How to find investors and structure funding
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I often give talks at Google for Entrepreneurs events to entrepreneurs on how to raise capital and start their company. This is the deck I usually present, happy to answer any questions about it!
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How to find investors and structure funding
- 1. How to Find Investors and Structure Funding How to Find & Structure Early Stage Funding
- 2. Google Confidential and Proprietary About us David McDonough Jesse Wedler Current: Product Strategy Google Ventures/Entrepreneurs (20%) Prior: Greenspring Associates VC Current: Google Capital Prior: Sherpa Ventures TPG Capital Goldman Sachs
- 3. Google Confidential and Proprietary Valuations aren’t everything!
- 4. Google Confidential and Proprietary Different Stages of Funding Pre-VCPre-VC dd Series B Series C Series D, E, F IPO Private Equity Institutional Venture Capital Early Stage Late Stage Growth Mezzenine Public Equity TIME REVENUE (ORVALUATION) Product Market Growth/Scale Monetization/Competition Series A
- 5. Google Confidential and Proprietary Different Stages of Funding Pre-VCPre-VC dd Series A Series B Series C Series D, E, F IPO Private Equity Institutional Venture Capital Early Stage Late Stage Growth Mezzenine Public Equity TIME REVENUE (ORVALUATION) Product Market Growth/Scale Monetization/Competition Pre-VC dd
- 6. Google Confidential and Proprietary Early Stage Options Pre-VC dd Pre-VC Pre-Incubator Incubator/Accelerator Angels Seed Fund/Micro VC Pre-Venture Bridge Crowdfunding Friends & Family
- 7. Google Confidential and Proprietary What type of funding for your stage? Who Mom Dad Wealthy Friend from College Pros Quick Easy Cheap Cons Awkward Trying on Relationships Dumb money Pre-Venture Pre-VC Investment Amount Duration/Runway 6 mos - 1 Year $0 - $200k Pre-Incubator Incubator/Accelerator Angels Seed Fund/Micro VC Pre-Venture Bridge Crowdfunding Friends & Family
- 8. Google Confidential and Proprietary Who StartupNext Blackbox Startup Weekend Pros Positioning Cons No Funding Investment Amount Duration/Runway 1 wknd - 5 wks None Pre-Venture Pre-VC Pre-Incubator Incubator/Accelerator Angels Pre-Venture Bridge Crowdfunding Friends & Family What type of funding for your stage? Seed Fund/Micro VC
- 9. Google Confidential and Proprietary Investment Amount Duration/Runway Who Pros Networking/Peer help PR Education Cons Competitive Relocation All are different 500 Startups YCombinator TechStars Manos SeedCamp Galvanize AngelPad NewME Investment Amount Duration/Runway 3 wks - 3 mos $10k - $100k Pre-Venture Pre-VC Pre-Incubator Incubator/Accelerator Angels Pre-Venture Bridge Crowdfunding What type of funding for your stage? Friends & Family Seed Fund/Micro VC
- 10. Google Confidential and Proprietary Who Brad Feld Mark Suster Ron Conway Steve Case Pros Cons AngelList Hunter Walk Chris Sacca Dave McClure Paul Graham Investment Amount Duration/Runway 1 Year $10k - $500k Pre-Venture Pre-VC Pre-Incubator Incubator/Accelerator Angels Pre-Venture Bridge Crowdfunding What type of funding for your stage? Spread thin Limited follow-on Flexible Quick Signaling/PR Friends & Family Seed Fund/Micro VC
- 11. Google Confidential and Proprietary Who Pros Cons Investment Amount Duration/Runway 1 Year $25k - $2m Pre-Venture Pre-VC Pre-Incubator Incubator/Accelerator Angels Seed Fund/Micro VC Pre-Venture Bridge Crowdfunding What type of funding for your stage? Validation Resources Higher ownership Big Expectations Friends & Family CrunchFund FF Angel True Ventures Google Ventures Andreesen Horowitz FirstRound Capital SV Angel
- 12. Google Confidential and Proprietary Who Bullpen Capital Pros Cons Investment Amount Duration/Runway 1 Year $250k - $1m Pre-Venture Pre-VC Pre-Incubator Incubator/Accelerator Angels Pre-Venture Bridge Crowdfunding What type of funding for your stage? Positioning Runway for Series A Small segment Friends & Family Seed Fund/Micro VC
