Welcome, my name is Roy Rodenstein and I love helping entrepreneurs. With this blog I aim to share what I've learned to help others start, and win. My hope is to develop how2startup into a wiki for the startup community.

Fundraising Debugged: My BarCamp Presentation

April 20th, 2010    Share

Last weekend at MIT’s Stata Center, 500+ hackers, designers and assorted geeks gathered for BarCamp Boston 5. The organizing team including Shimon Rura, Jay Neely, Sooz Kaup and many others did a great job, thanks on behalf of all attendees.

BarCamp is an unconference, specifically, anyone can propose a session on any topic, gauge audience interest based on votes, and then lead the session or even request that someone expert in the topic lead it. The final set of sessions, many with slides online, is on the BarCamp Wiki. Also interesting was the “10-second intros” portion, where a couple of hundred people gave their elevator pitch to other attendees; though time-consuming, it was a nice way to get a sense of who was there and to also spot specific people you might want to meet.

I was up until 5AM working on my presentation and grabbed one of the first speaking slots. Thanks everyone who attended the session, we had some good dialogue and questions despite a tight 30-minute timeframe. My biggest learning were some interesting rumors of intangible benefits of having Paul Graham aka Y Combinator on your cap table (a cap table, or capitalization table, is basically a ledger/roster of investors and stockholders), such as a higher chance of avoiding major dilution (or cramdown) if raising funds at a lower valuation than the last round (a down round).

I posted the presentation -Fundraising Debugged: When, Why & Who to Raise (and not raise) Money From- to SlideShare, embedded below. It covers:

  • Timeline of fundraising process for my startup, Going.com, from founding and bootstrapping, to quitting my day job, to seed and VC funding and acquisition by AOL
  • Fundraising Decoder Ring: a one-slide comparison chart of the costs, benefits and characteristics of funding via boostraping, friends & family, seed/incubator funds, angels, and VC
  • Deeper Pros/Cons/Bottom Line for each source
  • Bustin 4 Myths about VC Funding
  • List of advanced fundraising topics and Further Resources

I’ll be breaking down fundraising further in later posts. As always, appreciate your comments, questions and experiences.

Author: admin | Filed under: Uncategorized | View Comments
  • http://venturehacks.com Nivi

    Wonderful chart. Thanks for the AngelList plug. What's the cramdown rumor?

  • http://how2startup.com/ Roy Rodenstein

    Hey man, it's an honor :) Look forward to meeting/helping at some point.

    My translation of the rumor, from some YC folks, is that if a company has a down round some VCs are less likely to apply the full ratchet or other anti-dilution provisions if Paul is in the deal. The reality is that is actually a question regardless of who the original investors were -should we cram them and maybe slightly hurt our relationship or should we not- but I could buy that PG gets good respect in those cases.

  • http://twitter.com/travellperkins Travell Perkins

    So do startups ever issue debt bonds with no conversion to equity?

  • http://how2startup.com/ Roy Rodenstein

    In early stage it's rare from what I know, most people want the opportunity to benefit from the upside. In some cases Friends & Family funding could take that form as they may just want to be nice and support you but not get into more complex arrangements – although really most form seed documents these days are 1-2 pages tops (see bottom of slide 17).

    In later stages, debt financing is pretty common from banks if a company is doing well and/or has solid money in the bank, although even then they often require some warrant coverage, i.e. equity options, if things go south.

  • http://jmillerinc.com Jeff Miller

    This line caught my eye: 'In reality, nothing ever comes down to a “vote”'.

    Thanks for this. Great to see more entrepreneur blogs sharing information.

  • http://www.architexa.com/ Vineet Sinha

    Great post.

    It will be helpful to see more details (posts) on the myth-bustin' slides for those of us that couldn't make it to the bar camp.

  • http://how2startup.com/ Roy Rodenstein

    Thanks Vineet. Good point, I should do a followup with details on those myths.
    Any immediate questions, feel free to post here and I'll try to clarify.

