a founders and vc perspective
TRANSCRIPT
Financing your start-up..A Founder’s and VC’s
perspective
Commercial in ConfidenceThis document is subject to commercial in confidence and must not be distributed, reproduced or published in whole or in part without the prior written consent of AirTree Ventures Pty Ltd (ACN169 127 020). Attribution under creative commons (Mekeltan on flickr). For more information contact AirTree Ventures ([email protected]).
Craig Blair, AirTree Ventures
@craigRblair
Four seasoned entrepreneurs and investment professionals
Daniel PetreCo-founder, Partner
Craig BlairCo-founder, Partner
Paul Bennetts Investment Director
Cath Rogers Investment Manager
• Founded 2 of Australia’s most successful technology investment firms
• Senior leadership roles at Microsoft in Seattle/Asia Pac
• 2 portfolio board positions
• Principal at netus – a top decile VC firm
• Founder/CEO/Director of Travelselect, Beamly (Aus), PetCircle Expedia
• 3 portfolio board positions
• Entrepreneur, investments, operations, PE and investment banking
• 2 portfolio board positions
• Entrepreneur, operations, PE and investment banking
• 2 portfolio board positions
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We have built and invested in >20 businesses over the last 15 years
Key skills we bring to invest-ments
Deep insights into business model evolution and technology trends causing business disruption
Large, extensive network of local entrepreneurs, product peo-ple at larger tech companies, an-gel investors, exit stakeholders and ecosystem at large
Wide operational expertise at all of levels of organisation.
What have we done before?
Netus 2005 - 2012
Ecorp 1997 - 2003
15 years experience
3rd Venture Fund
4.1X cash on cash returns
($1 invested returned $4.10 to investors at the end of fund life)
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10 Investments in our First Year
Date Description Traction Investment roundInvestment
size Founders
Dec 14 Online pet sitting
Leading marketplace in
11 markets including
Canada, UK and NZ
Convertible Note $1.5m
Tanguy Peters
Feb 15Design
marketplace
- 456k Graphic Designers
- $26m design projects and competitions
Series B $6m
Alec Lynch
March 15Web based
design platform- 3.9m active
members Convertible Note $7.5m USD
Cameron Adams, Cliff Obrecht & Melanie
Perkins
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Date Description Traction Investment roundInvestment
size Founder
April 14 On-demand cleaning service
Late Seed $750k
Stacey Jacobs
April 15Designer dress
rental marketplace
- Over 500 dresses for rent
- Doubling revenue YoY
Late Seed $500k
Dean JonesAudrey Khaing-Jones
May 15 Educational resource platform
- Used in over 120 schools
Series A $2.6m
Jeremy CoxDuncan Anderson
Ben Szu
10 Investments in our First Year
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Date Description Traction Investment roundInvestment
size Founder
June 15 Cloud-based rostering
Late Seed $1.2m
Aulay Macaulay
June 15
Vertically integrated
ecommerce furniture business
Series A $2m
Ivan Lim
TBA July 15Marketplace
business
TBA July 15HealthTech business
10 Investments in our First Year
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The start-up journey1. Often raising seed/angel 3. Series
A/B raised2. Need time and
the right team andinvestors to navigate
Source: Gartner Hype Cycle
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The cost of a start-up is getting lower
…it’s now possible to build a start-up with a credit card
£5m
$1.5m
$20K
1998
My first start-up
2005-2011
Businesses built in the Netus vintage 201
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Accelerators and Incubators
Angels and Micro VC Early Stage VC Traditional
Venture Capital Late Stage VC
Range Sweat- $100k $100k-$500k$500k-$2m(late Seed/ Pre S-A)
$2m-$5m $5m +
Funds
AngelCube, ATP Innovations, Blue Chilli, Incubate, Startmate, Innovyz
Artesian, Sydney Sidecar fund,
Blackbird Ventures, MH Carnegie IIF, SXVP
MH Carnegie PEMacquarie Bank, Square Peg, One Ventures
Telstra Ventures
Selected Companies
Na Kindy, Cuzin Coinjar, Equitise Canva, Wego Vend, Invoice2go
Portfolio Companies
Na Na 3 3 Na
Target Investment Space (TIS) - Inside Fund
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…and it’s never been easier to finance your start-up
TIS – Outside Fund
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VC Funding Process
VC World Entrepreneur World
We have seen 400 business in 9 months
60 Became Leads 340 didn’t fit our thesis
20 were intensely reviewed
40 didn’t fit our thesis
6 were funded
You make 5 calls
5 responses 5 Responses 0 Responses
Everyone Loves it Too Early(VCs never say No)
VCs Suck!
