Welcome, everyone, back to our GVR Masterclass.
We are in week four, and I am so excited because we have Kim Seals here, and she is going to
be teaching on Venture 101.
I know in the beginning of our Masterclass, our GVR kickoff, some of you asked about specific
terms and topics.
Kim is going to break it down for you, so I hope you all are ready for a wealth of knowledge.
I'm just excited to hear it because she always brings so much information for us to gather
and to process.
So without further ado, Kim, I'm going to go ahead and bring you up for the class.
Hi, everybody.
Thanks, Siobhan.
I appreciate the welcome, and happy to join everybody here tonight as part of the Get
Venture Ready program.
Wanted to share my presentation, and hopefully everybody can see that and talk a bit about
what we're going to cover today in our Venture Capital Funding 101.
This is intended to be a beginning to maybe moderately intermediate resource for you as
you're thinking about the different ways that you can fund your business.
I'm going to structure this today where we have about, I'd say, about 45 minutes of content,
and then I want to save some time at the end for any questions you may have for topics
that I don't cover in the deck or anything you might need some clarification on.
But first, just to finish out the introductions, I'm Kim Seals.
I've been investing in early-stage startups across many different industries since 2013.
I am one of the general partners of the Junk Fund.
We are a micro-venture capital investing firm that has helped fund more than 30 women-led
companies headquartered in the southeast of the United States, and we've invested across
two different funds.
My background, I also have experience in HR, talent strategy, and M&A-type roles, which
also helps as I coach the entrepreneurs in whom we've invested.
Happy to be here with you today and encourage you to check out our website to learn more
about some of the companies that we've invested in through the Junk Fund.
As we kick off tonight's discussion or today's discussion, depending on where you are, one
thing to really keep in mind is that as you as an entrepreneur and as someone starting
your business or looking to grow or scale your business, the funding decisions that
you make are about a series of trade-offs.
How much will this money cost you?
How would you pay it back?
What will you be spending the money on?
What do you want to do about overall ownership and control of your company?
So today, we'll be talking about all of these elements so that at the end of this, you should
be able to take a view of your company, where you are, and what type of funding might make
sense for you.
Before you decide on your funding strategy, it's really important that you identify the
end goal you have for the company that you've started.
For example, you may be building what we consider to be a lifestyle business, which is a profitable,
sustainable company that you don't intend to exit.
You're not looking to sell it to someone else.
You're not looking to give away equity in the company.
This business is for you and your family, and that's the way that you want to approach
building out this business.
That is a great goal, and there are ways you can fund the business when that's your goal.
So we'll talk about that tonight.
Also, you may start a business and say, look, I want to build this business.
I want to grow and scale it, but I really want to position it to sell it to another
company.
I'm really in it to help start this company, solve a problem, and then turn it over to
another company that can take it to the next level.
So if you're looking to get acquired, again, that drives maybe a different funding strategy
for how you'll think about your business.
And then the third most common thing is you may say, look, I'm in it all the way to the
end.
I'm going to start this business, grow it, scale it, and then I want to take this company
public.
So that certainly is a great admirable goal as well, and we'll talk about what that might
mean for you when it comes to funding.
But the primary note here is be sure to decide on your funding strategy before you ever take
a dollar of outside money, because how you are approaching this will make the difference.
So how might you think about funding?
Well, here are some of the most common options for funding your business.
You could obtain a bank loan or a credit card line of credit.
A lot of companies are started on credit card spend in order to finance building out an
MVP or getting some initial product ready.
So, certainly, that is one way that entrepreneurs go to fund their business.
Another is small business grants from the SBA, the Small Business Association, or perhaps
a local city fund that has grants that are targeting investing in the area in which you're
building your business.
If you graduated from a university that has an entrepreneurship program, you might want
to go back to that program and inquire about whether they have grants that are available
to those who are graduates of their university.
Of course, signing a paying customer, that's always a great way to get some money for funding.
You could join a startup or an incubator, a startup, an incubator, or accelerator, like
a TechStars or a Boomtown Accelerator, there are a number of them out there, and they can
sometimes give you cash to join their incubator or accelerator.
Of course, they will potentially take equity in your company, but certainly an option as
well if you need the support of an accelerator or incubator that comes with some cash.
You could start a crowdfunding campaign where you go out to the general public and look
to get some folks interested in investing in your company and helping you scale and
grow.
You could look at investment from friends, family, founders who might pool their money
together to invest in the company, or you could go solicit angels or venture capital
investors such as myself to put money into the company.
So, tonight, we're going to talk about most of these options.
We're going to dive into more detail about what they mean, and what you'll see is that
I'm not a traditional venture capital person who's going to encourage you everybody should
take VC money.
That may not be the case, and I hope what you'll walk away with tonight is the understanding
that you have choices, and that based on how you're thinking about your business, you could
then decide what's the right funding vehicle for me.
