1. Early-stage Fund Raising (including social-impact fund raising)
cell (512)
Founder and Executive Director, Southwest Angel Network
30 years experience in early stage technology start-ups
Raised $60M from investors

2. Agenda Stages of Fund Raising What Motivates Angels and VCs
How Investors Evaluate Deals
Types of Investment Instruments

3. Not all companies do all these things.
Stages of Fund Raising
Amounts raised
$ $x0, $x00, $xx,000, $xx0,000,000
Exits
Bootstrap
Friends and Family
Angels
Venture
Capital
IPO
Crowd Funding
Strategic
Investors
M&A
Kickstarter
Private Equity
Grants
Time
Not all companies do all these things.

4. What Motivates Angels and VCs

5. How Angels work Wealthy individuals looking for an energizing activity
Enjoy helping young companies
Angels are either part of a network or invest on their own
Networks work one of two ways:
Individuals write personal checks (aka, a network)
The angels create a funding pool which makes investments (aka, a fund)
Angels plan to make a return on their investment

6. What (ideally) happens with investments?
Then, maybe five companies will provide a return, and one of those will be a big win.
Assume 10 equal sized investments $ $

7. How Big an Angel Portfolio?
Minimum of 10
20 is better

8. Some Texas Angel Networks
Southwest Angel Network

9. How VCs Work They are professional, full-time investors
Early-stage VCs raise a ~$350M fund from largely institutional investors
They make 1st investment in companies over the first 2-3 years of fund’s existence
They plan to continues to invest in these companies in later rounds
Then wait ~7 years for an exit/payout
1 in 10 deals make a fund successful

10. How Investors Evaluate Deals
The bottom line: Can they make a return on the investment?

11. The most important consideration!
At a high-level ….
Gain confidence in the management team.
The most important consideration!
Gain confidence that the company will become profitable and provide a return to investors
For social-impact investors - Gain confidence that the company will have significant social impact

12. Team Validation –Job #1 CEO’s emotional maturity
Transparent, open, trustworthy, humble, coachable, always learning
Ability to enable team collaboration and open communication
CEO’s startup experience
Prior mistakes are good
CEO’s domain knowledge of the company’s market
Appropriate titles?
How does the C-level team work together?

13. Social Impact Validation – The most basic test
Does the company’s primary business mission clearly speak of impact?
Does the company’s home page clearly communicate that impact mission?
That said – “Impact is in the eye of the Investor”

14. Social Impact Validation - Efficacy
What evidence is there that the company will effectively deliver significant impact?
What a nice idea 
High confidence that significant impact will occur
vs.

15. Demonstrating Efficacy
Pre launch
Post launch
Write a Theory of Change
Cite evidence complied by other sources
Publish pre-release test results
Compare pre-use and post-use outcomes
Compare outcomes relative to competitive impact solutions
Compare outcomes relative to a control group

16. How Significant an Impact?
How much impact is the company creating per individual?
Useful, Helpful, Relieving, Life Changing
How many people will the company directly impact?
Tens, Hundreds, Thousands, Millions, Everyone
How long does the impact last?
Days, Weeks, Months, Years, Lifetime
How long before the impact takes effect?
Days, Weeks, Months, Years

17. Learn More on Impact Measuring Impact
Download the Angel 203 Webinar material at

18. Market Validation
Can they demonstrate that they solve a problem for a payer who strongly feels that pain, and who has a budget to pay for a solution?
Are there enough of those payers to generate enough revenue (big market)?
Is there thorough validation of the market opportunity?
Early revenue from payers is strong validation

19. Go-to-market validation
Does the company know how it will get to ~$30M in sales and an M&A?
How do they connect with potential customers?
What is the cost of acquiring one incremental customer?
What type of marketing and sales organization and partners do they need? And are they in place?

20. Product/Technology Validation
How ready is the product for full release?
Modern and viable architecture that matches market need?
Is the technology scalable?
Are developers tightly coupled to market validation?
If hardware, is the supply chain in place?

21. Competitive Advantage Validation
How significant is their competitive advantage?
What keeps them successful five or ten years from now (enabling M&A)?
Critical mass of customers?
Sales channel lock?
Supply chain lock?
IP?

