Live blog of Seminar 7: All About Funding (Friends, family, angels, VCs)

Tanner begins by explaining  the Venture Capital Corporation Program (VCC). This provincially funded program is a must-know for startups raising capital. There is a 30 percent refundable tax credit with cash back to investors. The definition of eligible small businesses is loose, meaning almost anyone can apply. The cost from an administrative perspective are negligible. If your business fails, you won’t owe anything over this to the government. One caveat is that investors will only get a tax credit if they file their taxes within BC. It’s on a first come, first serve basis, so get going!

Check it out here.

Financing strategy

The three pillars of a company: S&M, R&D, and financing.

Getting capital from investors takes a lot of time and energy. It in itself is a full-time job. One common problem is companies not leaving a cushion financially and running out of money before raising new money. It takes 4 to 9 months to raise a round of capital. If you wait until you’re out of money and you can’t get it right away you may be out of options. Even an angel investor your familiar with may not cut a check for at least three months, and angels you’ve never met will take 1 to 3 years because they look at building relationships. And institutions will take even longer still.

If you’ve never raised capital before, don’t expect to be good at it. It is a skill that is learned through experience. It doesn’t come naturally to most. Seek out somebody with this experience and leverage their expertise. You may need to hire someone. if so, thoroughly check their references and backgrounds. There are very good advisors and very bad ones. If they ask for a fee, it’s not a red flag—expect 4 to 5 percent commission. A good advisor is always worth their fee.

Where to get money?

• Friends and family.
• Government.
• Angels.
• Employees.
• Banks and lenders.
• Venture capital.

Angels, VCs, Govnt, and Banks

Angels and VCs invest in early stages while banks invest in later stages. Angels and banks close faster than VCs. Banks don’t offer follow-on capital; angels sometimes do; VCs often do. Banks are always passive, while angels and VCs may be passive or active. Banks offer a diversified sector focus, angels are usually focused, and VCs may be either diversified or focused. A bank’s decision maker is its credit manager, an angel’s is itself, and a VC’s is partners or investment committee.

In the end, avoid banks to raise capital for your startup at any stage. Stick to angels and/or venture capitalists.

Government has lots of programs: SRED, IRAP/NRC, funds like SDTC, innovation grants, the aforementioned VCC program, EDC, C4G. One great thing about money from the government is that it is non-dilutive; that is, it won’t dilute you or your investors’ ownership stakes in the company.

Banks boast an operating history, personal guarantees, asset pledges, etc. Tanner glosses over banks because he advises against them.

Angels have knowledge of past exits, experience as CEOs, CTOs, COOs, etc., active mentorship available. Relationships are important to them and they’re their own boss (which can be a good thing for speed of closing but a bad thing because follow-up capital isn’t always around). It’s important to note that when dealing with angels who want to be active, they are after more than just ROI. They tend to care more about their participating in the company and are fulfilled by taking on such roles. They’re still after a piece of the action.

Venture capitalists rely on ROI. They can be active or passive, they do have investors to answer to, but usually have experience and knowledge to help you.

These different investor types have different liquidity horizons and fiduciary responsibility. Banks have liquidity horizons of 1-3 yrs, angels 5-7 years, and VCs 7 – 10 years. Banks have corporate responsibility, angels have only their personal responsibility, and VCs have responsibilities to their investors.

Sequoia invested in 10 companies (YouTube and 9 similar ones). 9 out of 10 returned nothing but with YouTube returning 1,000% on its own, the IRR of the portfolio was still a solid 150%. This is how the game is played.

Who do you call and how?

The right people. Note the stage your startup is in. What sectors they prefer. Investors that get your type of company and have done similar deals.

The least effective ways to contact potential investors is through spam or a cold email or call. In the middle is LinkedIn. Effective methods are through mutual contacts and direct introductions. Contact and submit an executive summary but offer coffee. Follow up with an email or phone call if you don’t get that meeting right away. Your goal is to get a coffee meeting and then a presentation. When having coffee, let the investor talk half the time, even though they’re after info from you. Leverage your contacts to understand where you are in the queue.

Talk about your business. Don’t go in-depth on technology. Ask the investor about their portfolio. Follow up with a thank you note the next day or later that week. In your follow up, answer all questions you couldn’t earlier and ask your own questions too. Suggested another meeting with more focus on moving forward.

