Startup funding F.A.Q. Image source Volodymyr Nesterenko, Digital Future
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Startup funding F.A.Q.
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Volodymyr Nesterenko, Digital Future
Whatever I do, I end up in Investments
Managing Partner @ Digital Future Digital Future is the most active Ukrainian VC firm
Closed 11 deals in 2016, $4M+ invested
About me
When to raise moneyHow much to raise
What valuation to expectWhich investors to approach
Debt or EquityCan I get paid my past cost
Do I need a legal entityWhat is Term Sheet and do I need it
Questions
When to raise money?
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When to raise money?
When there is no other choice
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When to raise money?
When there is no other choice You know how to use it and prove you can do it
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When to raise money?
When there is no other choice You know how to use it and prove you can do it
You have at least 6 months of runway
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Runway
Runway: how many months a company can operate without new financing at the current level of cash burn
Cash burn: monthly net cash outflow
Mailchimp: The most known bootstrapped company
Founded in 2007, never raised venture capital $300M+ annual revenue, 550+ employees
Bootstraps
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How much to raise?
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How much to raise?
The round should cover 12-18m runway
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How much to raise?
The round should cover 12-18m runway If less: out of cash => depressed valuation (at best)
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How much to raise?
The round should cover 12-18m runway If less: out of cash => depressed valuation (at best)
If more: selling your stake too cheap
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How much to raise?
The round should cover 12-18m runway If less: out of cash => depressed valuation (at best)
If more: selling your stake too cheap Mind investors’ ticket
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What valuation to expect?
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The one promising an investor min 10x return over 5-7y
What valuation to expect?
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The one promising an investor min 10x return over 5-7y Using revenue multiples is the most common method
What valuation to expect?
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The one promising an investor min 10x return over 5-7y Using revenue multiples is the most common method Investors also check valuations vs potential exit value
What valuation to expect?
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The one promising an investor min 10x return over 5-7y Using revenue multiples is the most common method Investors also check valuations vs potential exit value If it’s $50M, they’re unlikely to accept valuation >$5M
What valuation to expect?
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Revenue multiple: a benchmark ratio that is used to measure a company's value based on its annual sales;
expressed in ‘times revenue’: 3x, 5x, 10x ... Multiples depend on industry averages, growth and margins
Which investors to approach?
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Which investors to approach?
Most appropriate for your stage
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Which investors to approach?
Most appropriate for your stageSeed and earlier stages: raise where the money is
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Which investors to approach?
Most appropriate for your stageSeed and earlier stages: raise where the money is
Late seed, venture stages: raise where the revenue is
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Which investors to approach?
Most appropriate for your stageSeed and earlier stages: raise where the money is
Late seed, venture stages: raise where the revenue is Seek VCs which can bring clients and other investors
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Debt or Equity?
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Debt or Equity?
They both suck
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Debt or Equity?
They both suck Selling equity is better for a founder
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Debt or Equity?
They both suck Selling equity is better for a founder
But it steals much time and costs money
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Debt or Equity?
They both suck Selling equity is better for a founder
But it steals much time and costs money That’s why we use convertibles and SAFEs at early stages
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Convertible note SAFE* Preferred stock Common stock
Class debt derivative equity equity
Ownership no no yes yes
Voting rights no no no yes
Asset claim priority 1 1 2 3
Maturity yes no no no
Interest yes/no no no no
Valuation yes** yes**/no yes yes
* Simple Agreement for Future Equity; it is neither equity, nor debt, as it doesn’t have any maturity or interest;** So-called ‘valuation cap’ -- maximum valuation, at which the underlying amount will be converted into equity; actual equity round valuation can be lower (or higher)
Can I get paid my past cost?
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Can I get paid my past cost?
Never ask this ^^^ question
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Can I get paid my past cost?
Never ask this ^^^ question Yes, you can. If it’s not your personal debt
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Can I get paid my past cost?
Never ask this ^^^ question Yes, you can. If it’s not your personal debt
To repay personal debt, sell your own shares(be prepared for low valuation)
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Do I need a legal entity?
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Do I need a legal entity?
YES - at any stage later than Friends & Family
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Do I need a legal entity?
YES - at any stage later than Friends & Family Register where your clients are
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Do I need a legal entity?
YES - at any stage later than Friends & Family Register where your clients are
LLC is just fine until you need to issue shares
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Do I need a legal entity?
YES - at any stage later than Friends & Family Register where your clients are
LLC is just fine until you need to issue shares Corp - for raising equity and for SAFEs
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What is Term Sheet and do I need it?
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What is Term Sheet and do I need it?
The summary of key terms of a future binding agreement
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What is Term Sheet and do I need it?
The summary of key terms of a future binding agreement Needed to save time & money for everybody
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What is Term Sheet and do I need it?
The summary of key terms of a future binding agreement Needed to save time & money for everybody
Normally used by professional VCs
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What is Term Sheet and do I need it?
The summary of key terms of a future binding agreement Needed to save time & money for everybody
Normally used by professional VCs This is an investor’s document
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Get connected /nesterenko.v
/digitalfuture
digital-future.org
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