Eric Koefoot

The Founders Institute

August 1, 2016

Some experiences and lessons to share

VC funding an alternate perspective

Thoughts on funding

A Little Background
Engineering degree & MBA
Ford, Deloitte, TWP
4 startups - 2 bootstrapped, 1 corp. funded, 1 PE
1 failure, 2 wins, 1 draw
Building 5th bootstrapped, Angel Round 2012

Example 1 - PrimeSource

Bootstrapped 401(k)
1st startup Internet search
Profitable in 6 months
Partner = friend
Partner = embezzler

Lessons Learned
Integrity matters
Trust but verify

Keep O/H low; beware fixed costs

The first jump in the pool is the coldest
Entrepreneurship is fun!

Example 2 Five Star Alliance

Bootstrapped, 3 partners
Cash -> working capital
4 years exit - private sale, all cash
Earn-out that actually paid out

Lessons Learned
Match partner skills
Jettison bad ideas (Tina)
Collections = capital
Keep cash in reserve
Illiquid sale = bad idea
Companies are bought, not sold

Example 3 U.S. News Ventures

PE funded
But we were hired guns
Inexperienced board
Successfully built company
Bought out by investors - too early!

Lessons Learned
Funding eases stress

Hired gun = no control

Quality board matters
Golden Rule applies to exits

5 Macro Lessons (some the hard way)

1.
2.
3.
4.

5.

Know your partner(s) and your investors

Bootstrapping is higher stress, but often higher reward
2x longer, 2x harder, 2x $
Execution is everything
If you fail, try again!

Some experiences and lessons to share

VC funding an alternate perspective

Thoughts on funding

What we are told

Think up a great business idea
Fund by FFF
Angels
Then Big Time with a VC
Grow like crazy
IPO or sell to a BAC for a lot of cash
Retire to the Caribbean

Reality is
80%+ Inc 500 = no $ beyond F&F
Most cashed-out entrepreneurs = no IPO or BAC
VCs often make out better than entrepreneurs
So do bankers (6-7% vs CEO 6%)
You need a big exit to retire in this model

First VCs are not all bad

Good for: capital-intensive, high risk, long payouts

Enables speed to market
But is first mover advantage true?
Expertise, rolodex (so can advisors)
Early partial liquidity

But VCs are not always good

Them = portfolio theory
You = one dice roll
VC = Preference, Coupons, Participation, Liquidation
Edge of the cliff
VC works for investors first
Once they control the voting...
You = expendable

Math Diversion Part 1

VC funded:
$15 mils over 3 rounds, 8% Coupon, Own 80%
Exit $100 mils after 5 years:
VC $15 mils off the top + $5 mils interest
Plus 80% of $80 mils
Total cash = $84 mils
Remainder = $16 mils to employees
You get $8 million

Math Diversion Part 2

Bootstrap, F&F, Angel funding

$2 mils funding for 30%
Exit $25 mils after 5 years
Investors get $7.5 mils
Company gets $17.5 mils
Employees may get $4-9 mils
You get $8-13 mils

Math Diversion Part 3

VC $15 mils over 3 rounds, 8% Coupon, Own 80%

Exit $25 mils after 5 years:
VC $15 mils off the top + ~$5 mils interest
Plus 80% of remaining $5 mils
Total cash = $24 mils
Remaining $1 mils to employees
You get $500k ouch

Math Diversion Part 4

Bootstrap, F&F, Angel funding

$2 mils funding for 30%
Exit only $10 mils after 5 years
Investors get $3 mils
Company gets $7 mils
Employees may get $2-3 mils
You get $4-5 mils

Considering VC Funding?

Ask yourself:
Are we a good VC fit?
Am I willing to give up equity?
What if I am asked to step aside?
Am I ready for a board to run the company?
Can I make it without funding?
What are my entrepreneurial goals?

Some experiences and lessons to share

VC funding an alternate perspective

Thoughts on funding

The Market Today

Can be a challenge to raise

Especially pre-revenue, East Coast

Many VC shops shut down in past 5 years

Solid recovery of liquidity
Valuations have lifted decently
Terms are getting better SeriesSeed.com

Funding Ask Yourself

What funding do you really need, and what can you get?

How cheap can you be and how long can you delay burn?
Temps? Offshoring? Mooching? Sweat equity?

Can you get FF&F funding? (first)

Can you fund with revenue? Side consulting?

Thats neat is not Ill pay for that

Can you win grants?

Raise what you need & as little as possible

Dont rule out VCs, but educate yourself first