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FUNDING HARDWARE STARTUPS RRE VENTURES | FUNDING HARDWARE STARTUPS Steve Schlafman email@example.com RRE Ventures February 27, 2015
ABOUT ME RRE VENTURES | FUNDING HARDWARE STARTUPS Principal, RRE Ventures Raised in Boston, live in NYC Focus: Marketplaces, media, SAAS, hardware Twitter: @schlaf Blog: Schlaf.me Hardware Investments: Understory Weather (RRE), SmartThings (LV), Dragon (LV), Romotive (LV) 1
RRE VENTURES Established 1994 Most active early stage firm in NYC for nearly two decades Multi-stage: Seed, Series A, Series B Current Fund Size: $280M Initial Investment: $250K - $8M SAAS, Fin Tech, Hardware, Marketplaces, Mobile Services, Media Support platform with unique access to Fortune 500 RRE VENTURES | FUNDING HARDWARE STARTUPS 2
Each investor views the world differently so this is far from definitive I’m not a lawyer so consult with one before you raise I couldn’t include every VC and seed fund This lesson is an adaptation from my class ‘How to Raise Seed Capital’ DISCLAIMERS RRE VENTURES | FUNDING HARDWARE STARTUPS 3
THE BASICS RRE VENTURES | FUNDING HARDWARE STARTUPS 4
YOUR FUNDING OPTIONS Debt / Credit Cards Family & Friends Crowdfunding Your Customers Grants RRE VENTURES | FUNDING HARDWARE STARTUPS Venture Capital 5 VC is just one option. There are numerous sources so make sure you evaluate the pros and cons of each.
HOW VC WORKS RRE VENTURES | FUNDING HARDWARE STARTUPS 6 VC Firm (General Partner) VC Fund (Limited Partnership) Paid 2% fee + 20% of Profits Limited Partners (public pension funds, corporate pension funds, insurance companies, high net-worth individuals, family offices, endowments, foundations, fund-of-funds, sovereign wealth funds, etc.) Investment 1 (Ownership %) Investment 2 (Ownership %) Investment 3 (Ownership %) Fund Management Ownership of Fund
WHAT IS SEED STAGE? RRE VENTURES | FUNDING HARDWARE STARTUPS 7 Series A, B, C+ $2.5M - $10M+ Out of Scope In Scope Institutional Seed $500K - $2M+ Accelerator $20K-$150K Angel $25K-$250K The seed is the “setup” round(s) where a person or startup venture approaches an angel or a VC firm for funding their product / idea. Source: wikipedia
REASONS TO RAISE RRE VENTURES | FUNDING HARDWARE STARTUPS 8 Your Company + VC Funding = Grow Faster 2. Expand Network 3. Timing Raise to accelerate growth. VC will help you scale but it absolutely will not validate your product and market.
RAISING VC CHANGES EXPECTATIONS RRE VENTURES | FUNDING HARDWARE STARTUPS 9 With VC Funding Without VC Funding
IT TAKES MORE THAN SIX YEARS TO EXIT RRE VENTURES | FUNDING HARDWARE STARTUPS 10 Source: http://www.cbinsights.com/blog/trends/venture-capital-exit-timeframe-tech
IT’S A ROLLER COASTER RRE VENTURES | FUNDING HARDWARE STARTUPS 11 Back & Forth Struggles Wins
HUGE EXITS ARE RARE RRE VENTURES | FUNDING HARDWARE STARTUPS Source: http://techcrunch.com/2012/04/09/facebook-to-acquire-instagram-for-1-billion/ 12
HERE’S THE PROOF RRE VENTURES | FUNDING HARDWARE STARTUPS 13 Source: http://info.crunchbase.com/2013/12/16 The average successful US startup has raised $41M and exited at $242M The average successfully acquired US startup has raised $29.4M and sold for $155.5M The average IPO-bound startup raised $162M before going public
WHERE ARE WE? RRE VENTURES | FUNDING HARDWARE STARTUPS 14
HARDWARE 1.0 RRE VENTURES | FUNDING HARDWARE STARTUPS 15 Before 2010 VCs and angels were reluctant to fund hardware companies because risk was lurking around every corner. Validating Demand Capital Intensive Venture Capital Long Dev Times Costly Distribution Heavy Tech High Volume Mfg
THE OLD PERCEPTION RRE VENTURES | FUNDING HARDWARE STARTUPS 16
A NEW ERA IS HERE RRE VENTURES | FUNDING HARDWARE STARTUPS 17
HARDWARE 2.0 RRE VENTURES | FUNDING HARDWARE STARTUPS 18 There has been an explosion of funded hardware companies because the barriers and costs to develop and launch products have dropped. Crowdfunding Software + Connectivity Rapid Prototyping Easier Distribution Open Source Lean Manufacturing
THE NEW PERCEPTION RRE VENTURES | FUNDING HARDWARE STARTUPS 19
HERE’S THE PROOF RRE VENTURES | FUNDING HARDWARE STARTUPS 20 Source(s): Wall Street Journal; CB Insights; Hizook.com
HOW TO PREPARE RRE VENTURES | FUNDING HARDWARE STARTUPS 22
BUILD & LEARN RRE VENTURES | FUNDING HARDWARE STARTUPS If technically feasible you should launch a minimum viable product (MVP) before raising capital. Benefits of launching Validate early hypotheses Social proof / traction Feedback from real customers Evidence team can ship Develop “bootstrapper” mentality Easier to raise capital 23 “If you weren’t embarrassed by the first version you launched too late.” -Reid Hoffman
FIND A GOOD LAWYER RRE VENTURES | FUNDING HARDWARE STARTUPS 24 Once you determine VC is the right funding option for your company make sure you partner with an experienced law firm.
