Founders Introduction to Venture Capital Fundraising Part 1 | John Colley | Skillshare

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Founders Introduction to Venture Capital Fundraising Part 1

teacher avatar John Colley, Digital Entrepreneurship

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Taught by industry leaders & working professionals
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Lessons in This Class

16 Lessons (39m)
    • 1. Entrepreneurs Introduction to Venture Capital PROMO

    • 2. Entrepreneurs Introduction to Venture Capital Finance Introduction Lecture

    • 3. Is Venture Capital Right for Your Business Section Intro

    • 4. 1 Look before you leap setting the agenda

    • 5. 2 Key Questions for you

    • 6. 3 Lets Take a Look at Your Proposed Business

    • 7. What are your Equity and Non Equity Financing Options Section Intro

    • 8. 4 What are your Financing Options?

    • 9. 5 Equity Finance Options

    • 10. The Pros and Cons of Venture Capital Investment Section Intro

    • 11. 6 What are the Benefits of a Partnership with a Venture Capitalist

    • 12. 7 When Not To Raise Money From a VC

    • 13. 8 So What Factors Should Founders Be Considering?

    • 14. Investment Stages Explained Section Intro

    • 15. 9 Investment Stages Explained

    • 16. 10 PreIPO Buyout Buy and Build Trade Sale Secondary Buyouts

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About This Class


This is a Part 1 of a 2 Part Course

Are you new to the complex and confusing world of venture capital finance? 

If the answer is YES, then congratulations you are in the right place. 

My name is John Colley and during over 30 years of investment banking, I have worked with hundreds of startups, entrepreneurs, founders and venture capital firms.   My goal here is to share some of that experience with you to enable you to understand how Venture Capital finance works…

This course is designed with you, the Founder Entrepreneur, firmly in mind!

Lets start by asking some key questions…

  • Is your business right for Venture Capital finance?
  • What are your equity and non equity financing options?
  • What are the Pros and Cons of Venture Capital finance?
  • Do you understand the Stages of Investment?
  • How should you attract and engage investors?
  • What should you know about deal structures and the investment process?
  • What are the key Deal Terms you should be aware of?
  • Summary - how to to choose the right Venture Capitalist for your business?

If you have any questions or issues, you can reach out to me here. I do my best to respond to student questions promptly.

Enroll Today!

See you inside the Course!

