L9 - Fund Raising for Startups

Federico Della Bella, MBA & TLC Engineer

Politecnico di Milano
 Funding Rounds for Startups:
6 questions around fund raising

Question # 1
How much money do I really need?

Question # 2
When collecting funds?

Question # 3
Who are the investors?

Question # 4
What’s the value of my company?

Question # 5
What is the role of incubators and accelerators?

Question # 6
How to present a business to potential investors?

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 2

 QUESTION # 1

How much money do I really need?

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 3

 Q1: Financial Need

Question # 1 How much money do I really need?

• You have to determine the “right” size of the investment

• Right means that you have enough money to sustain the activities before financial
break-even, but not too much too early

• The most widely used indexes to calculate financial needs are Cash Burn Rate and
Runaway

• Cash Burn Rate is the average monthly cash flows (if negative): it indicates what is
your monthly financial need

• To calculate the Cash Burn Rate you have to determine the monthly cash flow
statement

• Runaway is the correspondent number of months covered by your existing funds with
the current cash burn rate

• Runway is calculated dividing the funds by the Cash Burn Rate

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 4

 QUESTION # 2

When collecting funds?

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 5

 Q2: Fund Raising Stages

Question # 2 When collecting funds?

• In general, the later the better, when the value of your company has
grown and the risk is lower

• The type and size of funds and the sources changes along the startup
lifecycle

• Investors always try to delay their entrance

• At each stage the goal of fund raising (and the startup itself) is different

• At each stage, the size and the types of investors are different

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 6

 Q2: Fund Raising Stages

Startup Lifecycle & Funding

Cash Flow
Concept & Product Introduction Growth Maturity

50-100K 500K – 1 Mio 1-5 Mio 5-20 Mio 10-50 Mio

Pre-seed Round A Round B Expansion

Seed
Savings Startup VC PE
BA
FFF VC PE SE
Sales
Time
Time

Source: AIFI
[Link]

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 7

 Q2: Fund Raising Stages

Startup Investment Phases

Funding Rounds
1. Pre-seed
2. Seed
3. Round A
4. Round B
5. Later Stages

During these first stages, the founders don’t sell their shares, they are locked in and
must work in developing products and market

Exit
1. Trade Sale
2. Buyout
3. IPO

During these 3 stages, founders and first investors sell their shares. Founders usually
are locked in for a while and can’t create a competitive business for a period.
Source: AIFI
[Link]

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 8

 Q2: Fund Raising Stages

Pre-seed

• Funding: from savings, FF, crowdfunding, grants

• Size: € 10K – € 100K
• Business Plan, Prototype
• No revenues (or very small)
• Teams formed by founders who develop the product
• Financial objective: Cash Burn Rate (as low as possible)
• Corporate objective: conceive and develop the product; test and
understand the market

Source: AIFI
[Link]

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 9

 Q2: Fund Raising Stages

Seed

• Funding: from savings, FF, crowdfunding, Business Angels

• Size: € 500K – € 1 Mio
• Very small revenues
• Prototype, product
• Teams formed by founders who develop the product
• Financial objective: Cash Burn Rate (as low as possible)
• Corporate objective: develop the product and match the market

Source: AIFI
[Link]

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 10

 Q2: Fund Raising Stages

Startup

• Funding: Business Angels, Venture Capitalist Funds

• Size: € 1-5 Mio
• First revenues, toward breakeven
• Teams formed by founders and first contributors
• Financial objective: Prove the revenue model works
• Corporate objective: find the product-market fit, search of customers,
business model test

Source: AIFI
[Link]

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 11

 Q2: Fund Raising Stages

Round B

• Funding: Operating Profit and/or Venture Capital Funds, Private Equity

• Size: € 5-20 Mio
• Operating Profit
• Boards with founders, VC, other experienced C-Levels
• Teams formed by engineers and business developers
• Objective: Break-even, operating profit, scale-up

Source: AIFI
[Link]

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 12

 Q2: Fund Raising Stages

Later Stages: Expansion

• Funding: Private Equity, Stock Exchange

• Size: € 10-50 Mio
• Stabilization of cash flows
• Boards with founders, VC, other experienced C-Levels
• Structured team
• Corporate organization
• Founders can have a minority stake
• Objective: Cash Flows, stabilization, exit (for early stage investors,
ventures and founders)

Source: AIFI
[Link]

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 13

 Q2: Fund Raising Stages

Italian Market – pending issues

Pre-seed Early Stage Round B/Expansion

Seed investments are (as Few VC’s active in the Too few exits.
average) too small startup phase (they There is the need to
manage capitals too involve big Italian and
small). international firms to
Gap filled with seed increase exit
investments opportunities for ventures

Source: AIFI
[Link]

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 14

 QUESTION # 3

Sources of Funds & Investors

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 15

 Q3: Types of Investors and sources of funds

Question # 3: Which types of Funds & Investors exist?

