The Fundraising Field Guide Book

The Fundraising Field Guide

The Fundraising Field Guide was written to help early-stage tech startup founders decipher and navigate the fundraising process. It provides an overview of the soft and not-so-soft challenges you will need to prepare for as part of your fundraising journey, including things like reaching out to investors, dealing with rejections constructively, preparing materials and financials, understanding valuations and deal terms, and how to manage the legal process.

I hope you enjoy the book and get lots of use from it. I’ve adopted a ‘free-to-download-and-donate-if-you-like-it’ model because hey, if you’re fundraising, you’re bootstrapped right? If you do enjoy it, however, please consider donating to one of the charities in the “Get & Donate” section of this site to support organizations that are helping people around the world with their social entrepreneurship challenges.

To download the book, go to the book’s main website –

http://fundraisingfieldguide.com/donate

Continue Reading

The Changing Balance Between Experiences And Ownership: These Startups Enable It

Across society there is an increasing trend of experiences eclipsing that of owning material goods. We’re seeing this trend increasingly in action around the globe.

Some articles (U.S.News via Yahoo / Fast Company / NPR) have explained why millennials, for example, are choosing to live for experiences and less for ‘things’ (or at least the ownership of things). If and when they do buy things… there is a trend to buy things that have stories behind them and things that are longer-lasting. While the generational explanation helps explain an increase in some services and products, other articles simply point to economic stagnation as a main catalyst for the growth of the sharing economy.Economic concerns have also affected the luxury goods demand from Russia and China.

In addition to generational trends and economic circumstances, increasingly popular sociological movements like the tiny-house movement and the minimalism movement are promoting a simplified life that focuses on doing vs owning – and if you do own, have it be something that you’re likely to get value out of for a while (thus forcing a view towards higher quality affordable goods that don’t make you feel like they have designed obsolescence nor are about showing off).

Taking these trends into consideration, at Seedcamp we’re bullish on startups that bring experiences, meaning, convenience, and quality durable products to the market and/or allow for people to share products they own (enabled by tech to help them scale).

Below, is a list of Seedcamp companies that enable and participate in this trend:

PropertyPartner – Democratising investment in buy-to-let property at the click of a button
Try.com – Try clothes at home for free from any online store
Crashpadder (acquired by Airbnb: listen to the podcast) – Matching travellers to local hosts through shared interests
24 Symbols – A subscription service to read digital books on the internet
Divido – Consumer finance for online merchants
Fishbrain – A mobile app and social network for fishermen wishing to share and connect with other fishermen
BorrowMyDoggy – Find great local friends for your doggy
Teleport – Search Engine for Digital Nomads
Love & Robots – An online gift shop where you can buy 3d printed or customisable products
Hole19 – An app that helps you analyse your game and your golf statistics
Hype – Yelp + Timeout for spontaneous mobile generation
Lineup – The largest network of ‘what’s on’ guides in the UK
Incrediblue – An award-winning, online platform for unforgettable boating holidays
ByeBuy – Unlimited access to your favourite products. Pay-as-you-go ecommerce
Car Quids – Connecting brands with unique, targeted outdoor advertising spaces
Wriggle – Connecting users with unsold spaces at local food, drink & entertainment businesses at a discounted price
Krak – A skateboarding studio that aims to make the world a huge skatepark
Wanna – Home for parents, where they can buy and sell products and services locally
Continue Reading

How to build a tech ecosystem: The essential building blocks for your city

160435189-1-645x250

Originally posted on TNW

I’m continuously excited when I hear about how many new ecosystems are evolving and growing across Europe and around the world. It truly is an exciting time in history for us to live in with many new innovations being generated by smaller companies rather than a concentrated few.

Aside from helping economies move forward through the creation of jobs and wealth, a thriving ecosystem allows startup founders to connect with other founders and share stories about how to overcome technical and commercial problems they may be facing.

Building anything new is hard, never mind alone and in a vacuum, thus sharing experiences with others should not be under-appreciated. Additionally, a growing ecosystem unlocked pools of capital be they private or public that are already existing in the local community and put them to work on improving and developing the community further.

Using London as an example, I’ve seen the local ecosystem evolve from its nascent stages, to where it is today, rivaling New York (according to Mayor Michael Bloomberg) at the global scale. This growth has been due to many factors, and I don’t want to seem to oversimplify what is arguable a very complex set of interplaying variables, but I do want to highlight some of the ones that stand out the most for me as drivers of a maturing ecosystem.

Local concentration of founders and other ecosystem players

In Steve Johnson’s book  ”Where Good Ideas Come From,” he talks about the power of a network and how proximity of nodes aids the network’s speed of development. In the case of London, the emergence of TechHub and later on Campus and Tech City has, over the past seven years, truly helped bring together many would-be founders and growing companies.

