Raising Money for Your Start-Up | Scott Hartley | Skillshare

Raising Money for Your Start-Up

Scott Hartley, Venture Capitalist & Author

Raising Money for Your Start-Up

Scott Hartley, Venture Capitalist & Author

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8 Lessons (1h 2m)
    • 1. Trailer

      0:48
    • 2. Intro & The Funding Landscape

      7:15
    • 3. Determining your Capital Needs

      8:44
    • 4. How does an Investor Think?

      10:24
    • 5. Building your Pitch Deck

      7:23
    • 6. Thinking about Market Size

      11:06
    • 7. What's your Company Valuation?

      9:00
    • 8. Articulating Valuation to Investors

      7:38
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About This Class

This class is for any entrepreneur thinking about the next steps of their business, and what it takes to scale.

What You'll Learn

  • Introduction and the Funding Landscape. What venture capital is, and whether your business needs it
  • Determing your Capital Needs. How to calculate your market size, burn rate, runway, capital need, unit economics, life-time value of a customer, and all the criteria are for how investors evaluate deals.
  • Building Your Pitch Deck. The best way to frame your investor pitch.
  • Articulating Valutation to Investors. How to put all of the pieces together to communicate and calculate our pre-money and post-money valuation.

What You'll Do


By the end of the course, you will know how to pitch to investors, how to calculate your pre-money and post-money valuation, and how to raise seed, angel, or growth venture capital.

Class projects will highlight building a pitch deck to address investor evaluation criteria, calculating your burn rate, runway, market size, unit economics, and pre-money valuations.

Deliverable. You will create a pitch deck to pitch to potential investors.

Description. You will walk through your pitch including: your hypothesis, burn rate,  runway, and why you need to raise money today.You will know the parameters around the implied pre-money and post-money valuation, and how to articulate your needs and what it means for valuation. 

Specs. By the end of the class, you'll have a pitch deck and a pitch.

Meet Your Teacher

Teacher Profile Image

Scott Hartley

Venture Capitalist & Author

Teacher

Scott Hartley is a Silicon Valley native, who spent the past decade at Google, Facebook, and as a Partner at a $2 billion Sand Hill Road venture capital firm. He also worked in the Obama White House on innovation policy as a Presidential Innovation Fellow. He's worked with hundreds of founders, and know what it takes to find the right partner, frame your company and pitch, and talk about valuation. Check out his book, The Fuzzy and the Techie, coming April 2017.

