advice along the way?•How easy will the process be for the investor to cut the cheque? Which of their investments have failed? Will these entrepreneurs be willing to provide a reference?

Due Diligence of the investor

• Angel.co (angels & VCs globally)• Capitalist.co (London angels)• Thefunded.com (investor ratings)

Due Diligence of the investor