Let's first talk about crowdfunding, because I think this is one of the areas where perhaps
there's a lot of chatter out there, but maybe not as quite well known as to what it really
means.
But when you're crowdfunding money for your start-up, you are typically going out into
the broad community and targeting people who might be potential customers, or individual
investors who want to pool their money together in these crowdfunding sites, and help you
raise the money you need generally to produce first rounds of product, or build out technology,
things like that.
There's three most common types of crowdfunding platforms out there.
The first is a donation-based crowdfunding platform, where the person that puts money
into your crowdfunding effort is not expecting a financial return.
They're typically non-profits who are trying to raise money, or charities, or disaster
relief, that is really very donation-based, and the person or people that are giving the
money know, I'm giving money to this cause to help solve this problem, and I'm not expecting
a return on my investment.
This is more of a donation in my mind.
So those are those typical types of crowdfunding that are donation-based.
Rewards-based crowdfunding is what you're typically going to see when someone's trying
to build up a product or a service, and they want to go out to potential customers first,
and see if they would pre-buy whatever the product or service might be.
So let's say you're creating a new line of purses that you are making, and you want to
go out to potential customers who would be the people that you would ultimately sell
this purse to, and you want to see if some folks want to buy a purse in advance before
you ever make it.
You typically give them some incentive to do that, and then you take all the money that
you've raised, and you actually then start to begin to produce the purses that you first
give to the people who help fund your crowdfunding, but then you use the rest of the inventory
in order to get out in the market.
So rewards-based crowdfunding, I'm going to come onto the site, typically a Kickstarter
or Indiegogo or something like that, I'm going to see that you've got this crowdfunding out
there to get your product up and running, and I'm going to say, oh, that looks interesting,
I would be a potential customer.
Let me pay now for something that would be created and sent to me later.
So that's the rewards-based approach.
And then the third option is what we consider to be equity-based crowdfunding, and that's
where you're out there soliciting investors who do
Expect to take equity in your company, which means you're giving up ownership shares for the money that these folks are giving to you
They're not looking for an advanced
Commitment on product or anything like that
They're saying i'll give you ten thousand dollars and you give me a percentage of ownership in the company
Or it might be five hundred dollars in these crowdfunding platforms
You set the minimum terms of how much people can invest and if you're looking to get a good group of folks
Investing you might set a lower threshold and say i'll take minimum investments of say five hundred dollars because i'll
I'd love to get a thousand people to put five hundred dollars in
So, you know, they're definitely options on the crowdfunding
I would encourage you to do your homework about what's the right crowdfunding option for you
Uh based on what you're trying to achieve and understand the implications
I know i've said this before and i'm sure i'll say it again tonight
Before you ever take a dollar of money from someone outside your family and friend circle
Please understand what that person who's giving you the money. What do they expect to get in return?
So if you're thinking about venture and you're thinking about well, let me go
Take money from outside investors. It's important to know
When might be the right time for you to do that?
So as you see along this picture here at the bottom we talk about i'm in idea stage
Or i'm an mvp stage and mvp means minimum viable product
I have traction in my business. I actually have paying customers. I can see the real market opportunity here
Or i'm in high growth mode and I just can't keep up
And then finally i'm a mature organization that's really looking to um to continue to grow and scale
But I have a lot of customers. I have revenue and I just need some outside capital to help me get to that final place
so
based on where you plot yourself as to where the the
Maturity of your company is right? I'm in idea stage and I need a little bit of money. What are my options?
Well bootstrapping
Which we'll talk about more a minute. What does that mean you get money from friends? I can get money from family
Angels grants seed round money. So it's that initial set of capital that you need to get your idea off the ground
But once you start to get traction and once you start to see growth and paying customers
There's a lot more funding opportunities out there for bigger checks
Early stage venture capital growth stage venture capital or what we call venture debt where there are organizations out there
That will basically buy your debt from you as part of a venture
arrangement
And then finally you get to the point where you're considered to be a mature business
And that's when you can potentially qualify for bigger banking loans. You're thinking about ipos
You know a lot more traditional ways to raise money
So as you're saying to yourself, well, what what's the right place for me?
What should I be thinking about if i'm looking at venture?
You really want to understand how would I categorize the stage of my business and start there?
So let's talk about some of these terms I just threw out and let's make sure we're all talking the same lingo here
So I mentioned earlier bootstrapping
That's when
The company is fully funded by your own personal resources or your company's own revenue
So I have a company i've built it with my own personal savings and with paying customers
We would say you bootstrapped your company
Because that comes from the phrase of pulling oneself up from one's bootstraps
If you are going out for money and you're trying to raise
A round of financing. There's typically a lead investor
That's the person the organization
Who's typically putting the most money in that round that you're raising?
And they're the ones that are going to call the shots on what the terms are
For what it means to take that money. So is it preferred equity? Is it a loan?
