Funding

The funding section is a very thorough guide to attaining third-party capital for your business. It has resources on the preliminary matter of whether you should even fundraise, and then covers the fundraising and investor relation processes. 


Deciding to Raise & Raise Amounts »

Deciding whether to accept outside investment or capital is a decision that can greatly affect your ability to grow and control your business. This sections covers perspectives on when and whether your business should raise money, and it provides guidelines on how much money you should raise. It also covers logistical matters, such as when during the year investors usually invest. 

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Deciding to Raise & Raise Amounts

Pascal Finette

Sadly I encounter too many entrepreneurs (often first-timers) who want to raise capital too early and aren't ready to hustle to build value before going out for funding. The reality is - unless you have proven yourself either by having created value before (aka you're a second, third or nth-time entrepreneur) or you have actually created value - you will spend endless cycles chasing capital. And the capital you might be able to raise ends up being dumb capital as the smart investors will chase the entrepreneurs who have created value.

Boris Wertz

Being swamped with funding is a problem that most early stage companies would love to have. However, as an investor watching my portfolio companies and other start-ups in the market, I can see how large rounds negatively impact the culture of budding business. What’s the issue with too much funding? Here are four key drawbacks.

 


Financial Math »

When you fundraise, having a basic understanding of financial math is necessary. It's important to understand how an investment will affect your business financially, and you'll likely encounter these topics in your conversations with investors.

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Financial Math
Fred Wilson

When you think about returns, think about them in the context of risk. You can get to higher returns by taking on higher risk. And to some degree we should. It doesn't make sense for a young person to put all of their savings in a bank account unless they will need them soon. Because they can make a greater return by putting them into something where there is more risk. But we must also understand that risk means risk of loss, either partial or in some cases total loss.

 

Fred Wilson

What happens if you wait a few years to get your money back and receive annual interest payments along the way? Let's say you invest the same $900, receive $100 each year for four years, and then in the last year, you receive $1000 (your $900 back plus the final year's $100 interest payment). There are two scenarios here and they depend on what you do with the annual interest payments.

 


Funding Options & Sources »

When raising capital, there are several types of sources you can seek funding from (such as Friends & Family, Angel Investors, Venture Capitalists, and Vendors) and several types of funding arrangements that you can set up (such as Convertible Debt and an Equity Grant). This section will help you understand your options as you choose the appropriate mix for your business.

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Funding Options & Sources

Pascal Finette

A whopping 60% of the Inc. 500 companies were bootstrapped on less than $10,000. No angel money, no seed rounds, no Series A. Bootstrapped to revenue growth which wins them an Inc. 500 award. I find this truly remarkable. Something to chew on, think about and reflect on... We might have an obsession with venture capital which isn't quite healthy anymore.

 

Fred Wilson

As a company grows, it starts to consume a lot of cash in the day to day operations of the business that has nothing to do with its profits or losses. This type of cash consumption is called working capital. In accounting terms, working capital is equal to current assets minus current liabilities. In layman's terms, working capital is what your customers owe you plus any inventory you have built up minus what you owe your suppliers and employees. Working capital also includes any cash you have in the bank.

 


Approaching & Attracting Investors »

Investors receive an enormous amount of inbound requests, and they typically invest in only a small percentage of the companies that reach out to them. Therefore, it's critically important that you craft your outreach strategy and messaging carefully, and that you do your best to prime yourself and your company to attract investors. 

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Approaching & Attracting Investors

Hunter Walk 

The question I get asked most often is “would Homebrew like to invest in my startup” (and we do our fair share of chasing too -> “please let us invest in your startup!”). The question I get asked second most often is “if not Homebrew, will you introduce me to some VCs who would like to invest in my startup.” There’s a reason why I won’t – because it means putting my reputation on the line for a founder I don’t really know. And in this business, reputation is very important. 

Scott Britton

One of the most important things in writing an effective cold email is to keep it short. However, communicating all the things necessary to elicit a response in 3-4 sentences can be extremely challenging. One  way I’ve been able to overcome this and start dialogues with many c-level execs and big time entrepreneurs is by communicating my message in a more visually engaging format that’s easier to consume than text.

 


Pitch Content & Format »

Once you've set up a meeting with an investor, you might be wondering exactly what you should talk about in your pitch and the order in which you should present. While some creativity is always welcome, it is important that you cover the basics. Failure to do so may leave the investor with an incomplete picture of you and your company, or it may even cause the investor to think that you're an incompetent founder.  This section provides resources on these issues, and also on demo'ing your product, delivering elevator pitches, and deriving a vision and high-concept pitch.

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Pitch Content & Format

Hunter Walk

The average pitch contains substantial time dedicated to the “what” and the “how.” What is the market you’re serving? What is the product you’re building? What is the customer pain you’re addressing? How will you build your product? How will you recruit a team? How will you get customers? All of these questions are essential and certainly factor into any investment decision we make. That said, “what” and “how” haven’t been sufficient to get us to YES. In the handful of investments we’ve made to date and the termsheets we generated this week (it’s been busy), there has consistently been a strong “Why” as well. Why are you taking years from your life to work on this problem? Why does your company deserve to exist and why is the world a better place when it succeeds? Founders who can answer the “why” are usually called “mission-driven.”

 

Hunter Walk

As a seed stage investor I’m often looking at an incomplete picture when trying to assess an opportunity. Inevitably there will be a question where the data I’m seeking isn’t something the company has yet calculated/tested, or haven’t thought to research or maybe even not as important to their business as I’m suggesting it might be. For founders, these blank spaces are great moments to stray from your standard pitch and really connect with an investor. They’re also pitfalls where I’ve seen some entrepreneurs mess up and hurt their credibility. So here are some ideas of what to tell VCs when you’re missing the data they want to see.

