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THE FUNDAMENTALS OF START-UP FINANCING How the Hell can you raise money in Singapore? Tanguy Lesselin
THE FUNDAMENTALS OF START-UP FINANCING
How the Hell can you raise money in Singapore?
Tanguy Lesselin
Agenda
• Introduction
• How much do you need
• Types of investors
• Investment criteria
• Investor pitching
• Investor hook tactics
• Valuation and terms
INTRODUCTION
Money is hard to find when you need it, easy to find when
you don’t
Raising money is not an achievement…
it is a beginning
Funding = tons of dilemma questions
• How much do you really need?
• What % are you willing to sell?
• Raise less in order to minimize dilution?
• What duration do you need to cover?
• Bootstrap or raise funds now?
• Will I still feel “at home” in “my” company?
At what stage are you?
• Idea
• Initial team
• Prototype
• Product-market fit
• Traction
• Proven business model (*)
• Revenue scale ($1m, $5m, $20m)
* growing paying customer base with positive lifetime value contribution
# companies
Valuation
Think of financing as several steps
Seed Series A Series B Etc.
Pre money valuation 1.5m 5.0m 15.0m
Investment 0.5m 2.5m 5.0m
Post money 2.0m 7.5m 20.0m
New investor % 25% 25% 25%
Remaining for founders 75% 56% 42%
PrototypeFounding team
Product-market fitEarly customers
Scale up2m revenue1000 customers
01.2013 06.2014 01.2016
HOW MUCH MONEY DO YOU NEED?
Pre revenue phase
How much you burn
How long you burn it
Number of iterations
to reach product-market fit
EFFICIENCY, SPEED, DECISION-MAKING
You should hate multiplications
$10k $20k $50k $100k
6 months $60k $120k $300k $600k
12 months $120k $240k $600k $1200k
18 months $180k $360k $900k $1800k
24 months $240k $480k $1200k $2400k
• Salaries are almost all of it
• Making the right decisions has higher value
than dumb money
• No fat, decide well, play fast game
Your funding need
• Do your cash-driven business plan, take lowest cash point and add 30 to 50%
• Do not account for revenues yet if plan to launch more than 3-6 months from now
• Make sure you get enough money to reach several major milestones and still have time to raise a new round
• Don’t be forced to raise at the wrong time
• Enough to cover 18-24 months of burn + investments
• If it is too much then iterate, because you may be able do more with less (rethink you MVP?)
Why you will always get it wrong
• Underestimate costs and overestimate revenues
• You only know the revenue sauce when you already make revenues
Build milestones based business plans with clear go/no go decision points
INVESTOR CATEGORIES
Innovation financing (Singapore)
IPO
PrivateEquity
Venture Capital (Series A,B,C)
Business Angels / Seed (Series AA)
3F
Incubators
Grants
You / Bootstrapping
50 - 500
10-30k
30k – 0.5m
100k – 1.0m
2.0m – 15.0m
15.0m+
Investment
N/A
100 - 300k
200k – 2m
500k – 4.0m
4.0 – 50m
50m+
Valuation
You and your team (bootstrapping)
Monthly salary Over 12 months
Founder 1 10 000 120 000
Founder 2 5 000 60 000
Founder 3 5 000 60 000
Founder 4 5 000 60 000
TOTAL 25 000 300 000
• “No salary” is the first source of financing
• Salaries make 80%+ of costs in the beginning
• Seek free / super low cost solutions
• Get a prototype to show potential clients
Bootstrapping: how long?
• As long as needed to attract investors
• Pros: efficient cash management, no early dilution, customer exposure from beginning
• Cons: slower (time and money constraints), may miss the big opportunity
• You can get help bootstrapping (Founder Institute)
Best companies get funded to take the biggest chunk of the market
Grants
• 25k – 500k
• Take them if easy to take
• Make sure you don’t add constraints to your plan: IP vs speed to market
• US VCs don’t value IP before the company has reached a stage where it good to be able to defend
Incubators
• 10k – 50k for 10-20% of equity (indicative)
• Mentorship / networking / accelerator over short or “long” time frame
• Works for idea / prototyping / Product-Market fit
• Booster for investor pitching
• Great for first time entrepreneurs
3Fs: Friends, Family and Fools
• 30k – 500k
• They trust you and want to help you
• Make sure you are serious about the project
• Be very transparent on risks
• Don’t be greedy on valuation
• Think of protecting them in future rounds
Business Angels
• 100k – 1.0m
• Seek industry experts and smart money with investor connections for future rounds
• Seek deep pocketed so you don’t need too many of them and they can bridge if needed
• May pitch BA associations (?)
