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@NYUEntrepreneur
When & How to
Raise Venture Capital
Frank Rimalovski
Executive Director, Entrepreneurial Institute
Managi...
@NYUEntrepreneur
Topics
u Types of venture investors
u How does VC works?
u VC math
u When to look for VC?
u Fundraising t...
@NYUEntrepreneur
Types of Venture Investors
@NYUEntrepreneur
investor|in-ˈvestər|
noun
one who expends money with
the expectation of achieving a
profit or material re...
@NYUEntrepreneur
Myth:
Venture Capital funds are
the primary source
of startup funding
@NYUEntrepreneur
Venture Funding Lifecycle
6
①
Discovery
②
Validation
③
Customer
Creation
④
Company
Building
Test
assumpti...
@NYUEntrepreneur
Types of Venture Investors
Stage Pre-Seed Seed/Startup Early Late
Type Founder(s),
friends &
family
Indiv...
@NYUEntrepreneur
How VC works
@NYUEntrepreneur
The Basics
u VCs manage “OPM”
o Pension funds, foundations, endowments,
financial institutions, family of...
@NYUEntrepreneur
How do VCs Make Money?
u Investing at low valuation (through
multiple rounds at increasing valuations)
an...
@NYUEntrepreneur
How do VCs Make Money?
u Investing at low valuation (through
multiple rounds at increasing valuations)
an...
@NYUEntrepreneur
Myth:
VCs make money on
every deal
@NYUEntrepreneur
75%
of startups
fail to return
investors capital
Shikhar Ghosh
Harvard Business School
#nyuef
@NYUEntrepreneur
VC Math
NB: Figures and sequencing are intended
to be illustrative. Your mileage will vary.
@NYUEntrepreneur
From idea to incorporation
Inspiration & ideation
Customer discovery
Customer validation
Problem-Solution...
@NYUEntrepreneur
In search of Product-Market-Fit
Continue to test prototype
Customer discovery
Customer validation
Secure ...
@NYUEntrepreneur
Raise seed round
3 months & 30
pitches later
Greycroft Leads
Series Seed
Pre-$ $3.00m
Raise 1.00
Post-$ $...
@NYUEntrepreneur
Raise seed round
3 months & 30
pitches later
Greycroft Leads
Series Seed
Pre-$ $3.00m
Raise 1.00
Post-$ $...
@NYUEntrepreneur
Hire first employees
Add 10% Option Pool
Founders
75%
Seed
Investors
25%
Fully Diluted Ownership
@NYUEntrepreneur
What are Options & Why?
u Definition: Right to buy common stock at a
specified price within a pre-determi...
@NYUEntrepreneur
Hire first employees
Add 10% Option Pool
Hire first employees
Founders
67%
Seed
Investors
23%
Options
10%...
@NYUEntrepreneur
Hire first employees
Add 10% Option Pool
Hire first employees
Identify repeatable &
scalable business mod...
@NYUEntrepreneur
Hire first employees
Add 10% Option Pool
Hire first employees
Identify repeatable &
scalable business mod...
@NYUEntrepreneur
Hire first employees
Add 10% Option Pool
Hire first employees
Identify repeatable &
scalable business mod...
@NYUEntrepreneur
5 months & 40 pitches later
Flybridge Capital Offers
Pre-$ $7.50m
Raise $2.50m
Options 15% *
Founders
67%...
@NYUEntrepreneur
Make room for more options!
Flybridge Capital Offers
Pre-$ $7.50m
Raise $2.50m
Options 15% *
Founders
60%...
@NYUEntrepreneur
Smaller piece of a bigger pie!
Post Money Value
Founders $4.50m
Seed 1.50
Options 1.50
Flybridge 2.50
Pos...
@NYUEntrepreneur
VC Math Lessons Learned
u If you raise $, you will be diluted
u Options come out of your hide, not theirs...
@NYUEntrepreneur
A Complex Process
29
@NYUEntrepreneur
On Lawyers…
u Important to pick a very experienced one
o Not the top Wall Street lawyer you can find
o No...
@NYUEntrepreneur
When to Look for VC?
31
@NYUEntrepreneur
When to Look for VC?
32
①
Discovery
②
Validation
③
Customer
Creation
④
Company
Building
Test
assumptions
...
@NYUEntrepreneur
Why defer raising money?
u A time consuming, distracting process
u Minimize dilution (when your valuation...
@NYUEntrepreneur
Getting Funded Tips
@NYUEntrepreneur
What do VCs look for?
35
@NYUEntrepreneur
Myth:
VCs Invest in
Technology
@NYUEntrepreneur
VCs invest in
businesses.
