Financing your startup is obviously a very complicate topic, and as you've seen in many of the other lectures and pieces of material that we provided in this module there's a lot of complexity. What I want to do is give you a bit of an overview of some of the issues associated with financing, and especially the trade-offs among different types of financing and some of the vocabulary used in financing startups. First to put things in context a little bit. There's actually a really interesting survey, called the Kauffman Firm Survey, that looks at startups across a range of different areas, and asks where does the money come from for startups? What I want to show you is where the money comes for companies that are high tech, right? So most of the companies in the Kauffman Firm Survey are not necessarily high growth startups. So they might be a restaurant, or a dry cleaning business, and those are great businesses, but they're not as complicated from an external financing standpoint. So in this case, let's look at where high tech businesses come from and where they get their money from. And the first source of money is probably not what you'd expect. The first source is on average, the money comes from the founder themselves. So the founder equity in this survey is on average about $46,000 of investment from the founder. And that could be their own sort of cash, or it could be their cash plus their labor. And at this point, people start to expect things like seeing VC on the list of friends and family, but actually the second biggest form of financing is debt, which is at $41,000. And the third biggest is venture capital or other forms of risk capital at $31,000. And finally, friends and family, at about $10,600. So to just put this in context, VC and that risk capital raising is only the third biggest source of financing. So why are we concentrating on this issue so much in this module on venture capital, and angel investment, and those sorts of risk capital? The reason is that this is the average number. So very few firms, in this sample around 2%, actually receive VC. And those that receive VC receive millions of dollars. So if you need millions of dollars to make your company work, venture capital or angel investing is the only real way to make that happen, unless you have some very, very wealthy friends and family. And in that case, it's worth spending some time talking about those approaches and why they might be advantageous. So fundraising can often be a complex subject, and it's not made easier by the fact that terminology can often be complicated as well. So I'm going to give you some information about how fundraising works, and this is how fundraising works today in 2016. If you're watching this video in 2026, there's a good chance that many of these numbers may have changed, the terminology may have shifted, there are sort of fads and fashions in these things. But I think this is a good way of sort of getting an introduction to some of the ways in which we describe fundraising. So the most important thing to realize about fundraising is startup fundraising is often thought of as happening in rounds. Each round is a discreet fundraising experience. So you go out and you find investors. Those one or more investors put money into your company and then you close a round. And then you run the company for a year, year and a half, however long until you have to raise another fundraising round. So the rounds used to be simply labeled A, B, C, with the first round being A, the second one being B, third round being C, and so on. But what's happened is as the cost of launches started to drop, there start to be additional rounds that are happening before the A round even starts. So you might hear of something called the friends and family round, or a pre-seed round. This is the earliest round of fundraising in a company. Usually at this point, you are just getting started and you're raising some amount of money under $1 million. It could be as little as $50,000, $20,000, it could be closer to $1 million, but you're raising it from people you know from existing networks, from friends and family, that's the first round of fundraising. If things go well, you may bring in the first professional investors into your company. These can be angel investors or VCs, and this is the seed round of investment where under $2 million investment is coming into your company. If you're growing quickly and you end up seeking venture capital, venture capital sources being interested in the next rounds, which are again, the A round, B round, and C round. So an A round is typically around 6 to $8 million. A B round would be a larger round, a C larger still, and so on. There are companies that have gotten D, E, F, G rounds, but that is very rare and those are multi-billion dollar companies. So as a rule of thumb, and again, this can be changed, each round you're going to give up somewhere between 10% and 40% of the equity in your company. So each time you go through a round, you're going to be diluting your own share down. So it's to your advantage to go through as little rounds as possible and to give away as little equity as possible. Usually the way this works is the first rounds, especially the friend and family round, uses something called convertible debt. And convertible debt is a somewhat complicated topic. But just to give you the basic introduction, in a convertible debt round what you do is you're not setting a price for your company, instead you're issuing debt. And the trick is though that this debt then converts into equity, into a percent of your company when you actually raise a round of official financing. So it's a way of deferring a decision about what your company's worth until a professional investor gets involved in your company. And so, this has become a preferential way of dealing with things like friends and family rounds when your company's value is completely unclear. At this stage you issue convertible debt and you push ahead the issue of wondering what your company's worth until later on in your company's growth. Later rounds almost always happen through equity. So people are buying a percent of your company and you're issuing them special class of stock, like preferred stock, in order to have that investment be taken care of. But you should be aware there's many different funding vehicles available, and they depend on the stage of the company you're at, the industry area of interest, and even the sort of type of VCs that are interested in your particular area. So I want to cover a little bit of some of this menu of options for you, but it's a very complicated set of choices. There are a number of major funding sources. This is just a small piece, but I want to give you quickly an introduction to five different funding sources that a lot of companies end up seeking out, especially in the high growth sort of entrepreneurial space. So venture capital, which you've heard about in some of the other discussions in this class, involves limited partners who put money into a fund. That fund makes investments and startups. They're generally interested in spending $2 million plus, round