Funding & Exits

By Tom Mohr

Funding is the fuel you need to scale your company and to exit at a time and on terms of your choosing. So how do you get funded? Fundraising is both an art and a science. You weave strands of traction and the swatches of opportunity into a beautiful tapestry — your "epic story". That's the art. But surrounding that art is a lot of science. Here, you will learn how to time your fundraise, how to execute it, and eventually, how to sell your company at maximum valuation. All three of these things are important. Your family, your employees and your previous investors count on you to do them well.

What makes you, as CEO, investable? What progress must you prove and what potential must you show? How do you target the right investors, given your progress? What preparatory steps must you complete before you start working on the pitch? How exactly do you prepare your story so that the elevator pitch, the executive summary, the pitch deck, the demo, and the Q&A talking points are all fully aligned? What alternative funding sources are available to you? What motivates each of these investor types? The answers to all these questions are in this book.

• Language: English
• Publisher: BookBaby
• Release date: Jan 30, 2020
• ISBN: 9781098300197

Book preview

internalize.

Introduction

Cash is fuel.

As a tech company CEO, you need cash to scale. Most small businesses in the United States generate cash from operations. There’s nothing wrong with a self-funded business. You retain full ownership, free to chase your dreams as you want without any anxious investors to deal with.

It’s not so easy for technology companies— tech moves too quickly. A self-funded tech company is at risk of being eclipsed by a well-funded competitor. For this reason, most promising technology companies pursue outside funding to accelerate business growth.

Funding is the fuel you need to scale your company and to exit at a time and on terms of your choosing. So how do you get funded? Fundraising is both an art and a science. You weave strands of traction and the swatches of opportunity into a beautiful tapestry — your epic story. That’s the art.

But surrounding that art is a lot of science. Here, you will learn how to time your fundraise, how to execute it, and eventually, how to sell your company at maximum valuation. All three of these things are important. Your family, your employees and your investors count on you to do them well.

What makes you, as CEO, investable? What progress must you prove and what potential must you show? How do you target the right investors, given your progress? What preparatory steps must you complete before you start working on the pitch? How exactly do you prepare your story so that the elevator pitch, the executive summary, the pitch deck, the demo, and the Q&A talking points are all fully aligned? What alternative funding sources are available to you? What motivates each of these investor types?

The answers to all these questions are in this book.

Successful fundraising requires smart timing. It’s critical to plan thoughtfully so that you reach an investment-worthy value inflection point well in advance of each funding event. The journey from first preparatory steps to final close and cash in the bank can take months. As CEO, it’s on you to ensure the closing of each funding event with cash to spare.

There is an investor class for every stage of company growth. The investment thesis, risk profile and expected return vary for each. In Funding & Exits, you’ll learn about each investor class. Armed with this knowledge, you can match your company’s progress to the right investor class. Nothing wastes more time than chasing investors who have zero chance of investing in you. Your investor search must be efficient and effective.

Remember, time is not your friend. Every day, cash burns.

Investors buy stories. The fundable story wins on two dimensions: opportunity and traction. Opportunity — the investor’s judgment about your future performance — is demonstrated through your product vision and road map, your competitive advantage thesis, your market opportunity thesis, your business model, your go to market strategy, and (perhaps most important of all) your team. Traction is proven by the achievement of value inflection points, specifically in the domains of product, revenue engine, systems, people, and cash position.

Value inflection points are the milestones a company must achieve in order to be fundable. These are the points in the journey where a company’s investment value jumps due to a newly achieved proof of traction.

The initial product release is a value inflection point. So are Minimum Viable Product, Minimum Viable Traction, Minimum Viable Scaling, and at the later stage of a company, the IPO. Your investment story is anchored by the value inflection point you have most recently achieved. Funding follows milestones.

Are you clear on the milestone you have achieved? Do you understand which investor class is most relevant, given that milestone? Have you leveraged that knowledge to choose the right investor class, create the list of appropriate target investors, and prepare your opportunity and traction story?

Funding happens when both company and investor decide they are the best fit for each other compared to all other alternatives.

At each stage of the funding process, companies and investors seek similar things:

Lots of top-of-funnel optionality

Efficient not interested communications

A partner that meets pre-determined attributes for fit

Open consideration of alternatives, even if interested

Efficient mutual valuation

Enough diligence to validate claims while not slowing things up so much it costs the deal

Thorough but efficient negotiation of terms

Thorough but efficient finalization of definitive documents and close

Commitment to the company through thick and thin

Celebration of a successful exit

The most promising tech companies are able to be picky about their investors. For such companies, cash and a favorable pre-money valuation are not enough. Company CEOs will favor the investor who boasts lots of dry powder to follow on in subsequent rounds. She will favor the investor with an elite brand, who brings relevant domain expertise and can leverage powerful connections. Investors such as these help a company scale faster, find more powerful partners, raise more money, experience less dilution and accelerate towards outsized exits.

At my company, CEO Quest, we advise tech company CEOs on the journey of company building. Our research has shown that company building occurs in five domains, represented in the CEO Quest Q:

‍ In Funding & Exits, the focus is on the center circle: Belief. Belief is the domain of what you believe, and who must believe. What you believe refers to your vision, your mission, your values and your strategy. Who must believe refers to customers, employees and investors.

