Practical funding masterclass: a series of 5 presentations by Benno Groosman. Session 1: Introduction to funding language + business planning. Session 2: Determining funding need + milestone-based funding. Session 3: Building your financial investment plan. Session 4: Investor readiness. Session 5: Advanced funding and wrap-up.

1. SESSION FOUR:
INVESTOR READINESS
Benno Groosman MScBA – www.groosman.co –Athens, May 24, 2016 –

2. MASTERCLASS FUNDING FOR
INNOVATIVE STARTUPS
Benno Groosman MScBA – www.groosman.co –Athens, May 24, 2016 –

3. THE SLIDES ARE ONLINE ALREADY!
www.slideshare.net/benno_groosman
FUNDING MASTERCLASS www.groosman.co

4. MASTERCLASS SCHEDULE
 Session 1: Introduction to funding language + business
planning;
 Session 2: Determining funding need + milestone-based
funding;
 Session 3: Building your financial investment plan;
 Session 4: Investor readiness;
 Session 5: Advanced funding and wrap-up.
FUNDING MASTERCLASS www.groosman.co

5. INTHIS PRESENTATION
Scope
Preparation
Valuation
The process (with important clauses)
After the investment
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6. SCOPE
This is not a presentation on negotiation tactics, but:
Preparation and understanding of the process will help
you in the dealmaking and negotiation
You can only start negotiations if you meet the
minimum requirements (the investor has to be
interested, you have to be prepared)
The better you present your case, the better the deal
you can get
FUNDING MASTERCLASS www.groosman.co

7. PREPARATION (1/2)
Business plan with financial plan
 http://www.slideshare.net/benno_groosman/funding-for-innovative-startups-part-1-of-5
 http://www.slideshare.net/benno_groosman/funding-for-innovative-startups-part-3-of-5
Know your funding need
 http://www.slideshare.net/benno_groosman/funding-for-innovative-startups-part-2-of-5
Presentation / pitch deck
FUNDING MASTERCLASS www.groosman.co

8. PREPARATION (2/2)
Lawyer and accountant
 Build your relation before you have to review your contracts or guide the negotiations: this
will save time and improve quality
Other experienced entrepreneur
 Before and during the investment process, find somebody with experience that can help you
Timeline
 When do you need the money? How do you want to go through the process?Take control!
Contact multiple investors
 Don’t bet on one horse
 More investors can share the risk and increase the funding
 Make sure they all have the same information and know the timeline
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9. VALUATION
Science, art
or random?
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10. VALUATION
Valuation of startups is not just a numbers game. It’s
more about expectations, feelings, investment limits etc.
But, start to quantify your value by:
Discounted cash flow;
Real option pricing;
Comparing to other startups.
FUNDING MASTERCLASS www.groosman.co

11. VALUATION
DISCOUNTED CASHFLOW
 Take the total cashflow for each year
 In the 5 year prognosis at
http://www.groosman.info/#!funding/cbvu this is
€18.800; € 153.500; € 87.615; -€ 14.963 € 113.460
in year 1, 2, 3, 4 and 5
 The discount rate is 0,15 (15 percent)
 =18800/1,15+153500/(1,15^2)+87615/(1,15^3)+(-
14963)/(1,15^4)+113460/(1,15^5)
 So, the DCF is €237.878 in 5 years
 This number is not totally fair, as it also includes
the funding in these 5 years
FUNDING MASTERCLASS www.groosman.co

12. VALUATION
REAL OPTION PRICING
NPV = -1000 + 0.7*0.3*100 + 0.7*0.5*3000 + 0.7*0.2*6000 + 0.3*0 = 1471
investment
1000
succes
low
1000
medium
3000
high
10000
failure
0
0.7
0.3
0.5
0.2
0.3
FUNDING MASTERCLASS www.groosman.co

13. VALUATION
COMPARINGTO OTHER STARTUPS
 Find comparable startups (stage and market) and look for
(public) data on the investments they made, talk with them
or people in their circle.
 Check websites like www.crunchbase.com for this too
 Valuation also depends on the investor’s previous
investments, if you find that an investor takes 20-30%
equity for €250k-350k this investor might look for valuations
from €833k to €1.75M
 Serial entrepreneur: look at your previous comparable
startups (stage and market) and add a premium valuation
for experience and network
FUNDING MASTERCLASS www.groosman.co

14. VALUATION
OTHER
Investor policy, e.g. “the maximum post-money
valuation for seed money is $2M”
Investor divides the numbers the entrepreneur
provides by 10
… entrepreneur knows, so multiplies by 10, etc.
Profit times 5, revenue times 2 (or any number),
industry multipliers, β
Tens of other methods
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15. THE INVESTMENT PROCESS
GO / NO GO decision after every stage in the deal making process:
 First contact, pitch
 Personal connection
 Business plan and/or presentation
 Term sheet
 Negotiations
 Signing term sheet (exclusivity phase investor)
 Due diligence
 Participation contract
 Deposit of money and changes of legal structure
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16. THE PROCESS
1/9 FIRST CONTACT, PITCH
You can pitch when you meet an investor at
an event
Get an introduction from somebody who
knows the investor
Or select the right investors for your startup
and send them an introduction email
Do not send your full business plan at first
contact!
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17. THE PROCESS
2/9 PERSONAL CONNECTION
Be clear in your goals and expectations
Listen to the investor’s perspective and ask
questions
First agree on mutual interest on your
business
Do not start to talk about valuation
immediately
Set goals for a next meeting
FUNDING MASTERCLASS www.groosman.co

