10 Surprising Things About Raising Money by: Michael Blake

10 Surprising Things about Raising p g g gMoneyMichael S. Blake, CFA, ASA, ABARCommunity Steward, StartupLoungeDirector of Valuation Services HabifDirector of Valuation Services, Habif, Arogeti & [email protected]@unblakeable

About HA&W

Largest independent accounting firm in GA Established 1952 300+ professionals in tax, audit, valuation,300 professionals in tax, audit, valuation, litigation, due diligence, information assurance

Clients range from startups to public companiesClients range from startups to public companies 20 languages spoken Valuation practice named Best in Georgia by Valuation practice named Best in Georgia by Acquisition International (2013)

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t d l t i G iventure development in Georgia– Educating entrepreneurs (Office Hours, PitchCamp, StartupSeminars)

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IT’S NOT WHAT YOU DON’T KNOWIT S NOT WHAT YOU DON T KNOW THAT KILLS, IT’S WHAT YOU DON’T KNOW THAT YOU DON’T KNOWKNOW THAT YOU DON T KNOW…


#1 Companies Run Out of Time Before CapitalCapital


Assume 6‐9 months to raise capital. 6‐9 months of burn (call that $500K) 6‐9 months of management distraction (at 20 hours a week, that is 1,000‐1,500 hours of , , ,time lost 6‐9 months of eating Ramen noodles and6 9 months of eating Ramen noodles and hitting happy hours What can competitors do in 9 months? What can competitors do in 9 months?


How Does Time Kill a Venture? Idea isn’t scalable Pivots kills a business over time

Team must have financial /R d B ll l trunway/Red Bull supply to

be focused and work crazy hours

One person shows are much harder to make workwork

Too long to get to market Failure to recognize MVP Are you making the most of Failure to recognize MVP your runway?


Startups Can Take a Long Time before being Capital Readybeing Capital Ready

Customer tractionCustomer traction Assembling the management teamg

Development of technologygy

Developing (not writing) the business plan

Don’t waste time raising money for a startup that isn’t ready.


#2 If it Takes Longer than 12 Months to Raise Money You Probably Will FailRaise Money, You Probably Will Fail


Is Your Deal This?Is Your Deal This?


Or This?Or This?


When companies don’t gain traction right away, th t’ ft i f t h f d i i d h d

Unless the market

that’s often a sign of a tough fundraising road ahead.

U ess t e a etchanges.

Unless something gfundamental to the business changes.

Sometimes, the fish aren’t biting.“H d bl ” “Hard problems” are hard to raise money for.

Deals get stale Deals get stale.12Habif, Arogeti & Wynne Educational Material

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Why Do Money Raises Fail?

You’re in the wrong cityg y Selling the product/idea and not the ROI Unprepared Capital not really needed Founder(s) appear hard to work with Raising an unrealistic amount Poor networkingT li l i k b b h f d Too little risk borne by the founders

The opportunity isn’t very financially attractive


The Funding GapThe Funding GapIt is MUCH tougher to find capital between $1 MM to $5 MM

$0 $100 MM $1 B

$ $

$0 $100 MM $1 B

Don’t manufacture a need for more money$1 MM $5 MM

Angels don’t have the capital

Venture funds don’t have the interest

money

Venture funds don t have the interest

• Too many deals

• Too expensive to manage lots of small deals

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• No skill set for deals that smallHabif, Arogeti & Wynne Educational Material

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#3 Valuation is Not That Big a Deal


In Atlanta pre money tech startup valuations In Atlanta, pre‐money tech startup valuations generally range $1.25 ‐ $2.5 MM.

Chances are you can’t really sell your shares andChances are you can t really sell your shares and cash out

If your company is really worth more than $0, youIf your company is really worth more than $0, you are doing better than 90% of your peers

Terms matter a lot more than valuation Value can be determined credibly but it’s arcane Matters more to you if someone makes you y ydetermine value (stock options, financial reporting, 83b elections)


Terms that Make You Poor

Liquidation preferencesLiquidation preferences Participation features

i id d Dividends Convertibility Board seats RedeemabilityRedeemability Antidilution rights


Keys to Thinking about Valuation

When you exit will you earn enough cash toWhen you exit, will you earn enough cash to make it worth your while? Target between 10 30% ownership at the time Target between 10‐30% ownership at the time you exit.If lk d h li i If you walk away, do you have realistic financing alternatives?


#4 Even a Low Valuation is a Lot of Money


$1 MM is a lot of Money

You can buy 50 carsYou can buy 50 cars You can buy an AMRAM missile

(0 200 h i 6 d ) McLaren F1 (0‐200 mph in 7.6 seconds) 2 fire engines Breakfast for the city of Richmond, VA


$1 MM isn’t a Lot of Money

New York City apartmentNew York City apartment It is *not* enough to retire early on for most peoplepeople 4 private college degrees


#5 Atlanta Investors Fear Technology k f llRisk Most of All


M t i t ’t i Most investors aren’t engineers Customer validation is, by definition, technology validation Technology risk almost impossible to manage Validating technology can take years. Validating customers takes weeks.Validating customers takes weeks. Demonstrated ability to innovate drives investor excitementinvestor excitement Hold on to this thought for #9


#6 Paying Someone to Raise Startup ll bMoney Is Usually Dumb


Raising money is selling. If you can’t sell, you g y g y , ycan’t grow a startup. Most of the audience at pay to pitch eventsMost of the audience at pay to pitch events aren’t actual investors. Many investors will refuse to pay the Many investors will refuse to pay the brokerage fee.

i i l i i Raising early money is too important to outsource. Don’t let a consultant wish your problems away.