Best regards


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1. Entrepreneurs Introduction to Venture Capital PROMO: Welcome to this entrepreneurs introduction to venture Capital. Let me ask you a question. Are you knew toothy, complex and confusing world or venture capital finance? Well, if you are, then congratulations. Because you're absolutely in the right place. My name is John Colley, and during 30 years off investment banking experience, I've worked with literally hundreds of startups, entrepreneurs, founders and venture capital firms. My goal in this is to share with you some off that extensive experience to help you to understand how venture capital finance works. This course is designed firmly with you, the founder on the entrepreneur in mind. This is absolutely for you and focus on helping you to understand this complex business. So let's start by asking some of the key questions. And this is what I'm going to cover in the course to help you to get to grips with venture capital finance. The first key question is, Is your business right? Prevention capital finance? Because if it's not, you could be completely wasting your time. What are your equity and non equity financing options? Make sure you've looked at the full range of options before you rush down one particular route because you may well find that there is some much more interesting and rewarding options for you to explore, including maybe even not raising finance at all. What are the pros and cons of venture capital finance? I want to get a balance. Yo, On the one hand, I want to tell you about all the other things other than money they can provide you with. But on the other hand, I want you to expert to be able to understand. I want to explain to you what it is they will expect from you on some of the drawbacks off having eventual capital investor in your business. The next question to address is, Do you understand the stages of investment now? This is important because you need to match the sort of investment you're looking for with the stage of your own business. So if you're a pre revenue very early stage, start up, there's no good going chasing after institutional venture capital investors. You need to look for somebody who's prepared to invest in a much earlier stage off business . Now, the next thing I then go on to talk about is how you should go about attracting and engaging with investors now, the first piece of advice on given when somebody says, When should I start looking for an investor? I say about 12 months ago, because you really should be trying to get investors on board before you need them. The old adage. When you asked for money, you get advice when you asked for advice. You get money is so true. So you do need to understand how you're going to go about doing that effectively. Then we'll look at deal structures and in the investment process, because I want again you to have some concept of what you're going into in terms of how this whole process is run and how it's organized on, then leading on from that, I'll talk to you about key deal terms because these are critical. Now. I can't talking through line by line, a deal sheet or term sheet or a new investment agreement that's really for your lawyers. But what you do need to understand is what the key points are going to be in these documents, particularly the term sheet, because the term sheet then gets replicated into the investment agreement so that you understand these key terms. They don't come as a surprise to you. And I want you to understand why there they're what they're trying to achieve and why they are important. So at the end of all this, we summarize by trying to help you to choose the right in venture capitalist or, indeed, angel for your business. So we draw all the strands together and try to make it easy for you to understand. I think I sincerely hope you're going to find this all extremely enlightening. So enjoy the course. Definitely. Sign up today and I'll see you inside the course and look forward. Toa working through this stuff with you so that you'll come out of it with a much clearer idea at the end off how the whole venture capital process works. Entrepreneurs introduction to venture capital It says what it does on the tin 2. Entrepreneurs Introduction to Venture Capital Finance Introduction Lecture: introduction. If you are new to the world of venture capitalism, then it can appear to be a very dense jungle inhabited by predatory animals. Actually, that's not such an inaccurate metaphor. This course is designed to try to shed some light on this apparently murky world. The better you understand how it works, the less likely you are to become lunch. I first worked with venture capital firms back in 1992. Since then, I have worked on dozens, if not hundreds of deals I've honestly lost. Count this course on my other venture capital courses are designed to share some of my experience with you. I am not advising you in the formal sense, nor am I providing financial advice. However, I have no axe to grind. My objective is to clarify and explain, and I hope you will find this helpful in this course. I want to share some important insights into the world of venture capital and angel investment to help you consider whether this is something you should pursue for your business. You should start by questioning whether external finance is right for your business. And if it is, where is the best place for you to find it. I ask you to question your objectives and motivations for your business. Your commitment is a big part of persuading investors to back you, and without a long term commitment to growing a successful and profitable enterprise, you may not be fungible at all. You also need to focus on the key issues in your business that venture capitalists will hone in on. In a sense, I want you to start thinking like a V C. Look at your business from their perspective and identify the unique aspects which will motivate them to want to invest in you. I want you to fully consider all your funding options, including bootstrapping, before just assuming that angel or venture capital investment is your next step. This process is a long term game with several rounds of