Funding basics - From Boots to Wings

Funding BasicsFrom Boots to Wings

Steve [email protected]

This presentation is targeted towards budding entrepreneurs that have a product idea – but aren’t sure where to get the key ingredient to success –

MONEY!

Introduction


$ MONEY! $

Introduction

“other people’s money”


$$ MONEY! $$

Introduction

“other people’s money” People who expect to make more money…


$$$ MONEY! $$$

Introduction

“other people’s money” People who expect to make more money… People who have legal Rights to question

many of the moves you make…

What are you really trying to do? How much funding do you really need? How much runway do you personally have?

Investors expect you to have significant “skin in the game” I have had investors say that they expect nothing less than

my own personal bankruptcy if the business fails. Can someone else do parts of your business

better? What does success look like? What are you willing to give up?

Ask Yourself:

You do not have to be the next big thing (contrary to almost everything you will see and hear about funding a startup company).

You DO need to recognize what your business is likely to become

Recognize what your own goals are

Then seek funding (if it’s even needed) that matches!

Who Funds Businesses?

Friends and Family (Love Money)

The easiest to get – at least your first time Patient money Great for “walking harvest” business

opportunities Generally small amounts

Love Money can have difficult emotional ties.Just because you are dealing with family doesn’t mean you shouldn’t document the deal and outline risk factors involved.


Micro-Funding

If you fit any special demographic there may be some easy funds available to you

Youth under 30, summer business, women focused, community focused, specific job focused… many others

Often loan based, sometimes with zero interest and occasionally with no payback required at all if business of product fails

Government or Charity based Generally small amounts (although some government

programs extend to hundreds-of-thousands)

Although not typically used for high-tech, these programs don’t explicitly limit the use of funds or type of business.


What is an Incubator?

Business incubators are organizations geared toward speeding up the growth and success of startup and early stage companies. They’re often a good path to capital, but rarely put their own hard capital into play directly.

- “Funding” is often in-kind in the form of free rent, consulting, internet, etc.

If you have watched this showthen you know what an exampleof a small incubator can look like:


(Underlying the comedy are some very real take-aways on funding a startup)

Crowd Funding

For this audience… If you haven’t heard of crowd funding, please hang your head in shame and leave now

What you may not realize are some of the pitfalls and best-uses for crowd funding.


Crowd Funding - Pitfalls

From my completely unscientific analysis of crowd-funding that targets product development: Funding amount is typically drastically low or

non-existent (product sale only) Nothing set-aside for major expenses like IP

protection, certification, safety approvals, etc. (especially critical for IOT devices!)

Development timelines are unrealistic and unsupported


Crowd Funding - Advantages Great way to gauge market interest and

acceptance for a specific demographic if you are ready to follow through

Excellent for small funding needs Excellent for products that only require small

volumes to justify development

Wonderful for existing small businesses (and under-utilized in this area)


Angel Investment Can come alone or as a group Often focused on areas that are familiar and

comfortable – in Ottawa it is easier to get “communications” funding than “medical” for example.

Often focused or more interested in local growth Can require multiple pitches Organized groups often require a

mentor/sponsor Sometimes have consultant-hooks in the deal


LONE Angel Investment Lone angels can be risky, especially if they have

not done many deals.- Inflated expectations- Emotional- High maintenance- Each may require their own special deal which leads

to a messy corporate structure and can hurt future investment

Lone angels can be a benefit- Willing to roll up their own sleeves and help- Easier to appeal to their moral compass or personal

interests


GROUP Angel Investment Groups vary but will often have well defined structure.

- Requirements to pitch- Set investment requirements- Well established legal framework- Not everyone has to buy-in

There are some huge angel networks such as Keiretsu which are broken up into chapters and can draw finances worldwide from over 1000 members allowing raises in the ten-of-millions: http://www.keiretsuforum.com/

And there are small angel groups such as Ottawa’s Purple Angels, Capital Angel Network.

