First Steps of Fundraising

Angel Labs

Buying shares in an unquoted private company in exchange for a cash injection Unsecured but permanent Not a loan, an investment Angel Investing, Venture Capital, Private Equity, Crowdfunding What is Equity Capital?

# of angel investments in the US 60,000 businesses get funded by angels each year in the US

An Angel investor is…

Angel funded companies

Seed: product is in development. Usually in business less than 18 months. Early: product in pilot production. Usually in business less than 30 months. Expansion: product in market. Revenue growth. Late: new product or product improvement. Continue revenue growth. Buy-out: a fund investment strategy involving the acquisition of a product or business, from either a public or private company, utilising a significant amount of debt. Business stage defines type of capital need Source: The Australian Bureau of Statistics’ 2001

Financing cycle

Venture Capitalists

Funding profile Amount in $b Angel investments in 2013Venture Capital in 2013 $24.2b deals individuals $28.8b deals 840 VC firms

Angels vs VCs What are the key benefits and downsides for an entrepreneur?

Angels vs VCs Lengthy diligence process. Venture capitalists take too long to decide whether or not they want to invest because they are set up to take large risks and have complex processes to evaluate those risks. Too much capital. Venture capitalists need to put too much capital to work – often a VC will want to invest a minimum of $3M. If you only need 4 people to build the product and get it into market, this likely won’t make sense for your business. Board seat. Venture capitalists often require a board seat and, for that matter, a board of directors be formed. If 100% of the company is building the product and the team knows how to do that, then a board of directors may be overkill. In addition, it may be too early to decide who you want to be on the board.

Fundraising Process

Only 2% of those who submit a business plan to Business Angels get funded It will be difficult

The Four Key Steps

The first call and/or first meeting Evaluates the risks of the investment, the market size, and the industry Determines if it’s a fit with the angel/group Roughly 15% of startups continue on the next stage Screening

The angel will share their knowledge with other angels or members of the group Second meeting Pitch to a broader group 5% of startups move on to diligence Socialization

Evaluates the team, the market, product roadmap, and sales pipeline Investors call contacts in industry to refine their point of view Volley questions back to the startup Focuses on defensibility, regulatory risk, or competition Outlines deal terms 3% of the startups move onto the “Decision” phase Diligence

The deal team briefs the entire angel on all the diligence materials & deal terms One last pitch Granted an approval and a term sheet in hand, investors then must convince an entrepreneur to work with them 2% of the deals are signed Decision

Why raise money?

Acquire credibility to land contracts? Salaries? Need of a large team? Research & Development? Up-front investment needed? Marketing? Catch first mover advantage? Gain the skills/connections/advice to the table of an investor? Alternative: Bootstrapping Why raise money?

Bootstrapping

“Refers to the starting of a self-sustaining process that is supposed to proceed without external input.” - Wikipedia Bootstrapping

PROS – Fundraising is time consuming. More time to concentrate on your business. – No equity dilution – Lean startup mentality: iteration, iteration, iteration... – Focus on profitability for survival – No investor management CONS – Slower growth – Fewer staff – Focus on cash management (time consuming) – No investor support (network, knowledge...) Bootstrapping

Your relation with investors

How to attract investors?

It is a dating process: attractiveness vs neediness Actively asking money can come across as “needy” Meet for advice, not for money Have a sales funnel process How to attract investors?

1. Always be pitching 2. Over-deliver 3. Keep on the radar screen 4. Find ways of helping the investor 5. Schedule a follow up meeting 6. Rinse and repeat 6 Steps to building relationship with investors

How long to raise money?

Typical time frame: 3 months to 6 months But aim for 1 year from planning to raising an equity investment: – Negotiation power – Don’t be needy! How long to raise money?