• There are different sources of funds that a startup can rely on

• Different types of investors invest at different stages of startup lifecycle

• Each investor has a different impact on the life of the startup

• External investors get “shares” of your company

• You need a valuation of your company to decide the share of ownership sold

• Ideally, the startup should receive the minimum amount of money to enforce
plan activity till next round or break-even

• There are many overfunded and underfunded startups

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 16

 Q3: Types of Investors and sources of funds

Sources of funds
The source of funding can have a different impact on your
financial structure, composition of the ownership, level of
risk, etc.

Financial resources are in the right part of the balance sheet

and are part of 2 main families:

• Equity
• Debt

Debt can be financial (loans, short term debts) or

commercial (accounts payable)

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 17

 Q3: Types of Investors and sources of funds

Sources of funds
Ultimately, a company can fund itself via:

• Commercial debt
• Financial debt
• Operating activities
• Grants
• Equity

Each of them has a different impact on the structure of the company,

the balance sheet, the ownership, the level of risk and the cost.

It’s possible to add grants, prizes, and forms of incentives. These

usually don’t have an impact on the ownership and have no monetary
costs if you don’t have to pay interests on them

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 18

 Q3: Types of Investors and sources of funds

Commercial debt

• If your accounts payable are bigger than your receivables, it means that you
are financing yourself through commercial debt, and thus through your suppliers

• it has (usually) no monetary costs

• If your business is cash positive, you can have very big advantages

• Often, B2C business are cash positive: final clients pay cash, whereas they pay
their suppliers with a delay of 30-60 days

• It can create tensions along the supply chains

• It depends on your bargain power

• For a startup are great but when the product is on the market, not during
concept generation or product development

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 19

 Q3: Types of Investors and sources of funds

Financial Debt
• Loans, short-term debts, mezzanine, etc.

• They must be repaid during a certain period

• They have a cost: the cost of interest

• For a startup without a history and assets, it could be very difficult to

ask for a loan

• Usually, the request from a bank ask you a collateral to secure the
investment

• Consider that giving as a collateral belongings and assets of the

founders is very risky (e.g.: real estate properties)

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 20

 Q3: Types of Investors and sources of funds

Operating Activity

• The best source of funds is your own company, as you are not just creating a
positive cash flow to finance yourself, but you are also proving that your
business works.

• A startup is supposed to be a temporary organization to search for a business

model, and thus matching market needs and value proposition.

• A startup is not an organization in search of funds!

• Through operating activities, a startup can fund itself, proving that the
business model works

• Founders can keep ownership and control

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 21

 Q3: Types of Investors and sources of funds

Grants

• Several types of grants, startup competitions, etc.

• The prize can be monetary or non monetary (incubation services, mentoring,

partnerships, etc.)

• The typical size is small-medium: few thousands to some hundreds of thousands of

euro

• There are several different entities: private companies, incubators, foundations, local,
national, international organizations, banks, etc.

• Some are in the form of loans with special conditions (longer repayment periods, lower
interest rates, etc.)

• Founders don’t loose any control and share of ownership

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 22

 Q3: Types of Investors and sources of funds

Equity
The majority of the funds collected by startups have an impact on the ownership, as they are
equity. This means that, if these are external people or entities, the company is giving away part
of the ownerships. The founders loose part of the control. It is pretty delicate, because the size
and the type of resources and funders can have a strong impact in following funding rounds.

