Originally presented to the TechRaising community http://TechRaising.com, this presentation by Craig Vachon does an awesome job walking founders and startup employees through the world of funding their companies. It is provocative and enlightening - Definitely worth anyone's time who is starting or looking to start, or looking to join a new venture.

1. A conversation about the F-word:
Funding
16 May 2012
G Craig Vachon
Craig.Vachon@gmail.com
@c_ster

2. Overview:
• Why pursue investment?
• What type of investment is best for you?
• Who are the best investors for your start-up?
• PE/VC traits – know your audience before asking for a
meeting
• What are the five keys that investors look for in your
business?
• Researching investors and how to get introduced
• The Pitch – what to present – what not to present
• Terms sheets and legal stuff

3. Why pursue investment?
• Investment = selling your company
– Loss of control
– Give away some of your up-side rewards
– Earning investment is a huge distraction of
many resources
– Investors are a huge distraction
• Goal: Sell as little of the company as
possible

4. What type of investment is best for you?
1. No investment [use revenue for growth]
2. Revenue/Investment from your customers [pre-
payment on future sales]
3. Kickstarter and Crowd-Sourced [non-equity]
4. Crowd-sourced [equity]
5. Friends and Family
6. Incubator
7. Angel
8. VC
9. PE
10. IPO/Exit

5. No Investment or pre-payment from
your customers
• Allows you to maintain control of all
aspects of your business
• Growth may be modest but “steady
performance often wins the race”
• Customers like to have a close connection
with suppliers
– Offer great terms – look to leverage their
customer/supplier base for your own growth

6. Crowd-sourced funding like Kickstarter
[non-equity]
• Typically you can raise between $1000-
$50K [there are some outliers]
– No equity is given to “investors”
• 70K projects have applied
– approximately 1% accepted by Kickstarter
– and of those, ~30% funded [~210 projects]
• Know and follow the rules
• Rewards seem to be key

7. Crowd-Sourced selling Equity
“Jumpstart Our Business Startups” Act
• Timing: EOY 2012 or 2013
• Start-ups can raise up to $1 million annually,
• Small investors can invest up to $2,000 [larger investments will require Accredited Investor
credentials
• Start-ups, before they sell stock, must file financial statements with the SEC and disclose any
risks related to the offering. [Your competitors are going to get your plans/finances].
• Start-ups should only use credible platforms for their investment raising.
• Start-ups also need to make available to potential investors their income-tax returns for the most
recent year, as well as certified financial statements.
• Small companies should be specific about how they plan to use the funds that they raise from
investors.
• Valuing the company? [have a well-thought out plan]
• While not technically required, it will be a good idea to give investors regular updates every
quarter, perhaps in the form of a webcast or an email newsletter.
• It's also important to spell out investor ground rules early on. For example, let them know that you
will be providing quarterly updates, but you will not be returning phone calls because you need to
focus on your business.
• The largest concern is that most investors will know that when a professional investor looks at
your business for further investment, will/can you protect those original investors?

8. VC’s - Talk only to the right
investors
• Gun-Shot approach is not effective
– Wasting someone’s time is perhaps the biggest “sin” in the industry
– VCs love to gossip and share “deals”
– If one says no, many will follow…. VCs have a chronic herd mentality
• Select, qualify and approach only “compatible” firms/partners
– Do they already have an investment in your space, whether complimentary or
competitive? If it is competitive – do you really want to give them your business
plan?
– Have they made money or lost their shirts in the industry?
– What’s the general mood around your type of companies within the
VC/partnership?
– Can the General Partner understand, appreciate and properly evaluate your
project / business?
– Does the GP have the ability/stature to push the deal through his/her
partnership?
• Look for truly value added players who will work hard to help you build value
– Connections with customers, vendors, partners, investors
– Entrepreneurial experience

9. Who owns what – “best case”
15%
40% Founders
Founders
Employees 15%
Investors
Investors
60% 70%
@ series a @ typical exit

10. The 5 keys to earning investment
1. Team
2. TAM
3. Scale/Virality
4. Sustainable Differentiation
5. Customer/Revenue Visibility

11. Team
• Does the best team usually win?
• What are you doing to hire, develop, and
retain the best team?
• Is this new hire someone you’d bet your
paycheck on? 100 paychecks?
• What are the team’s ethics and values?
• Can every new hire be a utility player?
– What are the keys to a great team?

12. TAM
• Do large TAMs mean more opportunities
for course correction?
– Only one in five VC-funded businesses have
the same business as they did when they first
presented to the VC
• How well do you know your TAM?
• Are you hiring experts from the TAM?
• How focused is your business on this
TAM?

13. Scalability/Virality
• Does you business scale?
– Efficiently and effectively
• What are the valuations of similar-value
chain businesses?
– How well do they scale?
• How capital efficient are you?

14. Sustainable Differentiation
• How do you avoid being copied by
competitors if you are a success?
• Do you understand the strengths and
weaknesses of things like trade secrets,
patents, copyrights et al?
• How many companies have beaten
GOOG?