18. THE PROCESS
3/9 BUSINESS PLAN / PRESENTATION
Give a 10-15 minute presentation highlighting the
most important parts of your business plan, but
also working on the relationship with the investor
and discussing questions together.
Send your business plan. Only ask to have a NDA
signed in case you disclose technology that is not
patented/public yet.
Propose a date for the next meeting with a clear
agenda immediately. Keep in control, don’t loose
momentum.
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19. THE PROCESS
4/9TERM SHEET
Investor will send a term sheet in case the
investor wants to proceed with the process.
In the termsheet the most important
investment critera and terms are defined, like:
Valuation
Preferred stock and influence rights
IP claims
Obligations founders
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20. THE PROCESS
5/9 NEGOTIATIONS:VALUATION
• WithVCs it’s easier to ask more money than to
give away less shares, with informal investors
it’s the other way around.
• Investment in multiple stages (one contract)
can lead to better valuation. E.g., $200k at once
will come at lower valuation than $100k upfront
and $100k after first customer.
• More risk for you: what if the customer comes
too late?
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21. THE PROCESS
5/9 NEGOTIATIONS: SHARE HOLDERS
• Drag-Along right
• If big shareholders sell, small shareholders are forced to sell too
• Tag-Along right
• Like the previous, but small shareholders are not forced, they have the
right
• Pre-emption right
• Before another shareholder comes in, the existing shareholders get the
right to buy new shares
• Right of first refusal
• Like the previous, but also for existing shares and at the price offered by
the potential buyer
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22. THE PROCESS
5/9 NEGOTIATIONS: GENERAL
Preference rights, exit options, and penalties
• What if it goes very good?
• More important: what if it goes bad?
• Will you lose your shares?
• Will you lose your management position?
FUNDING MASTERCLASS www.groosman.co

23. THE PROCESS
5/9 NEGOTIATIONS:TAKE CONTROL
• It is your business
• Don’t get controlled and sucked up by the game
• Be hard on the content, but soft on the relationship
• Don’t get intimidated by negotiating tactics
• If you don’t like the deal, take time to negotiate
• Use an experienced and trusted advisor/mentor/lawyer
 … and dare to walk away and cease the deal. Be nice though,
it gives you credits
FUNDING MASTERCLASS www.groosman.co

24. THE PROCESS
6/9 SIGNINGTERM SHEET
Be aware: after signing, the startup and
investor go in an exclusivity phase:
founders can not make a deal with another
investor for a period of time
Make sure there’s a deadline on the due
diligence process defined in the term
sheet: you don’t want to be exclusive a
long time and not have a deal.
FUNDING MASTERCLASS www.groosman.co

25. THE PROCESS
7/9 DUE DILIGENCE
In the due diligence the investor will research the
founders, the books, contracts, IP and all that is or can
be relevant for continuing or ceasing the deal.
Make sure that all info is complete and searchable for
the investor.
You can also do a form of due diligence on the investor.
Due diligence can be used for renegotiating by the
investor in case you forgot to share something
important, or can cancel the deal completely.
So, be honest about the risks and difficulties before.
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26. THE PROCESS
8/9 PARTICIPATION CONTRACT
In the participation contract all aspects of the
investment are defined, including agreements for future
events.
Get your own lawyer, preferably paid from the future
investment capital (not your current account)
This contract takes most time to review and negotiate.
After signing the deposit of money and changes of legal
structure can be done.
FUNDING MASTERCLASS www.groosman.co

27. THE PROCESS
9/9 LEGAL AND FINANCIAL WRAP-UP
Deposit of money (only then the deal is
completed!)
Changes of legal structure
Changes of management freedom and
board structure
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28. AFTERTHE INVESTMENT
• Keep working on the relationship with your investor
• Get used to an extra decision maker in your team
• Prepare for more financial and strategic reporting
• Use the network and time of the investor wisely
• Keep looking for additional funding and investors: your
investor will help with contacts and negotiating with
them or provide even an additional round of funding
FUNDING MASTERCLASS www.groosman.co

29. MASTERCLASS SCHEDULE
 Session 1: Introduction to funding language + business
planning;
 Session 2: Determining funding need + milestone-based
funding;
 Session 3: Building your financial investment plan;
 Session 4: Investor readiness;
 Session 5: Advanced funding and wrap-up.
FUNDING MASTERCLASS www.groosman.co

30. YOUR NEEDS?
What do you want me to
cover in the final session?
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31. FOLLOW ME
Benno Groosman MScBA
Experienced startup entrepreneur
www.groosman.co
FUNDING MASTERCLASS www.groosman.co