Not ideas.
Not technologies.
Your technology/IP is only one
of the many critica...
@NYUEntrepreneur
What do VCs look for?
u Serve unmet need in large & growing market
u Differentiated solution(s) + support...
@NYUEntrepreneur
VC Dealflow Funnel
1,000 150 25 5-10
Inbox
Desk
Meet
Due Dili Deal
Credenza
Reject
@NYUEntrepreneur
Your initial goal is to
get a meeting!
40
@NYUEntrepreneur
Myth:
Raise money when you
need it!
@NYUEntrepreneur
Raise money when you
can raise it!
42
@NYUEntrepreneur
Running out of money
is not a milestone!
43
@NYUEntrepreneur
Myth:
VCs are hard to
meet!
@NYUEntrepreneur
VCs are easy to meet!
NYU
Entrepreneurial
Institute
Respected
VC or angel
Present/
former
portco exec
Wel...
@NYUEntrepreneur
Myth:
Don’t approach VCs
until you are ready to
raise money
46
@NYUEntrepreneur
Lines not Dots
47
@NYUEntrepreneur
Lines not Dots
48
@NYUEntrepreneur
Myth:
VCs Invest in Teams
with Strong Data
@NYUEntrepreneur
VCs invest in the trend!
50
@NYUEntrepreneur
Final Thoughts on Fundraising
u Diligence investors like they diligence you
u Be prepared, but less is mo...
@NYUEntrepreneur
Final Thoughts on Fundraising
u Diligence investors like they diligence you
u Be prepared, but less is mo...
@NYUEntrepreneur
Final Thoughts on Fundraising
u Diligence investors like they diligence you
u Be prepared, but less is mo...
@NYUEntrepreneur
Final Thoughts on Fundraising
u Diligence investors like they diligence you
u Be prepared, but less is mo...
@NYUEntrepreneur
Final Thoughts on the Pitch
u Investor pitch is a proxy…
@NYUEntrepreneur
Final Thoughts on the Pitch
u Investor pitch is a proxy…for your ability to:
o Recruit talent & lead a te...
@NYUEntrepreneur
Lessons Learned
u Many sources of capital…VC comes later
u VCs are professional money managers
u Focus on...
@NYUEntrepreneur
Questions?
entrepreneur@nyu.edu
@nyuentrepreneur
entrepreneur.nyu.edu
16 Washington Place
58
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When & How to Raise Venture Capital

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Frank Rimalovski's When & How to Raise Venture Capital workshop slides from the 2016 NYU Entrepreneurs Festival

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When & How to Raise Venture Capital

  1. @NYUEntrepreneur When & How to Raise Venture Capital Frank Rimalovski Executive Director, Entrepreneurial Institute Managing Director, Innovation Venture Fund March 5, 2016
  2. @NYUEntrepreneur Topics u Types of venture investors u How does VC works? u VC math u When to look for VC? u Fundraising tips u Startup Funding Resources at NYU u Q&A 2
  3. @NYUEntrepreneur Types of Venture Investors
  4. @NYUEntrepreneur investor|in-ˈvestər| noun one who expends money with the expectation of achieving a profit or material result by putting it into financial schemes, shares, or property…
  5. @NYUEntrepreneur Myth: Venture Capital funds are the primary source of startup funding
  6. @NYUEntrepreneur Venture Funding Lifecycle 6 ① Discovery ② Validation ③ Customer Creation ④ Company Building Test assumptions about customer needs/problem & develop MVP Seek Validationthat people are interested in your solution Begins to build demand & improve efficiency of customer acquisition Drive growth aggressively & execute business model Invention & ideation Grants, Competitions Founders + Credit cards Grants Crowdfounding Customers SBIR/STTR + Accelerators Friends & family Angels Seed funds Venture capital funds Leasing Factoring Vendor finance Private equity Public markets Valuation*
  7. @NYUEntrepreneur Types of Venture Investors Stage Pre-Seed Seed/Startup Early Late Type Founder(s), friends & family Individual angels/groups & seed funds Venture Capital Funds Financial Investors Strategic/Corporate Typical Amount $5,000 to $250,000 $25,000 to $1,000,000 $2,000,000 and up Source of Funds Individuals Individuals Institutional Investors, Family Offices & Corporations Number of rounds Single Single Multi
  8. @NYUEntrepreneur How VC works
  9. @NYUEntrepreneur The Basics u VCs manage “OPM” o Pension funds, foundations, endowments, financial institutions, family offices, etc. u 10-year fund life u “2-and-20” Fund returns 5 10 15 Fund I Fund II Fund III Fund investments
  10. @NYUEntrepreneur How do VCs Make Money? u Investing at low valuation (through multiple rounds at increasing valuations) and then…
  11. @NYUEntrepreneur How do VCs Make Money? u Investing at low valuation (through multiple rounds at increasing valuations) and then… u Exit (a/k/a liquidity event) at a higher value o Initial Public Offering (IPO) o Merger into a Public Company o Merger into another private company o Return of capital from cash flow o Asset sale
  12. @NYUEntrepreneur Myth: VCs make money on every deal
  13. @NYUEntrepreneur 75% of startups fail to return investors capital Shikhar Ghosh Harvard Business School #nyuef
  14. @NYUEntrepreneur VC Math NB: Figures and sequencing are intended to be illustrative. Your mileage will vary.
