3. Two Buckets of Financing Options
Non-Equity
Financing
•Self-Financing/
Bootstrapping
•Debt/Bank
Financing
Equity Financing
•Angel Financing
•Venture Capital
•Strategic
Financing
4. Self-financing/Bootstrapping
• Financing growth from cash flow and personal funds or sometimes family
• Example in the portfolio – Peku Publications – http://www.pekupublications.com
• Often good bootstrapped companies emerge from a service or consulting companies that
are productizing their offering
• Example in the portfolio – SocialToaster – http://www.socialtoaster.com
• KEY POINT: Second time, successful startup people often self-finance or bootstrap the
Early Stage
• Things to Think About:
• Bootstrapped companies almost always spend cash more effectively than equity financed
companies – WV loves to work with bootstrappers!
• If they are coming out of service business in the same vertical, they should understand the
market
• No outside influences driving startup to places the business shouldn’t/doesn’t want to go
• Resources for product and market dev constrained by cashflows or size of pockets, but this is a
good thing
• May miss a big opportunity if other players raise finance and invest heavily, but this is mostly a
head fake
• A founder has to take on all/most of the risk
5. Debt / bank finance
• Relatively limited funds are available
• Banks only lend to businesses they can understand and
they understand very little in the startup world
• Process is slow and painful
• Almost always need a personal guarantee
• NET-NET BANKS ARE WORTHLESS IN THE STARTUP
WORLD
6. Why Should I Raise Outside Capital?
• You Believe in Your
Offering
• You Believe in Your Team
• The Opportunity is
MASSIVE (i.e. over
$100MM valuation)
Raising Money
Raises the Bar
• You have outside investors
who have different goals
• The pie to split is smaller
• Speed is now more
important than ever
What You Get
• Financing to execute
• Credibility
• Access to partners
• Hopefully some guidance
and direction
All of this leads to
a big win for YOU.
7. When to Not Raise Outside Equity Financing?
Is this a
company or
a feature?
The Opportunity is Too
Small
Is this a
vitamin
or an
aspirin?
“I want to
make the
world a
better
place.”
Money is Not Your
Primary Focus
Would this
better be
served as a
non-profit.
You like
having your
hands
involved in
every aspect.
You Don’t Want it to be
BIG
You don’t
want a
massive
number of
employees.
8. What Happens When You Raise Money When You
Shouldn’t
• You let people into your business who are not aligned with your goals
and dreams.
• You will be working at something you may not like for 3 to 7 years
and doing it for little pay.
• Can’t do a small exit and call it a win.
• Almost always means you will be raising money forever.
• You have lost control of the business when you didn’t want to.
9. Venture Capital – What is a VC?
• Raise a fund from groups/people: Pension funds, financial
institutions, and rich individuals. These groups/people are known
as “LPs”, “Limited Partners”.
• Most funds will eventually have to close the fund and send a return
to the investors. The one exception are evergreen funds.
• They invest money over 3-5 years with the hope that a fund may
close in 7 to 10 years
~ 5/8 of investments lose money and go to near zero
~ 1/4 of investments basically break even
~ 1/8 of investments are homeruns and make lots of money
• VCs make profits through two items
• Management fee on funds managed, usually 1 to 2.5%
• Carry on the profits of the investment 20 to 25%
10. VC Money Making – An Exercise
• VC Firm XYZ raises a $100MM fund in 2010 – They call it “XYZ Fund 2010 LLC”
• 2% annual management fee
• 20% carry
• Between 2010 and 2015 they make 10 investments for $10MM each
• In 2018, all of the investments have reached some liquidity event
• 5 went out of business and returned nothing = $0 total return
• 3 returned 10% profit = $33MM total return
• 2 returned 800% profit = $180MM total return
• $213MM total return
• XYZ Fund 2010 LLC’s Outcome:
• $113 MM Gross Profit for the fund
• ~$16 MM in Management Fees
• ~$22.6 MM in Carry
• $174.4 Returned to the Investors
11. Angels – What Makes Them Tick
• Angel = Probably a rich person who has USUALLY been successful in the startup world.
• Unlike the VC, an Angel invests their own money
• Two successful exit scenarios for an Angel
• Startup might be sold quickly for a relatively smaller amount of money (i.e. single digit millions of
$$$s) and the Angel can make a quick multiple on his/her money back
• Startup raises VC money, but has built up interest into a venture-backed startup that is going to
shoot for a homerun. NOTE: In many ways, they are at the same risk of dilution as the founders
unless they keep investing.
• NOTE: A vast majority of angels do not invest to make money. They do it just so
they can be part of the action or for some other alternative reasoning.
12. Angel and VC Equity Financing
• WV considers them the same from a practical
standpoint
• KEY POINT: WV is both an Angel and/or VC
• Almost all startups have to raise equity-based financing
• The key to raising equity-based capital is knowing when
to raise the money
13. What is a Strategic?
• Large company or organization that is in the vertical or distribution chain
target for a startup (e.g. Ford would be a strategic for an startup building an
automobile software-related product)
• They invest to help innovation and lock out competitors
• Things to Think About:
• Gain instant credibility
• Can help with a distribution channel
• Can occasionally add technical help
• Often caps your backend potential
• Be careful of becoming the forgotten girl at the dance
• Can close off opportunities
14. Key Terms that You Will Hear
• Convertible Note – A loan that will convert into equity (with a discount
and interest) with the next major financing round
• LOTS of Info on this in the Analyst Training Room
• Term Sheet – The document that investors sign that describes the
terms of the financing
• Cap Table – The capitalization breakdown of a company. Who owns
what percentage of the company
• Pre-money Valuation – How much is a company worth before a
financing takes place
• Post-money Valuation – How much is a company worth after a
financing takes place
• Liquidity Preferences – An investors right to be paid back at a certain
rate on a successful exit, e.g. 2X liquidity preference
