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When & How to Raise Venture Capital
The document provides a comprehensive guide on raising venture capital, highlighting types of investors, stages of funding, and essential fundraising tips. It dispels common myths about venture capital, emphasizing that VCs invest in businesses rather than just technology or ideas. Key strategies include understanding the fundraising lifecycle, the importance of customer validation, and the need to prepare and engage effectively with potential investors.
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When & How to Raise Venture Capital
- 1. @NYUEntrepreneur When & Howto Raise Venture Capital Frank Rimalovski Executive Director, Entrepreneurial Institute Managing Director, Innovation Venture Fund March 5, 2016
- 2. @NYUEntrepreneur Topics u Types ofventure investors u How does VC works? u VC math u When to look for VC? u Fundraising tips u Startup Funding Resources at NYU u Q&A 2
- 3. @NYUEntrepreneur Types of VentureInvestors
- 4. @NYUEntrepreneur investor|in-ˈvestər| noun one who expendsmoney with the expectation of achieving a profit or material result by putting it into financial schemes, shares, or property…
- 5. @NYUEntrepreneur Myth: Venture Capital fundsare the primary source of startup funding
- 6. @NYUEntrepreneur Venture Funding Lifecycle 6 ① Discovery ② Validation ③ Customer Creation ④ Company Building Test assumptions about customer needs/problem &develop MVP Seek Validationthat people are interested in your solution Begins to build demand & improve efficiency of customer acquisition Drive growth aggressively & execute business model Invention & ideation Grants, Competitions Founders + Credit cards Grants Crowdfounding Customers SBIR/STTR + Accelerators Friends & family Angels Seed funds Venture capital funds Leasing Factoring Vendor finance Private equity Public markets Valuation*
- 7. @NYUEntrepreneur Types of VentureInvestors Stage Pre-Seed Seed/Startup Early Late Type Founder(s), friends & family Individual angels/groups & seed funds Venture Capital Funds Financial Investors Strategic/Corporate Typical Amount $5,000 to $250,000 $25,000 to $1,000,000 $2,000,000 and up Source of Funds Individuals Individuals Institutional Investors, Family Offices & Corporations Number of rounds Single Single Multi
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- 9. @NYUEntrepreneur The Basics u VCsmanage “OPM” o Pension funds, foundations, endowments, financial institutions, family offices, etc. u 10-year fund life u “2-and-20” Fund returns 5 10 15 Fund I Fund II Fund III Fund investments
- 10. @NYUEntrepreneur How do VCsMake Money? u Investing at low valuation (through multiple rounds at increasing valuations) and then…
- 11. @NYUEntrepreneur How do VCsMake Money? u Investing at low valuation (through multiple rounds at increasing valuations) and then… u Exit (a/k/a liquidity event) at a higher value o Initial Public Offering (IPO) o Merger into a Public Company o Merger into another private company o Return of capital from cash flow o Asset sale
- 12. @NYUEntrepreneur Myth: VCs make moneyon every deal
- 13. @NYUEntrepreneur 75% of startups fail toreturn investors capital Shikhar Ghosh Harvard Business School #nyuef
- 14. @NYUEntrepreneur VC Math NB: Figuresand sequencing are intended to be illustrative. Your mileage will vary.
- 15. @NYUEntrepreneur From idea toincorporation Inspiration & ideation Customer discovery Customer validation Problem-Solution Fit! Develop prototype Test prototype Retain McCarter & English Form SLE Split founders equity Open account at Silicon Valley Bank Founders 100% Fully Diluted Ownership
- 16. @NYUEntrepreneur In search ofProduct-Market-Fit Continue to test prototype Customer discovery Customer validation Secure early adopters Product market fit! In TechCrunch! Begin to craft seed pitch Commence fund raise! Founders 100% Fully Diluted Ownership
- 17. @NYUEntrepreneur Raise seed round 3months & 30 pitches later Greycroft Leads Series Seed Pre-$ $3.00m Raise 1.00 Post-$ $4.00m NYU Innovation Venture Fund & 3 angels complete round Founders 100% Fully Diluted Ownership
- 18. @NYUEntrepreneur Raise seed round 3months & 30 pitches later Greycroft Leads Series Seed Pre-$ $3.00m Raise 1.00 Post-$ $4.00m Deposit $1.0m with SVB Pay McCarter & English Back to work Founders 75% Seed Investors 25% Fully Diluted Ownership
- 19. @NYUEntrepreneur Hire first employees Add10% Option Pool Founders 75% Seed Investors 25% Fully Diluted Ownership
- 20. @NYUEntrepreneur What are Options& Why? u Definition: Right to buy common stock at a specified price within a pre-determined time u Aligns incentives u Why use options instead of shares? o Simplifies governance o Saves money for the company & investors o Tax & capital efficient for employees u 10-20% pool is customary 20
- 21. @NYUEntrepreneur Hire first employees Add10% Option Pool Hire first employees Founders 67% Seed Investors 23% Options 10% Fully Diluted Ownership
- 22. @NYUEntrepreneur Hire first employees Add10% Option Pool Hire first employees Identify repeatable & scalable business model Founders 67% Seed Investors 23% Options 10% Fully Diluted Ownership
- 23. @NYUEntrepreneur Hire first employees Add10% Option Pool Hire first employees Identify repeatable & scalable business model In NY Times! Founders 67% Seed Investors 23% Options 10% Fully Diluted Ownership
- 24. @NYUEntrepreneur Hire first employees Add10% Option Pool Hire first employees Identify repeatable & scalable business model In NY Times! Draft VC pitch Commence VC raise Founders 67% Seed Investors 23% Options 10% Fully Diluted Ownership