At the beginning, the best is to rely on personal savings and resources, then the startup can
involve external people, like FF, BA, etc.
During first rounds (seed, early stage, round A&B) with VC’s and BA’s, the founders are locked in:
they cannot sell their shares and monetize the investment, but they get diluted, giving away part
of the ownership and control during the increase of capital.
• Founders’ savings à seed
• Family & Friends à seed
• A Job (Consulting) à seed
• Business Angels à Early Stage / Round A
• Seed Funding Firms (incubators or others) à Early Stage / Round A
• Venture Capital Funds à Round A / B
• Private Equity à Later Rounds and Exit
• Trade Sale à Exit
• Stock Market à Exit

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 23

 Q3: Types of Investors and sources of funds

Savings à seed

• Founders keep complete ownership

• First phases (idea generation, first prototypes, sometimes first product)

• The risk is high

• The fund raising would be meaningless

• Don’t waste time in fund raising when you don’t have the product yet

• Typical size: € 10/20 K

As a general rule, it is better to postpone the entrance of external investors,

when the value of startup is a bit higher. The value of an idea is Zero

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 24

 Q3: Types of Investors and sources of funds

Family and Friends à seed

• First phases (concept, business plan, prototype, or MVP, Test A/B, etc.)

• They know you

• They usually don’t ask too much for their money

• You don’t have to provide metrics, business plans, results

• They could be a problem in later rounds as they are not professional investors

• They don’t offer any additional support

• Typical size of investment (in total): € 20-50 K

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 25

 Q3: Types of Investors and sources of funds

A Consulting Job à seed

• Founders keep complete ownership

• First phases (idea generation, first prototypes, sometimes first product)
• The risk is high (don’t put all your eggs in one basket)
• If the market is the same or the business or competences are related, founders can train
themselves and sustain first months of activities
• It should be last for few month
• A consulting firm is not a startup!
• If startups are temporary organizations in search of a scalable repeatable business
model, this means that not all new enterprises are startups
• Startups usually have products to be sold to large segments and scale up
• Professional services are usually labor intensive and cannot scale

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 26

 Q3: Types of Investors and sources of funds

Angel Investors à early stage & round A

• Seed stage (product ready, market entry, first metrics)

• They are private, like former managers or entrepreneurs, with a large savings
that want to invest (in part) in startup

• They can offer managerial or entrepreneurial support

• They have networks

• They much tougher than FF and you need an Exit Strategy

• They want to see some data but most of all “fall in love” with founders and
eventually their product

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 27

 Q3: Types of Investors and sources of funds

Angel Investors à early stage & round A

• They invest in the team (even more than in the product)

• You have to negotiate their participation: size and share of the ownership

• Sometimes they keep a strategic role and you can be tight

• Giving them more than 20% in this stage can block future capital increases

• Often they invest in group (IAG for example)

• Often fixed criteria in early stage (if they are in group)

• Their interest is to delay the entrance (the later they enter the lower the risk)

• In Italy, they invest between € 50K to € 1M

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 28

 Q3: Types of Investors and sources of funds

Seed Funding Firms à seed & early stage

• Seed stage (product ready, market entry, first metrics)

• They are similar to Business Angels but are companies

• They offer you services and consulting

• Part of their investment can be in services like the office, the internet connection,
mentorship, etc.

• Difficult to assess the value of non monetary services

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 29

 Q3: Types of Investors and sources of funds

Seed Funding Firms à seed & early stage

• Usually they have similar behaviors as business angels

• But they are company and can be more strict on some terms

• The deal is the result of a bargain, there are no fixed rules

• Although, in seed investment, seed funding firms (and business angels) often have fixed
policies like the size of the investment and the valuation of the startups, and thus the share
of the ownership

• This is because giving a value to a early stage startup is like guessing, and it makes no
sense to waste time in negotiation

• Most famous one are rigorous, second tiers can be more aggressive

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 30

 Q3: Types of Investors and sources of funds

Venture Capital Fundsà round A/B

• Round A / B

• They are companies and have fixed rules to select investments

• They manage portfolios of their clients and follow guidelines

• You must have a competitive exit strategy

• They are valued by their success stories

• Most of the startups fail, but few outperform and repay all the other investments

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 31

 Q3: Types of Investors and sources of funds

Venture Capital Funds à round A/B

•They become parts of the board, and sometimes they assign the CEO role to an
experienced manager and not to a founder, especially if she has a technical background

• You must create a relationship with them

• If you speak with a junior, she can have genuine enthusiasm (they want to discover the
next Uber)

• Senior fund managers are more objective

• They invest some millions

• Founders are usually not allowed to sell their shares till final exit

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 32

 Q3: Types of Investors and sources of funds

Private Equity, Stock Exchange, Private Sales à Later Stages,

Exit
• This is the phase of larger investments or of the exit

• Usually founders can sell part of their shares and monetize

• At the same time, they are locked into the company for a few years

• In this case the company is not more a startup, and thus ready for PE funds and even the
stock exchange

• Competitors, incumbents, bigger entrants can buy through a private deal the company to
acquire products, markets, technologies

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 33

 Q3: Types of Investors and sources of funds

Venture Capital Process

Let’s have a look at the process of proposing a VC the investment in our startup.
Remember that this is a deal. They must see the opportunity to multiply in few
years the value of their investment.