If you visit local buzzing digs such as Ozone Coffee, it is quite common to see investors and well-known founders intermingling. It is through this intermingling, across cafes, pubs, bars, and restaurants, that creates the serendipity that is required to have more ideas and decisions  ”just happen.”

The local culture’s support tone towards founders and local entrepreneurial heroes

Whilst it’s never easy to start a company, the process can easily be made twice as hard if you don’t have the support of your friends, family, and community. If your family thinks you are insane for not taking that corporate job and your friends think so as well, there is social friction in the ecosystem which prevents the unlocking of innovation.

Tolerance for failure is another aspect that is important for a culture of entrepreneurial innovation to occur. Failure both in terms of the personal failure, but also the legal failure. In a culture where failure brands and stays with you for life financially and socially, risk taking will naturally be discouraged.

While these aspects of a community are hard to change quickly, this is something that local governments and schools can help change through targeted media campaigns (as can be seen, for example, in other forms of government intervention programs and their success rates in changing popular perceptions such national health issues).

Quality of local education and engineering training

In London, we have some amazing universities, and thus, every year, a new crop of recently graduated engineers and other majors interested in starting a business enter the workforce.

For the most part, most large cities has distinguished academic bodies, so rarely is it about capability, but sometimes about offering students a place to experiment new ideas and providing them with applied internships. Universities are increasingly  developing internal incubators to allow students to exercise a more applied version of their education, which either leads to new developments, or more experienced founders.

Additionally, programs that help teach entrepreneurship to students, such the NEF, or to the public at large, such as Startup Weekend can greatly lead to an increase in the quality of the workforce and entrepreneurial mindset of a community.

Availability of HR talent and immigration reform

Aside from students, other individuals with experience are needed in a growing ecosystem. One quick way of bridging a shortage in staff in an area is to create immigration policies that allow for talented and capable individuals to enter the county and its labor force without major hurdles.

This is an area that many countries struggle with, particularly when the local population starts taking a protectionist slant towards employment opportunities. Nothing helps accelerate an ecosystem’s growth as the importing of highly skilled migrant talent.

The UK has, in many ways, led innovation in this area, originally with the creation of the Highly Skilled Migrant Programme (no longer available unfortunately) and the Startup Visa for founders in startups that have received £50K in investment. Innovations likes these have made some great strides in solving this problem for the UK, and I’m surprised how few other countries have attempted to solve this.

Access to successful mentors or serial entrepreneurs

It goes without saying that there are plenty of smart and accomplished in Europe. Companies such as Soundcloud  Skype, Transferwise and more were born out Europe and there are plenty of new companies that are creating technologies in hardware, fin-tech, and other areas.

The challenge for any emerging ecosystem is identifying these individuals and finding an efficient way for these potential mentors to meet promising new companies and founders.

A strong and growing media presence

As the old adage goes, “If a tree falls in a forest and no one’s around to hear it, does it make a sound?” Likewise, a successful startup story without an amplifier doesn’t help inspire others to do the same.

Of course, the media isn’t only about highlighting success stories, but also helps keep the ecosystem honest by bringing to light causes, political initiatives, key players, and even the occasional startup post-mortem to help founders navigate the emerging local tech industry.

Access to infrastructure

Building a tech startup is near to impossible if you don’t have access to a reliable and fast internet connection and access to key services such as hosting companies, social networks, and search engines (some countries block these services for various reasons).

This does mean some countries really struggle, but these problems tend to be ones that local governments are almost always keen on resolving quickly – not just for the tech community, but also for other communities. If censoring is an issue in your local ecosystem, that can still make things more challenging.

Access to experienced capital

Capital comes in many forms, but experienced capital can really make a difference to new companies. Experienced capital is not just about having made money before, but rather understanding what early stage startups are like and that they don’t fit the return profile, regularity, forecastability, or structure of real estate or private equity investments.

Experienced capital also knows how to coach and help founders along their journey rather than just auditing founders the way a public company analyst may.

Investors that understand how the global fundraising process works and know how to scale a company are hard to come by, so for sure any local ecosystem that has a few of these are very lucky, and the ecosystem as a whole can grow greatly by increasing the knowledge share between these individuals and the rest of the investment community.

Tax relief for investors investing in risky companies

Investing in startup companies can be lucrative if you do well and manage to back the minority of companies that do well. However, you will likely lose on most investments you make in the asset class because of its inherent risk.

This has always been the fundamentally difficult thing for new investors to digest when choosing to invest in startups versus, say, a well-structured financial product from a brokerage firm.

