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    Vcfundraisingprocess 124000675624 Phpapp02 Vcfundraisingprocess 124000675624 Phpapp02 Presentation Transcript

    • An Insiders View: How to Raise Money from VCs Bob Dahlberg Venture Partner Horizon Ventures Los Altos, CA Bob at horizonvc com
    • Key Message: VC Fundraising is a Sales Process, Not a Pitch
    • Agenda n Venture Capital financing Caveats n Raising money is a sales process n Four steps to falling in love Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 3
    • Full Disclosure: VC Costs… † n False sense of security: masks viability n Fund raising takes time away from serving customers n Adds an additional set of masters n Money enables costly mistakes n Money removes spending discipline n Sets the exit strategy and timing n You give up a lot of ownership † Source: Greg Gianforte, CEO RightNow, http://cet.berkeley.edu/Resources/CETLectures.html Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 4
    • Venture Capital Isn’t Required To Build a Great Business … n Broadcom n No VC money n Cisco n $5M in revenue, profitable before Sequoia invested n Dell n Raised money at $60M in revenue n eBay n $4.5M in revenue and profitable before Benchmark invested n Microsoft n VC funded after being profitable n The MathWorks n >$300M in revenue, no VC money n Oracle n Government contract funded first product n SAS Institute n > $1.9B in revenue, the largest private software company, no VC money n Siebel n Customers funded first product Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 5
    • … But it Can Sure Help 1. Cash to fuel growth 2. Cash to fuel growth 3. Strategy / business advice 4. Introductions: VCs, customers partners 5. Recruiting Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 6
    • Agenda n Venture Capital financing Caveats n Raising money is a sales process n Four steps to falling in love Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 7
    • Fundraising = Selling an Investment n It’s likely to be the biggest sale of your life n Success demands careful planning and execution Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 8
    • Fundraising is a Grueling Process 1. Requires mental toughness 2. You may have to talk to 10 – 40 firms to find the match 3. It’s the best business advice you will get! § Listen § Learn § Accept it § Bake learnings into your business plan Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 9
    • The Classic Enterprise Sales Process Initiate Educate/ Justify Discovery Evaluate Validate Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 10
    • Fundraising is a 4 Step Sales Process Initiate Educate / Justify Discovery Evaluate Validate 4 1 2 3 Due Prepare Approach “The Pitch” Diligence Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 11
    • Time Scales 4 1 2 3 Due Prepare Approach “The Pitch” Diligence 1 to 6 weeks Per VC 2 to 12 weeks Per VC 2 to 26 weeks Per Funding Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 12
    • Agenda n Venture Capital financing Caveats n Raising money is a sales process n Four steps to falling in love Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 13
    • Step 1: Prepare n Goal: Build an investable company n Strategy: Understand the VC’s Mind Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 14
    • VC Problem #1 n Deliver BIG returns to their Limited Partners in an out of favor investment sector n HUNGRY to do GOOD deals 40.0 30.0 20.0 10.0 0.0 -10.0 -20.0 2000 2001 2002 2003 2004 2005 2006 VC Return PE Return Source: Cambridge Associates Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 15
    • VC Problem #2 “We kiss a lot of frogs to find the prince” -- Venture capital industry cliché Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 16
    • Venture Grade Deals are Rare % 2003 Corporate Tax Returns by Revenue 100% 81.8% 80% 5.4M Returns Percent of 60% Life Style Companies VC AKA “Walking Dead” Grade 40% 20% 13.6% 2.2% 1.9% 0.5% 0% < $1M < $5M < $10M < $50M >$50M Revenue Source: IRS.gov Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 17
    • VC Problems #3, 4, 5 n No one can pick which start up will make it n Every deal has “hair on it” – it’s easy to find problems n Portfolio returns: 1 @ 10X; 4 @ 2X; 5@1X; 10 @0X n => VC will rely on their gut in the end n Will be working together for 6+ years n It has to be an interesting project n There has to be compatibility with the team n The unexpected is going to happen n Got to get through the hard times Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 18
    • So How do Most VCs Decide? VCs “fall in love” with the deal Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 19
    • So the Start-Up Must Be Attractive Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 20