15. Customer/Revenue Visibility
• Are you ready to have the investors talk to
your customers?
• Does your pro-forma plan pass the giggle
test?
– How many years did it take for MSFT or
Google to break the $50m revenue mark?

16. VC’s – a quick tutorial
• The average VC fund has about $300 million to invest,
with an average investment of around $15-20 million
per company and an average return of between $45
million and $50 million.
• A $300 million fund needs to see a return of about $1
billion for it to be considered a good performer. That's
about 3 to 3½ times the initial investment with about
20 to 25 companies in the fund's portfolio.
• VCs use the 80-20 rule. It means 20 percent of the
companies return 80 percent of the money. If you do
the math it means four to five companies have to
return $200-$250 million.

17. Common Mistakes
• Not researching the firm/partner
• Asking for too much money [or not asking for enough
money]
• Not having your “skin” in the game
• Trying to be profitable too soon (stunts a company's
growth)
• Confusing early revenue for sustainable growth
• Don't compromise hiring, always hire world-class
people
• Not persevering – this is at best a 3-6 month process
for an Series A round
• Remember, VC money is expensive. Use the money
wisely [or other means of funding]

18. Cheaper, faster, better
• Can you build your company on open-source
software and cloud computing? Can social
media marketing cut your marketing expenses?
• Can you crowd-source your design
• Can offshore engineering [Freelancer.com]
• Estimates are that today’s most ambitious
startups can take shape for $100,000 or less, a
mere one-tenth of the cost a decade ago

19. Researching investors and how
to get introduced
• www.thefunded.com
• Their VC website should have plenty of
data
• Ask your network/prior successful
entrepreneurs
• Many Angel forums/VC firms will make
time available if they like your pitch
– Using angels or a Board of Advisors to get to
the larger VCs makes the most efficient sense

20. The Pitch – what to present –
what not to present
• The five keys [Team, TAM, Scale
Sustainable Differentiation and Customer
traction]
• Pro-forma financials and use of proceeds
• Do Not present:
– outliers like FB, Twitter or Instagram as
examples of your future success

21. Term sheets and legal stuff
• Hire a professional who has done this type
of deal repeatedly [legal and deal]
• Clean term sheets are rare, but the goal
• Most importantly, know what you are
signing up for.

22. Why would you ever want to be
an entrepreneur?

23. What motivates you?
• 92% of all new businesses never earn >$1000 of
revenue (Source: CA Franchise Tax Board)
• A typical Sand Hill VC sees 1500 executive summaries
per annum
– The same VC takes presentations from ~300 companies per
annum
– The same VC makes 4-6 investments per annum (avg.)
– The same VC watches 6 of 10 investments fail outright (avg.)
– The same VC watches 3 of the same 10 become plausible but
not successful (“walking dead.”) In most instances, employees
will earn nothing more than a mediocre paycheck for their
efforts… (avg.)
– For the statistical one-in-ten “8X winner,” only a hand-full of the
top/first employees will make enough money to retire.

24. What’s your tolerance for pain?
• Serial Entrepreneurs have the abnormally high
incidences of:
– Affairs and Divorce (too many nights in a
strange/cheap hotel room or working greater than 60
hours per week)
– Hemorrhoids, deep vein thrombosis, airborne
illnesses and Valsalva surgery (1 million “air miles”
equals 2500 hours or 104 days of sitting in a coach
class seat)
– Moving their families (the average start-up lasts only
15 months)
– “Austerity pay”

25. So entrepreneur-ism is hell, why consider it?
1. Every day you learn something new
2. You get to work with like-minded people
(or at least you should work with these
people)
3. Your actions/decisions will have an
impact on the success of your efforts
4. It feels pretty good when you drive your
vision to fruition

26. 6 lessons you’ll learn
• 1. You'll have more responsibility.
• 2. You'll be given more opportunities.
• 3. You'll be able to do a lot of different things.
• 4. Your work will be recognized (as will your failures).
• 5. You'll learn to be frugal.
• 6. You'll be instilled with the value of hard work,
ownership, and self-sustainability.
• Working at a startup also means that you and your small
team are the only people responsible for your success.
For some, that may trigger a response to go crawl into a
corner. For others, it's the greatest motivation there is.

27. A knucklehead’s guide to finding success as an
entrepreneur (there is no magic formula!)
• Say “yes” (often) [while remaining focused]
• Know where you are going
• Work smart and accomplish more than your peers
• Hire/retain people that you’d bet your next 100 paychecks on…
• Stay focused on the customer/value chain
• Act with urgency
• Keep your promises
• Pursue respectful iconoclasm
• When in doubt, do the right thing. (Ask your peers and mentors)
• Learn from your mistakes (and don’t be afraid to make a few) and keep it a
blame-free workplace
• Over-communicate
• Celebrate the wins
• Laugh often (at yourself primarily)
• Find a great partner who complements/appreciates your skills/efforts
• Appreciate the journey/adventure