From Seed to Series BMike Miller
General Partner Liquid 2 Ventures
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My Background
• Particle Physics
• Y Combinator (S08), Cloudant, IBM
• Liquid 2 Ventures
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“Universal” startup trajectory?
–Graham from Cendana Capital
“Our job is to help you keep your startup alive long enough to realize its potential”
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“Universal” startup trajectory?
5Data taken from Pitchbook
Industry Trends
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Industry Trends
In truth, graduation rates vary wildly on starting population. Who did the seed, how big, when?
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–Anon (Top 5 seed fund MD)
“We find 65-70% get Series A funding, 40-45% get to Series B.”
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Why deals really get done
Quantitative
Market, Team
“Coverage” (aka FOMO)
3 Types of Investors9
“What do I have to do to get funded?”
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What you cannot control
• Your competitors
• Geopolitics and macro-trends
• VC dogma
• The outcome of any given deal (highly stochastic)
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What you can control• Product
• Team
• Revenue
• NPS
• Messaging around raise (pre-seed, seed, seed’, seed+…)
• Timing
• Optimizing the raise:
• Establish the market
• Who you pitch first, what feedback you get, etc
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Aside: Why investors care so much about Marketing
• Measure twice, cut once
• Have you really identified the core business problem that you solve?
• How easy is your sale
• Is your sale repeatable
• Cloudant example: it’s not the tech, or scaling, its the time time market. => make it faster to build new revenue
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Series A: SaaS• Pre-A Funding: $2.5MM-$3.5MM
• MRR: $100k - $250k
• ARR: $1.2MM-$2MM
• 15-20% MoM,
• 12 months in the market
• Wide range, dependent on the actual GP14
Series A: Infra• Pre-A funding: $4MM-$5MM
• “Prepare yourself for a seed prime/seed extension/seed plus/seed convertible raise…”
• $1MM - $3MM ARR
• 3-5 “marquee” customers: “thought leaders associated with New IT, devops, digital transformation and the like”
• “Beefy ACV to demonstrate you’re solving an important problem”
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Series B• Estimates vary even more wildly.
• “5x your A numbers in <2 years”
• “Be like Gitlab!”
• MRR: $500k - $1.2MM
• ARR: $6MM - $9MM
• Quantify: churn, CAC, LTV
• Team size 40-60, significant non-eng
• 2-3X YoY strong B (*)
• 5-10% MoM rev growth(*) Hmm, where does that come from?
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IMHO: To achieve Series B, prove you are going to be a “meaningful exit” for your VCs.
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https://medium.com/jme-venture-capital/meaningful-vc-exits-2bb5702776e2#.usqs1a7h6
A Typical Early Stage VC Fund
• 2/20 Fund Structure
• ~20 core investments per fund
• Goal: 3x gross returns
• Expected outcomes:
• 7 zeros, 7 money backs, 6 wins
• 5 “meaningful exits” and one “home run”18
https://medium.com/jme-venture-capital/meaningful-vc-exits-2bb5702776e2#.usqs1a7h6
What’s “meaningful”?
Return GoalHomerun
Money Back
Meaningful Exits
Meaningful Return = 1/3 of Fund Size
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https://medium.com/jme-venture-capital/meaningful-vc-exits-2bb5702776e2#.usqs1a7h6
What’s “meaningful”?
Assumes 20% ownership (Series A goal) Larger funds do have more GPs, but this is LP math
Your Goal
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https://medium.com/jme-venture-capital/meaningful-vc-exits-2bb5702776e2#.usqs1a7h6
Revenue Requirements
Know your asymptote. I didn’t.21
https://medium.com/jme-venture-capital/meaningful-vc-exits-2bb5702776e2#.usqs1a7h6
Revenue Requirements
You’ve got 5-7 years to hit ~$20MM ARR
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https://medium.com/jme-venture-capital/meaningful-vc-exits-2bb5702776e2#.usqs1a7h6
Growth Requirements: t2d3
Triple: 10% MoM Double: 6% MoM
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https://medium.com/jme-venture-capital/meaningful-vc-exits-2bb5702776e2#.usqs1a7h6
What to do if your round isn’t happening
• Be honest with yourself and investors
• Grow both revenue & margin
• Extend runway: (Burn <$100k month)
• The dirty secret of the bridge round, and how to do it
• Venture debt (Banks & Funds)
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How bridge rounds really work
• Almost everyone has to do a bridge rounds.