funding involved. You need a game plan before you start to ensure that not only will you have the best chance of success, but that you will optimize if not maximize your outcomes on those of your fellow founder shareholders. With this in mind, I will run you through a range of equity and non equity funding options. I also want you to look at the strategic benefits of a venture capital partner, which go beyond money. I share some of these with you and want to encourage you to ask probing questions when you meet prospect of investors. Remember, this is a real partnership. You are setting up not just a financial investment. Venture capitalists and angels will want to sit on your board and get hands on with your business. This is your chance to make sure that they make a positive contribution without being overly negative. I do want to address the issues, which either will help you to decide not to seek external capital or which would disqualify your business from consideration in the first place. If you are aware of these factors and issues, this might save you a lot of time and money. The fund raising process is very time consuming, with no guarantee of success. Next, I want to walk you through the investment stages from seed to sale so that you can understand where your business is currently positioned. Each of these stages have criteria that need to be matched, which is why we then go on to discuss how you can attract on engage with investors. The main advice here is start yesterday. Build relationships with the investment community before you need them. Get them excited about your business before you ask for money. By doing this, you stand your best chance of getting their attention when you need it. I suggested several strategies for doing this. I explain how the investors make their returns. Essentially, they like to invest low and sell high, but they really only make money on successful exits. Everything gets geared up towards that goal I share with you the three key teas that investors look for and how you can identify these in your own business. This leads on to an explanation of how you can screen and identify suitable investors on. Then what you can do to get on the radio. I. Then we'll take you through an outline of the deal process so that you have some idea of what to expect, the documents you will need and how long it will take. I explained the three types of investments that are open to your investors and which suit which investors importantly, I next will turn to the term sheet deal terms to briefly explain what you can expect to see in a term sheet and why each term is there. You really need toe work through any term sheet very closely with your advisors. In the final section, we returned to how you can identify the right investor for your business. I introduce you to the entrepreneurs equation to help you think strategically about maximizing your future returns and then to the four key factors to evaluate in selecting your preferred investor. I hope you find this content helpful, and it starts to get you thinking objectively about the funding needs of your business and how these might be met by Angel and venture capital investors. 3. Is Venture Capital Right for Your Business Section Intro: is venture capital, right for your business before assuming that your business should raise venture capital finance, I want to invite you to critically evaluate whether this really is the case. Raising capital from bases is time consuming, complicated, expensive Andi. It involves a long term commitment, which you must be prepared to make. I want you to go into this whole project with your eyes open, which is why it's worth spending a bit of time evaluating whether the fit is right. So we're going to consider your financing options, whether you personally are a good fit for venture capitalists or an angel investor. And finally, whether your business is the right fit for these investors really important to get both of these carefully evaluated and for you to spend some time really convincing yourself that that is the case. So come on, let's dive in now and start asking some tough questions. 4. 1 Look before you leap setting the agenda: bringing external investors into a new business is a major step and not one that should be taken lightly. There are three main considerations for you to consider. What are your financing options? How should you attract and engage investors? And what should you know about deal structures on the investment process? We're going to consider all of these things during this course, But before we do this, let's take a closer look at you and your business plans. Are you ready for finance? Starting any business is a major commitment, and you should take stock before you start. Do you have the energy, passion and vision to see the project through? Do you have sufficient time to commit to ensure success? It's going to take you a lot longer than you currently think. Do you have the financial resources you need? Your need for finance will develop as your business grows, which you need to already be thinking about the key milestones you need to achieve and what it will cost to reach them. 5. 2 Key Questions for you: key questions for you. Before you start, ask yourself some key questions. Why are you doing this? To make money To finance a lifestyle To change the world. It's important that you have your core motivations clear in your own mind as you are going to have to motivate others. Andi. Convince investors off the strength of your own motivation. If your answer is either off the 1st 2 Think hard about whether seeking external finance is right for you. How long do you want to commit a month, a year or as long as it takes again. Your commitment has to be open ended Whatever timeframe you are currently planning on doublet immediately. If you're not in this until the project succeeds, why should your investors be Once their money is invested, they can only get it out on an exit or by selling to other investors. What level off financial risk are you prepared to take? This is a more difficult question to answer. I don't believe that founders should be highly indebted on have everything totally at risk . If you can't sleep at night, you will be no good to anyone in the daytime. Alternatively, if you don't have any skin in the game. Why should investors risk their money? Your financial investment should show a serious level of commitment and be enough to convince your investors that you are serious. If you lose this money, it needs to hurt you. What this means in actual dollars and cents is for you to determine. 