1. Business Plan Submission: entrepreneurs get in touch with investors and

present their business plans, or metrics, or MVP and tests, etc.
2. Due Diligence: analysis if company’s management team, market, products
and services, operating history, corporate governance documents, and
financial statements. This step can include developing a term sheet
describing the terms and conditions under which the fund would make an
investment.
3. Deal - Valuation and Negotiation: there is a pre-money valuation to assess
what’s the share of the new investors; the valuation can be as analytical as
possible, but the price is the result of a negotiation.
4. Investment: VC enter the company and board, founders sign term sheets
5. Execution with VC control: usually investment is released in batches if
targets are reached
6. Exit: VC’s final objective is to exit within a few years through mergers,
acquisitions, and IPOs (Initial Public Offerings)

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 34

 Q3: Types of Investors and sources of funds

Main Italian Venture Funds

In this and the following pages a list of some of the main VC’s in Italy and in USA, where
the biggest and the vast majority of VC’s is based

Innogest SGR
• ICT/Digital & Healthcare
• 28 investments
• € 55 Mio invested
• € 170 Mio capital fund
• Seed, Early, Late Stage

360 Capital Partners

• ICT/Digital, Healthcare, Industrial
• 80 investments
• € 300 Mio capital fund
• Seed, Early, Late Stage

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 35

 Q3: Types of Investors and sources of funds

Main Italian Venture Funds

Digital Magics
• Venture incubator
• Digital
• € 16 Mio investments
• Average size: € 300K

Dpixel
• ICT/Digital
• Seed investor

Ohters
•H-Farm Venture
•Lventure
•Principia SGR
•United Ventures

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 36

 Q3: Types of Investors and sources of funds

2 of the Biggest Venture Funds Worldwide

Khosla Ventures
• SW
• US, China
• Assets under management $ 3.100 Mio
• Early stage investment in 2014 $ 809 Mio

Sequoia
•Various
• World
• Assets under management $ 10.000 Mio
• Early stage investment in 2014 $ 650 Mio

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 37

 QUESTION # 4

What’s the value of my startup and

how can I assess it?

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 38

 Q4: Startup Evaluation

The Value of Ideas

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 39

 Q4: Startup Evaluation

Why assessing value

Once defined the financial need, and matched the need with the stage in the
startup lifecycle, founders must find the right counterpart.

If you finance the company with your savings, operating activities, debt, grants,
you don’t have to share the ownership of the company with anyone else:
founders remain the only owners of the whole company.

Instead, if you have to open your equity to external investors, you have to define
what is the share of ownership given away for the money (or services collected).

How does this process happen? How to make this price? How to assess the
value? Is it the same with FF, Business Angels, and Venture Capitalists?

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 40

 Q4: Startup Evaluation

Valuation, Price and Deal

Basically, the process is simple:

1. What is the pre-money value of the company?

2. How much do external investors put into the company?
3. What is the post-money value of the company?
4. How to define the price and share of ownership?

Consider that this is a deal: you have to start from a value, but at the end the final price is
the result of many other factors, including the bargaining power (and interest) of the
parties.

Main actors that can be involved into first stages of investment (FF, BA, VC) have different
objectives, cultures, politics.