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Transcripts

2. Intro & The Funding Landscape: - Hi there. - Welcome to raising capital. - Raising capital is a skill share class about raising entrepreneurial capital for your new - startup adventure. - My name is Scott Hartley. - In a venture capitalist. - I spent a number of years at a Silicon Valley sandhill road venture firm working with - hundreds and hundreds of startups on raising capital for their new ventures. - Part of that I spent time in a number of Silicon Valley companies like Google and Facebook - Today we're gonna be talking about the funding landscape determining your capital needs. - . - How does an investor think how to build an investor pitch duck, - thinking about market size not just from the top down, - but also from the bottom up. - How to think about your company's valuation and then how to articulate that valuation to - the investors that you work with. - So to get started, - we're gonna talk about the funding landscape. - There's my team basic, - but it's very important to understand the context in which investors are placed in how you - think about approaching the right scale and stage investor, - given your startups traction. - So the capital pipeline consists of what I like to call the four different stages. - So first there's bootstrapping. - This is just, - you know, - friends and family. - This is credit cards. - Is his bank accounts. - This is asking your friend to help capitalize your business. - Um, - this is really sort of the very basic first step. - The second is incubators and accelerators. - We've seen a number of incubators come out of places like y Combinator. - We've also seen shared workspaces and shared desks, - desk rentals. - They come in all shapes and sizes, - but this is sort of the second stage. - The third I like to call Angel Capital Angel Capital consists typically of private wealthy - individuals who are making angel investments in the fourth stage is really institutional - capital. - So institutional capital means that it's a formal fund. - The fund is raised from third parties called limited partners in their subject till - slightly more constraints than angels are. - So walk through these four so boot shopping Like I mentioned, - this is the true scrappy entrepreneurship. - This is where you're working off your credit card, - where you're scrapping together bank account, - where you're asking your friends and family to support you. - This is typically the very basic prototype stage where you're just trying to get a minimum - viable product out the door and trying to figure out if this is an idea worth pursuing. - Further incubators and accelerators are really in vogue these days. - They come in all shapes and sizes. - They come from shared workspaces to mentorship programs to pretty rigorous boot camps, - where you spend weeks and weeks in house in a place oftentimes for an amount of capital - that's taking a small equity stake in your business. - Angel Capital, - like I mentioned, - are typically wealthy individuals there. - Often, - you know, - they're often quote unquote SmartMoney because they're entrepreneurs who have seen - successful exits. - They could be wealthy individuals out of other sectors. - But typically in tech, - we find that they're entrepreneurs who have seen great exits and companies that they've - created so they can be smart first, - investors to help kind of build into how to approach the market, - how to build your first prototype. - And they're not institutional because they typically are investing their own money. - Um, - these guys can be found on places like Angel List or even Kickstarter, - Um, - and they're investing out of their own bank accounts, - so they typically don't have as many constraints around the sector or the stage that - they're interested in investing in, - UM the stage typically is early because it's smaller amounts of money, - but they typically arm or agnostic to this to the sector. - So you might be able to find the right sort of angel capital to help you sort of get off - the ground once you've got your minimum viable product and basic prototype institutional - capital. - Our formal funds that raise pretty large amounts of money from what they call limited - partners now limited partners are typically pension funds. - University endowments are large pools of capital. - Those limited partners typically have a number of different investments. - They put some of it in stocks. - They put some of it in bonds, - and they put some of their money in what they call alternative investments venture capital - , - private equity, - these air forms of alternative investments. - So Institutional capital funds venture firms, - for example, - are basically raising money from limited partners. - So typically pension funds or university endowments funds typically run from about $50 - million to about a $1,000,000,000 U. - S. - U. - S currency on the typically invest from Syria's A all the way through initial public - offering or until ah company reaches the stage of public market, - where the where the stocks are listed on something like NASDAQ or the New York Stock - Exchange. - So the types of institutional capital really run from seed capital, - the venture capital to formal private equity seed capital. - Now we're still talking about institutional capital, - So we're we've gone through bootstrapping. - We've gone through friends and family. - We've gone through Angel Capital, - which is just private. - Wealthy individuals who are investing seed capital are typically smaller funds, - thes air institutional funds that have raised money from limited partners. - They typically are smaller in that they're probably 50 million or under um, - and they typically right. - The first institutional check, - meaning that check is, - is usually between about 250,000 up through about a 1,000,000. - These air rough estimates. - But this is sort of the ballpark where seed firms are playing. - The second type of institutional capital is really formal venture capital now. - Seed capital is certainly a type of venture capital. - Private equity can be a type of venture capital, - but but I think for all intents and purposes, - what people traditionally reference as venture capital are institutional funds that invest - in early stage start ups. - and those funds are typically from 50 to 100 million, - up through about a 1,000,000,000 in size. - And now these funds are investing some of the earliest checks into a startup. - Usually Siri's a through sort of growth equity. - This is before an initial public offering. - This is all private investment, - and there's check sizes are typically from about three million up through, - perhaps $50 million. - Now, - Beyond venture capital, - there is, - Ah, - an area of investment called private equity. - And venture capital is really a subset of private equity. - It's very typical. - It's typically very, - very large. - V C. - It's beyond the growth equity stages. - Um, - it's where investments are made more around financial metrics than around team in market - potential. - So those are some of the big differentiators between the capital pipeline. - Sonal is your homework. - I would encourage you to think about your company where you are in the process. - Where do you fit into the capital pipeline? - You know, - if you're finishing up your beta or your prototype, - you're what we would call you know, - the seed stage if you found your product market fit, - Um, - and you've raised some basic money from friends and family. - Maybe from some angels. - You're potentially at the stage where you know you could go out for SYRIZA and start - talking to formal institutional funds, - whether at the seed level or at the at the venture capital more. - Siri's a level. - So this is your homework for lesson one and ah, - take a little breather and we'll welcome you back shortly. - Thanks. 3. Determining your Capital Needs: - welcome back. - So we've talked about the funding landscape. - Now we're gonna talk about determining your capital needs. - So as a startup, - how you fit into the capital pipeline, - So raising money is expensive. - What this means that there's a cost of capital associated with every dollar that you raise - for your start up. - So if you take a look at this chart when you're in early, - early stage, - start up. - It's a fairly high risk profile. - What that means is that the investor is looking at the team at the market at the technology - at the adoption, - and they're unsure if it's actually going to work. - So as the risk is high that investors willing to put low amounts of money, - small amounts of money to work against the high risk profile company now, - as the entrepreneur de risks parts of the business as they proved that the team is smart as - they prove that they can build the product, - that people will adopt the product that people are willing to pay for the product or - service, - then the investor has greater and greater confidence that the business is going to work. - So the risk is coming down. - They're willing to put more and more dollars toe work against a decreasing risk profile. - And as they do this, - they're willing to own less and less of the company because they perceive it to be less and - less risky. - So if we take a look at this chart, - investors are putting small amounts of