6. 3 Lets Take a Look at Your Proposed Business: Let's take a look at your proposed business. You need to be really honest with yourself. Now do your customers really want or need your product or service? Do you have the competence to build the product, deliver the service and create a team who could do this with you? Can you sell your product or service? How competitive is your market niche and how would you differentiate yourself from your competitors? How big can your overall markets become? If you can answer these questions convincingly, then you may have the makings off a successful business. If you have any gaps in this simple analysis, go back and revise your assumptions and plans until dawn exists. Starting with holes in your plan is a certain recipe for failure. 7. What are your Equity and Non Equity Financing Options Section Intro: What are your equity and non equity financing options now, although your business maybe at an early stage pre revenue. Even this does not mean to say that you are without financing options, and many of those options don't involve venture capitalists or angels at all. You need to be aware off these options and consider all of them before you make the decision about which one to go for. And it's really worth spending time doing this. I particularly don't want you to just assume that your only options are angels or venture capitalists. The best option may actually be to avoid external funding altogether. So it's really worth spending time, as we're going to do now to consider what your options are before you actually make a decision about which route to go down. And that's why we're going to take a look at what your equity and non equity financing options are. 8. 4 What are your Financing Options?: What are your financing options? You have two main options. You can either go for non equity or equity finance If you opt for non equity finance. You are looking at either bootstrapping, which means self financing or business, or you're going to have to find bank stroke, debt finance. Let us be honest here unless you have some assets you are prepared to pledge against this finance, including your home, which I don't recommend. By the way, then banks stroke Debt finance is going to be nearly impossible to raise for a start up pre revenue company. In the real world, banks could be very difficult to deal with, particularly for new and innovative businesses. Thanks very conservative and tend only to lend to businesses which they can understand and who have a track record. If your finance requirements are very limited and you are in a developed sector or niche, some debt financing may be possible. This is seldom applicable to technology businesses. Bootstrapping, on the other hand, is tough but not impossible. You may be able to finance the first stage of your business from your own resources, which would be excellent. You may already have cash flow from your business with early customer wins for your first or prototype project. If that is the case, congratulations. This may also be the case if you have a service business from which you are developing a product, the service business cash flows can fund the project development in its early stages. Alternatively, you might find a prospective customer who is prepared to do a deal with you. They provide finance for you to develop your first product in return for long term access to the product and its future iterations on favorable terms. The customer's willingness to take this risk will depend on how desperate they are to find a solution to the problem you are solving the advantages of self financing. Are most self finance companies tend to spend their cash more effectively than externally finance companies? The reason for this is nearly obvious. It's their own money. Companies who have early stage customers are typically close to them and well understand the challenges and problems their customers face. This positions them in a great place to solve these problems and come up with great solutions. On the negative side, bootstrapped companies are almost by their nature cash constrained on their speed to market and growth can be restricted by this. If first start of advantage is going to be important in their niche, a self finance company may find that their competitors may raise finance and use this investment to take a lead in the market. 9. 5 Equity Finance Options: Equity finance options. If you opt for equity finance than you have five main options Angel Finance, crowdfunding, venture capital, private equity and public stock markets. There are good reasons to consider equity financing. Let's take a closer look at why this may make sense for your business. Firstly, there are some essential pre requisites which must apply. You must have a unique product or service, even maybe only a concept. This must be clearly differentiated from the existing competition, and you must be able to demonstrate your clear, unique selling points, otherwise known as U. S. Peas. Secondly, you must have a convincing and passionate founding team. Early investors are putting their money behind the team, particularly when the prototype is yet to be finished. Your team does not need to be complete. One or two vacancies are acceptable, but your key people must be in place. It always helps if you can demonstrate a track record of successful startup on business growth. Venture capitalists love backing serial entrepreneurs. If this is your first venture, can you persuade a serial entrepreneur to join your board even if it's only in an advisory capacity the size of the potential market is also critical. Investors always prefer to invest in companies addressing a large market opportunity. You need to be able to build the case for this market from the bottom up and not the top down. Arguing that because there are 100 million smartphone users in your niche means that a 1% market share will enable you to sell one million units of your product will not cut it. There are implications from these essential starting points. Firstly, you're unlikely to be in competition with several or many perspective, and established competitors never suggest toe any investor that your product or service is so unique that you have no competition. Secondly, this means that your speed to market is going to be critical. 