f317 – venture capital & entrepreneurial finance staged financing (bootstrapping, 3fs, angels)
TRANSCRIPT
F317 – Venture Capital & Entrepreneurial Finance
STAGED FINANCING (BOOTSTRAPPING, 3Fs, ANGELS)
Venture Capitalists don’t fund ideas. Too Risky.
So today we’re going to discuss how entrepreneurs get the requisite capital to launch a product or service before
raising Venture Capital
10,000 FT View
Cash Flow
TimeValley of Death
Survival / Growth Capital Seasoned Capital
Early Stage Later Stage
A
B
C
Mezzanine
IPO
Secondary Offerings
Seed Capital / Startup Capital
Break even
Financing Lifecycle – High Potential Venture
Thought 1 - Staged Financing
Risk
Cost of Capital
High
High
Low
Low
The process of raising enough capital to remove enough risk to make the opportunity attractive to the next group of investors
Thought 2 – Value Add is critical early in the start-up process
Founders Angels Series A Series B
Sweat Equity Contribution
Cash Contribution
Cash Flow
TimeValley of Death
Bootstrapping
3Fs
Angels
Financing Lifecycle – High Potential Venture
Crowd Funding
Accelerators
Thinking / Collective Intelligence
Pre-Funding Strategy - Thinking- It’s really hard, and really
cheap;
- Return on investment is massive;
- Diligence on competitors and market…free…and just a few clicks away;
- Gain million dollar strategies/tactics on someone else’s nickel….it’s called READING FOR THE WHYS….not the WHATS.
Pre-Funding Strategy – Talk to others
“Collective Intelligence”
Networking is extremely hard, but the returns are significant.
Share your thinking…it’s free…and the advice could be worth millions….
…but you have to be willing to hear the truth
When thinking/networking are exhausted….you’re ready for:
Bootstrapping
Bootstrapping78% of all businesses are bootstrapped. So what does bootstrapping mean?
- Relying on resources other than external financing.
What are some bootstrapping strategies?
- Don’t quit your day job (40 hours doing paid job / 40 hours working on start-up);
- Sell something….anything
Bootstrapping
Excellent Bootstrappers will utilize the “Low Expectations” Strategy:
- Take the “big idea” and divide it into the several smaller ideas;
- Focus on the “best” smaller idea to get into revenue;
- Then activate the other ideas as the company grows.
Bootstrapping
What are the benefits of Bootstrapping (from an entrepreneur's point of view?
1) Forces the entrepreneur to be scrappy and cheap;
2) Allow the entrepreneur to keep more of his/her equity;
3) Creates an ethos within the company of relying on customers and revenue, not big buckets of money.
When Bootstrapping strategies have been exhausted…next option:
Family & Friends$30 Billion Annually
Family & Friends (2 F Money)
What makes 2F Money attractive?
What makes 2F Money unattractive?
(and….there’s no right answer….just share your thoughts)
Family & Friends (2 F Money)
Friends and Family investors almost never have the knowledge and skills to objectively evaluate:
- Valuations;- Structures;- Market Opportunities- Technology
Thus, this creates a precarious situation when raising money. So how should you approach?
4 Strategies when raising money from the 2Fs:
1) Treat them as strangers (What does this mean?);
2) Structure the investment as debt;
3) Tie repayment to cash flows;
4) If equity, make it non-voting
Family & Friends (2 F Money)
When Bootstrapping strategies have been exhausted…next option:
Angel Investors$20 Billion Annually
Angel Investors
Wealthy individuals who invest money in fledgling ventures in exchange for the excitement of launching a business & acquiring and interest in any financial rewards.
Angel InvestorsAccording to Jay Adleson, Angel Investors are:
- Accredited Investors (Definition?)
- Investment sizes range from: $10K - $250K
- Typically don’t join Board of Directors (unless a super Angel….and then you want him/her on the Board of Directors); and
- Can be excellent connectors.
Angel InvestorsEntrepreneurs should first seek out active Angels (those looking to invest in startups)….Why?
- They Want to be a part of helping building something.
What’s a key ingredient to getting an active Angel to invest?
- A personal connection/affinity with the Founder(s)
Angel InvestorsBut….Active Angels don’t want to see 250 unsolicited emails (and business plans) from entrepreneurs each year……so what’ the best way of approaching them?
- Network with individuals that have the ear and attention of the Active Angels in the community…if they like what you’re doing, they’ll make an intro.
- Odds of success accelerate significantly as compared to a cold call.
Angel Investors / Angel Listwww.Angel.co / Premier Angel Investor Network. Post your opportunity on Angel List and begin marketing the opportunity to Angels throughout the Country.
Angel Investors / Angel List
But Remember: Most Angels prefer to invest in their backyard and are very hesitant to invest in Start-ups outside their Geography. Why??
More Recent Strategies
AcceleratorsStructured Programs that recruit talented technical founders and encourages them to build a startup and launch it in three months
Apply to get into the program
Build and Launch a Product or Service
Present results to multiple investors
1 2 3
Progression through an Accelerator
Accelerators
Accelerators / Basic Structure
Investment size:$25,000 - $150,000
Term: 90 Days
Equity: 7 – 10%
Class Size: 6-12 / 3 Class Per Year
Accelerators / Win Examples
Accelerators
Emerging Strategies
Crowd Funding
Crowd Funding
Create a funding page
Set the amount you need to raise and minimum investment
If you meet or exceed the amount needed, the funds are released
1 2 3
Crowd Funding Progression
“the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.”
Crowd Funding
Crowd Funding / Story
The story needs to be about not what you’re doing, but why you do it…..the story really matters.
Think about product commercials.
Crowd Funding
Oculus Rift Goal - $250,000
Raised - $2.44MM
Pebble:Goal - $100,000
Raised - $10.3MM
Crowd Funding / Structure
Most crowd funding has been about receiving a product reward for a contribution.
The next round of sites will be about receiving equity (investment focused)
End of LectureQuestions?