Startup
Guide
2013 Edition
The
SHARE FREELY
Building a Better World
Through Entrepreneurship
RYAN ALLIS
With Ellen Daly
CEO of [Link]
More slides at [Link]
RAISing VENTURE CAPITAL
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465
ENTREPRENEURSHIP
ABOUT THIS PRESENTATION
THIS presentation IS PART OF A LARGER slide DECK on building a better world through entrepreneurship
For more slides & CONTENT visit:
[Link]
[Link]
466
entrepreneurship Raise funding or bootstrap
YOU HAVE TO DO WHATEVER IT TAKES TO KEEP COSTS LOW UNTIL YOU HAVE REVENUE
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entrepreneurship Raise funding or bootstrap
THE #1 mistake I see First time entrepreneurs Make is raising too much MONEY TOO SOON
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entrepreneurship Raise funding or bootstrap
Dont raise outside CAPITAL UNTIL AFTER YOU KNOW YOU HAVE SOMETHING THAT CUSTOMERS ARE WILLING TO PAY FOR
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entrepreneurship Raise funding or bootstrap
TO TEST DEMAND BEFORE YOU RAISE MONEY BUILD AN INEXPENSIVE PROTOTYPE and improve it UNTIL YOU KNOW CUSTOMERS LOVE IT
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entrepreneurship Raise funding or bootstrap
Unless youre building a product Like a new drug that requires massive upfront investments dont raise Outside capital until after You have proven customer demand
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entrepreneurship Raise funding or bootstrap
IF YOU RAISE MONEY TOO SOON AND DonT YET HAVE SOMETHING CUSTOMERS WANT INVESTORS WILL EAT YOU FOR BREAKFAST
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entrepreneurship Raise funding or bootstrap
YOUR GOAL IS FOR EVERYONE TO DO WELL--CUSTOMERS, EMPLOYEES, INVESTORS & YOU SO DonT PLAY WITH INVESTOR MONEY UNTIL YOU KNOW YOU HAVE SOMETHING THAT THE MARKET REALLY WANTS
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entrepreneurship Raise funding or bootstrap
PRO TIP: GET AS FAR AS YOU CAN WITHOUT RAISING OUTSIDE CAPITAL
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entrepreneurship Raise funding or bootstrap
AT ICONTACT WE BOOTSTRAPPED
FOR THE FIRST 3 years (2003-2006)
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entrepreneurship Raise funding or bootstrap
WE GOT to $1.5 million in annual sales BEFORE WE RAISED ANY FUNDS BEYOND A $5,000 loan
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entrepreneurship Raise funding or bootstrap
HOW? BY KEEPING COSTS LOW UNTIL WE GOT REVENUES NOT TAKING SALARIES FOR 3 years AND DOING SERVICE WORK ON THE SIDE FOR FUNDS TO LIVE OFF OF
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entrepreneurship Raise funding or bootstrap
We LIVED IN THE OFFICE ATE RAMEN NOoDLES
AND Jumped IN DUMPSTERS TO RECOVER PROOF OF PURCHASE TAGS FOR REBATES
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entrepreneurship Raise funding or bootstrap
IN THE BEGINNING DO WHATEVER IT TAKES
TO KEEP COSTS LOW
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entrepreneurship Raise funding or bootstrap
RYANs 3 RULEs OF BUSINESS:
1. 2. 3. CREATE PRODUCTS CUSTOMERS LOVE RECRUIT TRULY EXCELLENT PEOPLE Dont raise venture capital until you have revenue & PROVEN CUSTOMER DEMAND
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entrepreneurship Raise funding or bootstrap
TOO MANY STARTUPS FAIL BECAUSE THEY RAISE VENTURE CAPITAL BEFORE THEY HAVE REVENUE AND BEFORE THE ENTREPRENEUR HAS BUILT SOMETHING CUSTOMERS LOVE
[Link]
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entrepreneurship Raise funding or bootstrap
THE ABSOLUTE BEST SOURCE OF FUNDING IS FROM
PAYING CUSTOMERS
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entrepreneurship Raise funding or bootstrap
Venture capital is LIKE THE GOLDEN MUSHROOM IN MARIO KART IT MAKES YOU GO FASTER BUT If you accelerate TOO QUICKLY IN THE WRONG DIRECTIon
YOU FALL OFF A CLIFF
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entrepreneurship Raise funding
JUST BECAUSE MONEY IS AVAILABLE DOESnt MEAN its good for you OR that your company is ready
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entrepreneurship Raise funding OR BOOTSTRAP
OUTSIDE CAPITAL SHOULD BE USED AS FUEL TO ACCELERATE WHEN YOURE ALREADY MOVING IN THE RIGHT DIRECTION
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entrepreneurship Raise funding or bootstrap
WHERE TO LOOK DEPENDS ON HOW MUCH YOU NEED AND HOW FAR ALONG YOU ARE
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entrepreneurship Raise funding or bootstrap
HEREs a chart of THE DIFFERENT TYPES OF MONEY BY STAGE
MONEY NEEDED SIDE JOBS CREDIT CARDS YOUR SAVINGS Friends & Family KICKSTARTER/Fundable BANKS Angel investors SUPER ANGELS SEED STAGE VC Growth StAGE VC Mezzanine debt LATE Stage VC PRIVATE EQUITY PUBLIC MARKETS PIPES CORPORATE BONDS
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<$50k Yes YES Yes Yes Yes
$50k-$500k Yes if PRUDENT Yes if available Yes if available YES Yes YES
$500k to $1M
$1m to $5m
$5M to $25M
