10 Surprising Things About Raising Money by: Michael Blake

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<ul><li> 1. 10SurprisingThingsaboutRaising p g g g Money MichaelS.Blake,CFA,ASA,ABAR CommunitySteward,StartupLounge DirectorofValuationServices,Habif, Director of Valuation Services Habif Arogeti &amp;Wynne mike@startuplounge.com @unblakeable </li> <li> 2. AboutHA&amp;W LargestindependentaccountingfirminGA Established1952 300 professionals in tax, audit, valuation, 300+professionalsintax,audit,valuation, litigation,duediligence,informationassurance Clients range from startups to public companies Clientsrangefromstartupstopubliccompanies 20languagesspoken Valuation practice named Best in Georgia by ValuationpracticenamedBestinGeorgiaby AcquisitionInternational(2013) Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 2 </li> <li> 3. 501(c)(6)nonprofit WeareVentureCommunists Goalistofacilitateearlystage venturedevelopmentinGeorgia t d l ti G i Educatingentrepreneurs(Office Hours,PitchCamp,StartupSeminars) Safenetworkingmeetingsfor entrepreneurs(StartupLounge Atlanta,Savannah,Athens) Atlanta, Savannah, Athens) Safenetworkingforangelinvestors (AngelLounge) AllFREE Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 3 </li> <li> 4. IT SNOTWHATYOUDON TKNOW ITS NOT WHAT YOU DONT KNOW THATKILLS,ITSWHATYOUDONT KNOWTHATYOUDON TKNOW KNOW THAT YOU DONT KNOW Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 4 </li> <li> 5. #1CompaniesRunOutofTimeBefore Capital Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 5 </li> <li> 6. Assume69monthstoraisecapital. 69monthsofburn(callthat$500K) 69monthsofmanagementdistraction(at20 , , , hoursaweek,thatis1,0001,500hoursof timelost 69 months of eating Ramen noodles and 6 9monthsofeatingRamennoodlesand hittinghappyhours What can competitors do in 9 months? Whatcancompetitorsdoin9months? Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 6 </li> <li> 7. HowDoesTimeKillaVenture? Ideaisntscalable Pivotskillsabusinessover time Teammusthavefinancial runway/RedBullsupplyto /R d B ll l t befocusedandworkcrazy hours Onepersonshowsare muchhardertomake work Toolongtogettomarket Failure to recognize MVP FailuretorecognizeMVP Areyoumakingthemostof your runway? Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 7 </li> <li> 8. StartupsCanTakeaLongTimebefore beingCapitalReady being Capital Ready Customer traction Customertraction Assemblingthe managementteam g Developmentof technology gy Developing(notwriting) thebusinessplan Dontwastetimeraisingmoneyforastartupthatisntready. Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 8 </li> <li> 9. #2IfitTakesLongerthan12Monthsto RaiseMoney,YouProbablyWillFail Raise Money You Probably Will Fail Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 9 </li> <li> 10. IsYourDealThis? Is Your Deal This? Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 10 </li> <li> 11. OrThis? Or This? Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 11 </li> <li> 12. Whencompaniesdontgaintractionrightaway, thatsoftenasignofatoughfundraisingroadahead. th t ft i f t hf d i i d h d Unlessthemarket U ess t e a et changes. g Unlesssomething fundamentaltothe businesschanges. Sometimes,thefish arentbiting. H d Hardproblemsare bl hardtoraisemoneyfor. Deals get stale Dealsgetstale. Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 12 </li> <li> 13. WhyDoMoneyRaisesFail? Youreinthewrongcity g y Sellingtheproduct/ideaandnottheROI Unprepared Capitalnotreallyneeded Founder(s)appearhardtoworkwith Raisinganunrealisticamount Poornetworking Toolittleriskbornebythefounders T li l i k b b h f d Theopportunityisntveryfinanciallyattractive Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 13 </li> <li> 14. TheFundingGap The Funding Gap ItisMUCHtoughertofindcapitalbetween$1MMto$5MM $0 $100MM $100 MM $1MM $ $5MM $ $1B $1 B Dontmanufactureaneedformore money Angelsdonthavethecapital Venturefundsdon thavetheinterest Venture funds dont have the interest Toomanydeals Tooexpensivetomanagelotsofsmalldeals Noskillsetfordealsthatsmall Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 14 </li> <li> 15. #3ValuationisNotThatBigaDeal Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 15 </li> <li> 16. In Atlanta pre money tech startup valuations InAtlanta,premoneytechstartupvaluations generallyrange$1.25 $2.5MM. Chances are you cant really sell your shares and Chancesareyoucan treallysellyoursharesand cashout Ifyourcompanyisreallyworthmorethan$0,you If your company is really worth more than $0, you aredoingbetterthan90%ofyourpeers Termsmatteralotmorethanvaluation Valuecanbedeterminedcrediblybutitsarcane y y Mattersmoretoyouifsomeonemakesyou determinevalue(stockoptions,financial reporting,83belections) Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 16 </li> <li> 17. TermsthatMakeYouPoor Liquidationpreferences Liquidation preferences Participationfeatures Dividends i id d Convertibility Boardseats Redeemability Antidilution rights Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 17 </li> <li> 18. KeystoThinkingaboutValuation When you exit will you earn enough cash to Whenyouexit,willyouearnenoughcashto makeitworthyourwhile? Target between 10 30% ownership at the time Targetbetween1030%ownershipatthetime youexit. If Ifyouwalkaway,doyouhaverealistic lk d h li i financingalternatives? Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 18 </li> <li> 19. #4EvenaLowValuationisaLotof Money Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 19 </li> <li> 20. $1MMisalotofMoney Youcanbuy50cars You can buy 50 cars YoucanbuyanAMRAMmissile McLarenF1(0200mphin7.6seconds) (0 200 hi 6 d) 2fireengines BreakfastforthecityofRichmond,VA Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 20 </li> <li> 21. $1MMisntaLotofMoney New York City apartment NewYorkCityapartment Itis*not*enoughtoretireearlyonformost people 4privatecollegedegrees Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 21 </li> <li> 22. #5AtlantaInvestorsFearTechnology RiskMostofAll k f ll Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 22 </li> <li> 23. M ti Mostinvestorsarentengineers t t i Customervalidationis,bydefinition, technologyvalidation Technologyriskalmostimpossibletomanage Validatingtechnologycantakeyears. Validatingcustomerstakesweeks. Validating customers takes weeks. Demonstratedabilitytoinnovatedrives investorexcitement investor excitement Holdontothisthoughtfor#9 Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 23 </li> <li> 24. #6PayingSomeonetoRaiseStartup MoneyIsUsuallyDumb ll b Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 24 </li> <li> 25. Raisingmoneyisselling.Ifyoucantsell,you g y g y ,y cantgrowastartup. Most of the audience at pay to pitch events Mostoftheaudienceatpaytopitchevents arentactualinvestors. Many investors will refuse to pay the Manyinvestorswillrefusetopaythe brokeragefee. Raisingearlymoneyistooimportantto ii l i i outsource. Dontletaconsultantwishyourproblems away. Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 25 </li> <li> 26. #7IfYouHavetoExplainYourBusiness toanInvestor,YouHaveAlreadyFailed to an Investor You Have Already Failed Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 26 </li> <li> 27. ItslikehavingtoexplainajokeoraHalloween costume Pitchingadealshouldntbeliketryingtowin g anargument Entrepreneurswithatrackrecordcanraise moneyforalmostanything money for almost anything Investorhastogetthestoryrightaway S Smartinvestorsonlyinvestindealsthey i l i i d l h understand Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 27 </li> <li> 28. #8IfInvestorsWerentArrogant,They Couldn tDoWhatTheyDo Couldnt Do What They Do Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 28 </li> <li> 29. Investorsonlymakemoneyiftheyreallyare smarterthananyoneelse Muchoftheinvestmentmodeldefiesfinancial andportfoliotheory MaybeIdontknowanything.meansIdo y y knowmorethanyoubutyourenotworth arguingwithandIjustwantoutofthis conversation. Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 29 </li> <li> 30. VCandOtherReturns(Annual%) 80 Source:NationalVentureCapitalAssociation.VCreturnsperCambridge AssociatesLLCsU.S.VentureCapitalIndex. 70 60 EarlyStage 50 Russell2000 40 S&amp;P500 30 20 Barclay'sGovernment BondIndex B dI d 10 0 1Year 1 Year 5Years 5 Years 15Years 15 Years 25Years 25 Years Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 30 </li> <li> 31. UpperQuartile&amp;MedianReturns(%) NettoLimitedPartners Source NationalVentureCapitalAssociation 25 20 15 UpperQuartile 10 Median 5 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 5 5 Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 31 </li> <li> 32. A30%ReturnisLousy A:$10MMfundmakes10$1MMinvestments :$ 0 u d a es 0 $ est e ts 5years:3gobust,5breakeven,2dowell 30%fundRoR $37 MM value in 5 years (10 x 30% fund RoR =$37MMvaluein5years(10x (1.3)5) $ ; $ , $ 3inv=$0;5inv=$5MM,need$32MMtohit returngoal 2investmentsmustgofrom$2MMto$32MM invalue(100%rateofreturn)forfundtomeet 30%returngoal. Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 32 </li> <li> 33. #9JockeysRaiseMoreMoney,Horses MakeMoreMoney Make More Money Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 33 </li> <li> 34. I Investorsalmostalwayssaytheybetonthejockey t l t l th b t th j k Empiricaldatasaysthatthehorsemakesmoremoney* Its easier to change jockeys than it is to change a It seasiertochangejockeysthanitistochangea fundamentaltechnology j y y Goodjockeyslimitdownsidebutareconstrainedbya mediocretechnology Youstillneedgoodjockeys Goodtechnologieshavethegreatestupside Goodjockeysareeasiertospotthangoodhorses E Examples eBay,Google,Cisco l B G l Ci *Kaplan,StevenN.,Berk A.Sensoy,andPerStrmberg."ShouldInvestorsBetontheJockeyorthe Horse?EvidencefromtheEvolutionofFirmsfromEarlyBusinessPlanstoPublicCompanies."The y p JournalofFinance 64.1(2009):75115.Print. Habif,Arogeti&amp;WynneEducationalMaterial michael.blake@hawcpa.com 34 </li> <li> 35. ThinkAbout Whydontprofessional servicesfirms(CPA,law, marketing)obtainVC funding? Why do very few services Whydoveryfewservi...</li></ul>