- 25. @NYUEntrepreneur 5 months &40 pitches later Flybridge Capital Offers Pre-$ $7.50m Raise $2.50m Options 15% * Founders 67% Seed Investors 23% Options 10% Fully Diluted Ownership
- 26. @NYUEntrepreneur Make room formore options! Flybridge Capital Offers Pre-$ $7.50m Raise $2.50m Options 15% * Founders 60% Seed Investors 20% Options 20% Fully Diluted Ownership
- 27. @NYUEntrepreneur Smaller piece ofa bigger pie! Post Money Value Founders $4.50m Seed 1.50 Options 1.50 Flybridge 2.50 Post-$ $10.00m u 50% step-up from Seed! u $2.5m in the bank u John Elton & David Aronoff on your board u Growing a team u Scaling a business u Life is good! Founders 45% Seed Investors 15% Options 15% Flybridge 25% $7.50m Pre-$ Fully Diluted Ownership
- 28. @NYUEntrepreneur VC Math LessonsLearned u If you raise $, you will be diluted u Options come out of your hide, not theirs u Timing of your raise will be key u Valuation nor your % ownership is everything u Focus on things that drive enterprise value, not just what maximizes your ownership
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- 30. @NYUEntrepreneur On Lawyers… u Importantto pick a very experienced one o Not the top Wall Street lawyer you can find o Not your cousin Murray o Not your patent attorney o Not the guy who did you will/mortgage refi o …someone who does venture financings daily u Doesn’t have to be local, but it helps u We are happy to recommend several 30
- 31. @NYUEntrepreneur When to Lookfor VC? 31
- 32. @NYUEntrepreneur When to Lookfor VC? 32 ① Discovery ② Validation ③ Customer Creation ④ Company Building Test assumptions about customer needs/problem & develop MVP Seek Validationthat people are interested in your solution Begins to build demand & improve efficiency of customer acquisition Drive growth aggressively & execute business model Invention & ideation Grants Competitions Founders + Credit cards Angels Seed funds Venture capital funds Leasing Factoring Vendor finance Private equity Public markets Valuation* You are here Grants Crowdfounding Customers SBIR/STTR + Accelerators Friends & family
- 33. @NYUEntrepreneur Why defer raisingmoney? u A time consuming, distracting process u Minimize dilution (when your valuation’s low) u Hard to stop spending once you start u You will spend it on the wrong things u 1st round raised on the promise… 2nd on the progress u If you’re wrong (and don’t hit your milestones), you’re dead u Many other non-dilutive sources of $$$ 33
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- 35. @NYUEntrepreneur What do VCslook for? 35
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- 37. @NYUEntrepreneur VCs invest in businesses. Notideas. Not technologies. Your technology/IP is only one of the many critical pieces necessary to build a business. 37
- 38. @NYUEntrepreneur What do VCslook for? u Serve unmet need in large & growing market u Differentiated solution(s) + supporting data u Customer validation of pain & gain u Scalable & repeatable business model that generates high ROI u Focused teams with proven ability to execute 38
- 39. @NYUEntrepreneur VC Dealflow Funnel 1,000150 25 5-10 Inbox Desk Meet Due Dili Deal Credenza Reject
- 40. @NYUEntrepreneur Your initial goalis to get a meeting! 40
- 41. @NYUEntrepreneur Myth: Raise money whenyou need it!
- 42. @NYUEntrepreneur Raise money whenyou can raise it! 42
- 43. @NYUEntrepreneur Running out ofmoney is not a milestone! 43
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- 45. @NYUEntrepreneur VCs are easyto meet! NYU Entrepreneurial Institute Respected VC or angel Present/ former portco exec Well- respected entrepreneur /exec Service providers Friend of VC partner
- 46. @NYUEntrepreneur Myth: Don’t approach VCs untilyou are ready to raise money 46
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- 49. @NYUEntrepreneur Myth: VCs Invest inTeams with Strong Data
- 50. @NYUEntrepreneur VCs invest inthe trend! 50
- 51. @NYUEntrepreneur Final Thoughts onFundraising u Diligence investors like they diligence you u Be prepared, but less is more u You do not need a prospectus/biz plan u You want professional investors 51
- 52. @NYUEntrepreneur Final Thoughts onFundraising u Diligence investors like they diligence you u Be prepared, but less is more u You do not need a prospectus/biz plan u You want professional investors 52
- 53. @NYUEntrepreneur Final Thoughts onFundraising u Diligence investors like they diligence you u Be prepared, but less is more u You do not need a prospectus/biz plan u You want professional investors 53
- 54. @NYUEntrepreneur Final Thoughts onFundraising u Diligence investors like they diligence you u Be prepared, but less is more u You do not need a prospectus/biz plan u You want professional investors u Never hire an agent/banker 54
- 55. @NYUEntrepreneur Final Thoughts onthe Pitch u Investor pitch is a proxy…
- 56. @NYUEntrepreneur Final Thoughts onthe Pitch u Investor pitch is a proxy…for your ability to: o Recruit talent & lead a team o Sell to customers o Attract partners u Tell a story & engage your audience u Cover the bases…not just your product/tech u But, remember it doesn’t stop with your pitch deck
- 57. @NYUEntrepreneur Lessons Learned u Manysources of capital…VC comes later u VCs are professional money managers u Focus on things that drive enterprise value u Investors fund businesses, not tech/ideas u Get to know investors early in the process u It’s a complicated process…arm yourself u You want professional investors u We are here to help! 57
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