SEEK ADVICE RRE VENTURES | FUNDING HARDWARE STARTUPS 25 Before you kick off the fundraising process, build an experienced advisory board that can help with strategy, introductions and general advice. Investors Successful Execs Venture Capital Professors Industry Experts Founders Influencers
Location Expertise / Focus Partner Brand Support & Relationships Strategy & Stage CHOOSING YOUR VC RRE VENTURES | FUNDING HARDWARE STARTUPS 26 When selecting your investors there are a variety of factors that should go into the decision making process beyond financial terms.
HARDWARE INVESTORS RRE VENTURES | FUNDING HARDWARE STARTUPS 27 Sample of VCs that have funded hardware in the last two years.
STRUCTURE A PROCESS RRE VENTURES | FUNDING HARDWARE STARTUPS Create a spreadsheet or use a CRM like Streak.com for targeting and tracking your VC conversations. Here’s an example you can use: 28
SET ROUND SIZE RRE VENTURES | FUNDING HARDWARE STARTUPS Estimating the amount of capital you’ll need requires more art than science. Here are some tips to keep in mind during your quest. Runway: Raise enough capital to give yourself 12-18 months. Keep in mind it will likely take 3-6 months to raise your next round. Dilution: Every time you raise a round, try to sell no more than 10-25% of the company. $ Target: Set a modest raise amount. It’s always better to nail your target, say you’re “oversubscribed” and then increase the size of round depending on investor interest and terms / dilution. 29
KNOW YOUR BRAND RRE VENTURES | FUNDING HARDWARE STARTUPS Your brand equals the sum total of positive and negative interactions that partners, customers and employees have with your company. 30 “In this ever-changing society, the most powerful and enduring brands are built from the heart. They are real and sustainable. Their foundations are strong because they’re built with the strength of the human spirit, not an ad campaign.” -Howard Schultz, Starbucks
CRAFT YOUR STORY RRE VENTURES | FUNDING HARDWARE STARTUPS The “story” behind your company and product is often one of the most important things an investor will want to know. Don’t underestimate it. “It’s not what you do, it’s why you do it.” -Simon Sinek What was the impetus for starting the company? Why are you obsessed with solving this problem? How did the founders meet and decide to partner? Why are you willing to sacrifice years of your life to work on this? What is your cause, your belief? 31
Title & Contact Info Problem Vision / Mission Market Size & Trends Distribution/Acquisition Product / Solution BUILD PITCH DECK RRE VENTURES | FUNDING HARDWARE STARTUPS 32
Monetization Roadmap / Timeline Traction / Milestones Team / Advisors Projections / Metrics Funding BUILD PITCH DECK RRE VENTURES | FUNDING HARDWARE STARTUPS 33
WHERE TO FIND MONEY Events & Classes AngelList Venture Capital Your Network Accelerators Twitter + Blogs RRE VENTURES | FUNDING HARDWARE STARTUPS Founder Intros 34 Angels and VCs are generally ‘networked’ so it shouldn’t be too hard to find them if you look in the right places and hustle.
KEEP IN MIND Industry Expertise Find Risk Takers Follow Exits Patience Stay Close to Home RRE VENTURES | FUNDING HARDWARE STARTUPS Set Fair Terms 35 There are a variety of strategies you can take to increase your odds of finding suitable investors.
THE PITCH RRE VENTURES | FUNDING HARDWARE STARTUPS 36
YOUR OBJECTIVE: FOMO* RRE VENTURES | FUNDING HARDWARE STARTUPS 37 *Fear of missing out Your goal throughout the process should be to create excitement, demand and scarcity for your round. Investors often move in packs.