The National Angel Capital Organization (which I am an original founder) provides a wealth of information and list of angel investment groups across Canada: http://www.nacocanada.com/


http://www.keiretsuforum.com/



http://www.nacocanada.com/

http://www.nacocanada.com/

What is a Professional Angel?

A Professional Angel is someone or a group that has done enough deals or is structured in such a way that they closely resemble a Venture Capital company

May only lack the official “corporate” designation as a financier

May actually drive a harder deal than a VC May be a non-financial corporation (yes,

corporations can act as angel investors especially if there are global, tax or other hidden drivers to their behaviour… this is good!)


Venture (Vulture) Capitalists – VCs.

Although mainstream media likes to demonize VCs as greedy, they remain an excellent source of funding provided their interests align with yours.

Deliver what you say you can deliver Deliver when you say you can deliver Expect short pay-back horizons – if you truly believe that you are going to

profitable in 12-18 months this is a great fit Show major returns, 10-20x is not an unreasonable expectation Expect difficult financing terms – if you accept them and become dilluted or

sqeezed out… then why did you accept the terms? The operational and legal costs of operating VCs along with an expectation to

return capital to their investors means deals have to be fairly large to make it worth it for all parties involved

VCs are themselves funded. You may not realize that while you are making a pitch to a VC, most VCs also have to make pitches to private investors in order to source their fund’s capital.

YOUR pitch eventually becomes part of THEIR pitch


Banks

Banks really DO fund businesses! If you can show purchase orders, personal financial success or

good backers then you may be able to get access to conventional (debt) funding

Programs exist, especially targeted government funds, where the government will guarantee the loan on your behalf

International sales can be guaranteed through Canada Commercial Corp (www.ccc.ca)

Consider the ADVANTAGES No ownership dillution Low maintenance No “voting rights” No “shareholder rights” Can easily scale up as orders increase


http://www.ccc.ca/

Other lesser known sources of funds – dig for them

IRAP/SRED/GRANT Often big R small D focused Sometimes repayable, royalty or combinationBCIP (Build in Canada Innovation Program) A buy and try program that is almost like fundingSADI or similar targeted funds SADI in particular provides funding for defense and

aerospace related development in the form of long-term loans

Federal, provincial or municipal - Matching Programs Provide funds on a matching basis with private

investment dollars (1:2 or less is typical)


A Summary of WhoWalking Harvest

Single product or Hobby

Slow growth solid business

High growth with acquisition exit

High growth with IPO exit

Love Money * * * * * * * * * * * * * * *Micro Funding * * * * * * * * *Incubator * * * * * * *Crowd Funding * * * Future? Future? Future?

Angels * * * * * * * * *Pro-Angels * * * * * * *VCs * * * * * *Banks * * * * * * * * * *

A few key ingredients we will cover are: Your Pitch Your Plan Your Model Your Value

This is really the minimum set of information you need to be successfully financed from ANY source. Only the level of detail will change depending on the source you target.

How do I get Financed?

There are LOTS of internet resources on how to create and deliver a successful pitch:

A pitch can be the 30-second “elevator pitch” A pitch can be an hour long investor presentation

Having an effective elevator pitch is very important as it provides the hook you will use over and over again.

The elevator pitch isn’t just for investment, you can also use it to find new customers, to introduce your business and even to convince suppliers to partner with you.

Be prepared to vary your pitch to your audience. A financier will have a different interest than a tech-guru.

First impressions are very important – Any presentation, no matter how long, can start with the elevator pitch to build

excitement right from the start and leave your audience wanting to learn more.

The Pitch

Creating your 30-Second Pitch Tell A Story – removes the feel of a hard-sell Don’t use jargon – Unless you are SURE of

your audience What Problem are you going to solve – NOT

your solution Why are you so damn special? Invite conversation – This is how 30 seconds

turns into 20 minutes

The Pitch

“A lot of soldiers are coming home early with bad backs, worn out knees and a host of medical problems because they are so overloaded in the field. The U.S. Military knows they are overloaded and are always looking for solutions. We have a battery technology that removes about 20 pounds from what the soldier needs to carry. I started working with this technology almost 20 years ago for smartphones (we called it a 2-way pager or Blackberry back then). Now I am bringing that technology to soldier power systems.”