What is it that lead investor will work with you to set those terms so that everybody who comes into that round you're raising
Knows exactly what they're getting for every dollar they put into your company
Due diligence
Once someone agrees to put money in your company and you have that verbal agreement that yes
I'm going to give you fifty thousand dollars to help build out your minimum viable
prototype your mbp
but
I'm telling you that verbally and then I want to do some homework. I want you to show me your financial records
I want you to prove to me that your concept is real. I want to measure the potential
ROI of my investment. So it's that final sort of, you know,
due diligence, if you will, before I actually give you the
check.
When we talk about an exit, we're talking about how you
actually get your money back. You know, how are you actually
going to get rich from this investment? And how is that
investor or entrepreneur going to actually take the company to
that exit, whether it's an IPO, whether it's selling it to
another organization. So a lot of times when you go to
somebody, like if you came to me and said, I'd like you to
invest in my company, one of the questions I'm going to ask
you is that's great. If I give you this money, if you grow and
scale this company, how do you ultimately intend to exit this
company in order to pay me back? And this is why I go back to
the first point I made early on of understanding what your goals
are for your company. Because if you're the person that's
building the lifestyle business, and you never intend to
exit, you're not going to sell it, this is a company for your
generations to come of your family, then you may not want to
take money from outside investors who will force you to
sell this company in order for them to get a return. You're
likely looking to say I need grants, or I need loans, or I
need paying customers, because I don't intend to exit my company.
So there's no way for me to pay these investors back.
I've said a couple of times, well, what stage is your
company? How do you know if when you're ready for for venture
money? How do you know when you're ready to raise? Well,
when we talk about the stage of a company, we mean, how early is
this company? Is it a really early seed infancy type company?
Is it just starting to get traction? It's a mid stage
company? Or is it a late stage company that's been around for
years and has lots of potential? Is it a mid stage company? Is
it a late stage company that's been around for years and has
lots of paying customers? So you will, you will help set the
definition of how you consider your company, what stage you
consider it to be in. There's no explicit rule, but there's some
general guidelines. If you have no paying customers, and you're
just trying to create your initial prototype, you're a very
early early stage company. But if you've got paying customers,
dependable revenue, you might say, well, I'm in that mid
stage, right? So you'll, you'll be communicating with potential
investors based on how you're setting the definitions of the
stage of your company. We'll ask you as an investor, we'll say,
well, what round is this for you? How many times have you
gone out to raise money? So the you initially would have like a
pre seed round, then you have a seed round, then they start to
go alphabetically, a series A round is followed by a series B
round. Typically, each round of funding gets bigger than the one
before. So it's very typical for me to see somebody who starts
with an initial raise of say, $150,000. I'm going to go raise
that from my personal network and get some folks to give
money. And then my next round, I'm going to raise 500,000. And
then my next round, I might raise $2 million. So as you go
up with these rounds, the intent is that each time you're raising
more money to get even further along with how you need to build
your company. So it's really important that the stage and the
round go together, that you're thinking about what stage is my
company? What round am I raising? And how much money does
that mean I want to raise? The general rule of thumb is you
want to be raising enough money to get you to your next set of
measurable milestones that can help you raise the next round.
So if you're thinking, Oh, well, I need to raise $150,000 because
that will get me these three milestones, I can achieve those
three milestones, then that's what you would tell investors,
and they would know, okay, so we're investing in this round
with this amount of money, because this company can achieve
these certain milestones, and then they'll go raise more money
to hit the next set of milestones. So it really all
kind of weaves together. The other thing we're going to ask
you is, what's the valuation of your company? What what's it
worth? And a little bit later on, we're actually going to work
through an exercise for how you might value your company. And
the reason why you want to know that is, if you take on an
investor who gives you $100,000, and your company is
worth $1 million, how much equity in your company did you
just give away? One other investor term is actually called
the term sheet. This is a non binding agreement. So this is
not the contract.
contract. This is where you and the potential investor put everything in writing that you're
about to agree to for I'm going to give you money and here's what you're going to give
me in return. We're going to lay out all of the details and this term sheet is used as
the basis for getting the legal documents. It's really important for you to know that
just because we get to a term sheet where we verbally agreed on I'm going to give you
money and you're going to give me equity in your company. We don't have a legally binding
agreement yet until it gets to a contract. So sometimes you get excited like I have a
term sheet. I'm ready to go. Well, the term sheet is one step in the process, but there
certainly will be more legal documents to follow. So what you're thinking about investors
and you're saying I need to go raise outside money. There's three most typical types of
investors for early stage companies to go after. The first is what's called a solo angel.
This is an individual who's usually investing their own money in companies that they're
personally passionate about. It might be an industry that they're really interested in
helping to grow and scale. It might be investor or entrepreneurs they want to invest in and
support. So, you know, a solo angel who's really interested in in solving some kind
of health care or beauty product problem that is passionate about that may be writing an
individual check on their own assets. Solo angels tend to write smaller checks in a lot
of different companies because they want to spread their risk. So they might write
a check for $25,000 or $50,000. That's typically what you're looking at when you talk to a
solo angel. And sometimes you'll ask more than one solo angel to pool their money together.
