January 4, 2021

Case Study, Venture Finance Offers


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  • How to prepare an investment offer to raise US$1.35M for Your Tech Startup: A Venture Finance Academy Case Study – Part 3
January 4, 2021
By Aery Advisors
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The third Case Study part is all about Going to Market with an offer that will attract the Investors and the Capital you need. And notice that we said both Investors, and Capital.

Because in this part, you will see how SanityDesk’s initial offer limited it’s fundraising capabilities. Then you will learn exactly how they fixed it.

You will learn how you could potentially be leaving a lot of money on the table. Or, like SanityDesk found out, you may be preventing yourself from raising the money (aka "liquidity and capital resources) you need to get to the next stage. Your offer for investors is a combination of a number of factors. But the two main elements are "economics" and "control".

When you take on investors, you are going to give up some measure of both economic upside, and and financial creative control over your company. Are you ready to make that kind of a bargain? Do you think investment is worth what you may be giving up?

Getting this right (your offer) is critical to your success as a startup and as Sam found out, and will share in the final lesson, giving up more of the economic upside and control isn’t necessarily a bad thing. And it was just in time to raise money in the midst of the COVID pandemic in March.

If you prefer to digest the case study PART 3 in video format, please click on the picture below:

If you prefer to digest the case study in written form, please continue reading below:

Sam Cook

Hi, and welcome to part three of the case study on how Brad Furber and the Venture Finance Academy helped SanityDesk raise $1.35 million in the midst of the global pandemic. Part one was about the sources of capital and how we played around in a few different capital pools in Europe, but decided the US traditional angel route was the right way to go. In the second part we went over how to structure it, based on that strategic decision of where to pursue capital. Because if we'd done it in Europe, it probably would have made a lot of sense for London. Everyone in Europe looks to London, even though with Brexit that might've been a little bit more complicated. 

In this part we're going to talk about creating a compelling offer, which is what you really need to go to market. We tested a couple of different offers and… Well, Brad, talk about creating a compelling offer. I think the first and most important thing that you taught me was that I thought I'd just go to an angel investor and they'd just tell me what the offer was, but it's actually completely the opposite way according to you.

Brad Furber

So basically it's empathy. Let's say that you're an angel that from time to time makes investments. If somebody comes to you and says, “Hey, do you want to invest in my deal?” and they don't have an offer, the angel is like, “Well, what is the deal?” And the founder says, “I don't know, you're the angel – you tell me what the deal is.” And if you're a lead investor, like if you're a real VC or a seed, actually that's what people pay you to do. They pay you to negotiate value – value the company, negotiate the terms and conditions etc because that's your job. 

But when you go to an angel, if you just say, “Hey, would you like to invest, but I want you to do the hard work.” I mean, that's just a turnoff. It's not that you're unwilling to negotiate. In the beginning, it's having empathy. It's how you present something so that the investor knows that they can either say yes or no, or maybe, without doing your work. 

Sam Cook

There's a quick analogy here that I've developed. I think approaching angel investors is like talking to a beautiful woman. If a beautiful woman's walking down the street, typically, she’s going to get approached by 10, 20 different guys every day, wanting her phone number. Just, that's just kind of the way things work. If someone knows your name as an investor, you're always getting bombarded with deals. And what happens? One, two, three offers a day. You just start to put up a filter. 

Someone who's beautiful is always getting approached. They have to come up with filters like,”Hey, I got a boyfriend” or whatever just to get through the day. And angel investors are the same way whenever they meet someone who finds out that they're an investor. It always seems to work its way into, “Oh, well, I've got a deal.” So they have a defense mechanism. And one of the filters is, “Is this guy competent enough? Or is this founder, this gal, competent enough to have put together an offer? And then I'll just judge it on its merits. Yes or no, that's overvalued/undervalued. I'm interested or not.

Brad Furber

Well, yeah, that's right. So if the startup hasn't done the homework of being able to present you with something that's in the ballpark, that's reasonable, you're just putting too much on the angel. I'm not saying that that's true if you go to a VC, but by the time you get to the VC, you’ve probably already done this. But yeah, the bottom line is you need to put something in the ballpark. That's not crazy. 