Series AA
• Typically 500k
• A few funds in Singapore
• Convertible debt or priced
Venture Capital
• 2.0 – 15m
• Series A still limited in Singapore
• Look also outside of Singapore
Some important trends
• Government funding
• Crowd funding: Kickstarter (US)
• Start-up competitions, demos, prizes
• Incubators: JFDI, …
• Online networks: AngelList
• Multi-stage funds / investors
VC INVESTMENT CRITERIA
Main criteria
Idea Team Product Traction
Idea and Market
• 2 main investor mindsets– Disrupting an existing market
– Creating a new market
• Playing Big is as easy as playing Small
• VCs seek the $100m revenue opportunities
Big and Bold
Misconceptions on market size
• Online travel agency is not USD XXX billion, it is only the size of commissions and fees (addressable market)
• Also do a bottom-up analysis to triangulate
A winning team
• A+ people
• Complementary skills
• Proven working relationship
• Ability to recruit other top people
• Ability to reach product-market fit fast
• Fact-based, ego put aside decision-making
Traction and metrics
Dependent on development stage
• Activation & Retention
• Acquisition & K factor
• Revenue & Profits
Your unfair competitive advantage
• Big market lead
• Big technology advantage
• Exclusive marketing partnership with industry leader
Criteria ranking?
Traction > Team > Product > Idea Market
Don’t rate average in all criteria, be
exceptional in one(except if it is the idea alone)
INVESTOR PITCHING
Process and documents
• First contact via introduction– Executive summary (1-2 pages)
• First meeting– Pitching presentation (10 slides)
– Product demo
• Before Term Sheet– Simple XLS business plan
– Team CV book
– Cap table
– Others as required
Pitching presentation
1. Elevator pitch2. Problem3. Solution (demo)4. Market size5. Business Model6. Unfair advantage7. Competition8. Marketing & Sales9. Team10.Finance and milestones
10 slides
20 minutes
30 point font
INVESTOR HOOK TACTICS
DREAM
Business Angels
• Fund when you can make them dream
– before product development,
– before launch,
– before pivot implementation
• Worst case: you have a product that does not (yet?) solve customers’ problem (trapped in the middle)
Business Angels
• Predefine everything
– Valuation
– Shareholder Agreement
– Process and Timing
• Secure the first 30% quickly, adjust terms with the “first” investor
• Create a list of targets
• Get introductions and go fast
Seed / VC stages
• Get PR before starting funding
• Sexy and committed Advisory Board
• Key people pool (20% pre money for instance)
• Future team hires
• Some key milestones fully achieved
• No mess to clean up (leaving co-founder, …)
Approaching VCs is a lot of work
• Better if they approach you (PR, competition)• Investor Relationship Management
– Meet informally so you can call back later– Build a target list– Filter (investment size, geography, portfolio, fund
maturity date, …)– Call portfolio companies – Test with one or two low priority and refine pitch– Introduction contact (Partner level)– Meeting 1– Follow-on
Create a competition
• You want investors to feel the pressure
• Competition enables better valuation, easier terms, and faster closing
Fundraiser or not?
• No for Angel / Seed stage
• Potentially yes for Series A
• Probably yes for later rounds (Technology oriented investment banks)
Why?- The good ones know more investors and know them well- Help you package your start-up and pitching- Help negotiate and close
Cost of fund raiser- Retainer (from 0 to 10k per month or lump sum)- Success fee (5-6%)
VALUATION AND TERMS
Valuation?
• There is no good model (DCF, P/E, P/S…)
• Comparable (check thefunded.com and other fund raising from comparable start-ups)
• You have to be a compelling investment opportunity
Try to work backwards
5 10
100
020406080
100120
Business Angel / Seed (Today)
Series A VC (In 18 months)
Potential value at exit (say in 7 years)
VCs want to make if successful10 X
BAs want to make if successful20 X
Comparable: IPO, trade sales…
Pre
-mo
ney
val
uat
ion
Terms?
You VC
You VC
You VC
What is “fair” (personal feeling)
• Information rights: open books
• Liquidation preference: 1X
• Pro rata right of first refusal
• Dragalong, tagalong
• Board: try to keep control
Some of the ones you want to avoid
• Some veto rights (new financing)
• Forced sale in 3 to 4 years– Too short to force liquidity
• Preferred dividends– Take equity-like risks if you want to own equity-like
benefits
• Ratchet – do not come back on agreed upon valuation
• Progressive cash inflows based on milestones– Milestones are irrelevant (like budgets) in a fast
moving environment
You need to do your homework
References
• Financing Map Singapore: http://sgentrepreneurs.com/wp-content/uploads/2009/03/megs-20090219.png
• Milestones based business plan (example): http://db.tt/fi4le3Rc• Capitalization Table (to simulate fund raising): http://db.tt/fi4le3Rc• Mint investor presentation:
http://www.slideshare.net/hnshah/mintcom-prelaunch-pitch-deck• How to pitch a VC:http://www.slideshare.net/dmc500hats/how-to-
pitch-a-vc-aka-startup-viagra-how-to-give-a-vc-a-hardon• Guy Kawasaki:http://www.slideshare.net/huer1278ft/the-art-of-
the-start-37633• The VC perspective:http://www.slideshare.net/benholmes/venture-
capital-an-entrepreneurs-manual