  • http://www.architexa.com/ Vineet Sinha

    Roy, We are thinking about doing an Angel round first with perhaps a VC round soon after – for many reasons: (i) getting our act together before talking to the professionals, (ii) getting a little more traction and because of the previous two (ii) reducing dilution.

    Does that make sense? How do these relate to the myths?

  • http://how2startup.com/ Roy Rodenstein

    My quick thoughts:
    (i) This makes sense, although I would view it/encourage it more as getting the business's act more together (which you kind of get at with (ii0)

    (ii) As I touch on in the VC Fundraising Myths, I think this is fine but most VCs like to get to know people (especially first-time entrepreneurs) over some period of time. As Charlie O'Donnell said today, it's a bit like dating. As in dating, investors love to feel like they found a diamond in the rough and have gotten to know you over some period, vs. “hey, 5 guys all want to marry me, do you want to be one of the bunch? Whatcha gonna offer me?”
    So it can actually be good to start talking with them sooner but yes, as you say having some time where you don't need the money is absolutely desirable.

    (iii) This is probably the biggest myth. The reality is 80% of Series A's, especially on the east coast, are “n on n” deals- could be $3M in on a $3M pre-money valuation, $4M on $4M, $5M on $5M. Chances that 6 months of runway will change the valuation or dilution are fairly small, again at least for first-time entrepreneurs.
    And the angel money isn't free, it will probably still add 10-15% dilution (e.g. $300k angel on a $3M pre-money valuation). So you absolutely can end up with *more* dilution by doing more rounds.

    However, if you're not sure *whether* (not at what valuation) you could raise VC, or if you want to have more leverage to negotiate other terms, bring in higher quality firms, etc. then definitely having that runway to prove more out of the market can be a good idea.

    (happy to talk more privately as well)

  • http://www.architexa.com/ Vineet Sinha

    Really helpful… Definitely things to think about. Thanks!

  • Click

    Roy,

    I have a strange situation on a California LLC. I've been asked to do some forensic cap table work. A mess that needs unwinding. I will limit my question to pre-money or founders cap table.

    Before I go into too many details the question is this:
    The company's initial value was based on an idea that required the licensing of a specific software. Call it SoftX with a shelf price of $1 million. Only a regional license not a purchase.

    Founder One came up with the whiz-bang idea that needed SoftX in order to monetize the idea.

    Founder Two negotiated a 90% discount on SoftX because he works for a related company and promised big consulting and customization work.

    These two founders talked Founder 3 to put up the 10% cash needed to buy the discounted SoftX, $100k.

    So then the first two founders draw up an initial 'pre-money' cap table showing no cash, assets or services (only the negotiated discount) from Founders One & Two giving them 90% and the Founder Three's cash gets 10%.

    Founder Three's cash actually gets used for operating capital, forcing the need for another round to actually buy the SoftX license.

    The SoftX software was actually purchased later with funds from another round.

    BTW, there was no provision for an option pool pre-money or post money pool.

    So, is this even legal? Calling a 'negotiated software discount from a related firm' some kind of contributed asset?

    Can the Founders just make up a value before a line of code is written and no money is in the bank?

  • http://how2startup.com/ Roy Rodenstein

    Hi there. I'm not a lawyer so I can't give advice and you should consult your own counsel on these topics, it sounds like the sequence of events got a bit complicated.

    However, to your last line -”Can the Founders just make up a value before a line of code is written and no money is in the bank?”- the answer is sure. Generally speaking, all company valuations are “made up” when startups are first formed (and, arguably, for startups at all stages before going public). It's up to the Market (i.e. investors) to determine whether it's fair or not- just like it's not “illegal” to try to sell a blank piece of paper or a bag of potato chips for a million bucks; it's just unlikely anyone would pay it. If I understand the scenario, it sounds like the pre-money valuation proposed was $900k, which is pretty typical for a seed-stage startup. It's certainly more common for there to be some code written or other tangible assets, but lack of code or cash doesn't mean the company is worthless. It sounds like in this case there may have been other complicating factors or lack of complete disclosure, but the valuation part itself does not seem especially unusual.