And when I say crazy, I mean when I was down in Australia, my son played on a basketball team and one of the dads found out that I do this sort of thing and he said, “Hey, I'm going to bring in this guy. I know.” And it was a little software startup with almost no revenue. And he was selling common stock at a pre-money value of 35 million. And he says, “What do you think? Do you know anyone that you could introduce me to?” And I'm like, “No, there's not a chance I would recommend this to anyone. Your valuation is totally out of whack. The security that you're offering... No. Thanks for the meeting, but no we're done.”

Sam Cook

In the Venture Finance Academy, you have a lot of material on creating a compelling offer. We're not going to go into all the details here of pre-money valuation, post-money valuation, SAFE note versus convertible notes and common stock and all that, but just know that investors need to know if they're going to be interested. Like what's going to be an enticing deal to them. What's the language through which they're used to getting pitched that feels comfortable, that communicates to them that you've done your homework? You need to have empathy for their situation. You're just not wasting their time with a deal they wouldn't be interested in. We've got a great story to actually illustrate this point. 

I had a lead investor who came in and put in some good money and really did try to help out a lot. He was quite helpful in many ways in the early stages. But when we were incorporating the company, we talked about Florida versus Delaware C Corp and you, Brad, guided us on a number of decisions there in the engineering. And you told me at the time, “Hey, this is a bit of a red flag.” Not a red flag, but just some things to watch that you would have expected a sophisticated investor to recommend. But when we proposed the right structure, it was okay. 

But then we get to the offer. And literally about a year ago, just over a year ago, we're here Kiev where I'm based and we came up with an offer that he said he could really sell. I didn't know any better. And I thought, “Let's go with it.” But what did you think?

Brad Furber

Well, it was an unusual offer and I'm open-minded as a finance guy. There's always new ways of financing companies. So the person who was recommending this structure said that not only did he like it, he had a whole network of other people that were going to love this deal. 

Sam Cook

Because they were more traditional, like real estate and natural resources.

Brad Furber

Something like that. And keep in mind you're a tech startup. So the idea was that we would do A), a convertible note that would convert at a future date at the option of the holder or B), they could put it back to the company. So essentially let's say you raise a half or a million dollars in three years, you would have the right, but not the obligation, to convert into the next qualified round, which is traditional vertical debt. Nothing wrong with that. 

But the flip side is: if they chose to, they could put it back and get their money back. So it's like a real deal. But we also had an equity kicker. So then that's called the redemption right, which is not that common for a pre-seed deal because I mean, how's the company going to have the money to pay you back? But nevertheless, I guess they'll deal with it later. I'll say, okay, well, if you say so. 

And then the second part of it was to provide an equity kicker, which was in the form of a SAFE: simple agreement for future equity, which is a very common instrument. We staple those two and then we also had a pretty high valuation. 20 million. But the idea is because we stapled them together that somehow or another, the valuation was 10 million. Pre-money. So it's really 20 million. But if you could separate these two instruments somehow or another, you're getting a twofer. So since you got a twofer, maybe you can argue that you're at 10 million, which is still on the high side of reasonable for your stage. 

Sam Cook

And here's the thing. Why did I like the high valuation? You told me, “Hey, this is a little bit high, but it may fly if someone sees it.” But why did I like it?

Brad Furber

If you were Elon Musk, you would sell it in an instant. 

Sam Cook

If I had had a track record as a founder who'd successfully exited before, I could have sold a high valuation, but the other thing was the ego got to me. It was like, “Oh, I’d like to have a high valuation.” It's like, “I want to sell my company for as much as I can say on paper. I'm worth X amount.” But what I didn't anticipate, and you kind of warned me as I went out to sell this was, I actually successfully raised a hundred thousand dollars on this instrument, outside of the person who recommended this, but all of them were brand new investors.

Brad Furber

And they all were your friends. Yes. So they were trusting. They didn't know.

Sam Cook

They didn’t know any better. And I didn't know any better. And I'd listened to you saying, “Hey, I'm open-minded, but this valuation is a little bit high.” But I felt that we had a strong lead investor and he was putting his money in. And he said he was going to put in a lot more and he could expose the offer to a whole other network of people.