  15. @NYUEntrepreneur From idea to incorporation Inspiration & ideation Customer discovery Customer validation Problem-Solution Fit! Develop prototype Test prototype Retain McCarter & English Form SLE Split founders equity Open account at Silicon Valley Bank Founders 100% Fully Diluted Ownership
  16. @NYUEntrepreneur In search of Product-Market-Fit Continue to test prototype Customer discovery Customer validation Secure early adopters Product market fit! In TechCrunch! Begin to craft seed pitch Commence fund raise! Founders 100% Fully Diluted Ownership
  17. @NYUEntrepreneur Raise seed round 3 months & 30 pitches later Greycroft Leads Series Seed Pre-$ $3.00m Raise 1.00 Post-$ $4.00m NYU Innovation Venture Fund & 3 angels complete round Founders 100% Fully Diluted Ownership
  18. @NYUEntrepreneur Raise seed round 3 months & 30 pitches later Greycroft Leads Series Seed Pre-$ $3.00m Raise 1.00 Post-$ $4.00m Deposit $1.0m with SVB Pay McCarter & English Back to work Founders 75% Seed Investors 25% Fully Diluted Ownership
  19. @NYUEntrepreneur Hire first employees Add 10% Option Pool Founders 75% Seed Investors 25% Fully Diluted Ownership
  20. @NYUEntrepreneur What are Options & Why? u Definition: Right to buy common stock at a specified price within a pre-determined time u Aligns incentives u Why use options instead of shares? o Simplifies governance o Saves money for the company & investors o Tax & capital efficient for employees u 10-20% pool is customary 20
  21. @NYUEntrepreneur Hire first employees Add 10% Option Pool Hire first employees Founders 67% Seed Investors 23% Options 10% Fully Diluted Ownership
  22. @NYUEntrepreneur Hire first employees Add 10% Option Pool Hire first employees Identify repeatable & scalable business model Founders 67% Seed Investors 23% Options 10% Fully Diluted Ownership
  23. @NYUEntrepreneur Hire first employees Add 10% Option Pool Hire first employees Identify repeatable & scalable business model In NY Times! Founders 67% Seed Investors 23% Options 10% Fully Diluted Ownership
  24. @NYUEntrepreneur Hire first employees Add 10% Option Pool Hire first employees Identify repeatable & scalable business model In NY Times! Draft VC pitch Commence VC raise Founders 67% Seed Investors 23% Options 10% Fully Diluted Ownership
  25. @NYUEntrepreneur 5 months & 40 pitches later Flybridge Capital Offers Pre-$ $7.50m Raise $2.50m Options 15% * Founders 67% Seed Investors 23% Options 10% Fully Diluted Ownership
  26. @NYUEntrepreneur Make room for more options! Flybridge Capital Offers Pre-$ $7.50m Raise $2.50m Options 15% * Founders 60% Seed Investors 20% Options 20% Fully Diluted Ownership
  27. @NYUEntrepreneur Smaller piece of a bigger pie! Post Money Value Founders $4.50m Seed 1.50 Options 1.50 Flybridge 2.50 Post-$ $10.00m u 50% step-up from Seed! u $2.5m in the bank u John Elton & David Aronoff on your board u Growing a team u Scaling a business u Life is good! Founders 45% Seed Investors 15% Options 15% Flybridge 25% $7.50m Pre-$ Fully Diluted Ownership
  28. @NYUEntrepreneur VC Math Lessons Learned u If you raise $, you will be diluted u Options come out of your hide, not theirs u Timing of your raise will be key u Valuation nor your % ownership is everything u Focus on things that drive enterprise value, not just what maximizes your ownership
  29. @NYUEntrepreneur A Complex Process 29
  30. @NYUEntrepreneur On Lawyers… u Important to pick a very experienced one o Not the top Wall Street lawyer you can find o Not your cousin Murray o Not your patent attorney o Not the guy who did you will/mortgage refi o …someone who does venture financings daily u Doesn’t have to be local, but it helps u We are happy to recommend several 30
  31. @NYUEntrepreneur When to Look for VC? 31