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 41

 Q4: Startup Evaluation

General Advices
• Share the ownership with non-founders the later the better (when your
company’s value is bigger)

• Don’t give away too much too early: the risk is to make the following rounds
impossible

• Don’t undervalue or overvalue your startup: in the former case, you give away
too much, in the latter, you could devalue the startup in future rounds. This is
odd and usually a bad message for investors

• Have a long term plan: you probably need future rounds

• Select the investors not just for the money: firstly, because you will have to
deal with them, second, because they can offer other assets, like networks,
expertise, …

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 42

 Q4: Startup Evaluation

A Deal with FF
• Family and Friends are not professional investors.
• If they invest in your startup is because they believe in you and your team.
• They usually don’t have an idea on how to evaluate a startup.
• They usually have doubts about your valuation and tend to pay attention to the
percentage of ownership they gain with their money.
• They invest few money in very early stages, when you usually have just the idea, the
business plan and eventually a prototype.
• Be careful not to give them too much for too few, even if it’s early, if you block large
percentage of ownership with these types of investors, you could have problems in future
rounds.
• If you are an Italian “Startup Innovativa”, you cannot pay dividends for the 4 years in
which you are a startup innovativa.
• But, if you are a startup innovativa, investors have fiscal benefits (discount of 20% of the
capital invested from taxes)

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 43

 Q4: Startup Evaluation

A Deal with a BA
• Business Angels are affluent private people
• Usually, they are former managers or entrepreneurs
• Often, they want to do something exciting, making some money, and with a “social
role”, to stimulate economy
• They often act in teams
• They value your company in different ways
• Their goal is the final exit
• They try to enter later, when the risk is lower
• They invest in seed and early stages
• Startup should have at least a product ready for the market
• Often, they need to be sure that the business model is validated
• Considering the difficulties in assessing a value of something so early, they usually have
general politics; e.g.: they invest € 50K for 10% of startups in seed stages (thus, the
startup’s value is € 500K
• They perform liht due diligence, but they judge above all the team

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 44

 Q4: Startup Evaluation

A Deal with a VC Fund

• They are professional investors

• They invest money of other people

• They have politics on how to manage risk

• They have strict due diligence recommendations

• They want to see your deck (elevator pitch)

• If interested, they want to read the business plan as well

• They start from the valuation, but then it is a matter of negotiation (it is a deal
at the end)

• They judge the team, but want to see metrics

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 45

 Q4: Startup Evaluation

When startups have to value the company

1. Fund raising: evaluate the share of ownership to sell during a round

2. Work for Equity and other 3rd parties participations; in order to match the
value of labor and the value of ownership

3. Exit: evaluation of the price to sell parts of the company

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 46

 Q4: Startup Evaluation

What is value
Premise: The creation of value is the typical and ultimate corporate objective

Which Value? Value of shares? Value for stakeholders?

There are different visions

1. Value for shareholders

2. Value for stakeholders

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 47

 Q4: Startup Evaluation

Financial Statement Analysis

Through the observation of financial indicators, you can evaluate the performances of
a company

1. EBITDA – Earnings Before Interests Taxes Depreciation and Amortization

2. EBT – Earnings Before Taxes

3. Net Debt Position – Difference between short and long term debts and cash
4. Capital Employed = Net Debt Position + Equity

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 48

 Q4: Startup Evaluation

Equity Value vs. Enterprise Value

Net Debt

Total Assets

Equity

Enterprise Value (EV) = Total Assets

Equity Value = Enterprise Value – Net Debt
Net Debt = Debt - Cash

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 49

 Q4: Startup Evaluation

Valuation Methods

There are basically 4 different methods to evaluate a company:

1. Evaluation of Assets typical of RE or company whose

2. Financial: Discounted Cash Flow Method

3. Economic Value: Economic Value Added

4. Analysis of Comparable
1. Stock Exchange multiples
2. Comparable transactions

The first is not applicable and the third one is not so frequent.
The most used are the second (financial method), and the fourth (comparables)

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 50

 Q4: Startup Evaluation

Startup Valuation Methods

Considering the peculiarity of startups, VC have elaborated

specific methodologies, which are applied to startups and
can be added to the first 2 (DCF and Relative):

• DISCOUNTED CASH FLOWS

• RELATIVE VALUATION
• VC METHOD

Links to VC Methods: [Link]

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 51

 Q4: Startup Evaluation

Financial Valuation: Discounted Cash Flow Method

•This financial method is based on the supposition that the value of the company is
equal to the present value of the cash flows generated in the future.

•The Discounted Cash Flow Method is analytical, based on the present value of
future cash flows.