<pause – you don’t need to say more>If I am talking to a military person, I would modify the pitch to make it more personal: “I really respect how much soldiers carry into the field, I don’t know how they can lug so much around… did you know that almost 40 pounds of that weight is batteries? We have a technology…”

There are so many opportunities for the person to now ask questions: “you were with Blackberry?” “what’s the technology?” “how much do those medical costs add up for the government?”

NOW I am no longer “pitching”, instead I am answering questions and the potential investor feels engaged and in control. Done well they will be the ones who eventually ask “are you looking for funding?”

Why yes… as a matter of fact we are…

The Pitch

An Exercise

At each table: Create a quick 30-second pitch!

Business: Pick your own idea, or use one of these.

A flashlight product Media streaming service Bacteria that can digest spilled oil

10:25 Pick your founder10:25-10:30 Create your pitch

10:30-10:35 Give your pitch

The Pitch

At some point you will also need a full pitch presentation.

This would be a condensed version of your business plan.

Going into building a business plan and full investor pitch presentation is beyond the scope of today’s session – but happy to give some real-world pointers:

Who should pitch? The founder isn’t always the right person! Picking someone else shows team depth and

willingness to delegate Passion is important

The LONG Pitch

Avoid At All Costs (how many of these did we hear?):10 – We have the cheapest…

The LONG Pitch

Avoid At All Costs (how many of these did we hear?):10 – We have the cheapest…9 – Everyone will want this…

The LONG Pitch

Avoid At All Costs (how many of these did we hear?):10 – We have the cheapest…9 – Everyone will want this…8 – We have no competitors…

The LONG Pitch

Avoid At All Costs (how many of these did we hear?):10 – We have the cheapest…9 – Everyone will want this…8 – We have no competitors…7 – Like an iPod (or like Apple or any other wildly successful product)*…

The LONG Pitch

*– it’s OK to humbly state that “we like the user interface on the iPod and would implement a similar interface on our product”

Avoid At All Costs (how many of these did we hear?):10 – We have the cheapest…9 – Everyone will want this…8 – We have no competitors…7 – Like an iPod (or like Apple or any other wildly successful product)*…6 – Better than Facebook (or any other wildly successful website)…

The LONG Pitch


Avoid At All Costs (how many of these did we hear?):10 – We have the cheapest…9 – Everyone will want this…8 – We have no competitors…7 – Like an iPod (or like Apple or any other wildly successful product)*…6 – Better than Facebook (or any other wildly successful website)…5 – The product will practically sell itself…

The LONG Pitch


Avoid At All Costs (how many of these did we hear?):10 – We have the cheapest…9 – Everyone will want this…8 – We have no competitors…7 – Like an iPod (or like Apple or any other wildly successful product)*…6 – Better than Facebook (or any other wildly successful website)…5 – The product will practically sell itself…4 – Everyone needs this…

The LONG Pitch


Avoid At All Costs (how many of these did we hear?):10 – We have the cheapest…9 – Everyone will want this…8 – We have no competitors…7 – Like an iPod (or like Apple or any other wildly successful product)*…6 – Better than Facebook (or any other wildly successful website)…5 – The product will practically sell itself…4 – Everyone needs this…3 – We hope… (hope is not a strategy)

The LONG Pitch


Avoid At All Costs (how many of these did we hear?):10 – We have the cheapest…9 – Everyone will want this…8 – We have no competitors…7 – Like an iPod (or like Apple or any other wildly successful product)*…6 – Better than Facebook (or any other wildly successful website)…5 – The product will practically sell itself…4 – Everyone needs this…3 – We hope… (hope is not a strategy)2 – We will worry about monetization later…

The LONG Pitch


Avoid At All Costs (how many of these did we hear?):10 – We have the cheapest…9 – Everyone will want this…8 – We have no competitors…7 – Like an iPod (or like Apple or any other wildly successful product)*…6 – Better than Facebook (or any other wildly successful website)…5 – The product will practically sell itself…4 – Everyone needs this…3 – We hope… (hope is not a strategy)2 – We will worry about monetization later…

1 – We only need 1% market share…

The LONG Pitch


Getting from YES to $$$ in the bank can be a challenge.