    • Attractive in 2008 Is n Big Market n Open to disruption n Customers in pain and who buy n Growing order trend n Strong product offering / technology n Differentiated, protected n Successful Team n “A Players” n Successful Investors / Advisors / Board Members Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 21
    • #1 Start-Up Failure is the Lack of (high) Paying Customers n Know your customer! n Walk in your customer’s shoes n Know why they will buy Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 22
    • Dot Bomb School n “Build it and they will come!” n Product Development Model Concept/ Product Alpha/beta FCS Bus. Plan Dev. Test n “Get big fast” Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 23
    • New School Customer Development Model † Customer Customer Customer Company Discovery Validation Creation Scale † Steve Blank, The Four Steps to the Epiphany. Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 24
    • Customers that are Buying is The Essential Investment Criteria www.cafepress.com/kandsranch Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 25
    • Step 2: Approach n Goal: Get the first meeting n Strategy: Approach the right VC, right Due Prepare Approach “The Pitch” Diligence Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 26
    • The Right VC, Right 1. Right VCs, 2. Right Time, 3. The Right Way Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 27
    • 1. The Right VC has Greener Money n VC money is not a bank loan n Do your homework! n Talk to start-up CEOs n Actively investing n Fund has money n VC has capacity (not too many board seats) n Right sector (life sciences vs. semiconductor) n Relevant portfolio, expertise, and synergies n Early vs. late stage Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 28
    • Approach the Right VC, Right 1. Right VCs, 2. Right Time, 3. The Right Way Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 29
    • 2. The Right Time - 1 “Seek financing on the backside of a milestone” – John Hall, Horizon Ventures Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 30
    • 2. The Right Time - 2 “VC money is very expensive fuel to be used for taxiing around an airport.” – Peter Rip, Crosslink Capital Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 31
    • 2. The Right Time - 3 n Seek VC financing after Customer Validation Funding “Taxiing Phase” Customer Customer Customer Company Discovery Validation Creation Scale † Steve Blank, The Four Steps to the Epiphany. Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 32
    • Software Seed Rounds Fell 27% YoY Software VC Investments by Company Stage 400 350 300 250 Seed 200 Early Stage Expansion 150 Later 100 50 0 2004 2005 2006 2007(75%) • Early Stage company investments increased 28% YoY. • Expansion company investments decreased 15% YoY and 20% from 2004. Source: PricewaterhouseCoopers/Thomson Venture Economics/National Venture Capital Association MoneyTree™Survey Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 33
    • Funding to Customer Validation n Customers n Consulting engagements n Non-Recurring Engineering (NRE) engagements n Retainer fees from customers n Government n Small Business Innovation Research Grants (SBIR) n Big Companies n Value-Added Reseller (VAR) agreements n Divestitures – protected supplier contract with parent for a defined period n Moonlighting n Founders waive compensation n Family, Friends and Fools Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 34
    • Approach the Right VC, Right nRight VCs, nRight Time, nThe Right Way Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 35
    • The Right Way “We only look at deals that are introduced to us by people we know” – Mike Schuh, Foundation Capital Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 36
    • The Right Way: Introduction by Referral 1. Successful entrepreneurs 2. Lawyers that work with VCs and start-ups 3. Angel investors 4. Other service providers: n bankers, head hunters, … Avoid Brokers (= Mothers-in-Law) Create a buffer layer in between you and VCs. Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 37
    • Sales Tool: The Executive Summary n Tool Objective: To get a meeting n One pager that covers: n Contact information n Customer problem n Your solution (product/technology) n Market size n Competitors n Team n Customer proof points n Funding status Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 38