 


Pitch Style, Tools & Issues »

Pitch content aside, the style of your pitch is where you can really stand out. Many experts argue, for instance, that a natural discussion is preferable to a rigid and over-rehearsed script. A deck, or slideshow, is also something you may want to consider using. This section covers these matters, and also issues such as who should attend your pitch and how to handle pitches that have gone awry. 

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Pitch Style, Tools & Issues

David Lee

When we receive an email from a referral source introducing us to a founder, we typically ask the founder if they have an executive summary. This may sound tedious and old-school. But it is a quick and easy way for us to decide if a call or meeting is a good use of both parties' time as a next step. It’s also a decent way to evaluate the founder(s). The ability to communicate your idea concisely and articulately is essential. It not only shows a potential to persuade (i.e., sell) but also shows clarity of thought and priorities. Here are some tips on how to create a good executive summary. 

 

Mark Suster

Crocodile Salesmen are people who are always talking.  They’re pitching to you.  They don’t take the time to realize what your true motivations are because they’re too busy telling you what they THINK you want to hear. Trust me – your chances of selling are much lower if you’re talking rather than actively listening.

 


Choosing Investors »

Once there are investors that want to invest in your business, there are many things that you should consider. Investors don't just provide money only to never talk to you again—they typically have legal rights to vote on key issues and to get access to the company's records. More positively, a good investor can really help propel your business. The term sheet they offer also delineates many rights that may differ from those offered by others. Therefore, enormous care should be taken to match your business with the right investors. 

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Choosing Investors

 Babak Nivi

Ask an entrepreneur what they’re looking for in an investor and they won’t say things like “advice, corporate governance, recruiting.” Entrepreneurs would prefer someone who has specific connections, interest, and knowledge about the market they’re attacking and the technology they’re building.

 

 Chris Dixon

At some point in the life of a venture-backed startup there typically arises a choice between doing an inside round, where the existing investors lead the new financing, or an outside round, where new investors lead the new financing. At this point interesting game-theoretic dynamics arise among management, existing investors, and prospective new investors.

 


Negotiating & Closing »

Choosing investors to work with merely begins the process of settling on mutually agreeable terms that will govern the investment. Typically laid out in a term sheet and finalized in closing papers, the negotiation process of agreeing to these terms can be very taxing—not rarely resulting in the funding round failing to close. This section will help you navigate a funding negotiation so you can increase your chances of closing your round. It also offers resources on standardized term sheets which you can use to avoid much of the back-and-forth. 

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Negotiating & Closing

Fred Wilson

You can do too much due diligence. It's important to talk to the market and hear what it is saying. But you have to balance that with other things; the quality of the team, the product, the user experience, etc. You cannot rely alone on due diligence, particularly early on in the development of a company and a market.

 

Fred Wilson

I never ever say that a specific provision is "standard". Nothing is standard. You either need it or you don't. Explain why you need it and most of the time you'll get it or something like it as long as both sides really want to make a deal.

 


Term Sheet Terms »

A term sheet is a document provided by an investor that contains their proposed terms to a funding. It is these terms that are the basis of negotiation, and that are eventually memorialized in the final closing papers. They are important. They represent the key economic and control rights of the parties involved for everything concerning standard economic distributions to later funding rounds, and they will also govern in the case of most disputes that may arise. 

Recent Posts

Term Sheet Terms

Brad Feld

Even though a term sheet might be four to eight pages long and the definitive documents might be 100 pages or more, other than economics, there are really only three things a VC needs in a deal: 1. Pro-rata rights. When things are going well (up) a VC wants the ability to continue to invest money to maintain their ownership. 2. Liquidation preference. When things don’t go well (down), a VC wants to get their money out first. 3. Board seat. In reality it mainly gives one the ability to know what’s actually going on, to the extent that anyone knows what’s actually going on in a fast moving startup.

 

Fred Wilson 

Investors like to require that an unissued option pool is in the pre-money valuation calculation when they put money into early stage companies. This post is about how to size the option pool. Many investors just want the number to be as big as possible. They'll put 15% into the term sheet and then let the entrepreneur negotiate them down from there and maybe if you are lucky you'll get them to 10%. But there is no logic in that kind of negotiation. It is just a price negotiation disguised as something else. It is bullshit. And I see investors engage in that kind of practice all the time. It annoys me.

 

Mark Suster 

I’m putting millions of dollars in your company.  My thesis is YOU.   I need some protection that you’re not fully or mostly vested where you could simply walk away with a large stake in the company, screwing not just me but the entire employee base of the company.  I’m not Sequoia.  I’m not looking to bring in a new team to replace you.  If you leave my thesis is largely out the door.

 


Valuations & Price »

A funding round's "valuation" or "price" is an important figure that represents the value of the company being funded. This section contains the resources you need to set and understand this term.

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Valuations & Price
Fred Wilson

Last week on MBA Mondays, I talked about valuing an internet marketplace business. In that post, I talked about using 1x gross marketplace transactions and 20x EBITDA as multiples to determine value. In the comments, I was asked about multiples for other sectors. That's a good question so I figured I'd show how to calculate multiples for various sectors. 

 

Fred Wilson   

Let's assume we have a portfolio company. I will call it fit.sy. It is a marketplace for fitness experiences. We invested in it last year as it was

getting ready to launch. A year later the business is scaling nicely and needs more expansion capital. The founders don't really want to go out and do a fundraising process. So they have asked the existing investors to make them an offer for an internal round. They believe they need $3mm of expansion capital to get them to cash flow breakeven. So now the VC firm (us) needs to figure out what is a fair price.