And that's how you might get to a say $150,000 round. You get, you know, three or four angels
to put in $25,000 to $50,000. There are also angel networks. And these are groups of individuals
who band together and look at deals together to pool their money into one investment in
the company. So, for example, here in Atlanta where I live, there's an angel network called
Atlanta Tech Angels. And it's a group of business people in the community who like to invest
in startups. They meet monthly and they take pitches from startup companies and determine
if they want to invest. And if enough of the members of the network want to invest, they
all chip in their money and then make one investment in the company. So rather than
you go meet with have to take five or ten different meetings with different solo angels,
you show up and go to this one network meeting where a lot of different angels are there
and then they decide if they want to invest. Or you could come to something like the Jump
Fund where we are a venture capital fund. We write bigger checks because we have a fund
to invest out of. It's also what the fearless fund is. It's a fund of limited partners who've
all put their money into this fund. And then a few key individuals run the fund and make
the business decisions for where the money will get invested. It's an easier way, so
to speak, of getting to a bigger check, but there's usually a lot more due diligence,
a lot more structure around it, and it takes longer than some of these other paths. So
as you're thinking about how quickly could I raise money, know that if you go to one
of these venture capital funds like the Jump Fund or Fearless Fund, there's a process they're
going to run you through. Our process at the Jump Fund has generally taken a couple
of months for us to make decisions on funding and then maybe another month to get the money
into the hands of the entrepreneur. So, you know, you've got to weigh the tradeoffs here
of how easy is it for me to find individual angels, how could I go to a network, and then,
you know, a venture capital group. So I think I've covered most of what's on
this slide, and I think we'll probably send these slides out so you'll be able to have
this for the future, but as I mentioned earlier, angels are investing smaller amounts in more
deals. They typically move faster to give you the cash. Venture capital, bigger checks
takes longer, and certainly perhaps a few more details that you have to cover off with
these venture capital funds. So the next question is, okay, I want to raise this money.
How do I actually structure that round? So first and foremost, what you might be used
to hearing about is what's called preferred equity, which is
You give me money. I give you equity in my company
Okay, so this is a preferred ownership position based on the price per share that you all have agreed on
That will be exchanged for me giving you money. You're going to give me equity
But if you're not ready to give up equity in your company yet, and you're ready to say I'll give you money now
And then later I'll give you equity
There are certainly a couple of options you have
The first is what's called a safe note a simple agreement for future equity
this is
Tended to intended to be a very simple agreement
It's typically for smaller amounts of money where we say you give me
$10,000 now and we'll figure out later how much of my company I'm going to give you a
Convertible note is much more like a loan document
Where we're saying all right, I'm gonna give you money today
You're gonna pay me interest on that money
And then eventually what I would expect is not that you're gonna give me a repayment on my loan
But that you're gonna convert my loan into equity in the company at a later time
This is typically done when you're early stage. You don't know how to value your company
So you're not ready to give up equity yet. So you're saying let's do a convertible note
It's more structured than a safe, but it still gives me some flexibility later to determine what the value of my company is
so it's really important that you think about the different ways you can structure this money and
Make sure you choose the right one for you and your company
And when I mentioned earlier that your lead investor helps set the terms, this is what you and your lead investor
negotiate
What are the terms of this round?
How are we actually raising the money and then everybody else who comes into the round has the exact same set of terms
So now let's talk about how do you buy you your company
Typically if you're early stage, you may not have a lot of data that helps you figure out what your company is worth
So here are some things you can look at to say
I think my company's worth two million dollars because I have a lot of user growth. I have customer success
I have daily usage statistics that show that my product has market fit. I
Might have some proprietary software. I have a patent. I have partnerships. I actually have product to sell
So think about ways that you can demonstrate what the value of your company is to potential investors
Once you've done that there are two pretty common ways to actually value your company
The first is what's called the Berkus method and it's where you assign a company value
Based on certain elements in your company today
So I have a very sound business idea that has been de-risked and we know what the value of that will ultimately
turn out to be I
Have a prototype where I can actually show people that this idea works. I
Have a management team that has experience and the capabilities to take this company where it needs to go. I
have strategic partnerships people who are willing to help me get my product in the market and
I've already started to produce that product and roll it out into the market
These are five key elements that you could assign a value to and it's a pretty simple math equation
So if you say look, I have a really good sound idea and I'm gonna put a value of that of a million dollars
I don't yet have my prototype. I'm still trying to work on that. So I'm not going to give any value there. I
Have a start of a management team. So maybe I'm going to value that at you know a million dollars
So you you start to make the case and you document this
Of why do you say my company's worth two million dollars or my company's worth 1.5 million dollars?
And you do it based on these elements
And when the investor says well, why do you say your company's worth two million dollars?