However, tax incentive schemes for investors led by the government, such as the SEIS program in the UK which allows investors to offset income tax and capital gains tax on positive returns on an investment, can greatly increase the attractiveness of high risk investments to investors.

Ecosystems who have government support to help investors invest more, generally manage to unlock stored pools of capital that can be repurposed to help stimulate the economy.

Tax relief for successful founders

In the same spirit as the above, ecosystems that offer founders some sort of tax relief on gains when exiting a company can effectively reduce the tax impact on them. This allows founders to have more available capital to invest in new startups. In the UK, this program is called Entrepreneur’s Relief.

Although not every exit will leave founders with a disposable net worth to invest in new startups, by creating the structure that encourages this, it merely becomes a numbers game of how many founders who are successful contribute back into the economy.

Couple with investor tax incentive schemas, you effectively create a virtuous circle of wealth creation that can be repurposed for further wealth creation.

Sure, not every founder will do this, but you just need a few to take this up, for it to be greatly effective.

Access to experienced legal counsel

Experienced lawyers can save a company a lot of time and money. I’ve seen deals go sour because someone’s counsel was not well-versed in standard terms or venture dynamics.

Lawyers are there to help you make things easier and protect you from things going wrong in the future, and not the other way around, but not all ecosystems have legal counsel that is well versed in venture law.

Initiatives such as the seedsummit termsheets, the series seed termsheets, and the BVCA documents – all available online – are good starting points for startups in emerging ecosystems to learn about what is normal and what is not. Then, if in the process of evaluating counsel for your company there is a mismatch between what you’ve seen and what they are familiar with, that is potentially a red flag.

Simplified local legal systems

Part of the legal challenge is not only just finding the right kind of lawyers to hire, but also in having the ecosystem have laws that help support Entrepreneurs. For example, laws that make it difficult to hire and fire employees make it hard for a startup to control cash burn as early founders will inevitably have to expand and contract as their companies go through natural peaks and troughs.

Simplification of the legal bureaucratic burden on the founder can make a huge difference: little things like allowing e-signatures can greatly speed up how quickly deals are completed vs having to have a notary sign or other more complicated structures which can slow things down.

And lastly, and considering how many successful startups come from after a founder has had at least one failure, a government’s treatment of company bankruptcy as either a black flag for the founder for ever more or as a state that does not tarnish one’s reputation from being able to try again.

To wrap it up…

In conclusion, whilst there are many variables to consider in how to help develop a local ecosystem, the above list are some that I see as almost very crucial to kick it off.

For example, note that I didn’t include things like interest rates or a thriving local M&A market… if an M&A market is present, for example, its great, but frankly, most foreign M&A markets pale in comparison with the global M&A market led by the top international corporations.

As such, a better place to start to try and influence change is to address the variables that are easier to adapt in the short term. In the longer term, as the ecosystem blossoms, the local corporates will take notice and will want to get involved.

If you like this post, please feel free to share with your local government officials to initiate a dialog about how to spur growth of your local community’s ecosystem.

Continue Reading

Investment – Are You in Danger of Raising a Toxic Investment Round?

Wallpaper by Morrissey666

money

Fundraising for an early stage technology startup is always a challenge. You have to navigate many meetings with potential investors and hopefully reach agreements that make everyone happy so you can continue to work in good faith after the negotiations are over. However, in some cases, after the dust has settled in a negotiation, it isn’t always a win-win for everyone.

For example, what do all the following company circumstances have in common? (note: all these companies are real early stage companies.)

  • A founder who gave away > 60% of his company for 100K in funding in tranches.
  • A founder that gave away > 75% of his company to his ‘investors’ in a pre-series A round.
  • A company that gave away > 70% of their company for < 100K to investors, but still wanted to go through an accelerator.
  • Another company with 51% ownership to existing investors.
  • Another company where the investor offered the founders a sub €30K investment but it came over tranches across the year (as in no cash right now).

As you read the above examples, you might find these offers as ’normal’ (then this post will hopefully help you think twice in the future about these kinds of deals), or you might reel in shock as you read each one of the above anecdotes. Either way, in this post I want to highlight the concept of a ‘Toxic round’ or a ‘Toxic cap table’ in an early stage startup to help founders navigate potential investment offers and avoid getting themselves into a difficult situation in the future.

What is a ‘toxic’ round?

‘Toxic’ rounds (not a technical term) can be defined as fundraising rounds that can pre-dispose a company to  struggle to find subsequent financing because newer investors shy away from a potential investment once they find out what the state of the company’s current cap table and or governance.