money toe work against high risk profiles and then, - as the company is able to de risk certain parts of the business as they're able to test a - hypothesis and prove that something is true and create less risk in the business than the - investors willing to put more and more money to work as they do that. - So this is staging of investment. - This is Syria's a serious be basically around the entrepreneur, - testing different hypotheses, - improving that their product or service is going to work. - So as a rule of thumb as the entrepreneur, - you basically want to raise the minimum amount of money at the high cost of capital in - order to get to the next step where you've reduced risk. - The reason you do this is because the cost of capital is high when the valuation is low, - so early on when your company's risky in the investor is giving you a lower valuation - because they don't know what it's worth. - The cost of capital for the money raised is going to be fairly high. - So as you reduce the risk as you test these hypotheses for the investor, - your valuation is going up, - the risk is going down, - and therefore they're able to invest more and more months of money against a decreasing - risk profile. - And they're able to do this in a way with confidence that brings the cost of capital down - for you. - So, - in a nutshell, - this is why investors air staging dollars in Basically, - they're putting seat capital the work when they're first testing out an idea, - as the entrepreneur de risks parts of the business. - And they proved that the team, - the product, - the market, - all these things work. - Then the investors willing to put bigger dollars to work in the form of a series A and then - the form of a Series B. - And even though these check sizes are larger there, - typically coming at less and less ownership positions because the valuation is increasing, - so is the entrepreneur. - It really behooves you to identify I hypothesis. - So what this means is figure out what exactly you want to test, - then figure out what? - Will it take you to prove this hypothesis? - So this could be traction. - This could be technology. - This could be market adoption. - This could be a number of different things. - Uh, - and then what you want to do is think about the costs that you will incur per month in - order to get there. - So in testing hypothesis, - it might be that you want to build a product, - test early adoption and figure out if you can get the number of beta customers that you - believe you can. - In order to do this, - you might need 12 months or 18 months of runway, - and you haven't implied cost per month that it's gonna take to get there. - So these are the various things that we want to talk about. - So first, - let's talk about cost per month. - Basically add, - apply your cost promotions so this could include you know, - your monthly rent employee costs, - development costs if you don't have in house technical support. - Um, - in all and all of those, - this is together combined. - Call your burn rate and your burn rate is basically the amount of money it costs per month - in order to keep your business running. - So as you think about your hypothesis as you think about what you're looking to test in - order to de risk your business, - increase your valuation and lower the cost of capital for raising more money. - You want to think about how many months is going to take for you to prove your hypothesis. - Now this is called your runway. - This is a very simple formula that you need enough runway given your burn rate so that you - can prove out your hypothesis before you run out of money. - So what does this look like? - In a nutshell? - Basically, - if you needed 18 months to prove that your product or your market was going to work and you - had 50,000 per month in burn rate and this is paying your rent, - paying for your computers, - paying for your Internet, - paying for various development services that may or may not be in house. - Basically, - if I had a product that I needed 18 months in order to test and it was costing $50,000 per - month, - this implies roughly a capital need of $900,000 now, - given that everyone under the sun makes mistakes and given the investors realize this, - it's really smart to buffer in an amount of money that allows you to make some mistakes. - This is perfectly fine to admit to an investor that you're not gonna get it perfect and - that you believe that you contest hypothesis. - It's gonna take 18 months. - Gonna cost $50,000 per month, - which implies $900,000 in order run this test and because you think you know you can't get - it perfect every time you're gonna buffer in $100,000 just to be safe. - So in this in this example or this scenario, - we would need $1 million in order to test a hypothesis successful successfully over an 18 - month period with a $50,000 per month burn. - Right. - So in this case, - you know, - this is basically what what we've talked about $1 million would get us 18 months of runway - on a $50,000 burn rate with $100,000 of buffer just in case. - So framed another way, - if we think about the cash we have in the bank divided by the burn rate That gives us a - runway that we could effectively spend building this company or testing the next hypothesis - . - So in this case, - if you have a $1,000,000 in the bank and we have a burn rate of $50,000 per month, - we've effectively got a runway of 20 months in order to test. - To sum that up, - Basically, - we want to ask the really big question. - We want to test the hypothesis. - We gotta determine our burn rate. - We're gonna determine the runway required in order to have that burn rate and test. - The hypothesis is going to take some amount of time, - and this implies our capital need. - And so this is the basic amount of money we want to ask for first when we go to whether - it's an angel, - investor seed investor, - venture capitalists, - because we realize that the early capital that we raise because the risk of the businesses - high that capital is going to be very expensive, - so we don't want to raise too much just for the sake of raising it. - We want to raise just the right amount that we contest the specific hypothesis is gonna be - able to de risk our business and enable us to increase our valuation so that when we raise - money the second time recon raise it as at a higher valuation and a lower cost of capital. - So this gets into kind of Erik Reece. - Um, - lean start up philosophy where we're gonna build, - collect data test hypotheses, - set tactics, - measure run experiments, - reset those tactics, - re inform our strategy. - Iterated, - learn, - repeat and scale. - Right. - So this is we're running, - experiments were setting tactics were defining strategy. - And we're basically rinsing and repeating, - meaning we're doing this over and over and over. - So as we test different hypotheses, - we're just trying to de risk elements over business so that we can increase our valuation. - And for every new amount of money that we raise, - that could be raised at a lower cost of capital. - So basically, - in the repeating process, - we do this as a seed where we're doing an initial testing hypothesis in a Siri's A where - we're finding our product market fit in a Series B where we're finding a repeatable sales - model, - it's in a growth equity round where it's really more about execution and scale, - and then hopefully in an I p o an initial public offering where we really scale and get - capital to reach a worldwide audience. - So as your homework for module to, - I'd like you to think about the hypothesis that it would take for you to de risk an element - of your business, - what your monthly burn rate is and what runway you think you would need in order to - successfully test this hypothesis. - And this will imply a capital amount that will also inform kind of where in the pipeline - where in the capital pipeline you should be thinking about pitching. - So thanks for module to take a little breather and we'll be back shortly. 