  32. @NYUEntrepreneur When to Look for VC? 32 ① Discovery ② Validation ③ Customer Creation ④ Company Building Test assumptions about customer needs/problem & develop MVP Seek Validationthat people are interested in your solution Begins to build demand & improve efficiency of customer acquisition Drive growth aggressively & execute business model Invention & ideation Grants Competitions Founders + Credit cards Angels Seed funds Venture capital funds Leasing Factoring Vendor finance Private equity Public markets Valuation* You are here Grants Crowdfounding Customers SBIR/STTR + Accelerators Friends & family
  33. @NYUEntrepreneur Why defer raising money? u A time consuming, distracting process u Minimize dilution (when your valuation’s low) u Hard to stop spending once you start u You will spend it on the wrong things u 1st round raised on the promise… 2nd on the progress u If you’re wrong (and don’t hit your milestones), you’re dead u Many other non-dilutive sources of $$$ 33
  34. @NYUEntrepreneur Getting Funded Tips
  35. @NYUEntrepreneur What do VCs look for? 35
  36. @NYUEntrepreneur Myth: VCs Invest in Technology
  37. @NYUEntrepreneur VCs invest in businesses. Not ideas. Not technologies. Your technology/IP is only one of the many critical pieces necessary to build a business. 37
  38. @NYUEntrepreneur What do VCs look for? u Serve unmet need in large & growing market u Differentiated solution(s) + supporting data u Customer validation of pain & gain u Scalable & repeatable business model that generates high ROI u Focused teams with proven ability to execute 38
  39. @NYUEntrepreneur VC Dealflow Funnel 1,000 150 25 5-10 Inbox Desk Meet Due Dili Deal Credenza Reject
  40. @NYUEntrepreneur Your initial goal is to get a meeting! 40
  41. @NYUEntrepreneur Myth: Raise money when you need it!
  42. @NYUEntrepreneur Raise money when you can raise it! 42
  43. @NYUEntrepreneur Running out of money is not a milestone! 43
  44. @NYUEntrepreneur Myth: VCs are hard to meet!
  45. @NYUEntrepreneur VCs are easy to meet! NYU Entrepreneurial Institute Respected VC or angel Present/ former portco exec Well- respected entrepreneur /exec Service providers Friend of VC partner
  46. @NYUEntrepreneur Myth: Don’t approach VCs until you are ready to raise money 46
  47. @NYUEntrepreneur Lines not Dots 47
  48. @NYUEntrepreneur Lines not Dots 48
  49. @NYUEntrepreneur Myth: VCs Invest in Teams with Strong Data
  50. @NYUEntrepreneur VCs invest in the trend! 50
  51. @NYUEntrepreneur Final Thoughts on Fundraising u Diligence investors like they diligence you u Be prepared, but less is more u You do not need a prospectus/biz plan u You want professional investors 51
  52. @NYUEntrepreneur Final Thoughts on Fundraising u Diligence investors like they diligence you u Be prepared, but less is more u You do not need a prospectus/biz plan u You want professional investors 52
  53. @NYUEntrepreneur Final Thoughts on Fundraising u Diligence investors like they diligence you u Be prepared, but less is more u You do not need a prospectus/biz plan u You want professional investors 53
  54. @NYUEntrepreneur Final Thoughts on Fundraising u Diligence investors like they diligence you u Be prepared, but less is more u You do not need a prospectus/biz plan u You want professional investors u Never hire an agent/banker 54
  55. @NYUEntrepreneur Final Thoughts on the Pitch u Investor pitch is a proxy…
  56. @NYUEntrepreneur Final Thoughts on the Pitch u Investor pitch is a proxy…for your ability to: o Recruit talent & lead a team o Sell to customers o Attract partners u Tell a story & engage your audience u Cover the bases…not just your product/tech u But, remember it doesn’t stop with your pitch deck
  57. @NYUEntrepreneur Lessons Learned u Many sources of capital…VC comes later u VCs are professional money managers u Focus on things that drive enterprise value u Investors fund businesses, not tech/ideas u Get to know investors early in the process u It’s a complicated process…arm yourself u You want professional investors u We are here to help! 57
  58. @NYUEntrepreneur Questions? [email protected] @nyuentrepreneur entrepreneur.nyu.edu 16 Washington Place 58
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