Getting Funded

About 80 entrepreneurs, early stage VCs and angel investors came to Nutter McClennen & Fish’s Seaport office last week for The Capital Network’s first Venture Fast Track Boot Camp. The theme of the interactive FastTrack was to give entrepreneurs an in-depth understanding of what it takes to raise early stage capital for a startup company.

In the audience were folks like Read McCarty, founder of Sandbox Medical (a provider of neonatal feeding solutions), Farnaz Bakhtari, Founder of TrainingPal (a SaaS based solution for the personal training and physical therapy markets), and Robin Coxe, founder of Close-Haul Communications (a developer of cellular over IP hotspots). Attendees included companies in the biotech, medical equipment, SaaS, cleantech, mobile, enterprise software, and other high growth fields.

In addition, fellow TCN Venture Coaching Graduates attended to share their success, such as Bettina Hein of Pixability and Joshua Herzig-Marx of Incentive Targeting. The group was joined by active Angels and VCs such as Jean Hammond of Launchpad and GoldenSeeds, David Beisel, of Venrock Capital, Jon Lim, of Polaris Ventures and the Polaris Dogpatch, Chris Sheehan, of Common Angels, and Elon Boms of Launch Capital.

The day started with keynote speaker Eric Paley, Managing Partner of Founder Collective, who discussed the current state of early-stage financing and the importance of leveraging the “network of trust”. Eric’s inspiring story focused on what to do when you are ready for financing, but it isn’t forthcoming. He illustrated the importance of building a strong Board and an active advisory group that were not just “window dressing.”

Some tidbits of advice gleamed from several of our sessions include:

On Creating a Business Model & Financing Plan moderated by George Simmons of Launchpad Venture Group & Yumin Choi of HLM Venture Partners:

• Lack of a consistent CEO is one of the biggest mistakes a start-up company makes. Founders should ask themselves honestly: Am I the right person to take my company from idea to exit?
• Would you rather be “rich” or be “king/queen”. Would I rather own 6% of a $100 million dollar company, or 100% of a lifestyle company?
• Fundable companies have large markets, create valuable solutions for critical customer problems, create barriers to entry for competitors, and have a well rounded “A” team.
• Most common mistake in looking at your financials? Entrepreneurs focusing only on top/bottom line. Learn to appreciate the value of gross margins, compare yours to your industry and know why your gross margin is higher/lower than others.
• Capital efficiency is critical to determining your financing needs.

On Raising Money from Friends & Families, Angels & VCs led by Jean Hammond, of Hub Angels, Launchpad Venture Group, and Golden Seeds, Carl Stjernfeldt of Castile Ventures, Joshua Herzig-Marx of Incentive Targeting, and Alex Golvsky of Nutter McClennen & Fish:

• When pitching your idea to an investor, even if the investor is not a good fit, ask if you can pitch to get advice.
• When going to friends and family for money, always write it down.
• When looking for angel group funding, find an internal champion.
• Always perform due diligence on your investor to see if they are good match — by stage, size, return profile, exit timing, interests and strategy.
• Some companies are a better fit than others for a particular type of capital. Figure out if you are a best fit with venture capital, angel capital, strategic capital, debt capital or bootstrap financing.
• Consider who an investor’s competitors are — because you may not be able to get funding from their competitors later.

On Dilution & Founder Equity Issues, led by Jeremy Halpern, of Evolution Advisors:

• Entrepreneurs should model the dilution impact of early stage investment – and understand exactly how this will affect the ultimate distribution of proceeds from a downstream sale of the company.
• The last investor is the most senior investor, which means last money in, is first money out.
• Participating preferred stock makes a deal significantly more investor friendly.
  If you pair strong valuations with strong anti-dilution measures, subsequent downround financings can radically diminish a founder’s equity value.
• Founders will typically take 100% of the dilution impact from an option pool that is adopted as part of the financing. If you are raising 12 months worth of cash, the option pool will need to cover the Company’s compensation needs for such 12 month period. This is just a fancy way of decreasing the pre-money valuation.

On Pitching the Plan led by Jeremy Halpern, of Evolution Advisors, Yumin Choi of HLM Venture Partners, and Jeffrey Arnold of Boston Harbor Angels and Mass Med Angels:

• When pitching investors, first appeal to their greed, then address their fears, then make sure they think you are a good use of their time.
• Successfully raising capital starts and stops with establishing your credibility – are you honest about the opportunity, risks and problems, and do you appropriately blend passion, humility and confidence.
• Investors invest in people because businesses don’t make things happen, people do.
• Focus on the value proposition and the market – not the technology
• If you can’t present your opportunity, solution, market, value proposition, competitive advantage, business model and team in less than 15 slides – you don’t know your business.
• Powerpoint slides are not the presentation – they are illustration – YOU are the presentation

On Angel & Venture Term Sheets and Negotiation/Valuation led by Bob Creeden, of Partners Innovation Fund, Jean Hammond,of Hub Angels, Launchpad Venture Group, and Golden Seeds, Jon Lim, of Polaris Ventures, Jeffrey Arnold of Boston Harbor Angels and Mass Med Angels, and Michelle Basil, of Nutter McClennen & Fish:

• It is important to pick your battles, not all terms are worth arguing over. Find the and focus on the key terms that are important to you.
• Understand how participation or multiple liquidation preferences change the economics of the deal
• Control over the board and the timing of selling the company is a critical issue
• Covenants and other rights of the Preferred investors can mean that even a minority investment will exercise significant control over the operation of the business
• Will you require the investors to pay-to-play – to support the company in subsequent financings or lose their preferred status and rights
• Valuations are driven by stage, leverage, the venture’s underlying competitive advantage and the ability to drive revenue
• Traditional valuation methodologies do not work for high risk, early stage companies — investors are trying to understand what their percentage of ultimate sale proceeds will be – and whether that is a good return on their investment.

Participants found the sessions very helpful, unlike any other all-day program with concrete takeaway material, a Mentor lunch session and a chance to meet with a high quality group of similar entrepreneurs. Tim Noetzel, founder of Pintley.com (an online community for the craft and micro beer industries), called it, “the most helpful and comprehensive program on early stage fundraising I ever attended.”

Let us know your thoughts on some of the above topics. We’d love to hear from you!