    • Executive Summary Template Company Overview: Logo Tagline Pain: Solution : Technology Company Information: Newco, Inc. Address : Phone: Fax: Website: Email Basic Details: Founded In: Defensibility # Of Employees: 15 (X US / Y off shore) Funding History: Total Amount Raised to Date: Funding History: Total Seeking: $ Raised to Date: Total Amount Participants Amount Individuals: Committed Funds (If Any): VCs: Others: Competition Use of funds: E Valuation Expectations: Total Seeking: Committed Funds (If Any): Use of funds: Financials: Cumulative Revenue: Burn Rate: $ Cash Flow Positive in: Year ? 3-Year Revenue Forecast: Business Model Year 1: $ Year 2: $ Year 3: $ Team: Milestones • Company founded ____ • ___ Patents filed on ___ • Product Introduction ____ • $ in sales in x • $ in sales in x+1 • $ in sales in x + 2 www.bandangels.com Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 39
    • How VCs Vet Your Exec Summary n Is the referral source credible? n Is this company in my geography? n < 1 -2 hours travel time n Is this a scalable business? n Is the team credible? n Are the existing investors credible? n Can I possibly love the: n CEO n Target market n Problem being solved n The technology being developed Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 40
    • VC’s Tool: VentureSource Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 41
    • Rejection “We can’t kiss all the pretty girls” -Bob Kagle, Benchmark Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 42
    • Step 3: The Pitch n Goal: Get follow-on meetings n Strategy: Sketch out a compelling, exciting picture 4 1 2 3 Due Prepare Approach “The Pitch” Diligence Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 43
    • PowerPoint “Pitch” Advice is Abundant n SVASE www.svase.org/components/uploads/SVASE%2010%20Sli de%20Template.ppt n David Cowan, Bessemer Venture Partners whohastimeforthis.blogspot.com/2005/11/how-to-not-write- business-plan.html n Brad Feld, Mobius Venture Capital www.feld.com/blog/archives/2004/06/the_torturous_w.html n Guy Kawasaki, Garage Technology Ventures blog.guykawasaki.com/2005/12/the_102030_rule.html Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 44
    • Your Goal: Get the Next Date n Tell a simple yet compelling story n VCs easily drown in details n Your key points get forgotten n Boredom sets in n Listen and learn Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 45
    • K.I.S.S. Principle: Tell a Simple Story n Avoid 3 Blind VCs and (You’re) the Elephant n Too common at first VC meetings: n You know your business best n Assume nothing! VC Start-Up K.I.S.S. = Keep it Simple Stupid Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 46
    • Peter Lynch’s Investment Advice “Never invest in any idea you can't illustrate with a crayon.” Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 47
    • Jerry Weissman Coach to IPO Road Show CEOs Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 48
    • Expect to Go off the Rails 1. VCs are curious, smart and impatient n They will ask a lot of questions when confused 2. VCs are testing you: n Are you an effective leader? n Able to listen to “board room” feedback? n Able to listen to customer feedback? n Re-arrange the slide order to address issues that come up early Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 49
    • Listen Carefully! n It’s the best business advice you will get! § Listen § Learn § Accept it § Bake learnings into your business plan Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 50
    • Four Reasons for Love Market + Team Technology Financials Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 51
    • 1. Market Size is Every VC’s Concern n Is the market big enough to build a big company? n Is there any potential to grow fast? n Is there room for this start-up? n Is the market big enough to maneuver if the first niche doesn’t work out? Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 52
    • 1. Lack of Customers is the #1 Cause of Failure n Does the team really know the customer? n Is there a logical reason behind the customer list? n Strategic or opportunistic? n Any notion of customer segmentation? n Are the customers tier 1? n How much are the customers helping? Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 53
    • 2. Team n Every team claims to be “world class” n Demonstrate Success n Company pedigree – worked at market leaders n Personal results n Personal success n Start -up mentality vs. Big company mentality n Expect your backgrounds to be rigorously checked. Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 54
    • 3. Product Test: Aspirin or Vitamin?? n Inertia is huge n Customers change only when they have to n “Don’t fix what isn’t broke.” Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 55
    • 3. Product Feature or a Company? n A Feature? n Can the incumbent add this feature to an existing product easily? n A Product? n Part of a full-product portfolio? n A Company? n Canthe value prop create a substantial business? Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 56