10. The Pros and Cons of Venture Capital Investment Section Intro: Let's take a look now at the pros and cons or venture capital investment. You might be thinking that the relationship between an entrepreneur and venture capitalist is similar to that off the relationship between Little Red Riding Hood on the big bad wolf . Well, actually, it's not. But there are ups and downs, pros and cons to this relationship, and that's what we need to explore. It's not an entirely risk free scenario. It has to be admitted. You are taking on quite a lot of responsibility. And there's quite a lot of implications involved in taking venture capital investment on DWI. Need toe help you weigh up the benefits and the drawbacks of accepting this external finance, whether it's mangers or whether it's venture capitalists. I really want you to understand what they can bring to the table what venture capitalists particularly can bring to the table in addition to just money, and we're going to explore that. But at the same time, I want you to consider the scenarios when venture capital investment is not right for either you or for your business, and you need to look at that very carefully, and that's what we're going to explore in this section. The pros and cons off venture capital investment 11. 6 What are the Benefits of a Partnership with a Venture Capitalist: What are the benefits of a partnership with a venture capitalist? Let's take a short pause to discuss the potential benefits off partnering with a venture capital firm. Other than money, a good V C should be able to bring considerable additional skills to help your business based both on their internal team and their network of companies and advisers. Hiring every far screwing company needs to be able to find the best people for their vacancies on veces can help with this. There is also the additional attraction off the Equity bonus pool, which is nearly always created when a VC invests, a large proportion of which is reserved, unallocated to incentivize new hires, rapid product development. This requires experience and is as much about process and risk management as it is about the product itself. Not only is speed important, but avoiding novice mistakes can prevent founders wasting one of their most precious resources money partnerships within a VC network. There is also the opportunity to find other people and companies, sometimes other investing companies with whom beneficial and profitable partnerships can be formed. Infrastructure in early stages, access to some infrastructure E G computer servers, office space etcetera can be made available by investors. This can save money at a time when founders of focusing on product development, customer acquisitions and sales internationalization This can be a big and important step for a start up. Working with the V. C. Who has offices overseas or strong international connections can be a real help. Commercialisation creating a product and selling it are two different skills. The latter also includes selling at the right price. Often, founders are technically adept and commercially naive. On experienced, V C can help guide a founder to develop commercial skills and hire the right person to head up sales. While I don't want this to sound like an advertisement for veces, founders should remember that in most cases they will have to proactively demand some of these benefits on this support from their veces who can get very distracted with other deals and opportunities once the initial investment is made. On the other hand, founders do not need to worry that veces will not ask for their monthly management information packed promptly 12. 7 When Not To Raise Money From a VC: when not to raise money from a VC. This is an important topic for founders who may want to rush ahead and start trying to interest faeces in their businesses. From one perspective, they may be moving too early from another. That business may be unsuitable for VZ investment. One risk here is that the founder wastes a lot of time and money trying to raise capital when they should be focusing on their business. Capital raising is a very time consuming process, and it tends to involve most of the management team who are consequently distracted from their day jobs. Another risk is that actually the founder succeeds in raising capital. But for the wrong type of business at the end of the period of investment, the chances are that the business will not be a success on the opportunity of a successful exit will be missed. Such a business might be more suitable to a trade sale at an earlier stage. This would result in a smaller exit but enable the business to go forward under the ownership of a strategic partner who could continue the development off the company. The founder might lose the opportunity to run a perfectly successful lifestyle business, which would provide a good return to him and his team, even if the company does not turn into a unicorn defined as a company with a $1 billion valuation. In the worst case, the founder might be shackling themselves to a business and financial relationship with a VC partner for three years or more, which may seem like a form of purgatory. 13. 