Early Stage Startup Financing

101
Part of the Wasabi Ventures
Academy Startup
Foundations
AN INNOVATIVE AND DYNAMIC APPROACH TO VENTURE CAPITAL AND INCUBATION

Two Buckets of Financing Options

Non-Equity
Financing
SelfFinancing/Boot
strapping
Debt/Bank
Financing

Equity
Financing
Angel
Financing
Venture
Capital
Strategic
Financing

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 shouldnt/doesnt 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

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

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

What You Get

You have outside
investors who have
different goals
The pie to split is
smaller
Speed is now more
important than ever

Financing to execute
Credibility
Access to partners
Hopefully some
guidance and direction

All of this leads

to a big win for
YOU.

When to Not Raise Outside Equity

Financing?
Is
this
a
vita
min
or
an
aspi
rin?

Money is Not Your

Primary Focus

You
dont
want
a
massi
ve
numb
er of
emplo
yees.

Is this
a
comp
any or
a
featur
e?
I
want
to
make
the
world
a
better
place.

You
like
havin
g your
hands
involv
ed in
every
aspect
.

The Opportunity is Too

Small

Woul
d this
bette
r be
serve
d as
a
nonprofit
.
You Dont Want it to be
BIG

What Happens When You Raise Money

When You Shouldnt
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.
Cant 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 didnt
want to.

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%

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 LLCs Outcome:

$113 MM Gross Profit for the fund
~$16 MM in Management Fees
~$22.6 MM in Carry
$174.4 Returned to the Investors

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.

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

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

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

Where Does WV Fit In?

WV is a:
VC We have a fund that we do all of our cash investing. In this capacity, we are like every
other early stage investor.
Incubator We take on existing startups who need help in a functional area and we fill those
roles. In this capacity, we are what ever incubator should be and never is.
Startup Farm We educate, train, fund, and work with daily EiRs who want to build their own
startup. In this capacity, we are co-founders.

We are an odd hybrid

85% of our investments are done as convertible notes
15% are Series A Priced Rounds
46% of our deals involve in-kind services (i.e. engineering, sales, marketing, etc.)
32% of our deals are 100% founded by us in conjunction with our EiRs

We rarely lead
Only 20% of our investments are situations where we lead

The Best Way to Look At WV

Startup
CoFounde
Financinr Talent
g

If you are interested or know some interested in the class, email

wvacademy@wasabiventures.com