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Business 16 Stanford Department of Continuing Education Class # 5, 10/26/09 Fundraising: Strategy, Termsheets, Dilution
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When do I fundraise? o When I have a strategy o When I understand the effects o When it makes sense for the company and for new investors o When investors are likely to be interested o When I have hit relevant milestones o When I can answer “who cares?”
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Fundraising Strategy o When do I ask? o Who do I ask? o Do my current investors help or hurt? o Do my investors do my road show with me? o How much do I ask for? o Do I get it all at once, or in tranches? o How does this fundraising affect future investment in my company? o How does this investment force me to raise additional rounds, what milestones will I will need to hit to improve valuations? o Will the increase in company value (or my share of company value) be greater than our dilution from this investment?
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Fundraising Strategy o You will need to fund to the next value inflection point o At least 18 months of capital o Less than that and you spend all of your time fundraising o More than that, and you are suffering unnecessary dilution o Calander timing o Expect at least a 6 month process
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Fundraising Strategy o Understand that as a founder/CEO, your main job is to raise money, so stop whining about how hard it is/how much time it takes/how you can’t manage the company and raise money/how investors are too stupid/risk averse/near-term oriented/etc.,etc. o Welcome to the NFL
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Fundraising Strategy o You need to make each new round make sense for each new group of investors o You need to create enough value that every round can make a multiple on their money o Series A needs 10x, Series B needs 5x, Series C needs 3x o You need to answer “Why don’t I just wait until the next round?”
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Fundraising: Effects o Everybody will get diluted o Investors protect themselves by putting in their “pro-rata” o Employees don’t o You will probably need to refresh the employee pool o Watch the cost of those options
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Fundraising: Effects o Post-money o Savvy investors are obsessed with it o If your last post money was too high for the milestones achieved, your investors are gonna get whacked o Investor pain=Common shareholder pain o Preferences o Eat away at common o Price per share is not everything; understand everything that can affect your payout
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Fundraising: Milestones o Make them real o Significant risk reduction o Sales, Management Hires, Reg. Approvals o Don’t get trapped into raising money before you hit a big milestone o Investors may just want to wait o Don’t get trapped into setting a valuation just before you reach a liquidity event o New investors will not want to pay much more than your investors just did
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Fundraising: Who Do I Ask? o Look in www.nvca.com under NVCA memberswww.nvca.com o Not firms that have funded competitive deals o Ask explicitly o Make sure they invest amounts and at stages and in technology that matches your company’s needs o Talk to decision makers o Get your attorney or any of your advisors to make introductions
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Fundraising: Bridge financing o Useful, crippling or necessary, depending on circumstances o Useful when you don’t want to set a price that is too high or too low o Punts the pricing decision to the next round investors o Crippling when no outsider is interested o Terms can get tough o Necessary when you have to hit a milestone and were not smart enough to raise enough money o Be careful of what the terms imply to new investors o Tough terms imply investors think there is a lot of risk o Investors may not understand what they are really gaining
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