A or beyond, and they add a bunch of stuff to your company. So, at least in theory, they help provide guidance, governance, they connect your networks. So they can be very useful. These funds are often $100 million plus funds, though there are smaller ones, and VCs make money by betting on a portfolio of companies and hoping those companies have giant exits. So they want to see you earn 10 times or 30 times the valuation in the end that you had when they put the money in. So they're looking for people for swinging for the fences, and because they get 20% of the profit that their fund makes. And they also get a small fee every year that's about 2% of the funds that sustains the venture capitalists. The other traditional source of funding has been angel investors. Angel investors are wealthy individuals who put money into companies. They are generally very interested in the seed stage because they can't put money in later on into the organization. Usually we're talking investments in sort of the $25,000 to $500,000 plus range. In some cases, angels may add something to your company. So an angel investor may, for example, have network connections that are useful to you, but that's not always the case. Angel investors could be anywhere from a local wealthy entrepreneur to a network of doctors who co-invest together in companies, to somebody who made a lot of money in finance and is now retired and wants to invest in your organization. So there's a lot of different angels out there, and they can range from individuals to sort of large groups. And we have more of that in the video on angel investing. There's also another class of angel investors that have emerged fairly recently called super angels. Super angels are angel investors who are very connected, usually in Silicon Valley, but there are other locations too. And they make lots of small investments as individuals, and they often act as a signal of quality for a company. So if a super angel, a very well known angel investor, puts money into your company, venture capitalists are more likely to look at it. Some of these people run small funds of $10 to $70 million, or they may operate as individuals, and again, they're looking to make money when you exit your organization. Even more recently, we've had the birth of what are called seat accelerators, or sometimes, seat incubators. Those sometimes mean different things. They're often used interchangeably, but an accelerator comes from the idea that to make money from a startup, you want to invest as early as possible in high potential startups. And if you wait until a startup comes to you to look for money, it's already a little bit late to get a lot of the company for relatively small amounts of cash. So the first accelerator was called Y Combinator, started by Paul Graham. And the idea of these accelerators was why don't we take people who have just basic ideas for companies, haven't really built them yet, and get some of these really smart people together in a room. Put them through a three month intense experience that ends with them pitching their idea to investors. And we can mentor them and help them out, we can give them a small amount of funds, and that way we have a chance to invest in these really early companies before they're even underway. So this model's been very successful for the top accelerator, so Y Combinator and Techstars as of the time of this recording are examples of this, as is 500 startups. There's a couple others, but there's hundreds of these accelerators, most of them don't seemed to be that helpful for people. But if you can get into one, the high status ones tend to be very good and connect you to lots of other future funding. They usually take somewhere between 5 and 10% equity in your company. They give you 10 to $30 million. So that could be a very powerful approach. And then, as we'll talk about in my next video, there's some information on crowdfunding. So crowdfunding is a way of raising money from many people. It could anywhere from $100 to $1,000,000 or more, and we'll talk more about that in future videos. So you have this very large list of potential options available to you. Just a couple things on the major decision, which is VC and angel investing. This shows you as of 2012, and the numbers have shifted somewhat as of the time of the recording, but not that much, the number of investments VCs versus angels make in various areas. Now, this data is not exactly matched. So if you don't see angel investors in one area, or you see VCs in an area, or angels in an area, but no VCs, that doesn't mean they don't make investments. I had to match two different data sets together. But I think it gives you a general idea of what's happening, which is where a VC investment is is in areas like software, biotechnology, things like medical equipment and devices, consumer products and services, energy and industrial. Those are areas where VCs are dominant. And angel investors are interested in areas where VCs aren't, like retail and financial services. VCs generally want to see a company that can scale very quickly, that can exit within five to ten years at the very latest, and that can grow from a relatively small base of people. So something like Uber or Google, where there's a small number of people producing a product that's used by many. While something like opening a set of retail stores, or opening a bank is something that angel investors would tend to be interested in. So there is a lot to think about, which industry or area you're in, how much dilution you want to give up, who do you know? So, many of the other videos in this module of the course will cover some of these issues in more detail. Just, again, as a current events update, right now the cost of doing business in a startup, the cost of starting a company has dropped hugely over the last 10 years. So there's some thought that the difference in launching a web-based startup has dropped by about three orders of magnitude since the late 90s. That means that you don't need a lot of money to get a company going. And as a result the environment is very friendly for getting funding for entrepreneurs, whether it's through VCs, or angels, or seed incubators, or crowdfunding, through that sort of early series A stage. After that, after series A, when only VCs are really doing the funding, there's what's happening that's called the series A crunch. So there's a lot of companies getting funded in the seed rounds. There are relatively few companies being funded in series A, and it's much harder for startups to get past that area. So you have to be aware that it might be easy to raise early funds, but it can often be very hard to get larger stage multi-million dollar investments for growth in the United States. But the good thing for being an entrepreneur is there's lots of flux happening right now, and there's many new ways of getting investment. Your government may have programs that help you with this. There's certainly new forms of fundraising being invented. So this is an exciting area, but one there's lots of change happening in, and I hope that these videos will help guide you in the process.