Funding and Selling/Marketing

Entrepreneurship for mathematicians

Summary of today’s lecture

• Part 1:
  • What is a company?
  • Equity vs Debt vs Grants. Valuation
  • Who do you raise money from?
• Part 2:
  • A lot of this course is going to be about “selling”
  • Selling (or marketing) is the heart of everything as an entrepreneur
  • How to understand and manage the interactions with customers
  • Closing deals
  • Discounts, special deals, cornerstone customers

Fundraising

How does a limited company work?

• Investors (you, or other people) give the company money in return for shares
• As shareholders, they collectively own the company
• They own a share of everything
  • The profits now and in the future
  • The assets of the company (money, computers, intellectual property, invoices not yet paid)
• But they are mostly not liable for the debts of the company
  • Loans
  • Payments to suppliers
  • Contractual obligations
• This is the magic of the “Limited Liability Company”
• There are alternatives (partnerships, charities, sole-trader etc)

The LLC

• Relatively cheap to set up
• Obligations for regular reporting and accounts
  • You need to keep records
  • Register shareholders, directors and the company secretary
  • Register persons with significant control
  • Debts, assets, stock, suppliers, goods bought and sold etc etc
  • Keep them for at least 6 years
• All the records are public on Companies House
• Bank account, accountants, bookkeepers, lawyers
• Pretty much obligatory if you’re going to start something

Shareholders

• When a company starts people buy shares
  • Initially there will just be some random amount like 1,000 shares at 1p each.
  • You pay the £10 to the company’s bank acount and…you own all the company.
  • But you’re not going to get far with £10
  • So you sell some of those shares to other people for more than 1p
  • And you have some equity to spend on building your company
• Shareholders have rights and obligations
  • A share of the profits after corporation tax
  • Vote on shareholder resolutions

More complex setups

• Different types of shares
  • Ordinary
  • Classes with more or less voting rights
  • Shares with pre-emption rights on subsequent share issues
  • Tag along, drag along
  • All described in the articles of the company
  • Get a lawyer to write the articles – they’re mostly boilerplate at this stage
  • Shareholders vote on changing the articles of the company

Board of Directors

• Chairperson and directors
• Keep official minutes of every meeting
• Boards represent the shareholders and can get into trouble if they make decisions which impact shareholders adversely
• Strictly, the board of the company appoint the managers of the company
• But it’s all more nuanced than that
• Founders are almost always on the board and early on they’re normally the largest shareholders
• Investors have no automatic right to be on a board but they might insist
• Boards generally vote on resolutions by headcount but if they are disagreeing, you’re already finished
• Capital raises and other major events are often voted on by shareholding

Raising Money

• Primarily as an early stage company, this involves raising equity
• That is either selling some of your shares or issuing new shares
• You offer to sell some percentage of your company to the investors
• At some notional value
• Everybody argues about the notional value all the time
• You go through multiple rounds of raising equity
• All the time selling little (or big) slices of your company to somebody
  • Good rule of thumb is 20% at each round
  • \(0.8^N\) is a small number for even quite small \(N\)
• Hopefully at higher and higher valuations

Valuation

• A dark art
• Let’s take an example
  • You’ve come up with an algorithm that will reduce the energy to train AI Networks by 90%
  • You’ve got some mathematics and some demo software
  • What’s that company worth right now?
  • What could that company be worth?
• It’s all just a massive guess
• What matters is how much money you need to get to the next stage
• And how much equity you’re willing to give away
• Or more likely, how much equity the investors demand given the risk

Example

• Say you need at least £2m to get to the next stage. This could be a huge £10bn business!
• You offer 20% of your business for £2m
• Your pre-money valuation is £10m. When the money comes in, the post-money is £12m
• From your perspective
  • When the business is worth £10bn, you’ve made £8bn. Woo hoo.
  • When the business goes bust, you walk away
• From the investors perspective
  • When the business is worth £10bn, they’ve made £2bn (a 1000x return)
  • When the business goes bust, they’ve lost £2m.
• Risk reward tradeoff

In reality

• What’s to stop you just wasting the money?
• You’re going to need many rounds of equity where you’re getting diluted
• The equity is almost always priced by investors not by founders
• Maybe your mathematics doesn’t work
• Maybe you can’t find a business model that works
• Maybe you’re only worth £100m in the future
• “Prediction is hard, especially about the future”
• Early stage equity raises are hard
• More “proof-points” is really really good

Other sources of funding

• Self supported
• “Friends and Family”
  • Probably more likely to believe your crazy idea
• Grants and other non-dilutive funding
  • Various parts of the Cambridge Ecosystem
  • Innovate UK
  • Regional grants
  • Non-profits
  • “In kind” donations