    • 4. Financial Forecasts “I don’t have Excel on my computer!” -- Mark Stevens, Sequoia Capital Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 57
    • Cash flow is king n Revenue forecast will likely not materialize, So n Is this plan realistic? n Revenue must not be too big, but not too small n Spending plan will be scrutinized. n Cash is King n Successful CEOs are frugal Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 58
    • The Morning After … Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 59
    • What Can You Do? n React to the business advice you received n Adjust your business strategy as is necessary n Polish your pitch for the next VC n Incorporate learning from each interaction n Simplify, Simplify n Clarifyconfusing points n Address objection items n Rearrange the slide order Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 60
    • What Will Most VCs Do? n Go silent or an innocuous turn down n They don’t want to burn any bridges n Go at their own pace, no urgency n Risk reduces as time passes n Wait for a milestone n quartersales results n prototype works Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 61
    • Rejection n Accept rejection gracefully n There is no rationale argument to bring the VC back Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 62
    • What Might Happen? n When a VC senses love, you’ll hear back n Be responsive! n VC’s like working with responsive people n You’re building a relationship n Respond to requests < 24 hours Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 63
    • Step 4: Due Diligence n Goal: Get a term sheet n Strategy: Two way test drive Due Prepare Approach “The Pitch” Diligence Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 64
    • Due Diligence = Two Way Test Drive n Can I work with this team / VC for the next 6 years? n Is this a quality team / VC? n Do team / VC listen? n Is the team/VC honest, ethical, reliable? dependable? n How do they react being under fire? Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 65
    • Prepare in Advance n Customer / technology references n Keep references updated on your progress n Use them judiciously n Executive resumes & references n Line up references in advance, n Contact people VCs will find n Financial Quarterlies n Capitalization table Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 66
    • Typical Due Diligence Process n More information (Exec. resumes, financials, cap table, personal references, etc.) n Meet with VC’s “expert(s)”: Portfolio companies, friends, paid experts n Follow up meeting(s) at your office / their office n Calls to customers and personal references n Calls to back-channel references Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 67
    • Getting “Married” n Locate a Syndicate Partner n Term Sheet n Legal due diligence n Cash in the bank Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 68
    • Syndication: Two Parents are Better than One n For the entrepreneur n More strategic minds around the table n Hedge against one VC walking out n For the VC n Validates that the start up has legs n More powder available Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 69
    • And Remember… Venture Capital Isn’t Required n Broadcom n No VC money n Cisco n $5M in revenue, profitable before Sequoia invested n Dell n Raised money at $60M in revenue n eBay n $4.5M in revenue and profitable before Benchmark invested n Microsoft n VC funded after being profitable n The MathWorks n >$300M in revenue, no VC money n Oracle n Government contract funded first product n SAS Institute n > $1.9B in revenue, the largest private software company, no VC money n Siebel n Customers funded first product Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 70
    • Entrepreneur Resources n Law firm outreach n DLA Piper Venture Pipeline www.venturepipeline.com n Fenwick & West LLP “Darrell Kong” < dkong _ fenwick.com > fenwick.com> n Orrick, Herrington & Sutcliffe LLP’s “Total Access” "Chad Lynch" <clynch _ orrick.com> <clynch orrick.com> n Pillsbury Winthrop Shaw Pittman LLP’s “Back Stage Pass” kiran.kamboj _ pillsburylaw.com n Wilson, Sonsini, Goodrich, and Rosati wsgr.com/WSGR/Display.aspx?SectionName=practice/venturecapital.htm wsgr.com/WSGR/Display.aspx?SectionName=practice/venturecapital.htm n SDForum n www.sdforum.org n Silicon Valley Bank’s Venture Exchange n Shai Goldman, Director, sgoldman _ svb.com n SVASE, Silicon Valley Association of Startup Entrepreneurs. Entrepreneurs. www.svase.org n The Enterprise Network of Silicon Valley Tensv.org n Women’s Technology Cluster www.wtc- www.wtc-sf.org Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 71
    • To Your New Venture Success! Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 72