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Venture Capital for Entrepreneurs
Daniel DrouetMcGill X-1July, 2016
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