Presenting your startup

Your presentation should be one hour, 12 slides maximum. Don’t say any dumb stuff, like the one guy who said his own business was “too risky to invest in,” or founders arguing over their business plan in front of the VC. Apply the KISS adage: keep it simple stupid.

Sell your business, not the technology. Know your audience; background check them online and don’t ask for their bio in person. Research them beforehand or they wil be offended. Don’t contradict yourself. Do a “throw away” pitch with an audience of family and friends or team members who make note of your voice, body language, presentation flow, etc. Adapt your presentation to connect with your audience.

Due diligence

Be prepared wit a DD binder ahead of time. Know where you are in the DD process at all times. Do not take a long time to reply to queries. Typical DD items include management references and CVs, strategy review, technical review, market analysis, etc.

What investors are looking for (and what they aren’t)

The ideal company for an investor is one with a team with applicable experience, and addressable large and growing market, competitive advantages such as a unique business model, a clear and scalable business model, market validation, and a credible vision of success. Remember: investors are in the business of saying so. You need to take away their reasons.

A lot of investors are now seeking smaller dollar investments and smaller dollar exits at a higher volume.

There are lots of things investors don’t want to invest in. They’re very picky. If you can’t get funding, it can be for a number of reasons:

• Your business is a bad idea. It happens.
• You don’t have a team. You need a good group of people who can adapt and innovate.
• You are targeting the wrong investor.
• Your timing is wrong. The tech space is fluky and very fast-paced.
• Your terms are not market.

Random tidbits

When you want an investor on your board of directors as an advisor, set up a simple contractor. You want X hours of their time per month in exchange for an options package. Advisors who offer value but are not integral to your company may own 0.25 to 1.5 percent in exchange for their ongoing services.

An investor will very rarely sign a non-disclosure agreement. Because they don’t want the liability as you could later sue them if they invest in a parallel or adjacent type startup. The solution? Don’t divulge the key ingredient. Investors don’t need to know it in the early stage. Keep your secrets to yourself until you are comfortable with the investor and deeper into the process.

When using a lawyer, get the absolute best one for capital raising and deal closing. If they cost $400 an hour and do their job, it’s worth every penny. Look for an experienced securities lawyer specializing in startup deals.

The U.S. trends can be indicative of what will occur in Canada in 1 to 2 years.

Synonyms for “No” from an investor

• Needs a new CEO.
• No means no.
• Maybe.
• Later.
• It’s too early.
• We want to follow a lead.
• We have no money right now.
• Doesn’t fit our mandate.

Other stuff

When looking for an investor, pick one you’ll want to spend time with in good times and bad. They should have industry experience or relevant deal experience or both, as well as experienced management and corporate governance. Be wary of investor who toss around a bunch of lingo but don’t actually know anything.

You pay not only your own lawyer fees but also your investors’ lawyer fees.

Lawyers are invaluable. There are many complex elements of managing a startup, such as anti-dilution clauses, preferred shares, dividends, board seats, liquidity preference, etc. This stuff can dramatically affect your role and stake in the business and how much you take home when you exit.

Strive for a structure that aligns investors with management; different structures create different motivations. Don’t say no to a structure based on principle—crunch the math and base it on that.

If you are raising money from investors, prepare to give up control. Period.

Investors have more experience than management.

Startups are very difficult to value rationally. Not based on previous investments or discounted cash flowers. It’s based on the ROI of the investor and incentive for management and founders. Be realsitic about it.

If your raise money from friends and families, let them know upfront the high risks.

Top 10 lies of entrepreneurs:

1. our projections are conservative.
2. gartner says our market will be $50 billion by 2012
3. verizon will sign our contract next week.
4. no one else is doing what we’re doing.
5. several investors are in due diligence.
6. cisco is too slow to be a threat.
7. beta sites will pay to test our software.
8. patents make our business defensible.
9. all we have to do is get 1% of the market

(from Guy Kawasaki)

Top 10 lies of Venture Capitalists

1. we can make a quick decision
2. i liked your company but my patrners didn’t.
3. if you get a lead we’ll follow.
4. show us traction and we’ll invest.
5. we have lots of dry powder.
6. we’re investing in your team.
7. we saw this coming so we didn’t invest.
8. this is a vanilla term sheet.
9. we can open doors for you at major companies.
10. we like early stage investing.