Levee de fonds_entrepreneur

Startup Finance

An Entrepreneur’s Manual

http://www.carsonworkshops.com/index.html

About Index Ventures

• Over €1.5bn under management

• Active investor in web / internet

• Pan European Venture Fund

• Based London & Geneva

Index Ventures

Selected Investments

Agenda

What are the financing options?

How to attract and engage investors?

Deal structure and what to expect during the investment process

Important reflections before you start

A big undertaking

• Starting a business is a big commitment– Energy & Passion– Time– Financial resources (yours and your

investors)• Before thinking of financing, is worth

taking a deep breath …

Key questions about you

• Why am doing this–Make money– Lifestyle– “Change the world”

• How long do you want to commit?• What level of financial risk are you

prepared to take?

Key questions about the business

• Be honest with yourself about the risks / unknowns– Do customers want the product /

service?– Do you have the competence to build

the product and the team– Can you monetise the product /

service?– How competitive is / will the space be?– How big can the overall market

become?

Agenda





Overview of financing options

Angel Financing

Venture Capital

Private Equity

PublicStock Markets

Self Finance / Bootstrapping

Debt / Bank Finance

Equity FinancingNon-Equity Financing

Self financing / bootstrapping

• Financing growth from previous cashflow and personal funds

• Obviously need to have cashflows…• Most good bootstrapped companies emerge from a service

or consulting companies that are productising their offering• Pros

– Bootstrapped companies almost always spend cash more effectively than equity financed companies

– Already being close to existing customers, give excellent ability to understand problems and define good solutions

• Cons– Resources for product and market dev constrained by

cashflows– May miss a big opportunity if other players raise finance and

invest heavily

Debt / bank finance

• Relatively limited funds will be available ; likely to want security anyway

• Banks only lend to predictable businesses they can understand

• If your capital requirements are limited and your business is following a well trodden path, can be a useful source of finance

• Not particularly useful web or high growth tech industries

Large PotentialMarket

Opportunity

Unique Product Or Concept

PassionateFounding Team

Pre-requisites

Intensecompetition

likely

Need to moverapidly

Implications…

Hiring

Infrastructure

VC funding supports

Rapid Product Development

Internationalisation

Partnerships

Commercialisation

Good reasons to raise equity finance

When NOT to raise VC

Applicationis a feature

not a product

Market size istoo small

Motivation isnot financial

• Risk is not that you waste time unsuccessfully trying to raise finance …

• … real danger is that you do succeed in raising VC funds– Lose opportunity for small exit which could be

personally lucrative– Lose opportunity to run lifestyle business– Get bound in to 3+ yrs work you may not enjoy

Equity Financing

SeedEarly StageSeries A, (B)

Later Stage(B),C,D…

Pre-IPO / Buy-out

PrivateEquity

Investment Size

Potential Sources of Funds

0 - €1m

Grant-funding

University seed funds

Friends and family

Angel Investors

(Venture Capital)

€2m-€20m

Venture Capital

(Wealthy) Angel investors

€5m-€20m

Venture Capital

€30m+

Specialist Late stage tech investment funds

Hedge Funds

Growth Fund

Agenda





Venture Capital – How the VC makes money

• Raise fund every 2-4 years– Pension funds, financial institutions and specialist “fund of

fund” investors

• Invest money over 3-5 years~ 1/2 of investments lose money~ 1/3 of investments break even~ 1/6 of investments make (lots) of money

• Very small management fee on funds managed~ 1-2.5% pa

• Carry~ 20-25%x (Total Return – Total Amount Invested)

Angels – How the Angel investor makes money

• Unlike the VC the Angel invests their own money

• Much smaller absolute returns can be very meaningful to an angel

• The Angel approach is to invest small amounts at a very early stage / low valuation– €50-€250k at valuations of €500k-€4m

• Two “exits” for angel– Firm might be sold quickly for €5-10m or less where the Angel can

make 2-5x money– Firm raises VC money, after which Angel typically becomes more

passive but has built up exposure very cheaply to a venture backed enterprise

• The key thing when selecting an Angel therefore is whether they can help you raise VC finance– See which Angel investors have invested with which VCs

• Advice and Strategy• Hiring

– Developers– Country Managers– Sales– CEO / CFO / COO– Advisory Board

• Partnerships• Profile and PR• Further access to

capital

• Internationalisation• Trusted service

provider relationships– Search / recruiting– Branding / PR– Finance, etc

• Exit optimisation– Knowledge / contacts

with relevant buyers– Experience with process

Venture Capital – What a good VC will add

What does an investor look for?

Technology Traction

• Can evaluate each as– Exceptional– Good / credible– Mediocre / incomplete

• Misconception that being good / credible across the board is what VCs look for– Can always add credible attributes to the mix later

• We focus on finding opportunities which rate as exceptional in one attribute

Team

Identifying relevant VC partners

Has funds to invest

Match of Size/Stage/Geography

RelevantPortfolio

No directlycompetitiveinvestments

Excellenttrack record

Shortlist

• Do create a shortlist• Rifle is a better weapon

than a shotgun

• Similar process for identifying angels, look at VC funding press releases to identify prior Angel investors

Getting on radar screens

• Out of the blue email is a longshot• Try to build context

– Analyse portfolio companies – are there any links there?