4. How does an Investor Think?: - welcome back to raising capital. - So we've talked about the funding landscape. - We've talked about determining your capital needs. - Now we're gonna talk about how an investor thinks about approaching an investment. - So basically an investor will think through a number of different factors or a number of - different points of analysis as they meet with an entrepreneur and having seen hundreds and - hundreds of startups myself, - I can attest to these sort of nine points as being very fundamental to how I think many - venture capitalists think about approaching investment or a company. - So the first is the problem. - The second is a solution that companies providing the third is the thesis whether the - thesis of the venture firm fits with the philosophy of the start up. - The fourth is timing team technology, - market traction and deal so well known dive in and talk specifically about thes nine points - . - So first is the problem. - So really, - when an investor thinks about the problem, - this is what problem are you as a startup, - us an entrepreneur addressing Now, - is this a massive, - world changing problem? - Is this something that you know fundamentally about? - Is this something that the investor personally believes in these air a number of different - ways of approaching this. - But I think that the clear thing to think about is is your problem that you're addressing - truly heart attack rather than a headache? - Meaning is it truly a very salient pain point that people have willingness to pay? - And I think this is something that every investor is going to think about off the bat is - what I use this. - Is this a major problem in my life? - Is this something that I truly believe in? - And it's something that I see the entrepreneur is truly passionate about solving the second - is around the solution. - So what's the specific angle that you are taking to solve this problem in a truly unique - way? - So we want to know that the problem is salient, - that the problem is really a heart attack rather than a headache, - meaning it's it's very fundamental and something you believe in, - and that you're taking a solution that's not just iterative around the margin, - but it's truly game changing, - so something that's truly going to change this problem in a completely fundamentally new - way. - The third is the thesis, - So institutional investors, - if we think back to the capital pipeline thes air investors that are typically raising - large venture funds from limited partners. - Those limited partners are university endowments or pension funds. - Thes institutional investors are often constrained by what's called the limited partner - agreement. - So or NLP A. - And basically, - the L. - P. - A is an agreement between the venture firm that raises a fund in the limited partners who - they borrow money from for, - you know, - five or 10 years to raise a fund and invest in start ups in the L. - P. - A. - They typically specify a number of areas that they're interested in investing in a number - of areas that they think they know better than other firms and, - you know, - really, - the L. - P. - A. - And thesis that those investors have specified a number of years prior to you probably - pitching them. - Um, - it does factor into how they sort of approach the market, - how those investors think about investing and you know, - their personal interests. - And so does your company fit with the right sectors, - the right stage and the right thesis of not just the investors but also the firm that - you're talking Teoh in the firm, - um, - you know, - would have created an LP a years past That would specify a number of different areas that - they were interested in. - So these are all sort of important constraints that are more structural to who you're - pitching Teoh and just making sure you're pitching to not only the right firm, - the right part of the capital pipeline, - but also the right investor, - the right general partner within a firm who, - based on their track record based on their investments in the past, - seems tohave a thesis fit or an interest in the same areas that you do. - This is very, - very important. - The fourth is timing. - So the big thing with all venture or all investing is the timing is everything. - So if you're too early, - you're effectively wrong. - So what are the specific dynamics of the market that make your idea relevant and absolutely - imperative that it happened right now? - So in addition to, - you know, - solving a big problem that's fundamental, - that's a heart attack rather than a headache. - In addition to having a solution, - it's truly unique and truly game changing, - not just entered ever around the margin. - In addition, - Teoh, - you know having a strong team and being part of the thesis that you, - ah, - that you're pitching to the venture capitalist and you fit within not only the firm - dynamics, - but the sector. - The stage in the specific thesis of the general partner that you're pitching, - Teoh timing and this whole perception around, - Why now? - Why is this imperative that it happens right now? - This is probably one of the other key pieces that I think leads to a number of venture firm - saying no to a company. - So it could be You have a great company, - you have a great problem you're solving, - you're solving in a truly unique way. - You fit on thesis. - But the investors just don't think that right now is the perfect time that maybe this is - going to happen in one year or two years or three years. - So I think convincing the investor that because of you know, - market dynamics because of macro trends, - that this is a trend that's that's happening today and that the company needs to be - financed today. - This is a very, - very important step in convincing the investor to bet on your company, - the fifth areas the team so at the earliest stages. - The team is nearly everything. - So is your team truly exceptional? - You guys have the smarts, - the tech, - the industry experience, - the camaraderie, - the charisma. - Because, - really, - at the end of the day, - you're convincing the world, - and you're convincing others to believe in you. - And so a number of these factors are incredibly important. - So how your team came together, - how you guys came to meet each other. - What the combination of industry expertise, - kind of novel perspective, - deep technology ability. - These are all factors that the investment team will think about as they evaluate not just - the problem. - You're solving not just the solution, - but who at the earliest stage comprises the team. - The sixth area is technology, - so you're building truly game changing technology with barriers to entry stickiness, - meaning it's hard to change once you've adopted it. - Do you have intellectual property meaning? - Do you have patents, - or do you have, - uh, - pieces of I p around the technology that you're building that would preclude others from - copying you right away? - And is this something that others are willing to pay for? - So I think in many companies we see you know kind of early trends around willingness to pay - , - even if you aren't accepting payments if you get people to log in with credit card details - or provide ah unique identification leading indicators to prove that your technology is - there. - But there's also sort of a willingness to pay beyond that. - The seventh is the market. - So truly, - how big is your market? - You know, - everything is a $1,000,000,000 market if you look from the top down. - But I think what's really important to investors is that you thought critically about the - acquisition channels to drive riel scale tear to your business. - So how is your technology going to actually build into the market? - Not just what's the size of the market in aggregate, - but what did the bottoms up steps you're going to take in order to acquire customers in - order to build into that market. - So I think thinking about the market size, - not just as a top down, - so not just as X y Z market is $10 billion I believe I can take out 10% of that market and - therefore my market is $1 billion. - It's thinking about what are the specific ways I'm going to go about acquiring customers - and build into this market. - And that's really the important way to frame how big your market truly is. - The A theory is traction. - So what type of early traction do you have? - If you're at the early stage, - it's fine. - If you don't have millions of users. - How are you thinking about user acquisition? - You know, - how are you thinking about scale? - Attraction is really a proxy of future value, - so it's signals, - big potential. - So in all these cases, - you know, - investors don't truly know they can't read the future. - But they're looking at these various inputs as proxies of value or different ways to - evaluate whether or not they think this is a big idea going forward. - So attraction is one sort of key element of that, - and finally, - the ninth point is around the deal, - so investors are, - as I mentioned, - often responsible to limited partners. - So if their institutional venture or seed firms meaning that they've raised funds before, - they have limited partners and they have models that dr how their businesses work the same - way that entrepreneurs have models that dr how their companies work so often what this - means as that a venture firm will have an ownership target or amount of equity that it - needs to take to model out. - You know, - if they've got a portfolio of investments and some of those investments do very, - very well. - And some of them don't work so well. - If they have a portfolio approach, - you know they need to own a specific amount of each company in order to make that work over - the long run. - So you know, - the ninth point is basically how investors you're thinking about, - not just the problem. - You're solving not just the solution, - not just why this is relevant now, - not just about the team and the technology and the traction in the thesis, - but also about what's the price of the deal? - How much equity or ownership could they potentially own for a specific amount of money? - And does this really jive with the model that they're that they're working with? - So, - you know, - ultimately, - is your company affordable enough for them? - So as your homework, - let's think about these nine features where you strong where you weak and where do you - think you need to improve? - Because I think as you walk into an investment meeting. - Thinking about these nine points of evaluation will be really critical to thinking about - you know how you can frame your company in the best