•It is the ideal methods for stable businesses, for which cash flows are easy to
foresee

• Use this method as a starting point

• The useful thing is the valuation of cash flows, much more important in startups
than profitability

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 52

 Q4: Startup Evaluation

Discounted Cash Flow Method step by step

1. Measurement of future Free Cash Flows to Firm

2. Definition of the cost of capital (consider the financial value
of time)
3. Definition of Terminal Value (the value of the company
beyond the period of analytical analysis)

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 53

 Q4: Startup Evaluation

Discounted Cash Flow Method: Levered vs. Unlevered

1. Unlevered or Asset Side

• Independent from the level of debt
• Valuation of the entire company (perspective of stakeholders)
• Valuation of Operative Cash flows
• Equity Value is the difference between Enterprise Value and Net
Debt

2. Levered or Equity Side

• Shareholders’ point of view
• Linked with the level of debt
• It evaluates Operative and Financial Cash Flows
• Equity Value obtained directly

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 54

 Q4: Startup Evaluation

Free Cash Flows to Firm

EBIT

-Taxes

+ Depreciation/Amortization

- Working Capital

-Net Capex

FCFF

Working Capital = Accounts Receivable + Inventories – Accounts Payable

Capex = Capital Investment
Net Capex = Capital Investment – Capital Divestment

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 55

 Q4: Startup Evaluation

Free Cash Flow to Firm vs. Free Cash Flow to Equity

Net Debt

Total Assets
FCFF

Equity FCFE

• FCFF are the cash flows for all categories of funding (debt and equity)
• FCFE are the cash flows linked with shareholders

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 56

 Q4: Startup Evaluation

Enterprise Value with DCF

TV = Terminal Value

V = Equity Value = EV – Net Debt

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 57

 Q4: Startup Evaluation

Weighted Average Cost of Capital

WACC represents the cost of capital
Used to evaluate the present value of a future flow of cash
It measure the risk. For startups, it is very high

= Market Value of Debt

= Market Value of Equity
= Market Value of Total Assets
= cost of debt
= tax rate
= cost of equity

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 58

 Q4: Startup Evaluation

Terminal Value as a Constant Perpetuity Cash Flow

With Terminal Value with Perpetuity, for the horizon beyond the period of the
analysis (usually 3-5 years), consider cash flows as stable.

The most prudential terminal value is 0

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 59

 Q4: Startup Evaluation

Terminal Value as a Growing Perpetuity Cash Flow

With Terminal Value with Growing Perpetuity, for the horizon beyond the period
of the analysis (usually 3-5 years), consider cash flows increasing year by year
with a constant growth rate.

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 60

 Q4: Startup Evaluation

Relative Valuation
For established companies, if there are comparable listed in a stock market, it is easy to
find a pool of comparables, find the average value, and assess the value of the company.
This method is not analytical, as it is not based on financial statements of the company.
If there are no public comparables in stock exchange markets, you can use transactions
of similar companies.

The process is quite simple: you find an indicator of performance for a pool of
comparable, and assess the value of the company in a transaction.
Dividing the value in a transaction or in stock exchange of the company for the indicator,
you can find the multiple. Find an average of a pool and have a measure of the company.
Here below some multiples for companies:
•P/E ratio
•EBIT
•EBITDA
•FCF
•Book Value of Equity
•Sales

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 61

 Q4: Startup Evaluation

Relative Valuation for Startups

Startups can use different indicators to assess the value, observing comparable transactions.
Venture Capitalists judge the possibility of the startup to scale up. The valuation depends on the
expectations for the exit.

Some possible indicators are:

• Sales or EBITDA
• Nr. of users and engagement
• Reputation
• Distribution Channels
• Industry
• Traction (gain a stable grown in main metrics)
•…

If you check transactions involving comparables, you can assess the value.
A practical way is to assess the value of startups funded by VC’s and BA’s and compare to their
performance.
Consider that in a seed or early stage funding round, the typical share given away is not more
than 25%.

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 62

 Q4: Startup Evaluation

Startup Valuation: putting everything together

• Always start from previous financing rounds. This is the starting point of your valuation.
• Check whether your investor has fixed terms to invest (e.g.: they invest € 50K for 10% of the
startup in seed stage); basically, they invest in the team
• Check what is the value of comparables recently funded by VC’s or BA’s and some indicators
coherent with their and your business
• Valuate your startup through comparables
• Perform analytical valuation with DCF
• Valuate your startup through DCF
• Match your stage with the right BA or VC
• Get information about potential investor
• Get in touch with potential investor
• Present your Deck (or Elevator Pitch) with your valuation and financial need
• If they are interested they require Business Plan, where you explain your valuation and need
• If they are interested, they make a due diligence
• Start from your valuation
• Negotiate the price
• Make your Deal!