#7 If You Have to Explain Your Business to an Investor You Have Already Failedto an Investor, You Have Already Failed


It’s like having to explain a joke or a Halloween costume Pitching a deal shouldn’t be like trying to win an argumentg Entrepreneurs with a track record can raise money for almost anythingmoney for almost anything Investor has to get the story right awayS i l i i d l h Smart investors only invest in deals they understand


#8 If Investors Weren’t Arrogant, They Couldn’t Do What They DoCouldn t Do What They Do


Investors only make money if they really are smarter than anyone else Much of the investment model defies financial and portfolio theory “Maybe I don’t know anything.” means “I do know more than you but you’re not worth y yarguing with and I just want out of this conversation.”


VC and Other Returns (Annual %)

80

Source: National Venture Capital Association. VC returns per Cambridge Associates LLC’s U.S. Venture Capital Index.

60

70

Early Stage

40

50Russell 2000

20

30S&P 500

Barclay's Government B d I d

0

10

1 Year 5 Years 15 Years 25 Years

Bond Index

1 Year 5 Years 15 Years 25 Years


Upper Quartile & Median Returns (%)

25Net to Limited Partners – Source – National Venture Capital Association

20

10

15

Upper Quartile

5

10Median

5

02001 2002 2003 2004 2005 2006 2007 2008 2009 2010

‐5


A 30% Return is Lousy

A: $10 MM fund makes 10 $1 MM investments: $ 0 u d a es 0 $ est e ts 5 years: 3 go bust, 5 break even, 2 do well 30% fund RoR = $37 MM value in 5 years (10 x30% fund RoR $37 MM value in 5 years (10 x (1.3)5)

3 inv = $0; 5 inv = $5 MM, need $32 MM to hit $ ; $ , $return goal

2 investments must go from $ 2MM to $32 MM in value (100% rate of return) for fund to meet 30% return goal.


#9 Jockeys Raise More Money, Horses Make More MoneyMake More Money


I t l t l th b t th j k Investors almost always say they bet on the jockey Empirical data says that the horse makes more money* It’s easier to change jockeys than it is to change a It s easier to change jockeys than it is to change a fundamental technology

Good jockeys limit downside but are constrained by a j y ymediocre technology

You still need good jockeys Good technologies have the greatest upside Good jockeys are easier to spot than good horsesE l B G l Ci Examples – eBay, Google, Cisco

* Kaplan, Steven N., Berk A. Sensoy, and Per Strömberg. "Should Investors Bet on the Jockey or the Horse? Evidence from the Evolution of Firms from Early Business Plans to Public Companies." The y pJournal of Finance 64.1 (2009): 75‐115. Print.


Think About… Why don’t professional services firms (CPA, law, marketing) obtain VC funding?

Why do very few services Why do very few services firms go public?

We have “key person” insurance – why not “key technology” insurance?

Why are most lifestyle Why are most lifestyle businesses labor‐intensive and/or service‐related?


Good Isn’t Good Enough

$1 MM Profit to Cisco $1 MM Profit to Startup

Good Isn t Good Enough

$1 MM Profit to Cisco• Cisco’s cost of capital = 5%• Capitalized value = $1

$1 MM Profit to Startup• SU cost of capital = 50%• Capitalized value = $1Capitalized value $1

MM/5%• Value = $20 MM

Capitalized value $1 MM/50%

• Value = $2 MM

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Contests and Awards Really Don’t MatterMatter

Awards aren’t given out by customersg y Many awards are given out by people who have never run a company and will never be a customer or investorcustomer or investor

A decent sized customer is better than almost any awardaward

Is it really worth your time to go through the contest/award process

Goal should be to make contacts and build core management skills


#10 Crowdfunding is Important


The JOBS Act didn’t create crowdfunding –simply allowed you to sell stock with it Total of $2.6 billion total raised through 2012 Pebble smartwatch raised over $10 MM Kickstarter raised over $145 MM in 2012 Kickstarter raised over $145 MM in 2012 LendingClub raised over $75 MM per month in 20122012 9 states considering laws similar to Georgia to enable crowdfunding Equity‐based campaigns are raising the most


h k !Thanks!Questions?Questions?

Michael S. Blake, CFA, ASA, ABARMichael S. lake, CFA, ASA, A ARCommunity Steward, StartupLounge

Director of Valuation Services, Habif, Arogeti & [email protected]@startuplounge.com

@unblakeable

Your Venture is Much More Important to You than to any Potential Investorto You than to any Potential Investor

If you fail to raise money your company couldIf you fail to raise money, your company could be in trouble now. If an investor fails to invest, they may never be in troublethey may never be in trouble. Investors suffer worse consequences for making bad investments than missing goodmaking bad investments than missing good onesTh d h l The more desperate you seem, the less interested the investor becomes

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It’s not in the Investor’s Interest to say “No”No

By saying “no” they lose any option to investBy saying no they lose any option to invest later if your deal changes It costs them nothing to say “maybe” or “not It costs them nothing to say maybe , or not now”Wh h d “ ” h ll d ’ When they do say, “no”, they really don’t want to talk to you again…


VCs Having a Harder Time Raising MoneyMoney

$ Billions

35

40

$ o s

20

25

30

5

10

15

0

5

2004 2005 2006 2007 2008 2009 2010 2011 2012 1H 20132013


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10 Surprising Things About Raising Money by: Michael Blake

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