FIRST IMPRESSION IS KEY RRE VENTURES | FUNDING HARDWARE STARTUPS Most VCs usually form an opinion of the founder and opportunity within first 10 minutes of a pitch. Early stage investors generally look for: Traction You + Team Social Proof Product 38
GETTING TO YES RRE VENTURES | FUNDING HARDWARE STARTUPS 1. Get “Warm” Intro 2. Review Product 3. First Meeting 4. Diligence 4. Partner Meeting 5. Term Sheet / Close 80% 60% 15% < 1% 39 Every investor / firm has a different process. Some make a decision in 30 minutes while others take months of diligence. Here’s my process: 30%
WHAT I LOOK FOR Complementary Team Story & Purpose Differentiated Product Prototype Interesting Market RRE VENTURES | FUNDING HARDWARE STARTUPS 40 When evaluating early stage hardware investments there are a number of things that I look for and place value on. Feel for Design
WHAT I LOOK FOR (CON’T) ‘Action Not Analysis’ Business Model Venture Capital Data Driven Hustle / Hacking Real Problem RRE VENTURES | FUNDING HARDWARE STARTUPS 41 Here are some additional things that I look for and place value on when meeting with seed stage companies. Customer Obsession
QUESTIONS TO ASK RRE VENTURES | FUNDING HARDWARE STARTUPS What are the next steps in the process? What concerns do you have? How much time do you typically spend with your companies? Can you walk me through your decision making process? How do you think you can help our company? Do you lead and / or follow? What’s your typical check size? How does your firm think about follow on investments? Is there any additional information you’d like to see? Which investors do you enjoy working with? 42 During the process make sure you carve out enough time to learn about the firm, its process and how they think about your opportunity.
THINGS TO AVOID RRE VENTURES | FUNDING HARDWARE STARTUPS As I mentioned earlier every investor is different but there are some general things to avoid throughout the process. Product demos that don’t work Derivative product and positioning Long answers filled w/ buzzwords Trying to have all the answers Long pitch decks Don’t have clear raise amount Asking for investor intros after one passes Overemphasizing PR and press No product team in place Pitching different partners in firm after a pass Bringing non-founders to 1st meeting Too many emails / follow ups 43
AFTER THE PITCH RRE VENTURES | FUNDING HARDWARE STARTUPS 44
YOUR ACTION ITEMS Debrief w/ Team Send VC Requests Review Pitch Notes Note Questions / Issues Edit Pitch Deck Update VC Pipeline RRE VENTURES | FUNDING HARDWARE STARTUPS 45 Immediately following each pitch session there are some best practices you can implement which should help you throughout the process.
DECISION TO CLOSE RRE VENTURES | FUNDING HARDWARE STARTUPS 46 Once you have a signed term sheet in place, there are a number of final steps you will need to complete before getting back to work. Negotiate Term Sheet Build Investor Syndicate Review Docs Sign & Wire Legal Diligence Usually four to twelve weeks
SEED FUNDING VEHICLES RRE VENTURES | FUNDING HARDWARE STARTUPS 47 When a startup raises money, one of three financing instruments are used and which one is always specified in the term sheet. Preferred Equity SAFE Convertible Debt
Monthly Email Update* Strategy Sessions Network w/ Portfolio Real-time Crisis Mgmt Share Hiring Plan POST INVESTMENT RRE VENTURES | FUNDING HARDWARE STARTUPS 48 So you closed your round and have cash in the bank. Now what? Here are some way to engage with and get value from your investors: *Include what’s going well / not well, key metrics, hiring update, financing update, roadmap, help wanted Specific Intros
RESOURCES RRE VENTURES | FUNDING HARDWARE STARTUPS 49
SUGGESTED BOOKS RRE VENTURES | FUNDING HARDWARE STARTUPS 50 Before you start the fundraising process, reading these books will help prepare you for dealing w/ VCs and launching your company.
SUGGESTED VC BLOGS RRE VENTURES | FUNDING HARDWARE STARTUPS Chris Dixon, A16Z: cdixon.org Roger Ehrenberg, IA Ventures: informationarbitrage.com Brad Feld, Foundry Group: feld.com First Round Review: firstround.com/review Paul Graham, Y Combinator: paulgraham.com Semil Shah, Angel: semilshah.com David Skok, Matrix: forentrepreneurs.com Mark Suster, Upfront: bothsidesofthetable.com Tom Tunguz, Redpoint: tomtunguz.com Hunter Walk, Homebrew: hunterwalk.com Fred Wilson, Union Square Ventures: avc.com 51
INVESTORS ON TWITTER RRE VENTURES | FUNDING HARDWARE STARTUPS 52 As noted earlier Twitter is a good place to engage with VCs and share ideas openly. Here are some of the most active. Marc Andreessen @pmarca Chris Sacca @sacca Chris Dixon @dixon Josh Ellman @joshelman Vinod Khosla @vkhosla Naval Ravikant @naval Kevin Rose @kevinrose Howard Lindzon @howardlindzon Brad Feld @bfeld Jeremy Liew @jeremysliew David Lee @davidlee Mark Suster @msuster Dave McClure @davemcclure Fred Destin @fdestin Keith Rabois @rabois
IN SUMMARY RRE VENTURES | FUNDING HARDWARE STARTUPS 53 Raising any amount of capital is never easy. You’ll hear “no” more than you’ll hear “yes.” For many of you it will be a long but rewarding process. VC is just one financing option to consider Raise to accelerate growth Investors come in difference sizes and flavors Prepare, work your ass off and hustle Take advantage of resources on the web The real work begins after you close your round
ONE FINAL THOUGHT RRE VENTURES | FUNDING HARDWARE STARTUPS “The magic in business isn’t raising money but making money.” -Mark Cuban 54
GOOD LUCK! RRE VENTURES | FUNDING HARDWARE STARTUPS Steve Schlafman (@schlaf) firstname.lastname@example.org RRE Ventures 55