• Bridge rounds are always insider rounds.
• Try to secure 50% commitment from your anchor investors before picking up the phone.
• Don’t expect much/any bump in terms.
• If you are executing extremely well, you may be able to do an uncapped note with 20% discount to the next round.
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HerculesTechnologyGrowthCapital,Inc. SiliconValleyBank-TermLoan SiliconValleyBank-WCFacility GoldHillCapital2008,L.P.
LoanAmount $7,000,000 $3,000,000 $4,000,000
$3,000,000,minimumadvance
of$1,000,000.
FundsAvailability
$4MatClose,and$3.0M
availableQ12014upon
achievementof85%ofrevenue
intheBoardapproved2013
Plan.
Upto$3Mavailablefrom
closingthroughendofdraw
period,or6/30/14.
300%ofMRRxannualized
CustomerRetentionRate(CRR).
CRR=(100%-lostcustomer
percentage)x12.MRR=
monthlycontractuallyobligated
recurringrevenuefromSaaS
customers,excludinglicense,
advertising,andusagebased
processing.
$3,000,000availablethrough
March31,2014,minimum
$1,000,000advance.
MaturityDate 42months 48months,orJune1,2017 364daysfromClosing 42months
Interestonly 12months 12months 12months 6months
Amortization 30months 36months
PrincipaldueatMaturity.
OutstandingPrincipalshall
conformtoBorrowingBase
Formula,andanyamounts
exceedingFormulashallbepaid
immediately. 36months
PrepaymentPenalty
Prepaymentfeeof3%ofthe
advancedamountifprepaid
priortothefirstanniversaryof
thefunding,reducingto2%
betweenthefirstandsecond
anniversariesand1%thereafter. None None
Prepaymentfeeof3%ofthe
advancedamountifprepaid
priortothefirstanniversaryof
thefunding,reducingto2%
betweenthefirstandsecond
anniversariesand1%thereafter.
InterestRate 9.5%+1%PIKinterest
WSJPrime+2.25%,floating
(WSJcurrently3.25%)
WSJPrime+1.25%floating.
WSJPrimeiscurrently3.25% 11%fixed
FacilityFee/OtherFees1%,orupto$70k,andadue
diligencefeeof$30k
$5,000paidatclosing,$5kgood
faithdepositatstartofdue
diligence,refundableifnot
approvedbyBank.Ifapproved,
appliedtocommitmentfee,but
retainedbybankiftransaction
doesnotproceed.
$10,000paidatclosing,$10k
goodfaithdepositatstartof
duediligence,refundableifnot
approvedbyBank.Ifapproved,
appliedtocommitmentfee,but
retainedbybankiftransaction
doesnotproceed.
Finalpaymentof2%ofamount
advancedattheendofthe
amortizationperiod,orupto
$60k
WarrantCoverage
6%,or~208,955sharesor>1%
offullydiluted,pricedonthe
loweroftheSeriesBpreferred
stockpriceorthepriceofthe
nextroundoffinancing,includes
registrationandanti-dilution
rightsinparitywiththeseriesB
investors.
3%ofline,or$90,000worthof
sharesattheseriesBprice
(~45ksharesorlessthan1%of
fullydiluted).
2%oftotallineamount,or
$60,000ofsharesofSeriesB,or
approx.29,850sharesor<1%of
fullydiluted.
Uponclosing,130,000sharesof
commonstockat$0.32per
share,and43,333sharesof
commonstockpereach$1.0M
advanceat$0.32pershare.
