understanding vc mc gill x-1_july 2016

Venture Capital for Entrepreneurs

Daniel DrouetMcGill X-1July, 2016

About me

Twitter: mtlluoEmail: drouetd@gmail.com

Financing options

Right tool for the job• Self-finance (Bootstrapping)• Government grants• Loans• Selling Equity

Options available depend on• Stage the company is at• Type of business

What is Equity Financing? Trading shares of your company for cash Taking on a new partner! When to consider it• Up front costs not fundable from cash flow• Need to move fast• Unique product or technology with large potential

market• Exit possible in 5-7 years for $30M+

Equity Types Common shares• Simple• Founders and investors have similar rights

Preferred shares• Can be complex, typically used by VCs• Provides special rights

Convertible Loan• Simple and avoids valuing the company• For Seed or Bridges

Equity financing pros and cons Pros• Have resources to move quickly• Help with strategy, critical hires, fundraising,

partnerships, exits, etc. Cons• Give up control• Locked in for the next four years• Higher rate of failure• Give up possibility of lucrative small exit• Give up possibility of running lifestyle business

Angel investors

Successful business people Invest their own money often in groups Typically more involved than VC Usually only invest at Seed level Small exits can be wins

Venture Capital (VC) Raise funds that have 10 year lifespan Risk reduction based on• Funding over multiple rounds• Portfolio approach

50% investments lose money 20% break-even 20% make some money 10% make lots of money

Large funds require large exits• Swing for the fences

VC fund example (simplified)

$100M fund. Goal is $250M or 2.5x 20 investments. Aim for 20% ownership at exit• 50% (10) = 0x (written off)• 20% (4) = 1x (break even)• 20% (4) = 2x - 3x• 10% (2) = 10x or more!

$250M / 2 = $125M per company Own 20% => Need two $625M exits!!!

Investment stages

Startup Seed Early Stage(Series A, B)

Late Stage(Series C, D, E)

Mezzanine /Buy-Out

$0 - $50K < $500k $1M - $5M $5M - $30M > $50M

Friends & Family, Angels

Friends & Family, Angels, Seed Funds

Angel Groups, VC

VC, Expansion funds

Specialized funds

Validate idea,Prototype

Launch Beta Build team, grow users, first revenues

Ramp up growth, sales

Exit or remain private

Investors are looking for: Team

• Doers• Complementary• Deep knowledge of sector• Coachable or experienced

Technology / Product• Unique, disruptive• Defendable is nice

Market• Big to huge• Growing fast or ripe for disruption• Traction, Traction, Traction!!!

What you should look for

Has funds to invest Invests in your sector Complement existing portfolio Track record / reputation Share common vision Good relationship with Partner

* Take “Smart Money” with a grain of salt.

Approaching investors Do your homework• Shortlist of investors• Get an introduction through your network• Show how you would be a good fit

It’s like dating• Compatibility matters• You can’t force it

Build the relationship before you need it

Fundraising processInitial Meetings Term Sheet Closing

What’s involved Short list investors,Prep deck and other docs.Get introductions

Agree on roadmap and use of funds,Lots of back and forth over terms,Some due diligence

Legal and financial due diligence,Reference checks,Haggling over details

Goal Get investor excited Get signed term sheet

Close, i.e. cash the cheque!

Time 3 weeks to prep3 weeks for mtgs

6 weeks 6 weeks

Valuation

Driven by the investors• How much money they think you need• Percentage they want to own

Entrepreneur controls one thing• How much risk has been removed from the business

Miscellaneous• Pre and Post Money• Option Pools• Avoiding valuation with Convertible Debt

Valuation example: SeedShareholders (Founding) Money In Common shares %Jack $0 500,000 50

Jill $0 500,000 50

Total $0 1,000,000 100

Shareholders (Seed) Money In Common shares %Jack $0 500,000 35

Jill $0 500,000 35

Angels (pre $1M, post $1.25M) $250,000 286,000 20

ESOP n/a 143,000 10

Total $250,000 1,429,000 100

Valuation example: Series AShareholders (Seed) Money In Common shares %Jack $0 500,000 35

Jill $0 500,000 35

Angels (pre $1M, post $1.25M) $250,000 286,000 20

ESOP n/a 143,000 10

Total $250,000 1,429,000 100

Shareholders (Series A) Money In Common shares %Jack $0 500,000 26.3

Jill $0 500,000 26.3

Angels (pre $1M, post $1.25M) $250,000 286,000 15

ESOP n/a 143,000 7.5

VCs (pre $6M, post $8M) $2,000,000 476,190 25

Total $2,250,000 1,905,190 100

Resources Finding investors• http://www.cvca.ca/membership/member-directory/• http://www.nacocanada.com/directory• http://angesquebec.com/fr/investisseurs/profils-membres/

Fundraising• http://www.slideshare.net/startupcfo/investor-readiness-

workshop Pitching investors• http://venturehacks.com/pitching

Understanding Term Sheets• http://www.feld.com/wp/archives/2005/08/term-sheet-

series-wrap-up.html