way possible. - Put your best foot forward and really walk out of the investment meeting. - Successful. - Thanks. - Take a breather and we'll be back for more. 5. Building your Pitch Deck: - welcome back. - So as we've talked about, - we've talked about the funding landscape, - the capital pipeline. - We've talked about determining your capital needs based on burn rate based on the - hypothesis, - your testing to de risk your business in based on an amount of runway that you need in - order to get there. - We've also talked about the nine points of Howard. - Investor will think about approaching your start up based on the problem, - the solution, - the technology, - the traction, - the thesis on a number of other points that we highlighted in the fourth module. - We're going to talk about building an investor pitch deck with specific focus on the market - size. - So as we mentioned in the last section, - we talked about the nine points than investors going to think about company based on the - problem. - The solution that you're providing that thesis that they've sort of framed their limited - partner agreement with and how they approach the world. - The timing, - whether they think this is happening right now, - the team, - the technology, - the market, - the traction in the deal. - So we spent a bit more time talking about the market, - So as you mentioned, - there is a top down market size. - So market size analysis typically includes your total addressable market, - which is called the TAM in the sizable addressable market, - or the Sam uh, - these air, - the specific sort of segments or subsets of the total addressable market size that you - think are actually relevant to your business. - So these were the top down metrics of how we think about, - you know, - framing a market size. - Additionally, - there's really a bottoms up market size approach, - so it's very important that you not only have the typical pie chart where you say my market - is $10 billion I believe I can take 10% of it. - Therefore, - more market size. - Sizable dress addressable market is $1 billion. - You know that's helpful in framing the general context that it's a big idea, - but it's not helpful in telling the investor how you're actually going to get there. - So what's very important as a second slide is to talk about the bottoms up market? - So how will you specifically acquire customers? - What are the channels that you're thinking about going through to acquire your customers - and we're going talk a bit about how we can think through the bottoms up. - Analysis. - Second, - you know what? - Our unit economics. - So we're talking about the cost of user acquisition. - We're talking about the potential number of users what the average revenue per user could - potentially be also known as the are poo. - And you know how we think about retention. - So how we think about keeping these customers around and what the's number of of inputs - really create is what we call a lifetime value ltv of a given customer. - So as we think about, - you know, - market size not just from the top down, - not just as the total aggregate, - um, - total addressable market and the more addressable sizable addressable market. - The Sam, - um you know, - as we think about the bottoms up approach, - we need to think about the unit economics of the channels were going to go through to - acquire users how many users we think we can get, - how much we think we can make off each years there. - And then how long we think we can keep those users around because ultimately investors are - gonna be looking at your business and thinking about this business over time as a cash flow - machine. - So how does this business actually generate? - Um, - repeat, - you know, - repeat successful cash flow. - And obviously there are extremes in the consumer Internet world. - We see many examples of, - you know, - APS and businesses that achieve massive scale without ever having a revenue or monetization - model, - and these air perfectly fine approaches. - But we just have to keep in mind and keep the context that these air really one in a - 1,000,000 type ideas and that in the back of our minds to position for a really successful - startup an outcome. - We do need to be thinking about these sorts of things about, - like, - unit economics and user acquisition. - So, - ultimately, - what's driving a successful business is that the lifetime value LTV is greater than the - cost of the acquisition. - So over time we're making more money off each client that we acquire that we were spending - to acquire those clients in the short run. - There obviously examples that that refute this. - You know, - there are many examples and startups where you spend mawr to acquire users early on and - you're running a deficit because you believe that over time you're going to be able to - reduce that cost of user acquisition and increase the lifetime value, - and you can ultimately get to a place where this is a repeatable model that works. - Obviously in the long run, - if your cost of acquisition is always greater than your lifetime value, - this business will not be successful. - So in driving this formula success there three inputs that we need to think about So one is - that we could lower the cost of user acquisition to we could increase the lifetime value by - increasing the average revenue per user. - The are poo three. - We could increase the lifetime value by increasing the retention or how long were able to - keep that client around. - So these are really, - you know, - three of the main ways that we can think about augmenting this equation where we, - you know, - ultimately get to a point where the lifetime value is greater than the cost of acquisition - , - you know, - And as we mentioned in the short run, - it's very possible and perfectly fine if we believe that, - you know we need to run a small deficit in acquiring a number of early users to prove - traction in order to get to a stage where we, - you know, - can bring down the cost of acquisition and bring up the lifetime value. - But over the long run, - these are the things that we need to be thinking about. - So, - you know, - a recap of the market analysis for the investor deck? - We you know, - we should have two slides. - We should think about the top down market. - So the total addressable market of the sector that we're working in the sizable addressable - market of, - you know, - the specific sort of subsets of that sector that we think are actually achievable. - And then this bottoms up approach where we're thinking about the actual you know, - channels for user acquisition. - We're thinking about the unit economics and how we're going to go about acquiring these - users and what that's going to cost. - We're thinking about how we're going to increase the number of users that we've got or the - end, - how we're going to reduce that cost and how we're gonna drive lifetime value ultimately - being greater than the cost of acquisition by either increasing retention or increasing the - average revenue per user. - So as homework, - I want you to think about these things. - I want you to think about your cost of user acquisition. - I want you to think about, - um you know how the channels of acquisition will change over time. - And, - you know, - based on these inputs of driving sort of user growth, - the end driving, - retention and driving, - you know, - average revenue per user. - How can you think about augmenting these inputs to over time? - Be able to drive a really sustainable business where you can bring down the cost of user - acquisition and you can increase the lifetime value of your customer? - Because ultimately you know, - as and investors thinking about the market thinking about the slides that you present there - in the back of their head going to be thinking about, - you know, - in the long run, - how does this company become sustainable? - And how does the lifetime value of each customer or each client start to be greater than - you know, - the cost of acquisition in the cost of servicing those customers? - Because ultimately this is this is what's driving a successful business. - Thanks. - Take a breather and we'll be back for more 6. Thinking about Market Size: - welcome back. - So as we've talked about the funding landscape, - determine our capital needs how investor thinks about approaching. - Ah, - an investment meeting. - How we can build an investor pitch deck and think about market size not just from the top - down, - but also from the bottoms up incorporating elements of unit economics. - When we think about the number of users, - three acquisition channels, - the cost of acquiring these, - a user retention, - average revenue per user and how this implies, - ah, - lifetime value and how we can keep that lifetime value greater than the cost of acquiring - user. - But really, - let's talk a bit more about, - you know, - market size in the context of how venture firms, - or how investors are going to think about the size of the market and how it's gonna fit - into the deal or the way that they approach making an investment. - So what we're gonna talk about right now is what moves the needle on a fund. - So what this is informing is based on the size of your idea, - based on the size of the market, - not just the top down, - but the bottoms up way of approaching it. - How