22. Financial Validation
Reasonable bottom-up details driving the financial model?
Credible, customer-driven revenue plan?
Yes: “number of customers willing to pay how much to solve a problem”
No: “we will get 10% of big market”

23. Types of Investment Investments?

24. 3 Ways Investors Can Make a Return
Revenue-based Payments
M&A – Merger and Acquisition
IPO – Initial Public Offering of stock

25. Type of Investment by Stage
Bootstrap
Pre-Seed/Seed
A > B > C …….
IPO or M&A
Founders
Common stock
Typically few additional shares
Shares become liquid
Employees
Common stock option grants. Option pool may increase over time.
Can exercise options & have liquid stock
Equity Investors -
Often angels & convertible debt, SAFE, KISS
Typically VCs & preferred stock
Preferred converts to common
Non-equity Investors
Angels & revenue-based funding

26. Revenue-based Funding
Investors invest in company
Company repays investors by sharing a percentage of revenue
Benefits to company
Company does not give up equity [non-dilutive]
No M&A pressure from investors [no exit required]
Repayment amounts scale with revenue [no fixed monthly payment]

27. Revenue-based Structure
Amount raised
25% to 33% of annualized revenue
Repayment rate
4% to 8% of gross revenue
Total repaid
1.5x to 2x the amount raised
Typical repayment period
3 to 5 years
Examples:
Monthly revenue
$20k
$100k
Annualized revenue
$240k
$1.2M
Amount raised
$80K
$400k
Amount repaid
$160k
$800k

28. Key Equity Concept - Valuation
Pre-money company valuation ($2M)
plus
Investment amount ($1M)
equals
Post-money company valuation ($3M)
Result: Investors own 1/3 of the company

29. Equity Return Considerations
What percent ownership will investors own at an exit?
Is the current pre-money valuation or cap reasonable?
What future rounds of investments are anticipated?
With this current investment can the company achieve a business result that significantly increases valuation before the next investment?
How likely an exit? What are acquisition examples?

30. Convertible Debt
Does not require a pre-funding valuation to be defined
The loan automatically buys series A preferred stock when A is issued, at better terms than the series A investors receive
Loan is basically unrecoverable if the company fails

31. Convertible Debt – Key Terms
Valuation cap
Protects the percent ownership position for investors at conversion time
The most important term for investors
Discount rate
The discount from the Series A preferred price
Typically a 20% discount
Interest rate
Earned interest used to buy stock at Series A conversion
Typically 3% to 8% annually
Conversion trigger
Typically = series A of a certain size

32. What is a Typical Convertible Debt Valuation Cap?
Depends on every aspect of business plan
Team, traction, technology, market size, IP, sales challenges, competition, etc.
That said, annualized revenue rate (ARR) is a strong determinate … at least in Texas!
Likely valuation caps
Pre-revenue
ARR < $100k
ARR < $500k
ARR > $1M
$1.5 to $3M
$2.5M to $4M
$3M TO $6M
$5M to $10M

33. Comparing Early-stage Options – there are variations for each type
Structure
Number of versions
Equity mechanism
Has a discount
Has valuation cap
Earns interest
Has Maturity Date
Convertible Note (traditional)
No standard
Conversion 
Keep It Simple Securities: KISS 2
varies
SAFE - Simple Agreement for Future Equity 4
Warrant to buy X
Increasingly Investor friendly
More detail and nuance at:

34. Preferred Stock Successive rounds: Series A/B/C….
Typically a VC-led round
The marketplace (investors) sets the price/share
Don’t bother with net-present-value calculations
If investor wants 25% ownership for a $1M investment, the pre-money valuation is forced to $3M

35. Preferred Stock
Preferred stock holders have rights that common stock does not have.
Most notably, upon acquisition investors have the option to get 1 to 2 times their investment back before common gets anything
If a company raise $3M and get acquired for $2M than common stockholders may get nothing
The preferences are why investors pay more per share than stock option strike prices
CEO

36. Raising Funds is a Real Slog
Iterative / non-linear process
1 step forward, followed by 2 steps sideways or backward
Emotional roller coaster
Raising money can be a full-time job for CEO
6-12 months per round

37. Further steps
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