startup mba 3.1 - funding, equity, valuations
TRANSCRIPT
Funding, equity, valuations
http://startupmba.foundercentric.com
[email protected] foundercentric.com @foundercentric !Mailing list: http://bit.ly/fc-list
Revenue
Get paid by your customers
Even if it’s not the long-term plan, it puts you in a stronger position for eventual fund-raising
You don’t depend on anyone else’s approval to build your business
Paul Graham
Ideally you want to be able to say to investors "We'll succeed no matter what, but raising money will help us do it faster."
Debt
Borrow money and promise to pay it back with interest
If the company fails, you’re usually personally liable
Almost always a bad fit (and dangerous) for startups which deal with uncertainty
There is a “best” funding for you
Revenue - growth is not the most important factor
Debt - you have guaranteed income but uncertain cashflow
Equity - high growth potential with a moat and large market
We’re mainly talking about
equity funding
Stage at which VC deals happen
5%25%
60%
10%
Some revenue; still figuring out the rest →
The “typical” funding journey
Sweat equity - start!
Accelerator - 20-50k
SEIS Seed - 150k-500k
Series A - 500k-2mm
Series B - 3-5mm
Remember
The Series A funding gap is real. Plan to survive off of your seed round until you can raise a Series B.
Rule of thumb
The founder with the most equity should have no more than 2x the founder with the least equity
Sitar Teli (paraphrased)
We can’t invest in a company where the CTO has that little equity. It’s too much of a risk.
Joel Spolsky
The most important principle: Fairness, and the perception of fairness, is much more valuable than owning a large stake
Question
Your company is worth $2m and you raise $500k. !
How much is it worth after the money? !
What % do you still own? The investors?
Question
3 co-founders evenly share a company. They raise 250k on 750k. !
What % and £ does each of them own now? What % of the company have they “given up”?
Run the math!
When investors put cash into a business, your % ownership goes down, but your ££££ ownership stays the same
Don Dodge
Don't worry about giving up too much equity at an early stage. If the company is successful you will be very rich. If it isn't successful then holding 60% versus 30% won't matter.
Paul Graham
If you've [already] sold more than about 40% of your company total, it starts to get harder to raise an A round, because VCs worry there will not be enough stock left to keep the founders motivated.
The funding timeline
Raising money takes 3 months (full time)
But you don’t want to negotiate with an empty bank account, so you leave a safety buffer of 3 months at the end
Which gives you 6-18 months to actually build your company
Figuring out your valuation
1.Figure out 12 and 24 month budgets 2.Work out a valuation for each based
on 20% and 40% dilution 3.You’ve now got the four “corners” of
your valuation range 4.Negotiate inside those ranges based
on your strength vs. peers
Figuring out your valuation
In other words, if you’re strong, you can either negotiate toward the 20% (less equity) or the 24 months (more runway)
Paul Graham
One of the things that surprises founders most about fundraising is how distracting it is. When you start fundraising, everything else grinds to a halt.
Stephen Rapoport
I said, “I’m not raising money right now. But I will be in 3 months. What are you scared of and where would we need to be for you to be excited?”
London vs. the Valley
In 2012, the valley did $12.5B over 977 rounds and London did $1.75B over 274 rounds Source: Dow Jones VentureSource, 2012
So the valley has 4x the deals and 2x valuations (but also more startups)
Do your investor Due Dil
• f6s.com (accelerators) • angel.co (angels & VCs globally) • capitallist.co (London angels) • thefunded.com (investor ratings)
Warning
Employee option pools are a termsheet trick to dilute you without diluting investors (not a deal-breaker, but be aware)
Warning
Be aware that physical business investors have very different expectations from tech investors, and tend to offer bad deals when they shift into tech
Tip
Keep negotiation simple by focusing only on pre-money valuation and the amount they’re putting in
Tip
Search online for founder-friendly boilerplate and bring your own term sheet to resolve the rest of the terms
Tip
Close a strong lead investor ASAP (e.g. cash in bank), and then fill in the rest as a rolling round