- 13. Google Confidential and Proprietary Investment Amount $5k - $2m Duration/Runway 1 Year Who Pros Cons KickStarter CrowdTilt SeedInvest Indiegogo CrowdRise Fundly Pre-Venture Pre-VC Pre-Incubator Incubator/Accelerator Angels Pre-Venture Bridge Crowdfunding What type of funding for your stage? Market validation No debt/equity Good PR Amount unknown # of investors Accountability Friends & Family Seed Fund/Micro VC
- 14. Google Confidential and Proprietary Different Stages of Funding Pre-VCPre-VC dd Series B Series C Series D, E, F IPO Private Equity Institutional Venture Capital Early Stage Late Stage Growth Mezzenine Public Equity TIME REVENUE (ORVALUATION) Product Market Growth/Scale Monetization/Competition Series A
- 15. Google Confidential and Proprietary Deal Volume by stage: 10 years Source: Mattermark, 10/2015
- 16. Google Confidential and Proprietary 2014 vs 2015 by stage Source: Mattermark, 10/2015 Deal Volume by Stage Capital Deployment by Stage
- 17. Google Confidential and Proprietary 2014 vs 2015 by stage Source: Mattermark, 10/2015 Deal Volume by Stage Capital Deployment by Stage
- 18. Google Confidential and Proprietary Pre Series A Deal Size Trends Source: Mattermark, 10/2015
- 19. Google Confidential and Proprietary Times WILL change, make sure they’ll stick by you Look at track record, check backdoor references How nimble are they in generating a term sheet How involved/available will they be? Board Seat? What to look for in an early investor Industry/vertical connections? Business dev? Recruiting? Trust Value-Add Speed/Responsiveness
- 20. Google Confidential and Proprietary What They’ll Look For In You Intangibles Metrics Team Domain Expertise Background Passion Founder Relationship Your Advantage IP/Patents Proprietary Technology Barriers to entry Problem Being Solved Competitive Landscape Risk & Growth Stage (product risk/market risk/growth risk, etc) Business Model Strategy Rev Model (recurring vs episodic) Go-to-Market Strategy Addressable Market Opportunity Traction Adoption Churn Financials (probably non-existent) Rev Customer Acquisition Cost Margins Operating Margin Margin Growth
- 21. Google Confidential and Proprietary What They’ll Look For In You Intangibles Metrics Team Domain Expertise Background Passion Founder Relationship Your Advantage IP/Patents Proprietary Technology Barriers to entry Problem Being Solved Competitive Landscape Risk & Growth Stage (product risk/market risk/growth risk, etc) Business Model Strategy Rev Model (recurring vs episodic) Go-to-Market Strategy Addressable Market Opportunity Traction Adoption Churn Financials (probably non-existent) Rev Customer Acquisition Cost Margins Operating Margin Margin Growth
- 22. Google Confidential and Proprietary Questions they’ll ask What will you do with the money? How long will it last? Who is your target customer? What has their feedback been? Example? What if Google/FB/Amazon/Apple builds this tomorrow? How is this a business instead of a product/feature? What is your biggest shortcoming/hurdle? Why is your company different from X? Why didn’t this work before? What will this market look like in 5 years? What’s your biggest mistake so far?
- 23. Google Confidential and Proprietary Questions they’ll ask What will you do with the money? How long will it last? Who is your target customer? What has their feedback been? Example? What if Google/FB/Amazon/Apple builds this tomorrow? How is this a business instead of a product/feature? What is your biggest shortcoming/hurdle? Why is your company different from X? Why didn’t this work before? What will this market look like in 5 years? What’s your biggest mistake so far?
