[MUSIC] As I hope you discovered in the previous module, raising money from investors is a very structuring choice. Let's now consider that you have made that choice and that you want to successfully raise a first round with one or several VCs. Of course, before raising from VCs, you can consider raising from a friends and family round. I will be very quick about this, because there is no particular technique involved for a friends and family round, and it depends on how close you are to the individuals you ask to invest. One little tip though, when launching a friends and family round, you should set a valuation for your company and just ask for a yes or a no. Indeed, because you will potentially ask 10 or 20 different individuals, you cannot afford multiple discussions on valuation. If you're less familiar with financial techniques, let's quickly cover the notion of "pre-money" versus "post-money" valuation. Say for instance you want to raise 1 million dollars, and you're ready to give one third of your company to your investors. Let me ask you a question here, how much would your "pre-money" and "post-money" valuations be? Pre-money: $1 million, Post-money: $3 million, Both pre- and post-money: $1 million Pre-money: $2 million. In this case, your pre-money valuation is $2 million and your post-money valuation, should you complete the round, is $3 million. Now, let's consider that you have either completed the friends and family round, or that you chose to go bootstrapped: you might end up at a point where you need to do a more significant financing round of say $3 million or $5 million to really set your new company on track. At this point, this means you will most likely have to deal with professional investors entering you into a totally different universe. The first thing you have to understand about VCs and most professional investors is that investors themselves also report to investors. The job of a professional investor is to deliver ROI - "Return on Investment" to his investors. Investors in a VC can be, for instance, wealthy individuals, banks, or what we call "funds of funds", funds whose only job is to invest in other funds. ROI has two components: profit and time. An ROI of 30% means that between the moment at which an amount of money was given to you and the moment you give it back, you have, on average, generated a profit of 30% per year. Another component of the macrosystem of VCs is their organization. A VC has investors who more precisely invest in one or several funds that are managed by the VC's team. Each fund managed by the VC's team of investors has a starting and a closing date. This is what we call the "horizon of the fund", and it is typically 5 or 7 years. Some funds do not have any pre-defined horizon, but this is less common. At this point, you understand the macrosystem around VCs, so let's see what is at stake for you as an entrepreneur: First, the amount you will manage to raise, and whether or not you will complete the round. If you write to the VCs in your investment memorandum that you need $3 million, it will be hard to close the round, should you end up with for instance, $2 million, unless, of course, you find a VC who invests alone and is convinced that $2 million is enough. Second, the length of the process. Raising money is a very demanding process, and you might end up, as the CEO or co-founder, spending the majority of your time on this process. There is no general rule for how much time it should take, but to give a reference point, completing a financial round takes somewhere between three months and up to one year. Third, the dilution you will face, which depends, as we explained earlier, on your pre-money valuation. Regarding valuation, you need to understand that there's in fact absolutely no scientific rule behind the valuation you will negotiate: it is just a market, and the valuation you can obtain depends on your relative strengths and weaknesses on that market. Most of the usual tools you learn in a finance course to value a company, like "discounted cash flows" or "peer comparables", do not actually apply to a first round, especially if your company has a "disruptive business model". Now that you have a better idea of what's at stake when raising money, we'll move on to some of the traps that you might find when negotiating with these investors. [MUSIC]
