fundraising debugged: when, why & who to raise (and not raise) money from

Fundraising Fundraising DebuDebuggggededWhen, Why & Who to Raise(and not raise) Money From

Roy Rodenstein@royrod

BarCamp Boston 5, 4/17/2010

You

Should

Starting

a

Kompanny!

• OG[H] (Original Gangsta Hacker): Georgia Tech, MIT Media Lab• UI/UX Research: Xerox Palo Alto Research Labs, AT& Labs• PM/Mktg/BizDev/CEO etc: iPhrase (NLP startup), IBM, Going, AOL

My Company: User-Gen Local Events + Ticketing (originally HeyLetsGo)

2005 2006 2007 2008 2009

About Me - Roy Rodensteinhttp://how2startup.com @royrod royrod@gmail

Co-found Going.com

Rejected by YC

Quit Day Job

$500k Seed

$3M Series A

Additional Funding Acquired

$20M+$5M+$5M+AnyAnyExit

$10k - $50k+$2k - $10k$500 - $5k$500 - $5k$0 - $1kCost

MonthsWeeks - MonthsWeeksWeeksDaysTime

20-70%5-20%5-10%5-10%0%Dilution

EquityConvertible

Debt,Equity

EquityConvertible Debt,

Equity Debt,

Convertible DebtForm

$500k - $10M+$50k - $1M+$5k - $20k+$5k - 200k+Amount

“Traction”Idea / PrototypeIdea /PrototypeIdea / PrototypeIdeaStage

VCAngelsIndividuals, Groups

Incubators /Seed Funds

Friends & FamilyBootstrapaka yourself /co-founders

Source

Fundraising Decoder Ring

$20M+$5M+$5M+AnyAnyExit

$10k - $50k+$2k - $10k$500 - $5k$500 - $5k$0 - $1kCost

MonthsWeeks - MonthsWeeksWeeksDaysTime

20-70%5-20%5-10%5-10%0%Dilution

EquityConvertible

Debt,Equity

EquityConvertible Debt,

Equity Debt,

Convertible DebtForm

$500k - $10M+$50k - $1M+$5k - $20k+$5k - 200k+Amount

“Traction”Idea / PrototypeIdea /PrototypeIdea / PrototypeIdeaStage

VCAngelsIndividuals, Groups

Incubators /Seed Funds

Friends & FamilyBootstrapaka yourself /co-founders

Source

Fundraising Decoder Ring

Source:Bootstrap

Pros• No dilution• Simple, cheap, quick

Cons• It ain’t OPM (Other People’s Money)• Morale impact if funds run low

Bottom Line• Good to get some skin in the game• But don’t overdo it- fundraising is better than giving up

$20M+$5M+$5M+AnyAnyExit

$10k - $50k+$2k - $10k$500 - $5k$500 - $5k$0 - $1kCost

MonthsWeeks - MonthsWeeksWeeksDaysTime

20-70%5-20%5-10%5-10%0%Dilution

EquityConvertible

Debt,Equity

EquityConvertible Debt,

Equity Debt,

Convertible DebtForm

$500k - $10M+$50k - $1M+$5k - $20k+$5k - 200k+Amount

“Traction”Idea / PrototypeIdea /PrototypeIdea / PrototypeIdeaStage

VCAngelsIndividuals, Groups

Incubators /Seed Funds

Friends & FamilyBootstrapaka yourself /co-founders

Source

Fundraising Decoder Ring

Source:Friends & Family

Pros• Low dilution• Simple, cheap, quick• Feels great if make them money!

Cons• Feels horrible if lose their money!• Can complicate later rounds• “Only money” / no further help

Bottom Line• Keep terms very basic, no board seats, no blocking rights...• Make sure it’s money they can afford to lose

$20M+$5M+$5M+AnyAnyExit

$10k - $50k+$2k - $10k$500 - $5k$500 - $5k$0 - $1kCost

MonthsWeeks - MonthsWeeksWeeksDaysTime

20-70%5-20%5-10%5-10%0%Dilution

EquityConvertible

Debt,Equity

EquityConvertible Debt,

Equity Debt,

Convertible DebtForm

$500k - $10M+$50k - $1M+$5k - $20k+$5k - 200k+Amount

“Traction”Idea / PrototypeIdea /PrototypeIdea / PrototypeIdeaStage

VCAngelsIndividuals, Groups

Incubators /Seed Funds

Friends & FamilyBootstrapaka yourself /co-founders

Source

Fundraising Decoder Ring

Source:Incubators / Seed Funds

Pros• Moderate dilution• Help with Legal, IT, PR, etc.• Mentors & peers• Leg up on fundraising

Cons• $12k is not a lot of money• Usually have to move temporarily

Bottom Line• Great for first-timers• Post-program support differs, YMMV• Dilution is dilution

