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

Raising Money for Your Start-Up

Scott Hartley, Venture Capitalist & Author

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8 Lessons (1h 2m)
    • 1. Trailer

    • 2. Intro & The Funding Landscape

    • 3. Determining your Capital Needs

    • 4. How does an Investor Think?

    • 5. Building your Pitch Deck

    • 6. Thinking about Market Size

    • 7. What's your Company Valuation?

    • 8. Articulating Valuation to Investors


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.


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.