1.Management Team -Execution -Workable 2.Exit opportunity -Innovation -Fits portfolio -Solid exit strategy 3.Revenue potential -Robust economic model -Scalability Top 3 investment criteria Source: Inter Trade Ireland May 2011

Executive summary Business Plan Financial projections Investors’ preferred documents

Executive summary

The #1 document Summary of the main points Attract attention 1 or 2 pages The best business plans have a great summary Executive summary

Example of an Executive Summary

Business Plan

“We like business plans that present a lot of information in as few words as possible” - Sequoia Team Mirror of the proposed business endeavor Many templates on the internet: d/samplebusinessplan.pdf Business Plan

Financial projections

97% of projections are wrong Very valued by investors – show understanding of business and numbers: – Show the metrics of the business - labour wages, marketing spend, revenue growth – Demonstrate your ability to make fair and reasonable projections - projected profit and loss – Don’t forget founders salary Financial projections

Business Angels admit that 80% of documents they receive are bad quality Doesn’t reflect the quality of the business opportunity Document quality

Presentation

10 short & precise slides: 1.Purpose 2.Problem 3.Solution (Demo) 4.Why now? 5.Market Size 6.Competition 7.Magic / Expertise 8.Business Model 9.Team 10.Financials Presentation slides

30 sec / 2 min / 20 min ? What problem does your company solve? What is the solution? How large is the market? Who are the competitors? What is your product development plan? What does your financial plan look like? What is your sales and marketing plan? How much capital do you need to raise and what is the use of proceeds? Pitching

Show momentum

Applies to every pitch you ever do. Seeing is better than hearing. If you haven’t built it yet, show an example. Show, Don’t Tell

Meeting with investors I am the Best! They love me! I can’t tell you about my idea because you can steal it from me I want a salary of $15,000 + car + objective bonus + dividends ! There is no competition, this technology is unique! The total needed investment is $300,000 and I will put $1,000 I have all the skills to manage the company, I don’t need anybody in the board. I want 95% of the shares! I didn’t test the idea because the prospects could steal my idea!

Meeting with investors These guys will help me succeed! I don’t only need the money, I also need your knowledge. I want a salary of $1, 500. In my actual job I earn 3x more but I believe in this project. There is competition, but I know them well! I have identified their weaknesses and strenghts The total needed investment is $300,000 and I am ready to put $100,000 I don’t have skills A and B and I will hire co- founders with those skills. I am not opposed to give away 40% of the company. I talked with several clients and here are the results. I already got a paying beta customer.

Conclusions I need to emigrate to the US! There are no BAs in this country! Grants are only for government’s friends! Investors gave me amazing feedback! I am in talks with 6 Business Angels

Red flag if… You can’t explain product or service The business has no competition Unrealistic projected market share Unrealistic business model Major growth in business without identified triggers Pay off past debt instead of financing growth

Time management

1.Begin by creating relations with angels 2.Get your documents prepared 3.Have a credible team To sum up

How they want you to communicate? – Every month? Every week? Every day? – Financials? Cash? KPIs? Strategy? Can the BA help on getting more sales? Do they have relevant connections? Will they introduce me to people? BA availability? Willing to support? Knowledge on industry and business model? Do they ask the right questions? Deep pocket BA? Do I get along with? Do I want to work with them? Will the BA provide references? BA’s track record? Investments in similar companies? Success rate of these companies? BA’s exit timing and strategy? Do the due diligence of the investor

Talk with other entrepreneurs; reference check – Ask (politely) to the investor to supply with contacts – Find companies in the investors portfolio that didn’t succeed Stick with your instincts Check for digital fingerprints How to do it?

What questions should entrepreneurs ask angels? Can the investor afford to lose the money if the startup goes under? An entrepreneur should affirm that their reputation won’t be in jeopardy if the startup fails. How available is the investor to offer advice? How much time will they commit? How much capital are they willing to put in now? How much do they keep in reserve? Beyond the funding, where’s the value ad? How entrepreneur- friendly are they? Will they be supportive and offer advice along the way? How easy will the process be for the investor to cut the cheque? Which of their investments have failed? Will these entrepreneurs be willing to provide a reference? Due Diligence of the investor

Angel.co (angels & VCs globally) Capitalist.co (London angels) Thefunded.com (investor ratings) Due Diligence of the investor