Whilst it is very hard to make any judgments about the quality of investors because each company’s financing history is unique, a common view is that investors that ask for terms such as those highlighted above are usually not of the sort that one wants to take investment from. However, the focus of this post isn’t to highlight the qualities of ideal investors (if you want to read more about the ideal qualities of a new investor check out this text), but rather why subsequent new investors might shy away from investing in your company if you have taken on this kind of round in the past. Additionally, in this post I’m only focusing on founder dilution and not on other potential aspects of a company’s shareholdership that could make it difficult for new investors to invest.

Therefore, the reasons why a new investor might shy away from a company that has experienced a ‘toxic’ round in the past can include:

  1. Because the company will likely require more capital in the future should it prove successful, and potential new investors feel that the founders will be less motivated to stick with the company as the value of their equity declines over time through premature excessive dilution.
  2. New potential investors feel that current investors own too much of the company and perhaps the company has a governance issues as a consequence.
  3. Because the investors have a large stake, it brings up a lot of questions about how the company got itself into this situation. Did it happen through a down-round? Was it due to other negative circumstances which could affect the future of a new investment? The circumstances raise a lot of questions and doubt in a new investor, and considering how many investment options an investor receives per year, frankly, as a founder raising capital you just don’t need any more reasons for a new investor to reject you.
  4. In the specific case of ‘debt’ or an ‘early exit of existing investors as part of a new financing’; potential new investors can sometimes object to having the money they are putting in as part of a new round be used for anything other than to expand the growth of a company. This means, potential new investors may shy away from companies that have investors that are eager to dump their shares as part of the financing transaction or companies that have too much debt outstanding that is repayable as part of an upcoming round.

Having said the above, how do you more precisely define a toxic round? Well, a toxic round could be where either “too much money” comes in too early at a too low a valuation, or where a company is too under-valued, or both. All of these cases lead to founders being greatly diluted too early in their company’s life.

To help you visualise these potential scenarios, let’s look at the following equations:

  1. Money Raised / Post Money = % dilution to founders
  2. Money Raised / (Pre Money + Money Raised ) = % owned by the new investors

These two equations represent the same thing, the only thing that changes is the definitions, but the numbers are all the same. If you don’t know what Pre or Post money mean, check out myrecent blog post which defines some of the components of a round.

What is the solution for toxic rounds?

Knowing the above, it would seem that the solution for toxic rounds would include both raising the right amount of money AND setting the right valuation for the company early on so that as the company grows, it doesn’t find itself in a ‘toxic’ situation. If you want to read more about how much money to raise and setting the right milestones check out my following posts below:

So if that solves the ‘Money Raised’ part of the equation, how about the valuation parts of the equation (pre-money)? Valuing an early stage company is always a source of much debate and causes many people lots of stress. As I’ve described on my previous blog posts on the subject:

There are many methods one can take to arguably ‘price’ a company. However, the larger point is that no matter what method you use, it will always be subject to current market dynamics… meaning that no matter what “quantitative” method you think you are using, it is subject to the variability of how the overall market is trending… if we are in a boom, the pricing will likely be higher, if we are in a bust, it will likely be lower. It’s a simple as that.

Taking these market dynamics in consideration, take a look at a recent Fortune blog post on what the average dilution hits are in the USA for Series Seed, A, B, and C rounds. In the Fortune post, you can see the average dilution per round for the typical rounds and you can see the market dynamics over the years (check out what the 2007 recession did to % dilution per round). What you realise is that none of these rounds, no matter how big, take as much equity as the real life examples I noted above at the start of this post. Even if you consider that different countries have different country risks, the range of numbers is a multiple of 3x what is recorded over the last 6 years in the USA.

What if your investment round was toxic?

So what if you’re already in a tricky situation similar to the examples I noted above? If you find that you are in the situations described in this post, unfortunately the available solutions aren’t always easy and straightforward. The single best solution is to have a tough talk with existing investors on how to rectify the situation before new investors either walk away or make it conditional as part of their new investment. There can be many ‘creative’ solutions to solving the problem with your investors, such as investors giving back equity if founders hit milestones, but they will all seem ‘creative’ to a new investor rather than ‘clean’ if not completed before they invest; hence why the ideal solution is to work through this topic with existing investorsand help them understand that by not helping you overcome the situation, they very well may be jeopardising the long term value of their own investment. Perhaps counter-intuitive, but true. In the end, any progress you make with existing investors on fixing these situations if you are already in them, is better than no progress, no matter how tough the discussions.

I leave with you with the following thought of prevention for you to discuss with your potential new investors if they offer you a hard deal… yes, they are taking a huge risk by investing in your early stage startup, but by taking too much equity or debt too early, are they really just pre-disposing your company to failure? Something to discuss.

Originally Posted at Netocratic.com: http://netocratic.com/toxic-investment-round-2451

Enhanced by Zemanta
Continue Reading