Funded: The Entrepreneur’s Guide to Raising Your First Round

173 Pages·2016·17.647 MB·English

by  Katherine Hague

The
Entrepreneur's Guide
to Raising Your
First Round
Katherine Hague

Funded
The Entrepreneur’s Guide to
Raising Your First Round
Katherine Hague
Funded
by Katherine Hague
Copyright © 2017 Katherine Hague. All rights reserved.
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October 2016: First Edition
Revision History for the First Edition
2016-09-19: First Release
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978-1-491-94026-6
[LSI]
Table of Contents
Preface. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix
Part I. Building a Foundational Knowledge
1. What Makes a Startup Fundable?. . . . . . . . . . . . . . 3
How Investors Make Money 3
The Unicorn 5
Investor Expectations as You Grow 6
Tier 1 Venture Funds 8
Conclusion 9
2. Venture Capital: The Pros, Cons, and
Alternatives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Arguments in Favor of Venture Capital 12
Accelerated Growth 12
Network 12
Credibility 12
Exposure 12
Benchmarking 13
Funding Research and Development 13
Arguments Against Venture Capital 13
Loss of Equity and Control 13
Distraction 14
Changed Exit Opportunities 14
Five Alternatives to Venture Capital 15
Reward-Based Crowdfunding 15
Commercial Loans 17
Government Grants 18
Government Subsidies and Tax Incentives 19
iii
iv TABLE OF CONTENTS
Bootstrapping 20
Conclusion 21
3. Ownership and Valuations. . . . . . . . . . . . . . . . . . . . 23
Understanding Ownership 23
Share Classes 25
Common Shares 25
Preferred Shares 25
Stock Options 26
Warrants 29
Calculating Valuations 29
Factors Affecting Valuation 30
Market Interest 30
Experience 31
Location 31
Company Stage 31
Is There a More Scientific Way to Calculate a Valuation? 31
Types of Investment Vehicles 33
Priced Rounds 33
Convertible Notes 34
SAFEs 37
Conclusion 38
4. Structuring Your Raise. . . . . . . . . . . . . . . . . . . . . . . . 39
Timing Your Raise 39
Have at Least Six Months of Runway 39
Understand Your Seasonality 40
Plan Around Industry Events 40
Plan Around Company Milestones 41
Avoid Holidays 41
How Much to Raise 41
Structuring a Funding Round 43
Conclusion 44
Part II. Preparing for the Fundraising Trail
5. What Investors Are Looking For. . . . . . . . . . . . . . 49
Team 50
Market 54
Market Size 54
Product/Market Fit 55
Red Flags 56
TABLE OF CONTENTS v
Product 57
Traction 58
Other Factors Relating to Fundability 61
Social Proof 61
Geography 63
The State of Your Corporate Records 64
Conclusion 67
6. Building the Pitch. . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Cleaning Up Your Online Brand 69
LinkedIn 70
URL and Email 70
Social 71
Media 71
Website 71
Photos 72
Elevator Pitch 72
The Pitch Deck 72
What to Do When Preparing Your Deck 75
Use Data 75
Paint the Big Picture 76
Iterate 76
Put Time into Design 76
What Not to Do When Preparing Your Deck 77
Don’t List a Valuation 78
Don’t Include Everything 78
Don’t Be Unrealistic 78
Conclusion 82
7. Preparing for Due Diligence. . . . . . . . . . . . . . . . . . . 83
How Due Diligence Is Conducted 84
Responding to a Due Diligence Request 84
How to Prepare for Due Diligence 85
Conclusion 87
8. Drafting Financial Projections. . . . . . . . . . . . . . . . . 89
How to Properly Prepare a Financial Statement 89
List Deferred Revenue Separate from Other Revenue 89
List One-Time Revenue Separate from Other Revenue 90
List Booked Revenue Separate from Other Revenue 90
Pay Close Attention to Cash Flow 90
Be Conscious of Overspending 90
Properly Handle Assumptions 90
vi TABLE OF CONTENTS
Understand the Cost of Goods Sold 91
Address Bad Debt Expenses 91
Show Loan Payments 92
Include Taxes and Benefits 92
Include Wiggle Room 92
Provide Breakeven Analysis 92
Include the Founder’s Salary 92
Include Both Historical and Projected Data 93
Output Key Metrics 93
Conclusion 94
Part III. Executing Your Fundraise
9. The Investor Pipeline. . . . . . . . . . . . . . . . . . . . . . . . . 97
Types of Target Investors 98
Venture Capitalists 98
Angel Investors 99
Creating a Target Investor List 101
Evaluating Investor Fit 103
Personality Fit 103
Domain Expertise 103
Activity 104
Track Record 104
Strategic Fit 104
Stage 104
Tenure 105
Fund Hierarchy 105
East Coast Versus West Coast 106
Making Initial Contact with Investors You Don’t Know 107
Join an Accelerator 107
Enter Pitch Competitions 107
Get Warm Intros 107
Attend Events 109
Do Cold Outreach 110
Increasing Response Rates and Building Rapport 111
Find Common Ground 111
Add Value 111
Multiple Points of Contact 111
Stay in Touch 112
Timing Your Outreach 113
The Initial Pitch Meeting 114
Conclusion 118
TABLE OF CONTENTS vii
10. The Anatomy of a Term Sheet. . . . . . . . . . . . . . . 119
Understanding the Term Sheet 120
How Term Sheets Are Structured 120
The Deal and Key Players 120
Rights and Responsibilities 121
Housekeeping 124
Negotiating a Term Sheet 124
Conclusion 126
11. Closing the Deal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Securing a Lead 127
Due Diligence and Drafting 128
Filling the Round 128
Drafting 129
Signing and Closing 129
Managing Investors 130
Conclusion 132
Part IV. The Top Tens
12. The Top 10 Tips for Equity Crowdfunding. . . 135
1. Prepare Yourself Legally 136
2. Pick the Right Platform for You 136
3. Follow Other Deals 137
4. Work Directly with the Platform 138
5. Create a Great Deal Room 138
6. Time the Crowdfunding Portion of Your Raise Carefully 138
7. Get Backed by Influencers on the Platform 139
8. Take Advantage of Syndicates 139
9. Line Up Your Initial Backers 139
10. Be Data Focused 139
13. The Top 10 Fundraising Mistakes. . . . . . . . . . . . 141
1. Waiting Too Long to Raise 141
2. Raising with Nothing More Than an Idea 141
3. Putting All Your Eggs in One Basket 141
4. Overemphasizing the Importance of Valuation and
Overoptimizing Terms 142
5. Not Hearing No 142
6. Not Doing Your Research 142
7. Not Having a Lead Investor 142
8. Pitching Poorly 143
viii TABLE OF CONTENTS
9. Prioritizing Money over the Right Investor 143
10. Not Understanding Your Own Business 143
Bonus: Raising Too Much or Too Little Money 143
14. The Top 10 Fundraising Hacks. . . . . . . . . . . . . . . 145
1. Set a Deadline to Create Urgency 145
2. Network Your Way to Investors Through Entrepreneurs 146
3. Time Media Around a Raise 146
4. Inflate Demand 146
5. Play Investors Against One Another 147
6. Use Software to Get to Know Investors 147
7. Use Social Media to Turn Cold Outreaches into Warm Leads 147
8. Make Local Investors Think You Have Valley Interest 148
9. Say When You’ll Be in Town, Even if You Don’t Know Yet 148
10. Act Like You’re Based in the Valley—At Least Part-Time 148
Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153