I thought, “Maybe I'm just missing something.” And you said, “You know what? Let's see if that dog will hunt. And if it does, and it gets you guys funded. Cool. I'll be open to a new thing. I'm a Venture Finance Academy teacher and I'll found a brand new financial engineering mechanism.”

Brad Furber

Maybe this is Michael Miliken, you know. He's got a new deal. Yeah.

Sam Cook

Fast forward three months. It’s January and I'm in Austin pitching a group of sophisticated angels. I've moved past my friends network and those people who know and really trust me, but who aren't sophisticated investors. And the lead investor kept putting money into this... So it's not like it wasn't working a little bit. But then I'm in front of sophisticated angels. 

We knew we needed to raise more money. And I remember getting a follow-up meeting with a super angel – a guy by the name of Joel Trammell out of Austin, Texas – a super angel and a very high net worth individual who had exited a couple SaaS companies. And we get to the end of the presentation pitch deck and was like, “Now talk to me about this SAFE note.”

It was like he was saying, “It sounds like you're trying to jack up your valuation to something that shouldn't be. What's the real valuation?” And I looked at him and I said, “Yeah, you know…” and then it just kind of dawned on me: “Oh man, I'm selling something that I don't think I can really sell to sophisticated investors.” I thought the reaction would have been, “Oh, that's cool. This is a new financial engineering instrument.” It was too cute by half. And it was like, “I've taken two traditional instruments with an open mind,” but after a caution from you, I tried it. And I just knew, “Okay, this dog isn't hunting.” It wasn't hunting. And so this created a little bit of a crisis, which we'll go into in the fourth lesson, when I realized I was boxed in.

My lead investor promises his network can fund this and they're going to love this, but if they don't come through, I can't raise anywhere else. And this is where we started to take a look at it. And we came to the conclusion in early February that we had to adjust our offer and come back. And the good thing was that there was a network of people I was courting. I knew that I was fundamentally responsible as a CEO. I'd been working on a bunch of different leads. I went to another investor who is also a very sophisticated super angel and he told me, “Yeah, when you gave me that offer back in October, the high valuation is what turned me off.”

So I confirmed it from two data points – both sophisticated – who could have been lead super angels. I was looking at this and saying, “Okay, we're really in trouble. If we can't get these bigger super angels in, we need to shift gears and get an offer that speaks to them.” And then COVID happened. And a whole bunch of things started to accelerate. And we found a new super angel who was willing to take over the role as the lead investor. 

I remember going to him and you, Brad, at the time saying, “Hey, let's just go really simple. Let's go back to basics. Let's do a $4.5 million post-money SAFE, which is the YC Combinator standard.” And this was one of the great pieces of advice you gave that I think all founders can benefit from, especially if they joined the Venture Finance Academy. The beautiful thing about the YC SAFE is that it’s the gold standard. People trust YC. They paid lawyers a lot of money to create it. We were not going to modify anything on it. 

And what this means is you don't need to pay a lawyer to go create anything, because I'd already paid you. We’d spent quite a bit of money to create an offer that wasn't hunting so we decided, “Let's not waste any more legal hours or burn any more legal hours on that. Let's get something that's out of the can.” Everyone says, “Okay, I'm not going to question that legal document.” We brought the valuation down from 10 million to four and a half.

Brad Furber

Yeah. Well, you brought it from 20 down to four and a half with no debt. With no funny business. Without blowing up our balance sheet.

Sam Cook

It was the best thing that we ever did because even though we had a lower valuation, some dilution for the co-founders, we stayed in business. We got a new lead investor who had much more experience and who was comfortable. And as soon as I saw this, it was, “Okay, this, this is going to work. He comes in even.” 

And I'll talk about this a lot more in lesson four. Even in the midst of COVID, another one of his family members came in and it was critical to get the valuation right. The instrument right. And everything right. Based on where you are. And you were advising me, but also being open-minded because I wanted to run off a little bit. And with a lead who, to his credit, did put some money in and promised a lot more, but turned out to not be able to follow through. He had to change direction and you were right at the right moment, saying, “Boom let's let's change directions. Let's drop the valuation.”