– Analyse contact network and advisors– Analyse press coverage– Participate in blog conversations– Attend events and conferences– Relevant PR around product also helps

• VCs spend their time looking for businesses with momentum

Agenda





Sharing relevant information

• 100 page business plan not required

• 20 page ppt which clearly answers main questions is best bet– Product– Market– Business Model– Team– Competition– Product Roadmap– Technology Overview– Business Development– Financial Status

Pre - first meeting Pre - termsheet Post - termsheet

• Dialogue rather than documentation – expect lots of meetings

• Calls with current / prospective customers or partners

• Meeting broader team• Brainstorming around

strategy• Identifying key hires post

closing• Formal presentation to

VC partnership

• Some additional reference calls with partners / customers

• Personal reference calls• Legal / accounting audit

(if relevant)• Drafting legal

documentation

2-4 weeks 1-2 Months

Types of investment

• Ordinary Share investment– Simplest form, often used by angels– All shareholders have similar rights– Company Board composed according to

• Convertible Loan– Sometimes used by both Angels and VCs– Typically when another financing is anticipated soon– Loan will convert (with a discount ~25%) into the next

financing round

• Preferred Share Investment– Typical Structure used by VCs and occasionally larger Angels

investing as a group

Understanding a termsheet – case study

• Anything between 2 and 15 pages (if points are spelt out in fuller legalise)

• Sample phrasing is – “[XXX fund] proposes to lead a Series A preferred

share financing of €5m at a €8m pre-money valuation. As part of the investment process an employee option pool of 15% on a post money basis will be put in place. Typical venture capital terms including participating liquidation preference, etc. etc …”

• What does it all mean?

Case Study – Cap Table

• Board Representation• Liquidation Preference• Participation rights• Anti-dilution rights• Element of reverse vesting• Certain control and veto rights• Period of exclusivity to close legals

but that’s so unfair…

Photo Source: Philip Greenspun, MIT

Venture Capital – “Typical Deal Terms”

Case Study - liquidation preference

0 10 20 30 40 50 60 70 800

5

10

15

20

25

30

Types of Liquidation Preference

No Liquidation Preference

Non-Participating liquidation preference

Participating Liquidation preference

Participating Liquidation preference (capped at 3x)

Valuation of Company at Exit (€m)

Payout

to S

eri

es A

(€m

)


0 10 20 30 40 50 60 70 800

5

10

15

20

25

30


No Liquidation Preference


Payout

to S

eri

es A

(€m

)


0 10 20 30 40 50 60 70 800

5

10

15

20

25

30


Non-Participating liquidation preference


Payout

to S

eri

es A

(€m

)


0 10 20 30 40 50 60 70 800

5

10

15

20

25

30


Participating Liquidation preference


Payout

to S

eri

es A

(€m

)


0 10 20 30 40 50 60 70 800

5

10

15

20

25

30


Participating Liquidation preference (capped at 3x)


Payout

to S

eri

es A

(€m

)

Case Study - Antidilution

• If a subsequent investment round is done a price lower than the previous investment round then the previous investment round is repriced (more stock issued to Series A)

• Two flavours– Broad-based – Series A price ratchets down based on size of

Series B relative to Previous post-money valuation– Narrow-based – Series A price ratchets down based on size of

Series B relative to Size of Series A

• Say €5m Series B done at €0.75 per share– Broad-based – Series A reprices = €1.00–((5/(5+15.3)*€0.25) =

€0.93– Narrow-based – Series A reprices €1.00–((5/(5+5)*€0.25) =

€0.875

Case Study – Reverse Vesting

• The value of startup is typically in the promise of future labour from the founders

• Investors seek to secure this by reverse vesting founder stock, typically over 3 or 4 years

• For startups typically all founder stock is subject to reverse vesting.

• For later stage companies perhaps half the stock might be subject to vesting

• NB – this also protects founders from each other

Value at exit

Probability of getting there

% share of business at exit

Entrepreneur’s Equation • Revenues / Profitability

• Growth rate

• Team quality

• Strategic fit with buyer community

• Well managed exit process

• Fewest strategic errors made

• Hiring (quality & speed)

• Partnerships

• Product development

• Valuation at initial round

• Valuation and dilution at subsequent rounds

• Option grants

Choosing the right VC - Valuation should not be the decisive factor

Key things to consider when choosing an investor

Right partner at a fair price

vs.

Any partner at best price

• Relationship– With key individual(s); and – broader team

• References– Speak to other founders

• Portfolio– Relevant experience– Non competitive– Community you want to be part of

• Valuation and associated deal terms

Thank you

Ben Holmes

Email: [email protected]

Skype: ben_holmes

Artwork – (Transparent Layers)

Levee de fonds_entrepreneur

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