Early Stage Funding

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Early Stage Funding: 

Early Stage Funding Sean G. Ryan

Background: 

Background Currently Consulting with Start-ups Business Plans Fund Raising Charleston Angel Partners Corridor Roundtable

Background: 

Background Accenture (Anderson Consulting) Business Process & Technology Consulting Consulted with Fortune 500 Companies 1995 “the internet will be a big library at best, most links lead to junk” Digital River E-commerce Service Provider (ASP) Pre Dot-Com Director of Software Development IPO August of 1998 Today’s Market Cap: $1.3 Billion

Background: 

Background ExactTarget Web-Based Email Marketing Co-Founder, CTO Post Dot-Com Bubble, hard to get money Jupiter Research ranked ExactTarget highest in business suitability 2004 Several rounds of funding, most recent $10M Insight Venture Partners BookSurge Print on Demand, zero inventory book production Investor, COO Sold to Amazon, April 2005

Seeking Funds: 

Seeking Funds

Uses of Funds: 

Uses of Funds Operations Hiring Competent Management Sales and Distribution Support and Service Administration Growth Requires Capital Working Capital Accounts Receivable Inventory Capital Expansion Technology Equipment Leasehold Improvements

Types of Companies: 

Types of Companies Lifestyle Provide a family income/support desired lifestyle Fulfill personal goals Generally $1M or less in annual sales Limited upside Sole proprietorship, LLC, S-Corp High Growth Fewer than 1 in 20 businesses Possibly very large returns Generally require more funds Fiduciary responsibilities

Slide8: 

Types of Money

Types of Money: 

Types of Money

Types of Money: Internal Cash-flow: 

Types of Money: Internal Cash-flow

Types of Money: Debt: 

Types of Money: Debt

Types of Money: Equity: 

Types of Money: Equity

Slide13: 

Stages of Development

Stages of Development: 

Stages of Development Money Time High Growth Lifestyle Seed Startup Early Growth Expansion Maturity - You have an idea - Writing the business plan - Investigating the market Looking for people to join you Creating a prototype/demo of product or service Investigating patents

Stages of Development: 

Stages of Development Money Time High Growth Lifestyle Seed Startup Early Growth Expansion Maturity You have a new business Business plan is solid Patents, if any, may be in process Product demo or prototype has traction – interested clients/investors Maybe some initial sales Key management, in place or on sidelines

Stages of Development: 

Stages of Development Money Time High Growth Lifestyle Seed Startup Early Growth Expansion Maturity Success in marketplace Hiring sales and marketing Hiring operations Office space/warehouse/manufacturing Equipment purchases

Stages of Development: 

Stages of Development Money Time High Growth Lifestyle Seed Startup Early Growth Expansion Maturity Growing quickly More hiring Transition from initial admin/operations to full scale Move offices to accommodate hires New production facilities/hardware Invest in marketing Invest in product development Competition takes notice Fire-fighting, keeping the wheels on

Stages of Development: 

Stages of Development Money Time High Growth Lifestyle Seed Startup Early Growth Expansion Maturity Continued growth Formalize organization Departments are created Who is that person? National presence in market space Focus turning to margins and efficiency

Risk Assessment: 

Risk Assessment Risk* Time Risk Seed Startup Early Growth Expansion Maturity 80% of startups fail Less than 5% become high growth * Level of investment risk assumed by investor

Slide20: 

Sources of Funds

Sources of Funds: 

Sources of Funds Risk Time Seed Startup Early Growth Expansion Maturity

Sources of Funds: 

Sources of Funds Risk Time Seed Startup Early Growth Expansion Maturity Founders: Highest risk Typically invest up to $100K Use their own savings Ask friends to join them Offer a piece of company as incentive – outlined in Operating Agreement Work without salary (may defer on books) Provide space (garage/basement) Ask for favors (legal advice, accounting) Should all be highly active

Sources of Funds: 

Sources of Funds Risk Time Seed Startup Early Growth Expansion Maturity Friends and Family High risk Fund most new businesses Typically invest up to $200k Can be quick money Personal relationship risk Part of networking for your business Formal Private Placement Memo Have consistent agreements drawn and approved by a lawyer Keep records Generally passive investors Valuation

Sources of Funds: 

Sources of Funds Risk Time Seed Startup Early Growth Expansion Maturity Angels Moderate to high risk Typically invest $50K to $1M Perform due diligence Groups may work as a syndicate Can help with next round of funding 1/3 of deals at the seed stage May take seat on board In 2004: 225,000 Angels invested $22.5B in 48,000 ventures

Sources of Funds: 

Sources of Funds Risk Time Seed Startup Early Growth Expansion Maturity VCs Moderate risk Typically invest $2.5M to $10M Perform due diligence Can help with next round of funding 6% of deals at the seed or startup stage Generally lead a round Will take seat on board In 2004: $21B in 2,876 ventures $7M average

Sources of Funds: 

Sources of Funds Risk Time Seed Startup Early Growth Expansion Maturity Banks More likely to loan when cash flow is good and assets on the books Borrow on receivables and other assets Acquisitions/Equity: IPOs are rare Acquisitions are much more common

Slide27: 

Example

Example: 

Example Multiple steps in raising funds - rounds Larger sums raised at each step Growing valuation Owners get diluted

ExactTarget Example: 

ExactTarget Example Investment Ownership Valuation Founder Value 4 Guys and a Napkin Operating Agreement, LLC 3 Season Porch First Sale using PowerPoint! $25K 25% $0 $0

ExactTarget Example: 

ExactTarget Example Investment Ownership Valuation Founder Value Private Placement Father-in-Law in for $5,000 – Sh*t! 250 sq. ft. office, no windows V1 of product sends 25K emails 30 times $25K 25% $0 $0 $200K 20% $1M $200K

ExactTarget Example: 

ExactTarget Example Investment Ownership Valuation Founder Value First “Real” Investor Wealthy, Nice Guy Extended Network of F&F Salary – Wife is happy! New Office, Employee Opts $25K 25% $0 $0 $200K 20% $1M $200K $1M 14% $5M $700K

ExactTarget Example: 

ExactTarget Example Investment Ownership Valuation Founder Value First VC Incorporate, Formal Board of Dir. Partial Exit for Founders More Work, More Responsibility $25K 25% $0 $0 $200K 20% $1M $200K $1M 14% $5M $700K $10M 8% $35M $3M

ExactTarget Example: 

ExactTarget Example Investment Ownership Valuation Founder Value Next Year Based on Meeting Sales Goals Must Maintain Margins IPO Market Must Remain Strong Prayer! $25K 25% $0 $0 $200K 20% $1M $200K $1M 14% $5M $700K $10M 8% $35M $3M

Things Not to Do: 

Things Not to Do Spend money on party 1999 Pixelon.com throws $10M party after $23M VC Raise Wait until the last minute to raise money Digital River and ExactTarget layoffs Get more money than you need WebVan vs. Simon Delivers/PeaPod Models Spend money on “buzz” Beyond.Com “Naked Guy” SuperBowl Ad Cyberian Outpost “Wolves” SuperBowl Ad

Things To Do: 

Things To Do Have skin in the game Fail fast, fail small, try again, find a model Focus on revenues, margins – this will make raising money easier and valuations better Don’t be a big business too soon – DR Accounting on Qbooks until IPO Focus on the size of the pie and not the size of your piece Commit, raising funds often forces this Get excited, be confident and think big Look for similar business models

Slide36: 

Questions?

Slide37: 

Thank You