Went back to all the old investors, including the lead who recommended the much higher ones, and said, “Hey, you're all welcome to convert your old instrument into the new one. We'll pay the legal fees because we appreciate the early candidates.” That's the right thing,

That, I hope, gives some real life color to the importance of setting a compelling offer, knowing who you're trying to raise from and being humble about your valuation, even though ego may tell you that you want it at a certain level, especially when the pandemic hit. That probably took a couple million, at least, off what we could've gotten in valuation, but you have to understand the supply and demand of investing. And in March of 2020, not a lot of people were stepping forward to fund startups, but luckily we had one. He basically is a lead. We said, “Hey, the instrument's YC, post-money SAFE. We're thinking this valuation, what do you think?” And he helped us set it, but it was a very easy, clean to-the-point negotiation because we knew the ballpark valuation we were willing to accept. 

He knew in his head what he thought he was willing to invest in. We were able to very quickly come to an agreement on that. And in retrospect, we probably should have done that in the beginning. But we just had to go through that journey to learn it.

Brad Furber

I think it's a bit like fishing. And so sometimes you're on the river and somebody says, “Hey, I've got a new lure or a new fly. I'm going to try this.” Okay. Let's give it a go. Which we did, but the fish weren't taking. They were not biting on that thing. So let's go back to old faithful: switch the fly, put it out there. And sure enough, the fish started to take it.

Sam Cook

Yeah. Even in a very bad period, we managed to do it. And that's the difference between an offer that's compelling and not understanding who your audience is. So again, I think I'm just going to say this over and over again: without Brad advising me at exactly the right point during this journey, we wouldn't have made it. That was critical. 

Coaching and awareness and understanding from someone who's seen it over 200 times means expert advice: “Let's give it a chance. Boom, now it's time to reel it in and go back and fish in different waters with a different lure. We did that and that got us in.

I think I now have 11 maybe 12 angel investors in SanityDesk now and I have maybe 170 cards of investors that I've entered into my CRM of people. So basically I've had to speak to 170 people to get 11 investors. Not uncommon. And that's pretty much the odds of the way it goes. And, and also we have a really good system where someone says, “Yes, I'm interested.” I email Brad right away with the new investor and Brad or whoever your lawyer is sends out the DocuSign.

When someone says they're interested, cast it out there and let them sign it. And because you're professional you've got it all in the can. These are just small details that Brad coaches you through, but they make a big difference because an angel investor can be hot one week and boom, the next shiny object, or deal's going to come across their desk and they may just lose interest because your logistics around the compelling offer just aren't there. 

That's why it's so important to have this in the can ready to send off. And, you know, it's been really cool to watch the process unfold from someone who's just done it so many times. You advise me directly, or if Brad's advising you in the Academy, it's going to work the same way. All the little nuances and details of reeling that fish in and getting them out of the water will be very important.

So if you've enjoyed the first three parts of this case study, the fourth is where we're really going to get into the details. We're going to talk about what it's like to actually go to market – go through the ups and downs of closing a round. And, finally, some of the stories that I've been teasing are going to come out 

If you’re serious about raising money, the only thing out there I could recommend is the Venture Finance Academy. I've tried a lot different things. I've been through an accelerator online but I definitely wouldn't be sitting here having raised $1.35 million without Brad as a coach.

It's a deal. The payment terms and the way in which you can finance this and get the advice – all the videos and forms and documents and the one-on-one feedback with Brad and in the group meetings is really powerful. And the network of other founders who go on the same journey. Go through the application process. See if you're a good fit. If Brad wants to let you in, if you've got the right qualities he's looking for, I'd love to see you in therapy. It would be cool to network with you and see you on your journey. 

Do check out the Venture Finance Academy. Take the time to do that. 

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Sam Cook, SanityDesk, Venture Finance Offers

Aery Advisors

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Aery Advisors helps founders, funders and teams turn big ideas into reality by helping them become investors-ready.

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