Yes, investment is belief, for in the act of funding a company, someone with money makes the formidable decision to part with it. Why? Because she has listened to your story and has come to believe in it, and in you. She has become convinced that an investment in your company will yield safety and return superior to any other alternative in her chosen investment class. In turn, you have chosen her to be the investor in your company. You too believe. You believe that she possesses the money, the investor brand, the connections and domain-relevant expertise to help you scale your business towards an exciting exit.

This is the journey of company building. At every stage, you must confront and crack the riddles presented in the five domains. None is more important than funding, for without cash you have nothing.

Over the past thirty years, the majority of highly successful technology companies have availed themselves of VC funding — including the biggest ones (Microsoft, Apple, Google and Amazon). But VC funding is not the only source of funds to scale. In the earliest stage of your company, there are angel investors, incubators, and accelerators. In later stages, commercial lending and venture debt come into play. Even later, hedge funds become viable funding sources. Eventually, for a very small number of companies, the public markets beckon.

Chapter 1 of Funding & Exits starts with you, the entrepreneur. What are the essential characteristics of an investable entrepreneur? What steps must you take to make yourself investable?

In Chapter 2, you’ll learn about the value inflection points. From there, you’ll learn about the investor continuum — the investor classes available to you at each stage of growth. Then we discuss the art of storytelling, for indeed, investors buy stories.

In Chapters 5 through 8, you’ll learn about every step of the funding process. After that, we’ll explore different investment types, from angel and incubator investments, to venture capital, to commercial lending, to venture debt. We explore the underlying investment thesis of each and discuss how to access the funding. Finally, in the last four chapters, we address the exit process and the exit paths, strategic acquisition, private equity and IPO.

Prepare well, and you are more likely to get funded — and on terms favorable to you. In preparing for funding, you strengthen your grip on the company’s future. The imperative to tell a convincing story about exactly how you will scale the company forces you to think it all through. Funding events make you a better CEO.

If you take this book seriously, you won’t forget about funding once you’ve closed a round. You will celebrate the wiring of funds, and then you’ll sharpen your line of sight to the next funding event. By understanding what must be true at every funding milestone, you can organize company priorities and plans accordingly.

This planning-based approach to fundraising, always looking outward towards the next funding event, is a key lesson of this book. Someday you and your investors will decide it’s time to exit. As with funding, you must manage the exit process with care.

Start early by cultivating relationships. Know your options — from a private equity exit, to a strategic exit, to going IPO. Execute the process from start to finish with precision.

How? Read the book — the answers are here.

1

The Fundable Entrepreneur

Entrepreneurship is woven into the fabric of America. 30 million small businesses operate in the US.¹ Each year, about 800,000 startups join their ranks.² Every month, 300 of every 100,000 adults start a new business.³

For the past forty years, this small business activity has been the growth engine of the US economy, responsible for almost all net new job creation.⁴

And yet, almost as many businesses fail every year as are started. Of all new businesses, only 1% employ fifty or more people after ten years in operation.⁵

This percentage has declined fairly steadily since 1990. Less than 0.1% of all US businesses employ more than 500 people.⁶ The number of public companies in the US was down to 4,333 by mid-2016, a 46% drop from twenty years ago.⁷

In 2017, just 160 companies went IPO — down 42% from three years ago.⁸

Why have so many new businesses stayed small or failed? What factors have constricted their growth? Why have so few scaled into large companies, and even fewer gone public?

IPOs since 1999

Source: Number of IPOs in the U.S. 1999–2017 | Statistic, Statista, 2017.

Company building is a science. As CEO, the people you hire, the markets you choose, the products you build, the systems you design, the revenue generation practices you pursue and the funding path you follow all contribute to your growth trajectory. Not every company will go IPO, but armed with knowledge of the science of company building, a disciplined CEO can build a company that achieves greater success at every stage. The best CEOs will lead their companies towards impressive exits. A select few will break through and take their companies public.

Technology companies have a unique path to scale. Because of their potential for outsized growth, tech companies have access to capital not available to other types of companies. In this book, our focus is on tech companies. As tech CEOs scale their companies and introduce their technologies to more and more customers, they disrupt and change the world. But achieving success is hard. If you are a tech company CEO, you know well that the scaling of your company is a ragged jog through a vicious gauntlet. The marketplace is unforgiving. Failure nips at your heels. Only the strongest get funded; only the strongest survive.

Before an investor takes a deep look at your company, she will first take a deep look into your background (and into your soul). What makes you, the tech company CEO, fundable?

When I started the company eventually named Digital Air Strike, my cofounder and I each put in $100K of our own money. Five months later, just before that money ran out, I raised a $900K seed round. Then, as our bank balance fell perilously low, we raised an $8M A round. After that, there were a couple more funding events — one of which powered an acquisition.

One thing was common across every one of these funding events: they were all really hard. Investors were hard to reach. Once reached, most wouldn’t take a meeting. Once we met, all were skeptical. After the meetings, most said no. Only a few — the bare minimum, actually — said yes. Even after we received a term sheet, every step until the close of funding was difficult. Every time.

Was I fundable? Yes, I was — by the skin of my teeth. We had enough of a story and a strong enough team to convince just enough investors that our company was worthy of investment. I have no doubt each investor in Digital Air Strike took a close, critical look at me, the CEO. Each had to make a judgment: would I be able to lead this company to an exciting exit?

Investment is about confidence. An entrepreneur is fundable when she can create confidence in the hearts and minds of investors. At every company stage, domain expertise is important. But that’s just the beginning.

In the early stage, the company’s choice of market, product vision and go-to-market plan are all just theories. Nothing has been proven yet. You have