You say well, these are the elements I have in my company that I think makes it worth money today
Even though I don't have a paying customer
The other way you can do it is by breaking down the risks of your company, right
You can say I can assign a value based on the
What kind of competitive risk I have what kind of technology risk?
What's the risk that sales and marketing will go wrong?
So that's a risk factor summation method that really works the same way where you give yourself scores
Based on your review of the risks that are inherent in your business
So how does the math work?
Let's say you're going out to raise a $2 million round on a pre-money valuation of your company
of $4 million.
So you did the analysis we just talked about on the last screen, where you said, my company
is today valued at $4 million.
I'm going to go raise $2 million from outside investors.
And that means my company is going to be worth $6 million at the end.
I started at $4 million, I took in new money of $2 million, I ended up with $6 million.
So if you then do the math on that and say, I took in $2 million of outside money, and
now my company is worth $6 million, I've given away 33% equity of my company.
So these outside investors who gave me the $2 million now own 33% of my company.
So you want to keep it pretty simple.
As you're talking to investors, you have to be able to explain this math.
It's really critical that you can speak intelligently and in detail about how you valued your company
and how much equity you're willing to give away.
Before you ever take a dime of outside money, you as the founder own 100% of your company.
The minute you start to take on outside investors, you're diluting the equity of your ownership
in the company.
So in a typical round, the seed round, you typically are giving away somewhere around
25% of your company.
By the time you get to the Series A, you as the owner may only still have 56% of your
company left.
That's just averages of how it works.
You might do a better job of negotiating deal terms to where you don't give up so much equity.
But I wanted to point out to you that companies that make it the whole way to IPO, by the
time they've raised all this outside money and given away equity, the median amount of
equity ownership that that founder still has is 11%.
Now I will say that you might say, oh, only 11%.
That doesn't sound great.
But by the time you IPO, your company is usually worth hundreds of millions of dollars.
And having 11% ownership in that company is still really good.
So think about it that way.
You need outside money to help your company get bigger and bigger.
So you might have a smaller piece of a much bigger pie, right?
So don't be afraid to raise outside money when it makes sense for you.
And when you're willing to give away that equity, dilute your ownership, but know, hey,
an average of 11% of a, you know, $100 million company is a lot more than owning 100% of
a $2 million company.
So how do you find the right investor?
Well, it starts with doing your homework and looking at who else these investors have invested
in.
If you go to the Jump Fund website, you're going to see all of the companies we've invested
in.
The same if you go to the Fearless Fund website, we put our investments out there.
We're very proud of the portfolio companies that we put money in, and that'll help you
see what industries we target, what geographic boundaries we look at, what stage of companies,
how much money have we invested.
So look at those other companies in which we've invested and do your homework to say,
is this company a good fit for me?
So for example, if you're creating a consumer products brand, a clothing brand, for example,
you don't want to target investors who only invest in high-tech.
They're not going to take the meeting, and they're not going to be interested in investing,
but you could go look at other clothing industry companies and say, who invested in them?
And how might I approach them for investment?
So make sure that you're aligned on what that company is looking for, that investor group
is looking for, and how you might fit that.
Really important to do your homework.
So when you're talking to investors, what do we most typically care about?
The quality, passion, commitment, and integrity of the founders.
That's really important to us.
And a lot of times when we're on the fence and we say, am I going to invest in this company?
Am I not going to invest in the company?
You as the founder are the tipping point for us.
We believe in you.
We know that you know what you're talking about.
We believe that you're the person that can build this company.
So don't ever underestimate you.
and the impact you have on that funding decision.
The market opportunity.
We want it to be a big market opportunity because we know that you may only get a very
small part of that market.
So if you come to us and the total addressable market for your company is maybe about five
million dollars, we may say that's too small because if you only got two or three percent
of the market share, that's not a very big company.
But if you come to us and say the total addressable market here is five hundred million dollars
and if I could just get three or four percent, that's a very big company that I'm going to
build.
So think about that market opportunity.
We want to know that you have a clearly thought out business plan and that you can show us
evidence of early traction towards that plan.
Show us how you know people will buy whatever you're trying to sell.
We want to know that you have interesting technology or intellectual property that makes
your company different or unique.
We want to be sure that we're being realistic about what's the value of the company and
what are the terms on which we're going to make this investment.
And then we want to be sure we believe and you believe that we could raise additional
round of financing as you continue to grow and scale your company.
So these are the top six things I would say most investors really care about when they're
trying to decide whether or not to invest.
So what does this process look like?
You know, first it's about getting investors and gaining commitment.
Then it's about creating that term sheet that we talked about and getting through due diligence.
Then we need to produce all of the deal documents and finally sign them all and receive the
money.
So this can take some time.
It can take months.
So make sure that you don't wait until you're out of money to start this process.
You should always be networking, meeting potential investors, making sure people know about your
company, building those relationships, talking about terms, what it could be, because this
will take some time and there's a lot of work that could potentially go into it.