  • LukeSWalker

    Thanks Roy,

    This is the former 'Click' that wrote the original question. Reading your answer made me realize I asked the wrong question. It really has to do with contributed capital vs. valuation.

    My understanding is that contributed capital can only be cash, assets or services. The founders of this company are claiming that the discount they negotiated on SoftX was in effect their contributed capital. Also, they are carrying this amount on their books as an asset (?) in order for the equity accounts to balance out.

    The first three founders (LLC members) get 90% for negotiating the discount from a company one of them owns. This is like Bill Gates saying he will contribute a 90% discount on Windows 7 to an LLC and that buys him 90% of the company. (Assuming Windows 7 is the only asset). The other LLC member gets 10% for actually buying Windows 7 from the other member's company.

    Another question I didn't state clearly. The $100k member 4 contributed was meant to be part of the 'pre-money' valuation since it represented his original contribution to the LLC. The LLC wasn't formed until he deposited the money.

    Thanks for your advice! I will keep digging for an answer and let you know if I find anything to clarify these issues.

  • http://how2startup.com/ Roy Rodenstein

    That does seem like a stretch. You should research the legal definition of contributed capital but I don't see how a negotiated discount (whether for a company you own or not) should be claimed as capital and carried in the books.

  • http://www.air-jordan-14.com air jordan 14

    This place is very good, I recommend a place, we have had time to go to China and see. China’s Zhejiang Province, Hangzhou is located in the northeast of Hangzhou, 180 kilometers from Shanghai Hangzhou is well-known in our history One of the seven ancient capital of Hangzhou is the State Council’s key tourist cities and historical and cultural city. Hangzhou is a famous tourism city in China, attracts over 20 million Chinese and foreign tourists. Its beautiful West Lake in Hangzhou world-famous, “There is paradise in heaven, there is Suzhou and Hangzhou” expresses people through the ages for the heartfelt praise of this beautiful city. Yuan dynasty was the famous Italian traveler Marco Polo praised as “the world’s most beautiful and luxurious city.” A literary giant of Song Dynasty, wrote: “There is the West Lake 36, it is the best in Hangzhou.” West Lake, she has three sides Yunshan, a water holds city Hongya, her “total cash Yihe affordable” natural scenery cheap uggs

  • Afriedman

    Roy,

    Thanks so much for posting this. It's enlightening. I am hearing that Angels used to be warmer and fuzzier and had longer investment horizons years ago than they do now and are pretty much like VCs but with smaller dollar amounts.

    Recently, I heard that raising money from these sources pretty much guarantees you are selling your company at some point. What about those of us who love what we do and are looking for help enabling a company we're working hard to turn into a success, of whatever size? Who is out there who can be a little more patient to do some long-term good?

    I run a peer-review focused green building directory and online community called Rate It Green (http://www.rateitgreen.com). Companies post their products and services on the site, and their clients share their opinions and experiences primarily through peer reviews and social networking features (pending). I am confident this can be a successful small business, and there's some great upward potential in future parts of the model if we bring enough traffic and content. But this is also significantly about social impact. I am looking to increase the amount of available information in this industry and really change the nature of conversations to a point where people are sharing information and saving each other time and angst. We're still new and small, but we've got 900 companies registered as well as a growing list of contacts, and I have big plans. Here's a sample listing: http://www.rateitgreen.com/company/national-fib.... I envision a day when a site visitor sees a revolving globe and the site asks for a geographical and language preference, and this person then sees hundreds of thousands of products and services all reviewed multiple times. He or she can ask questions, post their thoughts, and easily get and share great advice about top green building items and projects. Then I will know I've done my job.

    Coming back to the present, I need to raise some money after a few years of development. I know I also need to add key team members and advisors as a part of this process. I am facing all of the chickens and eggs of needing to find my first paying clients (I have a few, but it's time to really start some Sales work – much of the funds I raised previously was for a book on green building information resources. The site's finally ready for some first sales now) and raise funds. My most likely clients right now are people who believe in what we do, and I can find some more future-thinking folks who see the value in the resource if we keep developing. Beyond these folks, I will have to fund some real marketing and programming development to bring the traffic, content, and functionality that would paying clients who want to see ROI immediately and who will pay more than the very reasonable rates we offer now to folks who can commit early. At the same time, I need to raise funds to pay for these investments.

