How to Get Funded

1. How to Get Funded 29 September 2009

2. Why take funding Growing an early stage company requires capital Entrepreneurs are faced with tough decisions about when and how to finance this growth…

3. Getting Started Bootstrap: Fund primary development through internal cash flow and forgone paychecks Positives • Maintain ownership and control • Customer becomes king • Forced rationalization • Able to more effectively channel $$$ Internal Cash Flow

4. Getting Started Bootstrap: Fund primary development through internal cash flow and forgone paychecks Negatives • Sub-optimize opportunity • Loss of market share • Unable to rapidly expand product offering • Prisoner to economic cycles Internal Cash Flow

5. Getting Started Not to mention the personal risks… “Forget the wheel. Invent diapers.” Internal Cash Flow

6. Alternative Capital Sources As a result, most ventures at some point seek capital from outside sources In addition to $$$, outside investors can bring with them: • Strategic partnerships • Talent networks • Management expertise • Etc. “I call it ‘The Wheel’, but so far I’ve been unable to attract any venture capital.” Founders, Friends & Family Angels Venture Capitalists Banks Acquisitions &Equity Markets

7. Which can in turn… Take a business from… … to

8. Is it possible to create a large business without outside capital? Sure, but… (Lifecycle Dynamics of Venture Capital report, Duke University) VC backed firms avg. 5X total sales compared with non VC-backed firms, ten years after inception VC backed firms avg. 6X the number of employees compared with non VC-backed firms, ten years after inception

9. Where? When? How? Where to get this capital, when to raise it, and how much to raise are critical in determining a new venture's success • Like shifting gears in a car

10. Where? When? How? As a company matures, risk diminishes, and the universe of potential backers increases Risk

11. Where? When? How? Although there is no “right” way to finance a venture, different financing sources focus on the various stages of a business’s lifecycle Acquisitions &Equity Markets Banks Venture Capitalists Angels Founders, Friends & Family

12. Developing Concept and Proving Technology Risk Profile: HIGH Investment: $50-$500K Characteristics: No product, no customers, primary risk is R&D Sophistication: Low Founders, Friends & Family

13. And again, Not to mention the personal risk of mixing business with family… Founders, Friends & Family

14. Engaging the Market Risk Profile: High Investment: $100K-$1M, might take board seat Characteristics: Beta product, no or limitedrevenue, primary risk is market acceptance Sophistication: Medium Angels

15. Venture Capital Risk Profile: Moderate to High Investment: Varies by round, will take board seat, detailed term sheet Characteristics: Varies by round Sophistication: High Venture Capitalists Late Middle Early

16. Venture Capital: Series A Risk Profile: High Investment: $1M-$10M, first institutional round, intended to capitalize company for 6mths – 2 yrs or breakeven Characteristics: Further develop products, sales, marketing, team build out, go to market Sophistication: High Focus of .406 Initial Investment Venture Capitalists Late Middle Early

17. Venture Capital: Series B and C Risk Profile: Moderate Investment: Typically follow-on rounds, higher valuation (hopefully) Characteristics: Operations, growth, new markets, etc Sophistication: High .406 Follow-on Investments Venture Capitalists Late Middle Early

18. Raising Venture Capital Prepare Raising Venture Capital is a long, resource intensive process… Find the Right VC Make sure you’re ready!!! Approach Pitch Due Diligence Per VC 1-8 weeks Per VC 3-15 weeks A long time…

19. Raising Venture Capital Prepare Find the Right VC Approach Pitch Due Diligence

20. Make sure you’re ready • Are you credible – do you know someone who is? • Show, don’t tell – no excuse in today's environment • Leverage SaaS and open recourses (S3) to put together a small beta on a small budget • Focus on the things that matter • Market, team, innovation, value proposition, competitive advantage • And not – Business cards, branded merchandise, catchy slogan, etc.

21. Make sure you’re ready Do you have a business capable of delivering venture grade returns? • Operational leverage – highly scalable business model • High margins and profits • Active acquisition market Can your company make an investor 10X returns one day?? Why will it work? Why will people buy it? Why is it defensible?

22. Raising Venture Capital Prepare Find the Right VC Approach Pitch Due Diligence

23. Finding the right VC Use a systematic approach – Rifle, not shotgun Do your homework… Lots of VCs out there Investments by Sector • IT – 561 firms • Healthcare – 382 firms • B/C/R – 388 firms • Cleantech – 161 firms 848 VC Firms in US

24. Finding the right VC Not all VCs created equal – A good VC should provide both monetary and non monetary support • Operational experience • Hiring contacts • Service provider contracts • Profile and PR • Exit optimization • Experience throughout process

25. Raising Venture Capital Prepare Find the Right VC Approach Pitch Due Diligence

26. Getting a meeting Website drop box or out of the blue emails DO NOT WORK!!! Build relationships at target VCs or with their friends • Network like crazy • Blog • Attend events and conferences • Create buzz Find connections anyway you can!!! – portfolio company, neighbor, friend of a friend of a friend 406 Stat

27. Preparation and Execution Pre 1st Meeting Don’t send a business plan • Nobody will read it and your business will be different by the time you’re done writing it Have a killer Executive Summary and/or PPT • This is the first thing a potential investor will see – and if not done well, will be the last Twitter’s original plan, circa 2000. Credit: Jack Dorsey

28. Raising Venture Capital Prepare Find the Right VC Approach Pitch Due Diligence

29. The Pitch Intro: Define the company, business, service, or product in a single sentence. Team: Identify the core group of talent that can execute the milestones. Opportunity: Why is your company relevant? Who are your customers? Are they rich? Solution: Demonstrate your solution and differentiation. Business Model: How will you make money? What have you accomplished to date? Competition: Who are your competitors? How are you defensible? The Ask: What do you need and why you need it. BE SPECIFIC.

30. The Pitch: Excite! don’t educate Presentation Do: • Be organized • Be on time • Leave ample time for Q&A • Know exactly what you need and why you need it Don’t: • Take longer than 30 minutes on your presentation • Use more than 12 slides • Use jargon • Make assumptions VCs Like to Hear: “We’re just nerds working out of a garage” “I don’t know” “I don’t have to be CEO” “We’re going to pick the best partner” “Never invest in any idea you can’t illustrate with a crayon.”

31. Raising Venture Capital Prepare Find the Right VC Approach Pitch Due Diligence

32. Expectations and Diligence Lots of dialogue Due diligence calls Team build out Strategy Formal partnership presentation Additional reference calls Personal reference calls Legal, accounting, and audit Draft legal documentation Background checks Pre Term sheet Post Term sheet Be honest – The due diligence process is intense

33. Expectations and Diligence Typical Deal Terms This hardly seems fair. • 20-50% ownership • Board representation • Liquidation Preference • Option pool • Exclusivity period • Participation rights • Certain control and veto rights

34. Key things to consider, if you’re one of the lucky few It’s a two way street… • References – Speak with other founders/CEOs in port • Portfolio – Right community for you, synergies with portfolio • Relationships – Are these VCs people you want to work with • Valuation – Right partner at fair price vs. any partner at best price …think of it as a marriage.

35. This is HARD One last thing… .406 looked at over 1,200 deals in 2008… and funded 4! Prepare Find the Right VC Approach Listen, learn, accept it, bake learnings into your next pitch. Pitch Due Diligence Don’t give up!

36. Questions? To your new venture’s success. 36