So if you are looking to get ready to raise money, what would you need to do that?
The first is an executive summary, and this should be no more than one or two pages that
explains your business idea and what it is.
We can always ask you for more information later, but we just want that quick executive
summary that has some basic financial information.
You're ready to back that up with what we would consider to be a 10-page slide deck.
That if I say, if I look at your executive summary and I'm intrigued and I want to potentially
invest, I'm going to say, tell me more.
And then that's when you'll send me the 10-page pitch deck.
You should have that summary of your market, your total opportunity market, your total
addressable market.
You want to have a detailed financial model that shows how you're going to make money.
How does this company work?
You want that 30-second elevator pitch, so that when people say, what do you do?
Tell me about your company, you've got that 30 seconds ready to go that's very succinct
and crisp, and everybody could walk away understanding exactly what your company is.
And then you want that introductory email ready to go.
A number of times entrepreneurs will come to me and say, I see you're connected to Susie
Smith and I want to ask Susie Smith to make an investment, would you make an introduction
for me?
And I'm going to say, absolutely, send me the email you want me to send to Susie.
I'm not going to write it, you're going to write it, and then I'm going to take it and
probably put a little greeting on it and add my own little color and send it.
Have that introductory email ready to go in your draft, so that as soon as I say, happy
to introduce you to Susie, send me the write-up.
So I mentioned the pitch deck.
Here are the 10 questions, this is why I say it's 10 slides.
Each of these questions should be answered on a slide.
What problem are you solving?
What is your solution to the problem?
Who has this problem?
Who are your competitors and why is your solution better?
And I will give you one little caveat here.
A lot of times I'll ask people and say, who's your competitor?
And they might say, we don't have any competitors.
And that's actually a red flag for me as an investor, because I'll probably think one
of two things if you say to me, I don't have any competitors.
First I might say to myself, well, if there's no competitors and there aren't others trying
to go after this money.
market isn't really a big enough market, isn't an important enough market, or I might say
you don't really understand your market and you don't know who your competitors are.
So this is a common thing I see first-time founders do is when I say who are your competitors,
they say I don't have any.
So I just want to encourage you to really think hard about this one.
You can build a slide that talks about your competitors, but also talks about why you're
better and that's the more advantageous way for you to talk about your competitive landscape.
How are you going to attract customers and how much is it going to cost for you to attract
those customers?
What are your sources of revenue and your expense assumptions?
Who's on your team and why?
How much money do you need and why?
And how do you intend to give your investors a return on their investment?
So that's the basics of the presentation.
I'm right on track at 745 here Eastern here in the U.S.
So what I'd love to do, Siobhan, is open it up for questions and see what else I might
go into more detail on.
All right.
So we're going to queue up the questions.
So hopefully you've been able to share some of your thoughts with Siobhan.
And we'll get those questions queued up in just a minute and get them answered for you.
All right.
Here's the first one.
Every time you raise another round, do you have to ask your previous investors?
It depends.
It depends on what the terms were in that first round.
A lot of times we will ask for what's called pro rata rights.
And that means if I invest in your first round and then you raise another round, I want the
ability to put more money in as well so that my ownership doesn't get diluted as one of
your initial investors.
So in the term sheet, you will identify whether or not your first set of investors get pro
rata rights and how it works going on and on.
As an investor, I have a right, but I do not have an obligation.
So I want to preserve my right to put in more money if I want, but I also want to be able
to say, no, that's it, that was my investment.
The second part of this question was I always thought investors would want monthly payments.
Is that not true?
It depends on the type of investor that you seek.
Most investors wait until you have an exit because they want their money back big bang.
They want multiples.
If they gave you $50,000, they're looking for you to give a 5X return.
You might have some investors who made a loan to you and they would be looking for
monthly payments, but that's less common because they know that as a startup, cash is so important
to you and if you're having to pay me back monthly, that's money you're not reinvesting
in the business.
So I would be very concerned about anybody who's expecting you to make monthly payments
back to them as opposed to waiting for you to be successful when you can pay them back
at once.
So another question, how often do VC funds raise money for the fund?
The way it typically works, and we would raise, usually it takes us about maybe one to two
years to raise our fund, okay?
And then we spend the next couple of years investing that fund, and then after that,
we make follow-on investments.
So for example, with the Jump Fund, we raised two different funds.
We raised our first fund in 2013 and we finished, so we started in 2013 and we finished raising
the fund in 2014.
We were investing as we were raising money, and then we started the second fund because
we had fully invested all of the first fund in 2016, and we wrapped up the raise on that
one in 2018.
It took us about two years because we raised a bigger fund.
So each fund decides what their own timeline is, and the way it works is we do rolling
closes of the money our investors give us so that we have money to start investing right
away.
We don't want to wait until we fully raise the fund to put money out there into these
new startups.
We will start investing in parallel.
So money comes in the door from the committed investors.