Structuring the deal itself will vary drastically depending on who is investing and what type of investment is involved.

Smaller deals can be dealt with using simpler terms if you choose the right method.

Be prepared by considering a few of the biggest next-step questions

OMG – Someone Said YES!(and you want “someone else’s money”)

Deals can be structured around a single form of compensation, or a combination of compensation (often called “kickers”)

Straight Debt Probably the simplest possible deal – An

exchange of funds for a promise of repayment with interest.

Secured, often using the founders own assets (be prepared).

Best for “Walking-Harvest” companiesKickers: Escallating interest Royalties / profit sharing Warrants for buying shares

Deal Types

Convertible Debt One of my personal favourites, especially for

small startups. Reduces the need for a valuation

An exchange of funds for a promise of equity in the company at a rate that matches a follow-on investor.

Eg. Invest $50K in a seed-round. When company does “A” round for $1M, shares issue as if I invested at that round.

Kickers: Conversion usually at a discount to follow-on Interest or pay-out after a fixed time if no

series “A” Royalties / profit sharing occasionally (rare) Warrants for buying additional shares

Deal Types

Equity An exchange of funds for part of the

company. Requires setting a value on the company

(breaks many deals) Usually includes seat on the board and

carries significant shareholder rights obligations

Kickers: Down-round protection Warrants for buying additional shares Early liquidation clause (founders beware!) Performance clauses (delivery, revenue, etc.) Dividends (for walking-harvest companies,

rare)

Deal Types

Less Common Types – at least for startups Bonds (very similar to debt, usually with a

lump payout) Earn-Out (used more in take-overs)

Deal Types

The best I have seen: Energetic, passionate, excited Willing to take advice Courteous Already well connected Prepared (competition, market, and who is your audience

are top three)The Bad that I have seen: Unsure of market Out of money / out of time Desperate GreedyThe Ugly: Arrogant Argues with a room full of people Won’t take advice

Good, Bad and Ugly

Harlan Sanders of KFC is often held up as a model for tenacity in the face of investors for being turned down over 1,000 times while seeking funding for KFC.

They Said No!


I think he was a bit of an idiot… who eventually either got lucky, or just found a dumb enough investor to join in his business.

They Said No!


I think he was a bit of an idiot… who eventually either got lucky, or just found a dumb enough investor to join in his business. Sharpen your plan and pitch!!!

Investors are human beings – and you may not believe it, but they actually LIKE to say yes and HATE saying No. You will rarely get an outright “No”, it is softened with terms like “come back”, “we will keep it in mind”, etc.So Ask them to educate you – ask for a debrief and offer to bring muffins: Where did I lose you? What would help me engage with other investors? What else? What else? What else? (keep asking this

until you really understand what went wrong)

They Said No!

Your are lucky!

Finding groups, resources and advice has never been easier!

MARS Entrepreneurship 101 Great resources on a variety of topics related to starting

and running a business. Free registration Financing Unit: https://entrepreneurs-toolkit.schoolkeep.com/catalog/

5xgabtoz/introduction-to-investment-readiness Include specialized startup guidance for different industries

from Digital Gaming to Cleantech. Almost 600 videos from Product Development Planning to

Body Language.

Resources

Your are lucky!

Finding groups, resources and advice has never been easier!

MARS Entrepreneurship 101 Great resources on a variety of topics related to starting

and running a business. Free registration Financing Unit:

https://entrepreneurs-toolkit.schoolkeep.com/catalog/5xgabtoz/introduction-to-investment-readiness

Includes specialized start-up guidance for different industries from Digital Gaming to Cleantech.

Almost 600 videos from Product Development Planning to Body Language.

Resources

Funding basics - From Boots to Wings

Technology

Transcript of Funding basics - From Boots to Wings