    So, what to do? I suspect I need to find a great Angel who is very interested in green technology. Or, I am wondering if I can find some funds creatively, perhaps through foundations and some green resources? I keep hearing how there is money out there to grow green companies. I would love advice on how to find it. I've even thought of creating a special category of founding advertisers.

    I see you are a MassChallenge advisor, and I hope we get a chance to connect. Rate It Green is fortunate enough to be a finalist. I am very excited to learn and take the next steps for Rate It Green through this super opportunity. I look forward to finding the right folks to approach and coming up with the right plan to excite them about what I am building here. I am eager to change the rate of development here – there are many green building businesses and folks seeking them out that this resource can help if I can get to point B and beyond.

    Thanks very much,
    Allison Friedman
    Founder
    Rate It Green
    http://www.rateitgreen.com

  • Afriedman

    Roy,

    Thanks so much for posting this. It's enlightening. I am hearing that Angels used to be warmer and fuzzier and had longer investment horizons years ago than they do now and are pretty much like VCs but with smaller dollar amounts.

    Recently, I heard that raising money from these sources pretty much guarantees you are selling your company at some point. What about those of us who love what we do and are looking for help enabling a company we're working hard to turn into a success, of whatever size? Who is out there who can be a little more patient to do some long-term good?

    I run a peer-review focused green building directory and online community called Rate It Green (http://www.rateitgreen.com). Companies post their products and services on the site, and their clients share their opinions and experiences primarily through peer reviews and social networking features (pending). I am confident this can be a successful small business, and there's some great upward potential in future parts of the model if we bring enough traffic and content. But this is also significantly about social impact. I am looking to increase the amount of available information in this industry and really change the nature of conversations to a point where people are sharing information and saving each other time and angst. We're still new and small, but we've got 900 companies registered as well as a growing list of contacts, and I have big plans. Here's a sample listing: http://www.rateitgreen.com/company/national-fib.... I envision a day when a site visitor sees a revolving globe and the site asks for a geographical and language preference, and this person then sees hundreds of thousands of products and services all reviewed multiple times. He or she can ask questions, post their thoughts, and easily get and share great advice about top green building items and projects. Then I will know I've done my job.

    Coming back to the present, I need to raise some money after a few years of development. I know I also need to add key team members and advisors as a part of this process. I am facing all of the chickens and eggs of needing to find my first paying clients (I have a few, but it's time to really start some Sales work – much of the funds I raised previously was for a book on green building information resources. The site's finally ready for some first sales now) and raise funds. My most likely clients right now are people who believe in what we do, and I can find some more future-thinking folks who see the value in the resource if we keep developing. Beyond these folks, I will have to fund some real marketing and programming development to bring the traffic, content, and functionality that would paying clients who want to see ROI immediately and who will pay more than the very reasonable rates we offer now to folks who can commit early. At the same time, I need to raise funds to pay for these investments.

    So, what to do? I suspect I need to find a great Angel who is very interested in green technology. Or, I am wondering if I can find some funds creatively, perhaps through foundations and some green resources? I keep hearing how there is money out there to grow green companies. I would love advice on how to find it. I've even thought of creating a special category of founding advertisers.

    I see you are a MassChallenge advisor, and I hope we get a chance to connect. Rate It Green is fortunate enough to be a finalist. I am very excited to learn and take the next steps for Rate It Green through this super opportunity. I look forward to finding the right folks to approach and coming up with the right plan to excite them about what I am building here. I am eager to change the rate of development here – there are many green building businesses and folks seeking them out that this resource can help if I can get to point B and beyond.

    Thanks very much,
    Allison Friedman
    Founder
    Rate It Green
    http://www.rateitgreen.com

  • http://how2startup.com/ Roy Rodenstein

    Hi Allison,

    Congrats on being a finalist for MassChallenge! And also on RateItGreen, it seems like a great initiative.