$25M to $100M
>$100M
Yes YEs YES YES YES YES YES YES YES YES YES YES YES YES YES YES YES YES YES
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entrepreneurship Raise funding or bootstrap
A great source to find early Stage angels is
[Link]
[Link]
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entrepreneurship Raise funding or bootstrap
ALSO CHECK OUT THE NEW Peer-to-peer investing sites That have launched FOLLOWING the PASSING OF THE U.S. JOBS ACT of 2012 THE BEST ONE IVE SEEN Is
[Link]
[Link]
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entrepreneurship Raise funding or bootstrap
OTHER BUSINESSES LIKE DALTON CALDWELLs [Link] HAVE BUILT KICKSTARTER-LIKE PLATFORMS OF THEIR OWN TO FUND THEIR EARLY EXPENSES
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entrepreneurship Raise funding or bootstrap
DO YOUR BEST TO AVOID RAISING MORE THAN 1x your current ANNUALIZED REVENUE
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entrepreneurship Raise funding or bootstrap
AS AN EXAMPLE, HERE iS Icontacts CAPITAL RAISED OVER 4 financing rounds
Date June 2003 May 2006 June 2007 August 2010 Capital raised to balance ANNUALIZED sheet REVENUE $5k $500k $5.3M $25M $5k $1.5M $5.5M $38M CAPITAL Source FRIEND IDEA FUND Updata JMI EQUITY Capital type LOAN SEED STAGE SERIES A SERIES B $16m $27M $100M $16.5M $32.3M $125M Approx. PreMoney VALUTION Approx Postmoney valuation Approx % of COMPANY SOLD 0% 3% 16% 20%
NOTE THAT OUR ANNUAL REVENUE WAS ALWAYS HIGHER THAN THE AMOUNT OF MONEY WE RAISED
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entrepreneurship Raise funding or bootstrap
YOUR NEGOTIATING POWER is BASED ON
LEVEL OF NEED FOR THE MONEY YOUR EXPERIENCE YOUR TEAM PRODUCT & TECHnOLOGY COMPETITION OTHER TERM SHEETS QUALITY OF YOUR ADVISORS
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entrepreneurship Raise funding or bootstrap
THE MOST IMPORTANT INVESTMENT TERMS VALUATION OPTION POOL SIZE LIQUIDATION PREFERENCES FOUNDER REVESTING PREFERRED VETO RIGHTS TYPE OF PREFERRED STOCK BOARD SEATS
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! THE HIGHEST VALUATION IsnT ALWAYS BEST
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entrepreneurship Raise funding or bootstrap
FACTORS IN SELECTING YOUR INVESTORS CHEMISTRY WITH THE PARTNER OPERATIONAL EXPERIENCE CURRENT PORTFOLIO ALIGNMENT PARTNER/FIRM EXIT RESULTS EXECUTIVE RECRUITING ABILITY TERMS OF INVESTMENT
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entrepreneurship Raise funding or bootstrap
TECH STARTUP PRE-REVENUE VALUATION GUIDELINES
VALUATION RANGES FROM $1M To $25M depending on Factors like CEO Past exits TEAM EXPERIENCE NUMBER OF USERS NUMBER OF ENGINEERS LOCATION OF COMPANY
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entrepreneurship Raise funding or bootstrap
PRE-REVENUE VALUATION EXAMPLE
INCORPORATED b2c tech COMPANY RUN BY FIRST TIME ENTREPRENEUR with 1 engineer
Pre-Money Valuation: $1m-$3m
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entrepreneurship Raise funding or bootstrap
PRE-REVENUE VALUATION EXAMPLE
INCORPORATED b2c tech COMPANY RUN BY FIRST TIME ENTREPRENEURS who have been through y combinator with a good idea AND 2 engineers
Pre-Money Valuation: $4m-8m
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entrepreneurship Raise funding or bootstrap
PRE-REVENUE VALUATION EXAMPLE
tech COMPANY run By experienced CEO with 10 years c-level experience, $100m prior Exit, & 5 engineers
Pre-Money Valuation: $10m-20m
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entrepreneurship Raise funding or bootstrap
TECH POST-REVENUE VALUATION GUIDELINES
1x to 12x revenue based on factors like
[Link]
AMOUNT OF REVENUE REVENUE GROWTH RATE NUMBER OF USERs/customers TYPE OF REVENUE CEO/TEAM EXPERIENCE COMPANY MARKET LOCATION OF COMPANY
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entrepreneurship Raise funding or bootstrap
AS YOU GO ABOUT FUNDRAISING YOU USUALLY WANT TO CREATE A COMPETITIVE PROCESS
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entrepreneurship Raise funding or bootstrap
BUILD YOUR FUNDING PROCESS TO ENSURE YOU RECEIVE
MULTIPLE TERM SHEETS
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entrepreneurship Raise funding or bootstrap
HAVE ACCESSIBLE IN YOUR HEAD VALUATION COMPARABLES
RECENT SIMILAR Venture Deals Recent SIMILAR M&A deals Public comparables
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entrepreneurship Raise funding or bootstrap
RAISE MONEY ONLY FROM SMART PEOPLE YOU REALLY LIKE YouLL BE MARRIED to Them FOR THE NEXT 3-10 years
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entrepreneurship Raise funding or bootstrap
WAIT TO RAISE Your series A UNTIL You HAVE PROVEN MATHEMATICALLY THAT X DOLLARS SPENT BRINGS Y DOLLARS BACK
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And make sure y is >4 times x!
505
Startup
Guide
2013 Edition
The
SHARE FREELY
Building a Better World
Through Entrepreneurship
RYAN ALLIS
With Ellen Daly
CEO of [Link]
More slides at [Link]