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 63

 Q4: Startup Evaluation

Startup Valuation: how VC’s invest

To asses what is the value of startups, we can observe how VC funds invest. VC intervene
in the startup or round B phases, when the company is already selling the product and
reached (or near to reach) the break-even. The following data have been collected by AIFI
in 2013, and offer the average VC investment.

Target startup and investment parameters (Y 2013)

Size € 800 K
Share 25%
Startup turnover € 1,2 Mio
Startup Valuation (indirect) € 2,4 Mio
Sales Multiple* 2
Industry (prevailing) ICT
Nr. of employees 7

* Sales multiple is not very common; EBITDA is more frequently used

Source: AIFI
[Link]

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 64

 QUESTION # 5

The role of incubators and

accelerators

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 65

 Q5: Incubators and Accelerators

Question # 5: What is the role of Accelerators and Incubators

The role of incubators and accelerators is crucial.
Startups are very fragile organizations and they need a lot of things.
Accelerators and Incubators help startups in several ways, offering services and
assistance. Their business models can vary. Some just rent spaces and basic services,
some others invest in incubated startups (or in most promising ones). Many professional
investors invest only in startups incubated in certain incubators, as this is a way to select
promising projects.

Usually they offer:

• Spaces, offices, meeting roms for free or for a rate usually below market standards

• Technical services like phone and internet connection, print service, meeting.

• Tutoring / Mentoring, as startuppers could need assistance to create a BP, or to

organize a salesforce, etc.

• Networking and business opportunities with other startups, established companies

(potential partners or acquirer), business angels, institutional investors, etc.

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 66

 Q5: Incubators and Accelerators

Incubators

An incubator is physically locating your business in one central work space

with many other startup companies. In many cases, the startups in these
incubators can all be venture funded by the same investor group.

You can stay in the space as long as you need to, or until your business has
grown to the scale it needs to relocate to its own space.

The mentorship is typically provided by proven entrepreneurial investors, and

by shared learning of your startup CEO peers.

Source: Forbes
[Link]

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 67

 Q5: Incubators and Accelerators

Accelerators
A startup accelerator is very similar, but has some distinct differences. Your time in
the space is typically limited to a 3-4 month period, basically intended to jump start
your business and then kick you out of the nest.

The cash investment into your business from the accelerator itself is very minimal
(e.g., $20,000), but your time in the accelerator should largely improve your chances
of raising venture capital from a third party entity on the back end, after you graduate
from the program.

Mentorship could be coming from 100 entrepreneurs that are affiliated with the
accelerator (many of which are proven CEOs, or investors looking for their next
opportunity or simply helping the local startup community).

Seed accelerators allow for startups, investors and entrepreneurs to connect with
each other and have become a way of shaping startups into scalable and viable
businesses

Source: Forbes
[Link]

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 68

 Q5: Incubators and Accelerators

The concept of Incubation

• Startups incubated have by far more chances to succeed than others

• IT-ventures model: large funds on single projects

• Dot-com bubble: March 2000 NASDAQ peak à 2 years later lost 80% value

• Firstly introduced in 1959

• An institutionalised environment assisting startups and enabling business ideas

to grow

• Provide housing, expertise, business contacts

Source: Univesity of Chalmers

[Link]

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 69

 Q5: Incubators and Accelerators

Y Combinator

• In 2005, Paul Graham launched Y Combinator in Silicon Valley

• Average 3 months development

• Known as “Accelerator”

Source: Univesity of Chalmers

[Link]

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 70

 Q5: Incubators and Accelerators

Accelerators

• Application process open and competitive

• Provision of pre-seed investment, in exchange of equity

• Focus on small teams (not individuals)

• Time-limited support comprising programmed events and

intense mentoring

• Startup supported in cohort batches or classes

Source: Univesity of Chalmers

[Link]

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 71

 Q5: Incubators and Accelerators

Incubators / Accelerators Services

• Space, internet, office services, logistics

• Mentoring / Coaching
• Investors’ relationship
• Networking
• Research departments, technology (university accelerators)

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 72

 QUESTION # 6

How to present your business

to investors?

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 73

 Q6: Investor Pitch

Question # 6 – How to present a business?