Who to choose?VC is dead
AUS VCs don’t take risks
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Approaching a VC
Use contacts to get an
introduction
1 2Do homework
on the VC/Partner
Background Check
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Use advisor sparingly
- e.g. Support on deal terms not for introductions
4Be clear on the differences of a VC lead round over a ‘book
build’ approach
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What To Do
• Have a detailed understanding of your competitors
• Develop a healthy paranoia for your position in the market
✔
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What To Do
✔ • Succinct Elevator Pitch Problem/Solution- Who is the customer?- Differentiator/competitor set- Team- Traction
• Crisp/insightful investor presentation (10-20 Slides)
• Simple model- Clear understanding of business
drivers- Sense check with
competitors/overseas players- Unit economics understood- Cash requirements
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What Not To Do
✖• Make an 80 page investment
memo!• Detail/data is super important (but
long docs are not data)
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What To Do
✔• Create relationships with VCs early! • Build the story and understand how they
work
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What Not To Do
✖• Over invest in PR so that profile
outpaces performance
High Traction
Low Public Profile
High Public Profile
Low Traction
VCs know this space Great place
to be
Good place to be
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Incubator
$100k of value
10%
$1m*
Funding your businessBeware of the pre-money trap
* Implied
Continuing to raise at higher valuations is difficult. Company forced to live off drip fed angel funding rounds
Starts with artificial valuation before there are real metrics
Angel rounds from HNWs may meanraise is at a high valuation and/or…… not enough raised to grow into valuation
Need to show up rounds – “grew 100% since last round so valuation is 2x previous round”Without a big enough raise to allow the business metrics to catch up to the valuation
Pre-money Valuation
Raise
% Dilution
Post-money valuation
Angel
$3.5m
$.5m
12.5%
$4m
Late seed
$8m
$1m
11%
$9m
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Funding your business
Beware of the post-money trap
Incubator Angel
Pre-money Valuation
$100k (of value) for 10%
$3.5m
Raise $.5m
Post-money valuation
$1m (implied)
$4m
- Decision option set moves from “what can we afford to do?” to “what is the optimal use of capital and resources?”
- Deploying capital sensibly is more difficult than most teams appreciate
- Company unable to create 3-5x value for every dollar invested….
Pre money valuation is fair, but size of raise inflates post money valuation and makes a subsequent up round more challenging
$5m
$15m
Late seed/Series A
$10m
Raise a lot of capital given opportunities for sensible growth investment
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Key Focus Points for Series A
Know your metrics• Unit economics are critical
– Consider the “unit” that makes sense for your business– Understand exactly how much your make or lose for each
transaction over time and when a customer becomes profitable– Don’t forget all the direct costs of a transaction (customer service
etc) and make sure the contribution is measured after marketing costs
• CAC or LTV– Bottom line: investors don’t want you to use their funds to “buy”
unprofitable business– The earlier you are in a business the more you can focus on LTV,
it’s OK if customers are expensive to acquire if they are valuable over time
– Be realistic in estimating repeats and retention, very few businesses can confidently assume a customer “lifetime” is more than 5 years
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People are key• People
– Building a successful start-up to an exit is an extraordinary business outcome
– Requires a few extraordinary people……. not everyone can hit this benchmark
– The best companies are able to hire and develop people....... and they recognise quickly when there is not a fit
– Use networks over recruiters where possible– Prioritise product and customer facing over marketing in the
early days– Consider office manager in the first 4-5 hires……. great utility
and leverage for the rest of the team
• Other– Use equity/ESS to create ownership and alignment……. but
only where this is valued – Founder vesting is good for the company and all shareholders
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Take Aways
• Long term value of your business > minimizing dilution in a round
• Build the right team including some extraordinary people
• Surround yourself with investors who can help build value
• Consider capped convertible notes when metrics are not clear or raising from Angels or Accelerators
• Too much capital can kill a business
– Raise 12 months in angel/seed
– Raise 18-24 months with Series A
• Allow room for market to value on real metrics
• Know your metrics
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How to choose your funding partner?
• Can they add value over capital?• Reference check, reference check. High profile does not
always = value add• Are you aligned on how to scale the business?• How you solve problems together in the early discussions
are a good indicator of how you will work together in the future
• Can they support the business through future rounds or in a slow down?
VCs and investors are the employees you can’t fire.. make sure you are doing 4-5 references on the firm and partner
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Some Common Terms Explained
Term Explanation Rationale Avoid
1. PreferenceIn case of liquidation preferred stock is paid out before common stock
Avoids misalignment at exits around entry price.
1x OK. Avoid 2-3x in early rounds
2.ParticipationThe degree to which preferred holders share in the proceeds after liquidation preference
Demonstrates adequate return for an investors risk
< 1x >
3. Anti-dilutionIn the future, the company can't issue shares to new investors at a lower price than the previous investors
Company has mispriced the round and investors should average out their investment
Full Ratchet
4. Tag-along Rights
Gives the minority shareholders the right to be tagged on the same terms as the majority in case of a sale to a 3rd party
“All in all out”Protection for minority
5. Drag-along Rights
Gives the majority shareholders the right to drag along the minority. if the 3rd party wants a 100% stake in the company.
Enables the majority of the investors to make decisions in the best interests of the company.