are you going to be able to get Teoh a scale or a stage. - Um, - where the potential for the company that you're building jives with the scale of the - outcome that the venture firm that you're speaking through is interested in hearing about. - So what this means is that you know no, - from an investor is not always a know. - It could be that for this scale and size of the problem that you're addressing, - you're just pitching the wrong part of the capital pipeline. - So it's important to have context or on what moves the needle for a specific type of fund. - So zooming back to lesson one, - we talked about the capital pipeline. - Now, - within this, - we talked about institutional capital being seed capital. - Typically funds that were around 50 million or less where they were writing the first - institutional check, - sometimes between $250,000 a $1,000,000 in the second group that we talked about, - which were venture capital firms, - typically a little bit larger to book we around $100 million funds to about a - $1,000,000,000 writing sort of the second checks in ah Siri's A to growth equity, - usually from about three million to perhaps $50 million in size. - So thinking about these two different types of investors and what moves the needle, - or what drives the returns that keep their business models working? - Um, - all funds are different, - but the basic mechanics in the basic decision making are actually quite similar across all - funds. - So it's very, - very important that we just know kind of what their incentives are. - And we pitched to the right part of that capital pipeline. - So what we're gonna do is think about this through a couple of different exercises. - So as we mentioned before, - funds have portfolios or a number of invested companies in order to earn a return for their - limited partners, - the university endowments or pension funds who they borrow the money from over a 5 to 10 - year time resin. - They're fiduciaries, - meaning they kind of owe it to thes limited partners to do the best they can to provide the - most ample returns that they can. - Um, - they need to own enough of each company that when some fail those failures air offset by - other companies that they own a bit more of that are successful. - So what this means is that they typically have an ownership target. - So every firm, - depending on whether it's a seed firm, - are a larger venture capital firm. - They all have ownership targets and those ownership talk. - It's very based on the mechanics of the fund. - But for one example, - let's walk through what say that for most typical venture firms, - it's different for seed but safer venture capital. - The typical ownership target is something around 15 to 25% of the equity of the start up - would be what they're targeting toe own by making an investment. - So let's make an assumption, - and let's call it 20%. - Now, - let's make a few more assumptions. - Let's assume that this is a fairly large venture capital firm. - This is a typical kind of new New York or Sandhill Road, - Silicon Valley venture capital firm. - That's about $500 million in the fund. - So let's make it an assumption that, - you know, - for the general partners in this fund, - the way that they think about investments is that 10% back to their fund is some amount of - money. - That quote unquote moves the needle on the fund. - So in a dollar amount on a $500 million fund. - 10% of that is $50 million. - So a $50 million returned to the fund off of an investment would move the needle on that - fund because it would return 10% of the total value of the fund. - And let's say this firm has a typical ownership target with each company each investment - that they make of owning 20% of the equity of that company. - So if $50 million moves, - the needle in the firm owns 20% of a company at Exit at the sale or the I P. - O of a company. - What that means is that the company's sale at exit must be $250 million or greater for that - VC firm, - given that they owned 20% to get back $50 million which would be 1/10 of their $500 million - fund and move the needle. - So you know the venture firm is going to be thinking about these things in the context of - they need to see a to $250 million outcome if they own 20% to get back $50 million which is - 1/10 of the fund size that they have. - So you know, - this is sort of the calculus that they're running in the back of their head. - As you know, - as you're going through your deck and pitching to an investor, - they're thinking about the market size there, - thinking about what moves the needle on their fund. - They're thinking about their own business model and what it's going to require from an - ownership standpoint and from a market size standpoint, - to really drive the returns that make make their model work. - You know, - now, - ultimately, - if it's WhatsApp or Facebook scale, - opportunity thes air things that drive returns on any fund under the sun. - But again, - these are these air major outliers. - And so, - in the typical calculus as a venture, - investors thinking about a deal. - They're thinking about some of these mechanics. - So it means that if you're pitching to a $500 million VC firm, - you should really know that they will only have, - you know, - kind of clear interest across all the general partners. - If you can demonstrate a clear pathway to hunt to a $250 million exit or greater right - where they're 20% ownership Target would amount to a $50 million returned to their fund, - which would be 10% of their fund and that would, - you know, - drive what they would consider to be moving the needle on that fund. - So this is sort of the cold, - hard truth of how venture mechanics work and why they're always positioning for fairly - large outcomes. - So let's make a few more assumptions. - Let's think about you know, - if there are comparables in your sector. - So there are other companies that have done this before and what those companies exit - multiples were. - So if we found a company that was kind of similar to what you're doing, - how much revenue did that company have when they sold or when they went went public? - And, - you know, - let's make assumption that there's an exit multiple of five times revenue, - and now we already discussed that In order to move the needle on this particular $500 - million venture firm, - we need to figure out how to get to be a $250 million business. - And if there comparables in our space that say that their exit multiples of five times - revenue. - We can basically assume that if we can get to $50 million revenue target, - we could potentially be a $250 million size company, - which would then move the needle on the venture firm. - And they would probably have interest in making an investment. - So what this means is that if we can show a really believable pathway to $50 million in - revenue over the next 3 to 5 years for some period of time, - that's believable. - Then we can also show that the comparable is in the space have demonstrated, - you know, - five X revenue multiples. - We believe that there is sort of a $250 million possibility here which the venture firm can - interpret as being. - If they own 20% of the company, - they could potentially receive $50 million back to their investment back to their limited - partners, - and this would return 10% of their $500 million fund. - So this isn't a target, - but this is a baseline for conversation. - So this is the kind of calculus that we should be thinking about as we approach different - venture investors as we think about the size of the fund and where they fit into the - capital pipeline. - How big idea is and how we can position idea best to get in front of that investor and - prove that the market and the technology and the team has the ability to scale into - something that can actually earn a return for that investor. - Because ultimately, - um, - you know, - as as well as driving truly, - fundamentally fundamentally game changing technology and investing an incredible teams for - the future. - Ultimately, - venture firms are businesses, - too, - and they raise money from limited partners who usually air university endowments or pension - funds. - And they've gotta earn a return for those fiduciary for those for those for those limited - partners to whom the air fiduciaries. - So the key take away is that, - you know, - moving the needle on a big fund is very, - very hard, - and it takes driving significant revenue for real outcome. - But what that means for you, - as the entrepreneur as the owner of your business, - is that you need to determine what size investment partner is right for you, - and you need to pitch to that part of the pipeline. - So it could be that giving the skill of your idea. - The $50 million revenue outcome doesn't seem feasible. - Or maybe it does. - But to know the context of what's gonna move the needle on a $500 million fund and to be - able to know that $50 million in revenue is probably a safe bet that is required in order - to really, - really drive the excitement level of that venture firm. - It just means that, - you know, - there might be an earlier part of the pipeline that you should be pitching to first before - going to those type of firms. - So as a market size exercise building on this section, - if you're positioning your start up with a path to $50 million in revenue, - how would you think about this? - So what's the lifetime value of each customer minus the acquisition cost? - What's the contribution of each new customer? - So what's this contribution margin and how would you acquire these users at scale? - So think about these various imports from the top down in the bottoms up market perspective - and think about what it would take in your particular industry with your business to get to - something like $50 million in revenue. - Is this possible? - It's fine if it is, - and it's fine if it's not. - All this means is that you should be pitching to a particular part of this of the capital - pipeline that makes most sense for you and is in the right place, - where the scale of the opportunity that you're providing is also in line with the size - investment that's gonna drive a return for the venture from that you're talking to. - So thanks so much, - and we'll get back into this in just a few minutes. 