Elevator Pitch, Investor Pitch, Business Plan, Executive Summary

• Elevator Pitch is brief presentation to introduce your business idea, your

product, your service, to summarize who you are, what you do and why an
investor should invest in your venture. Its name reflects the fact that you can
deliver its content in the time span of an elevator ride.

• Investor Pitch is a presentation sent to potential investors or stakeholders via

email or during a session of presentation of about 5 to 15 minutes. It is the first
document asked by potential investors. It is a short graphic and catchy
presentation of the business; it is more emotional than rational, and its goal is
to attract interest.

• Business Plan is an analytical document, with analysis, plans, premises, and

consequences, and all the details

• Executive Summary is dense resumè of the entire business plan.

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 74

 Q6: Investor Pitch

Investors’ Pitch
• The main goal of an EP is to persuade an investor to put some
money in the venture and become owner of a part of the
company

• You have to show her / him that your business is profitable, you
have the skills to manage a company, you know the market, you
will have positive cash flow after a while, you can control your
costs, your business is scalable, you can create and sustain
competitive advantages, the market is growing, you have a long-
term strategy, etc.

• Your Deck gives the potential investors the first impression of

you and your company

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 75

 Q6: Investor Pitch

Investors’ Pitch – The sections - SLIDE 1

Introduce yourself!

• Name of the startup and slogan

• Brief history (founded on …, in…, by name of

founders)

• A brief statement to introduce the activity:

Example:
Buy from emerging designers
Create your digital wardrobe
Share your style with friends

• Contact
Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 76
 Q6: Investor Pitch

Investors’ Pitch – The sections – SLIDE 2

Introduce the problem, client’s pain, need / opportunity

• Describe the market need

• Describe the clients pain

• Explain why current solutions don’t work or are fully

satisfactory

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 77

 Q6: Investor Pitch

Investors’ Pitch – The sections – SLIDE 3

Your Solution / your products and services

• What do we offer?

• Benefits of the product / services

• How do we relieve the customers’ pain?

• What’s the source of our competitive advantage? (types:

market, technology, relationships, …)

• Describe (and show in picture, if you can) the product

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 78

 Q6: Investor Pitch

Investors’ Pitch – The sections – SLIDE 4

Your Team: Why you are the right team to succeed

• For each member: name, role, experiences

• Organizational chart of the company

• Cap table (major shareholders %)

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 79

 Q6: Investor Pitch

Investors’ Pitch – The sections – SLIDE 5

What’s done so far? Use some metrics to describe past
performances

• Phase of the product /service development

• Date of foundation
• Capital invested
• Employees
• Revenues
• Gross Margin, Operating Profit, Net Profit
• Cash Burn Rate
• Metrics
• Clients
• Partnerships
• Patents, trademarks, licenses
Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 80
 Q6: Investor Pitch

Investors’ Pitch – The sections – SLIDE 6

Market & Competitors: why this market is favorable,
who are your competitors, what’s your competitive
advantage

• TAM
• Size of the market
• Trends
• Main characteristics
• Potential Market – Available Market – Target Market
• Key Success Factors
• Description of main direct* and indirect* competitors
• Competitive Advantages
• Benchmark

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 81

 Q6: Investor Pitch

Investors’ Pitch – The sections – SLIDE 7

Users / Sales / Cost Forecast

• Clients Forecast
• Sales Forecast
• Costs
• Metrics
• Targets (milestones)

If you have historical data is (relatively) easy, otherwise, you

have to do assumptions and create your own plan

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 82

 Q6: Investor Pitch

Investors’ Pitch – The sections – SLIDE 8

Cash Burn Rate / Runaway / Use of funds

• Monthly, yearly Cash Burn Rate

• Financial Need
• Use of proceeds (activity, objectives, milestones, …)

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 83

 Q6: Investor Pitch

Investors’ Pitch – The sections – SLIDE 9 (optional)

Valuation and Exit Opportunity

• Valuation Method
• Comparables
• Analytical Method
• Exit Strategy

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 84

 Q6: Investor Pitch

Investors’ Pitch – The sections – LAST SLIDE

Call to action, Value Proposition, and Contact

• Who you are

• Where you want to go
• What you need
• Add your contact details
• Add your logo, payoff, name of the company

Strategy & Marketing - a.y. 2019/2020 – Ing. Federico Della Bella 85