Debt

• As a company, if you borrow money you have to pay it back
• The rights of debt holders sit “above” the rights of shareholders
• If the company gets into trouble, the debt holders take it over
• The equity holders get wiped out – including you
• Convertible notes are debt
  • Effectively lend the company money with the promise to convert into equity later
• You can “borrow” money from your suppliers by paying them late. Don’t do this
• You can “borrow” money from the government by paying your taxes late. Really don’t do this
• Debt has limited upside (5%-10% per annum) and unlimited downside

Hierarchy

• HMRC
• Secured Creditors
• Unsecured Creditors (suppliers etc)
• Employees
• Shareholders

Raising Money (Founding stage)

• Primarily founders own money (and time)
  • Split of equity between founders is difficult to get right
  • You’re stuck with these people for a long time
• Friends and family
• Grants
• You’re aiming to get to a proof of concept
• And a decent business plan
• You can offer equity to people you want to work with
• The founders probably get to the end of this stage with 90% to 100% of their equity intact
• Maybe £100k-$250k (ish)

Raising Money (Seed)

• Angel investors
• Seed VC funds
• Early stage accelerators
• More grants
• Corporate relationships
  • Some invest money for early access
  • Some “invest” services like Google or Amazon
• £250k-£2m+
• Another 10-20% of your equity will be gone
• This is one of the highest risk places to invest so investors will want to see some chance of 20x+ return on their investment

Raising Money (Series A)

• By this point you’ve probably got a product
• You might even have customers and revenues
• You’re close to £1m annual recurring revenue
• You’ve got a plan to be profitable
• VCs
• Lots of pitches, very few hits
• £5m-£10m investment
• Another 10%-30% of your equity is gone
• Expect board participation from the VC

What it’s really like

Raising Money Beyond Series A

• Can’t really generalise about this
• What’s the exit?
• How much money do you need to grow
• At this point you’re a grown up business and you don’t need my advice

Summary

• Raising money is one of the primary jobs as a founder of a firm
• Once you’ve closed a round, you should be starting to think about the next round
  • If you’ve got some seed round money, start talking to VCs
  • “We’re a bit early for you right now but here are the things we’re going to do in the next 12 months in preparation for our Series A”
• Be prepared for dilution
• Be prepared for onerous terms which involve the investors taking over your business if you mess up
• Almost everybody says no. It’s depressing sometimes

Selling

Everything is about selling

• It’s basically all you do when you’re an entrepreneur
• You sell to investors
• You sell to customers
• You sell to your advisors
• You sell to your employees

Marketing vs Selling (the received wisdom)

• Marketing is about customer satisfaction. It starts with customer needs and demand and ends with customer satisfaction. It is a customer-oriented approach. Sales, on the other hand, is about selling what the company produces. It doesn’t care about the need of the customer but about the profits.
• Marketing is about providing quality products and consumer satisfaction. Selling is about generating by maximising sales and is a money-oriented approach.
• In marketing, emphasis is given on the wants of the consumer. Whereas in selling, emphasis is on the company’s products.
• Marketing is different from selling because here the company first determines customers’ needs and wants and then decides how to deliver a product to satisfy these wants. In selling, it is the other way round.
• blah blah blah

Marketing vs Selling

• They’re basically the same thing
• Or at least points on a spectrum
  • Maybe marketing is a little bit more about strategy
  • Maybe selling is a little bit more about closing a contract or a customer
• Being “Chief Marketing Officer” or “Business Development Director” is a cooler job title than “Head Saleswoman”
• If you’re Heinz or Tesla or Barclays they are different
• But you’re not Heinz or Tesla or Barclays
• As a startup founder, you just need some customers to buy your product of service

Marketing/Selling is a skill

• Like all skills it can be learned
• Like all skills, some people are naturally quite good at it
• You can hire people to sell/market for you
  • They will have done it before
  • They will have learned the skills
  • They may be good at it
  • They are very good at selling themselves so beware
• But as the founder/leader of a business, you’ll be intimately involved in the sales and marketing process for a very long time

How do you learn this stuff

• And about 5 billion other books

Learning selling and marketing

• These books are all terrible
• But you should probably read at least one of them
• Learn from other people
• Your own sales team
• Situations in which you are being marketed to
  • Buying a TV
  • Buying a car
  • etc
• Learn from bad salespeople as well as good ones
  • What do they do wrong?
  • Why are you hating the whole process of being sold to?

