VisuALS’ Funding Strategy
In yesterday’s story, the VisuALS team developed a business plan and won $11,000 in a business plan competition, but that wasn’t going to be enough to launch the business. Perhaps more troubling, most of the team was graduating and had well paying engineering jobs lined up as the first step in their career, what were they going to do?
As you may recall, the VisuALS team had grown from four engineers (Aubrey, Josh, Preston, and Tyler) to include an accounting student (Jevon) and a marketing student (Kevin). The four engineering students were graduating and starting career jobs, with Aubrey and Josh moving out of state. All four wanted to continue as technical advisors. Since Preston and Tyler were staying local, they remained active with the business, working nights and weekends with Tyler becoming chief product officer and Preston becoming chief information officer. Jevon had another year to finish his degree, so he was around campus with more availability. He became chief operating officer along with managing the financials. Professor Steve Maher took on the role of chief technology officer and I took on the role of chief executive officer. We also brought on Austin McRay as chief sales and marketing officer half-time as he continued in a similar role with another Oklahoma Christian University (OC) startup.
With summer about to begin, we hired four bright young computer science and engineering students as summer interns to turn the MVP into a market-ready product. We also had to work out all of the operational aspects including becoming an approved reseller of the hardware components, establishing inventory, implementing logistics and customer support processes, and more. Our goal was to officially launch the product on September 1, 2017 and we had a lot of work to do. More urgently, we needed money to do much of that work.
Funding Strategy
There are many forms of funding and the right funding strategy may change throughout the life of a venture. Entire books are written on funding new ventures, so I won’t try to cover all the details here. Two books I would recommend are Get Backed¹ by Evan Baehr and Evan Loomis and Venture Deals² by Brad Feld and Jason Mendelson.
Baehr and Loomis simplify funding options down to four broad categories:
- Create funding through profits (also called “bootstrapping”)
- Borrow money through debt (taking out loans)
- Buy funding through selling equity (finding investors)
- Get people to donate money (charitable giving or crowdfunding)
They then dive into five different kinds of equity investors, each with different pluses and minuses:
- Friends and family (easy to land, painful to disappoint)
- Crowdfunding (platforms that enable many small investors to participate)
- Accelerators (not big direct funding sources, but great places to learn/mature and position for funding)
- Angel investors (early capital, often with experienced advice attached)
- Venture capital firms (increasingly large funding rounds with high expectations and very active investor involvement)
To raise almost any amount of funding from anyone other than founders (and maybe family), you need to pitch the concept to potential investors and convince them that it’s a good investment for them. Baehr and Loomis lay out a 10-slide outline as the core of any good pitch deck:
- Overview
- Opportunity
- Problem
- Solution
- Traction
- Customer or Market
- Competition
- Business Model
- Team
- Use of Funds
Building out this outline into an effective pitch deck is the core of Get Backed. If you’ve never built a pitch deck for investors, just go buy the book. It’s full of guidance, instruction, and examples.
Feld and Mendelson cover some of the same basic material as Baehr and Loomis, but mostly pick up where the two Evans leave off. They focus a bit more on venture capitalists than on other types of investors, but cover negotiating, agreeing to a term sheet, creating a capitalization table, and even agreeing to a letter of intent for the acquisition of your business. Their insights are precise and detailed and are intended to accomplish the subtitle of the book: “Be smarter than your lawyer and venture capitalist.” If you are pursuing venture capital to scale your business, just go buy Venture Deals, read it and refer to it often.
When I say that the next step for new ventures is to develop a Funding Strategy, I really mean develop the strategy and then make it happen. The structure of the Funding Strategy is pretty simple:
The top level purpose explains why you are raising money.
The panorama identifies critical environmental factors that will impact the fund raising:
- How is the economy impacting investor decisions?
- How does your venture fit into current investment trends? Hot or not?
- With whom are you competing in your sector for investment dollars?
- What aspects of your approach/solution will be seen as strengths and which as weaknesses, relative to competing investment opportunities?
The second level of the strategy has three pillars:
- What “sources” are you pursuing — what types of funding sources?
- What “uses” do you have for the money — how are you going to spend it?
- What “returns” do you expect to gain — how will those investments translate into financial gains that ultimately will satisfy those who have invested?
For each pillar, identify three concrete steps:
- For “sources” — what specific investors will you target, how will you gain access to them, and how will you convince them to invest?
- For “uses” — what specific plans do you have for investing the raised funds: who will you hire, what will you outsource, what will you buy?
- For “returns” — what specifically do you expect from these investments: what metrics, what results, what timeframe?
As mentioned above, your funding strategy likely will change through the life of the venture, so you will create a funding strategy structure like this each time it does.
VisuALS’ Funding Strategy
The VisuALS business plan outlined a need to raise $125,000 in initial funding to launch the business. Since customers would pay up-front with a credit card before the product would be shipped to them, as soon as the product launched, cash would start flowing into the business. It was expected that the $125k would get the company to cash flow break even, but another round of funding was scheduled about a year out to fund moving the business off of the OC campus and into a facility that would be able to support growing volumes of orders.
Valuing any pre-revenue business is a challenge. For this reason, many early stage businesses have used convertible notes as the funding source. This instrument technically starts life as debt with all the usual terms (interest, maturity date, etc.) but with the hope and expectation that it will be converted into equity at a future time when there is a credible valuation of the business — typically in the first “real” round of fund raising.
Convertible notes though have their downsides. They can have complicated legal terms, and as debt, they have regulatory requirements that can slow down and burden the funding process. To overcome these challenges, in 2013 Y Combinator introduced (and freely shared) a new investment instrument, the Simple Agreement for Future Equity (SAFE). We decided to use this instrument for our initial seed round of funding for the business.
We outlined our funding strategy:
Since the VisuALS team had compellingly pitched (twice) to judges in winning the Love’s Cup competition, we already had a very strong start to a pitch deck for potential investors. Now we needed to find those investors and convince them to invest.
The timing couldn’t have been better. Providentially, OC’s annual celebration dinner for its top donors was held the same day as the semi-finals round of the Love’s Cup competition. OC’s President John deSteiguer asked if he could tell the VisuALS story at the dinner. He closed the entire evening with the story, including the video of how VisuALS had so dramatically impacted Carl and his wife Janice’s life. There wasn’t a dry eye in the room. If that wasn’t moving enough, President deSteigeur had invited Carl and his family to attend and the VisuALS team was standing behind them in the back of the room. Carl amazingly stood from his wheelchair and walked around to give each member of the VisuALS team a hug.
Three-hundred people who had already proven their willingness and ability to open their wallets to support the work of OC heard and felt the impact that VisuALS was having in the ALS community. We were blessed to be able to close most of the seed round of funding from friends, family, and angels in attendance at that OC dinner.
Now we had the MVP, we had the team, and we had the funding. All that was left was to execute (experienced entrepreneurs — feel free to chuckle…).
Sources:
¹Loomis, E., & Baehr, E. (2015). Get Backed. Harvard Business Review.
²Feld, B., & Mendelson, J. (2013). Venture deals: Be smarter than your lawyer and venture capitalist. Hoboken, NJ: Wiley.