- 24. Google Confidential and Proprietary How to pitch them Passion Tenacity Expertise Resilience Savvy FOMO CrEaTiViTy Competitiveness Integrity Resourcefulness Inventiveness Excitement Decisive Inspiring
- 25. Google Confidential and Proprietary Convertible Notes Structured as loans when the investment is made. Outstanding balance of the loan is automatically converted to equity when a subsequent equity round is raised Benefits Simplicity and speed of close. Can be done over a weekend with limited time or expense Puts off pricing discussion until later, how do you price an idea when that’s all it really is? Enables multiple seed investors at various times. Each $ is a “loan” and does not need to be part of a round Maintain full control - convertible note investors usually don’t have voting rights or board representation Considerations Investors expect a cap, i.e. a maximum price that their loan converts to equity at. Be sure to spend time negotiating this cap because it effectively serves as a price Usually gets same security as equity investors (inadvertent liquidation preference)
- 26. Google Confidential and Proprietary Convertible Note Example
- 27. Google Confidential and Proprietary Priced Equity Round Equity investment made at an agreed upon price with negotiated structuring terms and standard governance Benefits Transparency around what exactly you are getting Oftentimes easier for friends and family to understand Considerations Takes time. Negotiations can take a lot of valuable time as there are many additional terms to consider carefully Setting a price can be tough. What leverage do you have if your company is very early? Don’t want to set too low... More expensive due to legal fees
- 28. Google Confidential and Proprietary Key Terms to Focus On Focus on the amount of money you need and what percent you’re willing to give up. Don’t think about in terms of headline numbers. Know what your realistic burn rate will be. Very scary when you can’t pay employees. Investors generally want 20-25% (Series A ~ C) Valuation Pre / post money valuations don’t tell the whole story. Investors will want the company to increase the number of ungranted options (for granting to future hires) BEFORE they make their investment. This will dilute the current shareholders. Have a realistic hiring plan for the next 1.5 years and create an option pool size to fit that need. Option Pool Shuffle
- 29. Google Confidential and Proprietary Key Terms to Focus On Often the least well-understood of the major terms – mechanisms for investors to protect returns in downside outcomes “Preferred Equity” (startup definition, not public company definition) ➔ Preference Preference = investors get [a multiple of] their money back before others (“common” shareholders) get anything Participation = after receiving their preference, investors share (“participate”) with common shareholders until they receive another [multiple of] their money At any point, investors can elect to “convert to common”, give up their preference/participation, and simply receive their % ownership of the $ returns ValuationPreference & participation
- 30. Google Confidential and Proprietary Preference / Participation Example
- 31. Google Confidential and Proprietary Right for investors to invest sufficient $ in subsequent rounds to maintain their ownership %’s. Standard and non- controversial for VC’s (you want them incentivized to continue supporting your company over time), somewhat controversial for angels (too much pro rata rights can leave little room for new investors in subsequent rounds). General rule of thumb: I would recommend NOT giving pro rata rights to anyone who is not a board member or adding value to your company on the level of a board-member Other Terms to Always Consider Ability for some % threshold of shareholders to force all others to agree to sell the company. Many VC’s will want this in some form. Threshold is highly negotiable – a fair outcome is neither VC’s nor founders alone can force a sale, but together they can drag all other shareholders (angels, employee option holders, etc.) Drag-along right Pro Rata (Right of First Offer) List of actions the company cannot take without approval from investors. Often includes right for investors to block you from raising a new round or selling the company. (See “Protective Provisions” in term sheet below.) Standard and typically non-negotiable Protective Provisions
- 32. Google Confidential and Proprietary DMCD’s Actionable Advice Create Crunchbase/AngelList Profiles Focus on unit economics Avoid down rounds Project your cash/option balance (1.5 years) Don’t argue with angel feedback Get a headstart on hiring pipeline Get another 3 names from every meeting >1x participating-prefered or “Double Dip”... run away! Convertible debt CAN have full ratchet Short deck, ENORMOUS appendix Create exponential growth, not linear