8 So What Factors Should Founders Be Considering?: So what factors should founders be considering? Let's take a look at some other factors, which would make a business unsuitable for venture capital. Investment application is a feature, not a product. This is a common mistake where the functionality off the product is insufficiently differentiated from its competition to be unique. The solutions to this are either to expand the scope of the project or to pivot market size is too small. V. C investors are typically looking for a 10 times return on investment. This sounds excessive until he realized that only two out of 10 investments are likely to achieve this and four are expected to fail altogether. Such is the risk profile off businesses at this stage. If your addressable market size is too small, your business will never be able to grow large enough to offer the potential for this level of return. Motivation is not financial. It's important that both founders and investors have an aligned set of objectives on the relationship will not work if the founder is trying to create a lifestyle business on the venture capitalists trying to grow a business that could be sold at a significant profit to their entry cost business is not scalable. This is a factor that is often overlooked. It's why veces like product businesses, particularly software businesses, and don't like service businesses as much. To grow a service business, you need to hire more people to grow a software business. You need to sell more copies of the software, the opportunity cost of which is zero. This makes software business is much easier to grow. Company is pre revenue too early for V C investment. There is little appetite in the current market from venture capitalists for pre revenue investments. There are micro BC's who are beginning to address this market on very early stage specialists. But generally speaking, a business needs to prove that it has a working product for which there is a real customer demand, and this is proven when there have been several successful sales. 14. Investment Stages Explained Section Intro: I want to spend a little bit of time with you now and go through the different stages of investment, which is why this section is called investment Stages explained. The type and amount of investment you can raise is to a certain extent dictated by the stage of development of your business. So you need to understand these investment stages so that you can fit your business to the investment criteria dictated by stage off the potential investors. It's important that you're really clear about what these investments stages are because it means you can position yourself correctly for the right investors, which will greatly increase the chances you have or actually getting successful investment . I'm also going to spend a little bit of time with you taking you through some of the later stages the post venture capital stages of investment explaining how that landscape works, which will also give you some idea about some of your exit scenarios. So we're going to spend a little time looking at these investment stages, but it's a really important step. Two awards, making sure you know how to position your business for the right investor 15. 9 Investment Stages Explained: investment stages explained. It is not always clear what stage a business is at or which investors should be targeted. This lecture will explain these stages and how they relate to the money raised the sources of capital on the investment size seed. This is the earliest stage of investment, the investment sizes normally below £1 million or $1 million. The main source of funds are almost everything but venture capital University in government grants, friends and family angel investors increasingly specialised microbe venture capital funds are moving into this space, but only on a highly selective basis. At this stage, the company is focusing on creating its product and finding its initial customers. It is, more often than not, pre revenue. Early stage Siri's a. Once a business, has some traction with its customers. It's actually selling products and services to them. Revenues start to flow. The company is still going to be pre forfeit and cash flow negative. This means that to scale the business and grow further, funding is required at this stage. The capital raised is normally in the range one million to £20 million depending on the needs of the business. This is Siri's A. The first institutional investor round on the normal investors are venture capital. It is possible that some larger scale angel investors may also be prepared to invest in this round. Furthermore, it is not unusual for existing investors to follow their money and participate in the round later stages. Each successive funding round takes the next letter of the alphabet. Siri's be Serie C, etcetera. The size of these rounds are in the range five million to £20 million but they can be larger. This funding is focused on growth on the move towards profitability, although often fast growth comes at the expense of profits as marketing expenditures outstrips the ability off sales to fund them. These rounds are the centre ground for venture capital. 16. 10 PreIPO Buyout Buy and Build Trade Sale Secondary Buyouts: pre i p o by out by him Build trade sale. Secondary buyouts As the businesses achieve scale and profitability, they start to seek exits. This is the opportunity for early investors to sell on Realize their returns. Not every exit is achieved through a stock exchange listing on AIPO. There are opportunities for specialist funds to invest short term funds pre i p o. If the company needs an extra injection of finance shortly before listing on a stock exchange, other funds may have already invested in a similar business and made by the company toe add to their invest e business. This is known as buy and build. The original early investors may sell the company to another competitors. Er, who funds the deal from their own resources. Without any assistance from external investors or venture capitalists, this would be a trade sale. Another opportunity for an exit comes from specialist funds who focus on buying out existing venture capital investors in order to take the company on to the next stage of its development. These are known a secondary buyouts. Beyond this, venture capitalists tend to fade from the scene on larger scale deals are done by private equity firms. This is where the boundary lives between venture capital and private equity. Some of the transactions discussed above by and build secondary buyouts would more typically involve private equity rather than venture capital funds.