Follow-on Financing


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Anne DeGheest

Follow-on Financing

by Anne DeGheest
31 May 2010

On Tuesday May 25, 2010, I taught a course at Stanford University Continuing Studies program on Angel Investing and the specific challenges in getting follow-on financing.

Here are some key takeaways:

Do a reality check on the company status: did they meet their milestones? Is the opportunity turning into of a product or a large business? Has there been any significant product and market validation since the last round? How much money weill be needed to get to break-even?

What are the risk levels?

    o Product Risk
       • Working? pilot? IP? Regulatory? Cost?
   o Market Risk
      • Market size? Pay? Why? Proof?
   o People Risk
      • Meet prior milestones? Team?
   o Financial Risk
     • Cash in/out at exit? M&A in that space?

How much money will be needed?

   o This Round
   • Needed to reach next inflection point?
      • Milestones?
      • Sensitivity analysis on best vs. worst case scenario
   • Analysis on best vs. worst case scenario

o Next rounds

• To break even or exit

• Milestones?

o Investors type
• angels vs. venture capitalists vs. corporate investments

Get a "Lead"

   o Need third party to anchor deal
      • Valuation and term sheet
      • 30 to 50% new money committed
      • Help round up the syndicate
      • Share due diligence
   o Issues
      • Valuation vs. other "Terms"
      • Full ratchet, participative preferred, board seats

Role of Angels/Board Member

   o Coach entrepreneur/team on presentation
   o Challenge fund raising strategy
      • Type of investors: angels, VC, corporate
   • Money needed
   • Milestones and inflection points
   • Financial Projections
   o Open VC doors
   o Attend some meetings (feedback)
   o Follow up with VC
   • get concerns/objections and push them along

Topics: Angel funding, Conferences, Entrepreneur

@ADeGheest

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