7. What's your Company Valuation?: - welcome back. - So as you know, - we've talked about a number of different spaces. - We've talked about the funding landscape, - the capital pipeline. - We've talked about determining your capital needs based on burn rate, - runway and hypothesis that we're testing. - We've talked about the nine points of how an investor thinks about approaching a deal. - We've talked about how you build your investor pitch duck with focus on top, - down and bottoms up market sizing, - looking at lifetime value. - And we've talked about thinking about that market size in the context of an investor - approaching ah specific type of deal. - So how an investor thinks about what moves the needle on their own funds and how we can - position the bottoms up market to get to a revenue target that actually provides, - ah, - scale of opportunity that's commensurate with the stage of investment that that particular - venture from is looking for based on their ownership target. - And now we're gonna talk about how this implies your company's valuation. - So how we actually think about the valuation of your company. - So what are the lovers that determine valuation? - Basically valuations determined by a number of things, - including sort of the technology or the intellectual property. - The team who you are, - Ah, - the expected value of what you're building into the market size and how big the opportunity - seems. - The velocity of the traction that you're able to get based on installs based on engagement - , - um, - the macro trends of the tectonic plates within your space and how these plates are moving. - And you know whether or not it seems like your position to capitalize on a number of trends - , - whether his willingness to pay and, - to some degree, - the power dynamics between that the the interest from investors and, - uh and and sort of where you are in the space of raising money. - So early stage venture capital really is not quote unquote finance. - You know, - it's nice. - It's nice that we lump it in the finance bucket, - but they're no discounted cash flows there, - very few financial models, - but really, - what investors are thinking about at the earliest stages, - you know they're becomes much, - much more heavy finance as you get later into growth equity and definitely in the private - equity. - But when you're early in venture capital or seed seed capital, - really veces we're looking for proxies of value and these proxies of value are ways that - they're thinking about how this company could be worth a lot of money in the future, - but right now they're not really sure. - So they're thinking about things like profit, - like revenue like willingness to pay like month over month growth engagement, - like monthly active users or daily active users. - If it's on a nap, - installs various entry, - how you're going to keep the competition out And if your product is truly sticky and people - have trouble switching so high switching costs and if there's a past proof of execution on - the team and ultimately, - you know if there is also sort of syndicate signaling around, - um, - other investors showing willingness to invest in your company as well, - and this last one is interesting because it's not something that most investors would admit - to. - But I do think it's a key part of Of every, - uh, - every investment is sort of who else was looking at the deal? - Can you build the the momentum in the market and kind of prove that you've got the ability - Teoh really get people jazzed up about your idea, - including other investors? - So venture math works based on the number of inputs. - Basically, - the company or the entrepreneur specifies an amount they're raising now. - This amount, - if we go back to a couple of lessons ago that we talked about, - is based on a specific hypothesis that they want to test something that they will want to - test to de risk the business. - And based on that hypothesis, - based on a burn rate of who they're gonna have to hire, - how much they're gonna have to pay them, - how much this is going to cost per month. - That burn rate multiplied by a number of months it's going to take in order to test the - hypothesis implies an amount of money that that company is going to raise. - So the company says we want to test Hypothesis X, - and it's going to take us this many months at this burn rate, - and it's going to imply this amount of cost. - Therefore, - we're raising that amount of money at the same time, - the V C is thinking to themselves well, - we borrowed this money from our limited partners. - We've got to make a return for our limited partners and so we need to figure out what the - ownership target is that that we need to own in order to, - um, - work with this company for the next few years and be able to really engage with this - company, - put a lot of time and effort into helping them scale the company. - And you know, - what amount of equity is really gonna make it worth our while? - So, - typically, - as we talked in last lesson, - that's about 20% for a typical venture capital firm. - So then there's just believability around that math, - and we're gonna walk through that right now. - So let's taken example, - What does this mean? - So it means if we're testing a hypothesis that's gonna take 18 months of runway and we have - a burn rate. - Um, - let's say that we need to raise $5 million now if we do the math. - Basically, - our target runway, - we're saying, - is 18 to 24 months that we're gonna spend working on a problem testing hypothesis. - Building a team. - The target raise for our startup is $5 million so this would be a very typical series, - a investment, - So probably the second institutional round of money after the seed investment in the V. - C. - target is 20% ownership. - So this is just unexamined when we're making assumptions here. - That target could be lower or higher, - depending on who we're talking to and depending on some of those power dynamics that we - discussed. - But the implied valuation here would be that $5 million equates to 20% ownership. - So $5 million divided by 50.20 implies a post money valuation or a valuation of $25 million - . - After that, - $5 million is deposited in the start of his bank account. - So let's think about this. - So the implied valuation is $5 million divided by 20%. - So $5 million as an investment is equivalent to 20% ownership in the company. - So, - in other words, - for the VC firms, - $5 million check to quit to 20% ownership. - The company has to be your 25 million post money valuation, - or the Visi firm now owned shares equivalent to five divided by 25 right or 20% of the - company. - So this is sort of the way that valuation works. - It's almost backwards so that startups says we're raising X amount of money. - The venture for him says, - Well, - we need ownership. - Why in that implies a postman evaluation. - So if we think about this another way, - the investor is going to make a determination as to whether this makes sense to pay $5 - million for 20% of the equity, - or 20% of the shares in the company. - Or, - in other words, - if the company is actually worth $20 million pre money or before the investment goes in or - $25 million post money after the $5 million is wired to their bank account. - So this is really the math that's happening in the background is the startup is saying We - need to raise $5 million in order to have 24 months of runway in this certain burn rate in - order to test this hypothesis, - and the venture firm is saying Well for our model toe work, - we need to own 20% of that company. - So if we figured that $5 million is where 20% is this company, - can we come to a realization, - or can we come to a firm belief within our partnership and as a consensus that this - companies are actually worth $25 million in a post money valuation. - So, - you know, - we think about this through the proxies of value will think about this from the standpoint - of forward valuation. - Meaning, - can we pay for it into something? - You know, - maybe the company isn't worth 25 million today. - But if we truly believe it's a $1,000,000,000 idea, - maybe it's a good investment Teoh to invest in it now at 25 million, - even though they might not have all the bells and whistles in order to be truly value - valued at that right now. - Maybe we pay forward because we have strong believability that this is a big idea. - And we really believe in the team. - We love the technology, - and we think the market is there. - So really, - we're testing the believability of these ideas. - So his evaluation exercise, - Let's think about you. - So what's your hypothesis? - What? - What do you testing specifically? - What's the burn rate per month? - It's gonna cost to get either. - And then how much does 18 to 24 months of runway cost? - So this is going to imply for you an amount of capital that you need to raise And now if we - take that amount of capital, - let's say it's $5 million we divide it by 20% which is the ownership target that we've made - . - The assumption that most venture firms will probably thinking about that creates an implied - post money valuation of, - as we talked about in the last example, - $25 million to do that math for your own business, - thinking about the hypothesis, - the burn rate in 24 months of runway and how much that would cost you. - Thanks so much, - and we'll reconvene in just a moment. 