$20M+$5M+$5M+AnyAnyExit

$10k - $50k+$2k - $10k$500 - $5k$500 - $5k$0 - $1kCost

MonthsWeeks - MonthsWeeksWeeksDaysTime

20-70%5-20%5-10%5-10%0%Dilution

EquityConvertible

Debt,Equity

EquityConvertible Debt,

Equity Debt,

Convertible DebtForm

$500k - $10M+$50k - $1M+$5k - $20k+$5k - 200k+Amount

“Traction”Idea / PrototypeIdea /PrototypeIdea / PrototypeIdeaStage

VCAngelsIndividuals, Groups

Incubators /Seed Funds

Friends & FamilyBootstrapaka yourself /co-founders

Source

Fundraising Decoder Ring

Source:Angels

Pros• Good middle ground, if pick right ones• Serious money w/o board seat• Manageable dilution e.g. convertible debt• Long-term morale, PR, etc. benefits

Cons• Their money == wrong angel is trouble• Can require herding cats

Bottom Line• Right angel can be hugely valuable• Beware of getting bogged down• Best or worst of both worlds

West: Ron Conway, Dave McClure…

East: Dharmesh Shah, John Landry…

Groups: Founder Collective, eCoast, Founders Fund…

$20M+$5M+$5M+AnyAnyExit

$10k - $50k+$2k - $10k$500 - $5k$500 - $5k$0 - $1kCost

MonthsWeeks - MonthsWeeksWeeksDaysTime

20-70%5-20%5-10%5-10%0%Dilution

EquityConvertible

Debt,Equity

EquityConvertible Debt,

Equity Debt,

Convertible DebtForm

$500k - $10M+$50k - $1M+$5k - $20k+$5k - 200k+Amount

“Traction”Idea / PrototypeIdea /PrototypeIdea / PrototypeIdeaStage

VCAngelsIndividuals, Groups

Incubators /Seed Funds

Friends & FamilyBootstrapaka yourself /co-founders

Source

Fundraising Decoder Ring

Source:VC

Pros• Real money for scale, can pay yourself• Right VCs have strategic relationship

Cons• Closing VC rounds is major time sink• Board management is major time sink• Major dilution == big exit needed• Can come with strings e.g. CEO/team

Bottom Line• Commitment level == getting engaged• Complex deal terms, have to know which to fight for• Key for building a big company, from FB to Xobni

VC Fundraising Myth-Bustin’

Myth: Higher Valuation is Always Better• You can price yourself out of future rounds• “Down” rounds (valuation falls) are really, really painful

Myth: Angel First, Then VC Reduces Dilution• Reality is Angel and VC valuations are not that different• Is $200k for 10% dilution better than $1M for 25% dilution?• Is 10% dilution and then 50% dilution better than 50% dilution?

Myth: Control is About Board Votes and % Ownership• Good VCs will never force founders to do something• In reality, nothing ever comes down to a “vote”• “50% ownership” is a red herring, VC controls are really about dilution and sale

blocking rights

Myth: I Shouldn’t Talk to VCs Until I Need that Mill• Yes, you should have your story together before talking to VCs• But much of “traction” == “I’ve been talking with them for a few months and see growth”

Q&A Time!

Advanced Topics• Convertible rounds: discounts, caps, warrants• Valuation• Fostering deal competition• Deal terms e.g. pro-rata (& super), anti-dilution, etc.• Inside rounds, follow-on rounds, leading a round etc.• Managing the lawyers• Managing the board• Term sheets: comparing, exploding• Compensation across funding stages• Pitch decks• Financial modeling• Business plans (do plan, don’t do a 50-page document)• VC seed rounds• Signaling• VC fund size, fund life stages, LPs, etc.

Further Resources

Angel, Incubator, VC Lists• Xconomy: http://www.xconomy.com/boston/resources/• Jon Pierce Boston Angels List: http://twitter.com/jonpierce/boston-angels

Relevant Blogs• VentureHacks: http://www.venturehacks.com• Mark Suster: http://www.bothsidesofthetable.com• Brad Feld: http://www.feld.com• Chris Dixon: http://cdixon.org• Fred Wilson: http://www.avc.com• Paul Graham: http://www.paulgraham.com/articles.html• (me): http://how2startup.com

Documents• YC Series AA Funding Docs: http://ycombinator.com/seriesaa.html• AVC Seed Docs: http://avc.com/a_vc/2010/03/standardized-venture-funding-docs.html• Wilson Sonsini Term Sheet Generator: https://dealbuilder.wsgr.com

Image Creditshttp://www.whyy.org/blogs/itsourcity/files/2008/11/bag_of_money.pnghttp://www.istockphoto.com/file_thumbview_approve/6907003/2/istockphoto_6907003-cartoon-bugs.jpghttp://blogs.nyu.edu/blogs/mj11/businessofart/money.jpghttp://upload.wikimedia.org/wikipedia/commons/b/b2/Coins.jpghttp://eroidays.com/files/2009/05/guy-bootstrapping-400x300.jpghttp://futureofmoney.com/moneyconference/wp-content/uploads/2010/02/McClure.pnghttp://www-math.cudenver.edu/~wcherowi/sdr.gifhttp://i31.photobucket.com/albums/c372/ryanmediocre2/BabyChick1.jpghttp://www.vcwear.com/fuck-id-fund-that/http://kk.org/ct2/calvinhobbes_friends.jpghttp://www.complete80s.com/media/ghostbusters.jpg