Collateral
Perfectedfirstliensecurity
interestinallassetswitha
negativeIPpledge.
Firstlieninallcorporateassets,
excludingIP,withanegative
pledgeonIP.
Firstlieninallcorporateassets,
excludingIP,withanegative
pledgeonIP.
Blanketlienonallcorporate
assetsexcludingIP,with
negativepledgeonIP.
Covenants/ConditionsofClosing:Contingentuponclosingatleast
a$10MMseriesBequityround.
Nodiscoveryofmaterialfacts
thatwouldchangeinvestment
decisionafterduediligence,no
reps,warrantiesordisclosures
shallbefalseormisleading,
signaturesrequired,borrower
payslegalcosts.
Allcollectionswillflowthrough
acashcollateralaccountor
Lockbox,Nodiscoveryof
materialfactsthatwould
changeinvestmentdecision
afterduediligence,noreps,
warrantiesordisclosuresshall
befalseormisleading,
signaturesrequired,borrower
payslegalcosts.
Transactionmustbecompleted
45daysfromexecutionofterm
sheet.Subjecttosatisfactory
duediligence,callswithventure
capitalinvestors,satisfactory
loandocumentationandno
materialadversechangesprior
toeachadvance.
FinancialCovenants None None
MinimumTNW(TangibleNet
Worth)plusdeferredrevenueof
$2,800,000. None
ReportingRequirements
Monthlyandquarterlyfinancial
statements,includingbookings
andbillingsreports,audited
financials,BODmaterialsand
otherLenderrequests.
AnnualCPAauditedfinancials,
andCompliancecertificate
within180daysofFYE.Monthly
companyfinancialsand
compliancecertificatewithin30
days.Annualapproved
projectionsandanymaterial
projectionchanges.
AnnualCPAauditedfinancials,
andCompliancecertificate
within180daysofFYE.Monthly
ARaging,APAging,deferred
revenuereport,recurring
revenuereport,renewalrate
report,andBorrowingBase
Certificatewithin30days.
Annualapprovedprojections
andanymaterialprojection
changes.
Quarterlycompanyfinancials
andmonthlycompliance
certificate,BODslidedeck
within30daysofmeeting,
annualauditedconsolidated
financialswithin180daysof
FYE,operatingbudgets,updated
captablesasmodified.
Reportingrequirementsbecome
quarterlyuponrepaymentof
loanandexpireuponexpiration
ofthewarrant.409avaluation
reportwithin30daysof
completion,management
representation(audit)letterand
CFOquarterlychecklist.
RighttoInvestinfuturefinancing
Upto$500,000inSubsequent
EquityFinancingundersame
termsasexistinginvestorson
futureround. None None
Borrowershallgrantrighttoa)
investthelesserof$500,000or
5%ofeachofBorrower's
subsequentequityroundson
sameterms,conditionsand
pricing,orb)convertupto
$500,000intheBorrower's
subsequentequityroundonthe
sameterms,conditionsand
pricing,conversionatLenders
solediscretion.
BreakupCharge:
IntheeventBorrowerdoesnot
gothroughwithHercules
financing,Borrowertopayall
expenses,DueDiligenceCharge
andLoanFacilityFee. None None None
Expiration:April15,2013,loanclosingMay
31,2013 6/21/13 6/21/13 6/23/13
• Debt is complicated: CFO territory
• Banks: WSJ’ + 1.25-2.25%
• Funds: ~11% fixed
• Interest, warrants, right of first refusal
• Amortization, prepayment, fees, collateral, covenants, breakup charge…
Venture Debt
Venture Debt (Funds)
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-Top 5 venture debt partner
25-40%
Venture Debt (Banks)
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-Top 5 venture bank
Conclusion
• Focus on what you can control
• Revenue growth is your #1 measure of success
• If your round isn’t happening, know your options
• Lean on your existing investors for advice
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