8. Articulating Valuation to Investors: - welcome back. - So as you know, - we've discussed a number of different areas around raising capital for your start up, - including the funding landscape in the capital pipeline. - Determine capital needs for your company based on burn rate, - based on hypothesis testing and based on, - um, - the amount of running that we need. - We've also talked about the nine points of how an investor thinks about approaching a - company. - We've talked about pitching to an investor and building a deck around, - specifically around market size. - We've talked about placing that market size within the context of what drives the returns - for a venture firm. - And we've talked about the basics evaluation being You know, - how much you think you need to raise based on an implied, - um, - based on burn rate based on testing a hypothesis based on 24 months of runway, - how much money this requires and that divided by the amount of ownership that the venture - firm is probably going to position for, - um, - leading to an implied valuation. - And now we're gonna talk about how we articulate valuation to investors. - So, - as we've alluded to, - there are these concepts of pre money and post money evaluations as we've also talked about - , - you know, - for an entrepreneur and four, - uh, - most companies pitching do investors. - There isn't really need to talk too much about valuation. - What you should really focus on is how are you going to get to the next step of your of - your investment? - So how you're going to test a big idea we're gonna test The hypothesis is what your burger - it is to get there, - how long it's going to take, - typically around 24 months and what this implies. - Foreign amount of capital that you need to raise taking into account that the venture firm - , - in order to make their model work, - will probably target something like 15 to 25% ownership. - So based on the amount of money you're gonna raise divided by the ownership target, - there's going to be an implied valuation that's generally a ball park figure for for all - companies. - So as we talk about valuation as we think about this, - let's think about pre money and post money. - So pre money. - What this effectively means is this is the value of your business. - Without the new infusion of capital or before that capital is deposited or wired into your - bank account. - Post money is what we've discussed in the last in the last module. - So this is the value of your business after the new investment is deposited in your bank - account. - So what this is is the post money is equal to the pre money plus the new investment. - So as we talked about before, - if we had 24 months of runway and we needed to raise $5 million and that was the amount of - money we were pitching investors to raise and those investors were targeting in 20% - ownership target, - we would take that $5 million divided by the 20% to imply $25 million post money valuation - . - So if we think about the pre money, - the pre money is basically just the post money minus that $5 million investment. - So in this case, - the pretty money would be $20 million. - So to determine the pre in the post, - we're gonna think about the capital being raised. - The percentage ownership of the investor, - typically something like 15 to 25% target. - And we're gonna think of the capital divided by that investor ownership as being equal to - the post money valuation and then the post money minus that capital as equal to the pre - money valuation. - So pre money basically meeting before that capital infusion happens. - So how should we communicate valuation to our investors? - The truth is, - the best way to communicate this is to focus not on what you think your company's worth, - but what the implications are by focusing on the things we discussed, - like hypothesis, - runway burn rate and the amount of money that you're raising, - evaluation will be implied based on these factors. - So in practice, - I think one of the best ways to for evaluation if you are pitching to an investor as an - entrepreneur, - is to say something like Hello, - You know, - we're testing X hypothesis. - In order to test it, - we need Teoh have 24 months of runway. - We believe that's gonna give us ample time to be able to test this hypothesis that we want - to do in order to reduce the risk of our business. - Given our hiring plan and all the people that are amazing that we're gonna bring onto our - team are expected burn rate is X amount per month, - therefore you know, - over 24 months or two years in order to pay people for 24 months. - Given this burn rate and given this runway that we need in order, - you know, - figure out what this hypothesis will work. - We're raising X amount of capital. - And based on that, - you know, - we're seeking fair terms and a partner who can really help us take this to the next level. - I think saying something like that really gives you the ability to remain objective. - You're not forcing evaluation on the investor, - but you're providing all the necessary details to prove to them why you need to raise a - specific amount of money. - And they're going to come to that with, - you know, - very even keel footing, - thinking about the ownership target that makes sense for their business. - And I think this is how you can arrive at truly fair terms with your investors and find - yourself a great partner who can help you build to the next level. - So, - in truth, - this takes a lot of practice. - You know, - this is not something that you learn overnight, - but it's thinking about these various inputs, - like hypothesis like burn rate like runway, - all leading to an implied amount of capital that you need to raise in order to test that - next type offices. - To reduce the risk in your business, - to increase the valuation of your company and to lower the cost of capital going forward. - And ultimately, - if you can do this, - then you can frame it in the right way and you pitch the right part of the capital pipeline - . - It should be a piece of cake to go to that next step and raise. - Raise money for your business with your investors. - So what you should expect is your investor is going to think about the proxies of value. - They're gonna think about your idea, - your team, - your market, - very technology. - They're gonna think about all of those things in the context of their own business model. - They're going to think about their limited partners, - their thesis, - how they approach the world in the ownership target that makes that viable and based on - your capital ask. - Divided by their ownership target. - And based on that implied valuation, - they're going to start doing their due diligence. - They're gonna ask Teoh, - talk to people on your team, - talk to former advisers talked to people that you might be hiring. - Look at other companies in this space, - and they're gonna decide basically, - whether or not they believe that that post money valuation makes sense or not. - So in the case of the example that we've given $5 million Siri's A raise Ah, - and a 20% ownership target with an implied post money valuation of 25 million, - they're going to do their due diligence and think about the size of the opportunity, - the market size, - the way that you frame all of these problems. - And they're gonna think about, - you know, - doesn't make sense today for us to invest $5 million say that this company is worth $25 - million post money after our check is wired in. - If that makes sense, - the investment will go ahead. - If it doesn't seem to make sense, - there could be a negotiation on the terms of the deal on the term sheet. - There could be negotiation around slight changes in the valuation, - or maybe the venture firm owned slightly more. - Maybe they put in more money toe own mawr. - Maybe they put in less money and simply want a lower evaluation overall, - but these are a number of the sort of different levers that they're going to start - impacting how this negotiation takes place. - And ultimately, - that's how you can think about valuation, - how you should articulate it. - Ah is not by addressing it head on, - but by thinking about these underlying fundamental things like hypothesis, - burn rate, - runway in the capital that you need to get to that next step. - So thanks so much and we'll see you soon.