We then turn around and invest it in startups, more money is coming in, so you have this
initial funding.
raising period and then you have an investment period. Do you
still have to consider valuation with a safe? No, that's the
beauty of the safe. It allows you to punt till further down
the road as to what the valuation is. You may be asked
to put a cap on what the future valuation could be. But you
should not be pressured to value your company. When you're doing
a safe, the understanding there should be that your company is
too early to really know what the value is and you might be
selling your value short if you put a value on your company too
soon. You do want to give yourself time to figure out what
the real value is. Because if you think about the math we did
earlier, your starting valuation plus the amount of money you
raised determines your post money valuation and how much of
your equity you just gave up. So you want that valuation to be
as high as possible and you want to give yourself plenty of time
to get that right. If you never distribute equity, what happens
with the safe? There's typically some language in these
agreements that talk about what happens if you sell your company
or you go out of business before you distribute equity. So this
happened to us with one of our investments where we put $100,000
in a company in a convertible note or safe. The company then
turned around and sold themselves before we ever got
equity. So all we had was the note where they had to pay us
back the money that we had originally put in their company
plus the interest rate and a preferred rate of return. But we
never had equity in the company. In the terms, it said, if you
exit this company before we get our equity, here's what happens
to our money. So those kinds of conversations happen when you're
negotiating the terms of that safe. Because we all know it's
entirely possible you might raise money early on and then
end up selling your company or going out of business. Obviously,
if your company goes out of business, which we know is a
risk as an early stage company, then we wouldn't get our money
back, we would just lose it. So what kind of lawyer does this
stuff? That's a good question. There are law firms that
specialize in startup paperwork. But I would also encourage you to
look at resources like Y Combinator. Y Combinator has a
whole website out there for founders like you with templates
for all of these legal documents. I mean, this, this
stuff, it can be very boilerplate. So many companies
have raised money, they put these term sheets together, they
put these deal documents together, please go look at the
resources that are available to you before you spend a lot of
money to help to have lawyers draft the documents, when you
can save your money to have the lawyers review the documents,
right. So you can take a template that's already out there
for a safe, you could fill it out with your negotiations, and
then you can have the lawyers do the final review. That certainly
saves you some money, not to disparage any lawyers out there.
But excuse me, there's a number of, of good templates out there.
That's a great starting point for you. Um, the next question
is, what's the preferred legal structure to take on a VC?
Typically, venture capital money wants you to be some kind of
corporation, like an S corp, or a C corp, or a B corp. We do not
like investing in LLCs. Typically, if you're an LLC,
you're taking much earlier money from individual angels. But by
the time you get to us with venture capital, you've
converted into a full S corp, or B corp, or things like that. So
just be prepared for that. Because the different ways that
you structure your company will make a difference.
The next question is, can you put a term for how long you can
have they the investor can have equity, or is that a loan? Once
you give away equity in your company, unless you buy it back
unless you buy it back from them, it's their equity until
the company exits. So you can't put a term for how long somebody
owns equity, unless they agree to sell that equity back to you,
or sell that equity to another investor. The term limits on
loaning money, right. So So for example, if we did a convertible
note, we typically structure it for about 18 months, which says
I'm going to give you this money now on a convertible note, and
I'm expecting
You're going to convert it to equity in 18 months and that's the the term on the note the loan note
But that doesn't apply to equity. Um, and that's why I say be very very sure
You're ready to give away equity before you ever give away a dollar
Evaluations, yes evaluations can be based on theory and not fact
Um valuations can sometimes be an art and not a science
Especially if you don't have revenue if you're pre-revenue
We're going to have to look at these other factors to figure out what your company is worth
But once you have revenue, it becomes very formulaic
very data driven
If you have a technology company and that technology company has monthly recurring revenue or annual recurring revenue
The the valuation is typically some multiple of that revenue
But if you're pre-revenue
Then yes, it's a theory. We have a theory of what your company is worth and we will negotiate together to get to that answer
The next question is how do you figure out tam or total addressable market
the total addressable market
Is the market that you're targeting with the problem that your solution solves?
So, uh, for example if let's go back to the purse analogy if you're selling purses
And you're and the price point of your purse is going to be two hundred dollars
You would then figure out
Who are the potential buyers of my two hundred dollar purse?