    I think many angels are still “warm and fuzzy” but keep in mind they are investing their hard-earned money so they will look to get a return at some point.

    This is not my area of expertise but a couple of quick thoughts for you would be
    - shouldn't http://www.rateitgreen.com/products be your home page?
    - and also, how will you differentiate from the other companies working on this problem and all facing the same chicken and egg problems, e.g. GreenKonnect and others?

    Best of luck and thanks for the comments,
    Roy

  • Afriedman

    Hi Roy –

    Thanks very much for your reply.

    It is certainly on my list to implement a home page and other redesign projects (right now the tech budget is going to polish our new code installation and for some tech needs that have been waiting). And it's a great thought to have the directory more immediately available. As an intended phone book of the green building industry, the question would be why to pick one category over another. Certainly service providers like Architects, Builders, and Designers wish to be found just as much as products? But I hear you. I can't wait to fund more design time.

    The difference with Rate It Green is that we are an open and inclusive directory with a peer-review focus committed to working to find every green building product out there as we can. I don't know the folks at GreenKonnect personally, but I do know their site and that they exhibited last year at the Greenbuild show. While there are maybe 10-12 top directories in this space in my opinion, they are all really at various stages of development. GreenKonnect might go do great things! Right now, it looks like a nice idea that is still pretty small – 8 or so projects, people, and companies. It is hard for many folks in this space to be as patient as is required to build traffic and content, and still keep their enthusiasm and putting in the time and energy like I do (for many, this is a side project). And it is hard for people still entrenched in development to justify spending what we all might need to to drive traffic. Especially when the content isn't at a critical mass yet. So many chickens and eggs, yes. Revenues first? Funding first? Funders need returns, but most advertisers want to see ROI reasonably soon, and that doesn't happen without more investment than most in the space can muster.

    As far as directories and online green building communities go, I tend to categorize them into: Experts, Open Communities and simple paid-advertising-only (the bulk). There are a couple of great experts (one was bought out unfortunately). Rate It Green is different here in that the site is open and more welcoming and comprehensive. We expect to be able to become the largest directory in a a reasonable amount of time partly as we are one of the very few that will give a product manufacturer a free listing level (some do offer free Service listings) – we have 900 registered companies now, and 4500 items total if we count suggestions and items in intern may have found in the past, etc. We do not charge users, and we warmly invite both experts and beginners as well as product and service providers and trade professionals and end users to the community. Our free basic listing is also critical to getting companies excited to list so we can build our network. Some will upgrade their listings, while others will just take the free service. But more Members and more content are worth a sincere offer to build participation and provide information. The idea is to get everyone talking and sharing information in the same space so we can all learn from these conversations what vendor relationships will work best long-term. Providers reach their intended target markets, and people reading reviews get a sense of who to trust by reading reviews. I was once asked by a paid directory leader how I could afford to offer something for free. I actually wondered why this person might NOT have a free listing, because their directory seemed so small. I don't want to list 9 paints – I want to list them all. A challenge is that it takes a pretty self-confident advertiser to get up there and support peer reviews. We're all working on how to really give a push to peer-content. I know of one other green building site hoping to build peer review content as a main focus. One is very small. The other started charging users to see content, to support development. It isn't easy being green?

    I don't buy glossy magazine ads or promote in traditional ways I can't afford. We build Rate It Green one friend at a time. I am passionate, and patient. I think the difference may be my tenacity and the loyalty some companies have shown who get what it is we're working to build. They know I take this quite seriously and am working to build a trusted neutral resource they can feel good about. I don't have people reviewing with a bare minimum of information. They register and become community members and take their roles quite seriously. When we say “community,” we mean it.

    Thanks, and I am sure this is more than you wanted to know. The short answer is that there is room for information leadership in an industry now predicted to reach $170 billion in sales by 2013. I am looking forward to build a highly enabling portal so others can focus on doing the actual building more confidently. Have you used an eco paint? Write a review! Social networking is next. I can't wait. I just have to go do that Saleswork and Fundraising. I am so excited to perfect the best strategies as a part of masschallenge!

    Thanks,
    Allison

blog comments powered by Disqus