Go to market

• What is your “market”?
• First work out who your customers are likely to be (make a list)
• Are they consumers or businesses or government or academia?
• Presumably you’re not targetting every member of the customer group
• What are the characteristics of your initial customer group?
• Remember…what do they need?
• Do research into your customers
• Do more research into your customers
• If you don’t understand them and their needs, you’re wasting your time

Go to market

• Pricing model
  • Depends mostly on what the market will bear
  • What’s the value of the benefits of your product or service to your customer?
  • How much of that value can you “extract”?
  • It costs you £1000 a year to supply your product. Your customer saves £10,000pa because of your product. Charge somewhere between £1,001 and £9,999
  • Preferrably £9,999
  • What do competitors charge?
• Important: Only the lower bound depends on how much it costs you to deliver your product or service

Go to market

• Ok, we know who the customers are and how much we are going to charge but…
• How do you reach these customers?
• How do these customers know that your world-beating product exists?
• Advertising, print, social media (LinkedIn ugghhhhhh)
• Word of mouth
• Cold calling
• Industry conferences
• Earned media
• You need a plan and it will be part of your Business Plan
• Your customer research will help here

Go to market

• You’ve found your customers and actually got a sale (of which more later)
• Cost of Acquisition vs Life Time Value
• How do you deliver the product or service?
• How do you deal with ongoing customer support?
• Unhappy customers
• Refunds
• Being taken to court because the customer hates your product
• Lots of things to think about here too

Go to market

• I found this definition online which I like
• “A go-to-market strategy (GTM strategy) is an action plan that specifies how a company will reach target customers and achieve competitive advantage. The purpose of a GTM strategy is to provide a blueprint for delivering a product or service to the end customer, taking into account such factors as pricing and distribution. A GTM strategy is somewhat similar to a business plan, although the latter is broader in scope and considers additional factors like funding.”

Selling

• At some point you end up “in front” of a customer
  • Maybe a bit different for B2C businesses but essentially it’s the same
• You’ve got a chance to present your product or service
• Write a presentation for customers
  • Be careful about emphasising the problems they face
  • Emphasise the benefits to them
  • Carefully compare to competitors – maybe their best friend works for the competitor or the competitor just took them to the Monaco Grand Prix…
  • Personally I wouldn’t put pricing in the presentation but YMMV
• Ask for the sale

When they say no or maybe or later

• Nobody ever ever ever says “Yes, I’ll buy 10,000 of your widgets today, show me where to sign”
• What they actually say
  • “Not sure we have capacity at the moment”
  • “We have already got this thing”
  • “Seems really expensive to me”
  • “I don’t understand”
  • “I don’t like <insert feature here>”
  • “I’m not really the person who buys this thing”
  • “This is very interesting”
• Mostly, this means “no”
• Sometimes it means “maybe”

Next steps

• Never finish a meeting without asking (or stating) the next steps
• The next step is what turns “maybe” into a “more likely maybe”
• If there’s no next step it’s a definite “no”
• Have a process or system
  • Keep records of meetings
  • Follow up the meeting with an email
  • And then a phone call
• Unless it’s a real no, don’t take no for an answer
• Rejection is hard but get used to it
• It’ll happen a lot

Ways to deal with delays and maybes

• “I don’t like blue cars”
  • “Blue is the best colour for cars”❌
  • “If it wasn’t blue would you buy it?”✅
• “I’m not really the right person”
  • “Who is the right person?” ❌
  • “Can you introduce me to the right person?”✅
• “This is really interesting”
  • “Oh good”❌
  • “Can you see your firm buying this?”✅
• “We use your competitor”
  • “They’re rubbish”❌
  • “What is it that you like about the competitor?”✅

More ways to deal with delays and maybes

• “It’s too expensive”
  • “Oh, ok”❌
  • “But let me just go through the benefits again”✅
• “I don’t understand”
  • “<sotto voce>Moron”❌
  • “Maybe if I explained the benefits in a different way”✅
• “Great, we’ll get back to you”
  • “Thanks”❌
  • “When?”✅
• It’s all about keeping the conversation going

Special deals

• Early adopters
  • Give them a special price?
  • Give them it for free?
  • “Proof of concept” or “Technology evaluation”
• Cornerstone or vanity customers
  • Give them a special price?
• How transparent is your pricing?
• Do you really want to lie to your subsequent customers?
• Prices never go up later

When do customers buy?

• The terrible books will give you all these tricks
• But the tricks are just that
• Necessary conditions to buy
  • The customer has to believe that there is a benefit to them
  • The benefits of your product are better (for some definition of better) than the benefits of your competitors
  • Customer believes that you will “take care of them”
  • Customer likes you

Next lecture (24th April) – the boring but important stuff)

• Part 1:
  • Legal structures
  • IP protection
  • Accounting
  • Hiring, firing, leading, managing
  • Disputes
• Part 2: The Cambrige Ecosystem
  • Main players in the Cambridge Ecosystem
  • Accessing the ecosystem
  • What the ecosystem does well
  • What it does badly less well.

Questions