We know it's not everybody because that's pricey for a purse. So it's probably people with some kind of level of disposable income
It's people who like to use purses
and
Where are you going to sell your purses? I'm only going to sell them in the us or i'm going to sell them worldwide
You answer those kinds of questions and then you do the math and you say
If there are a thousand potential buyers of my purse and my purse is two hundred dollars. Uh, um
A purse then that's my total addressable market or if I have ten thousand potential people who would buy my purse
Then that's my total addressable market. So that's how you do the math on that and you figure out what your total addressable market is
Um, what website is a good place to see where I can find investors for companies between the startup and the traction phase
A lot of times you're dealing with angel investors at that stage
And one of the best resources that I found for that is a is a website called the angel capital association
And they have a whole section there for entrepreneurs
Including a list of every angel investor group across the united states
They're sorted by state
And then there's hyperlinks out to the websites of those angel investing groups
So that you can do your homework and figure out what they invest in so i'm a big fan of angel capital association
And their website how it helps link you to angel investors
The next question is how do I figure out how much market share my competitors have
That's a little tricky because
It could be hard to figure that out
Especially if this information is not public because it's not a publicly traded competitor, right? So like with coca-cola
Everybody knows what their market share is. Everybody knows what their revenue is because they're public
But with private companies, it's it's a lot harder and you really just have to ask around you have to do some guesstimation
You have to you know, look at their websites see if they have case studies for the number of clients
They have or who those clients might be
um
You know, it's going to be it's probably going to be a guess right?
And uh, and it's typically going to be uh available to you through a little bit of internet sleuthing if you will, right?
What's out there? Um, what could you find in the market?
All right, well, I know we've just got a couple of minutes left shaman
Do we have time for one more question or do you think we should?
Wrap it up
Maybe talk about homework
Oh last one, okay one more question
As a latinx woman-owned production company based in los angeles my business is per project narratives unscripted live events
I have recurring clients and a global network of creatives who can support each project's needs
Our films have been recognized in several academy award qualifying festivals such as tribeca urban world
pan african american
film, festival, and others. We have Academy Award winners to emerging BIPOC
artists collaborating together on JEDI justice, equity, diversity, and inclusion storytelling
in front of and behind the cameras. The last project includes a PBS American Masters documentary
about Elsa, and I'm not going to try to pronounce Elsa's last name, I won't do it any justice,
DeafBlind Hugo and Aurora Award winner. We have the talent, we just need the resources.
What's the best strategy you would recommend for making a valuation of the company?
Well, I certainly would say take a look, you mentioned that you've had recognized films
that are winning awards, that's a great sign of traction, it means you're on to something
with what you're building, so you could look to put a value on that. Your management team,
the people that you have running this company, and your background in the film industry,
and your ability to take this company bigger. So, take a look, when we send out the deck,
take a look at the different categories I've given you, because I think they will be super
helpful for you in figuring out what are some of those intangibles that you can put together
to come up with the value of the company. With that, I want to just talk one second
about homework. We have a coaching session, I think, coming up on Friday, and, you know,
one of the things that I would encourage you to do is take a look at that slide, I'm going to send
this deck out to Siobhan so that you all can get it, and there was that slide that said what are
the things you need to get ready to raise money, and what I'd like to ask you to do is take a look
at that slide and think about where you might not have something ready yet that's on my list,
and work at putting at least a draft of something together that we can look at in our coaching
session. I'd be happy to take a look at what you're putting together, let you know if you're
on the right track, give you some advice for how to finish it up. So, please take a look at that
slide once you get the deck, and then we'll go from there. And thanks again for the opportunity
tonight to present. I really appreciate it, and over to you, Siobhan. Yes, thank you so much, Kim.
As always, you bring such a wealth of information, and I knew that it was going to be a hit. So many
questions came up. So, just a few things that I want to reiterate for you all. One, make sure
that you go ahead and that you log your attendance. It will be open until 8 10. Also, the resources
for Y Combinator and Angel Investor, I put it in the Mighty Network platform group. So,
you can go ahead and go there, and it'll be in the group for you to further expound on.
The slideshow, as always, will be available within 24 hours. So, it'll be under the Masterclass tab,
and the coaching sessions, as you know, they'll be split into two groups. They will open up
tomorrow. You will get an email letting you know when it opens up. Again,
everything will be explained in there. The coaching sessions will be on Zoom. So, you will
get the link, and you will come in Zoom, and then you'll be put in breakout sessions with either
Shelly or Kim, depending on which one you sign up for. Make sure that you bring your homework,
whether you have, if you're in Shelly's, bring the homework that she assigned. If you're in with
Kim, bring the homework that she assigned. And so, I hope that you all have enjoyed this. If you have
any questions, please feel free to email me at GBR at GBR. What is the email? GBR at fearless.fund.
With any of your questions, I typically try to respond as quickly as possible. You can also
message me in the Mighty Network. I know some of you have had issues getting into the system,
and myself and the production team, and they've been amazing with getting you all back in.
I just want to reiterate that the link is the same link each week with your login credentials,
but if you are having issues, please try the link before class on Tuesday, so we can make sure we
troubleshoot any of those things. I'm going to put the link in the Mighty Network platform. I want
you all to save it and bookmark it. Write down your login credentials, so I can make sure that you all
get into the class. Yes, thank you for putting that in, Isis. GBR at fearless.fund. Any questions that
you may have, I also want to let you know that I will be starting this week with my individual
emails and calls just to chat with you, check in with you,
making sure that you get any questions, connecting you with any resources that you may have.
need. So until the coaching call, I will see you all on Friday.