An Insiders View: How to Raise Money from VCs Bob Dahlberg Partner Horizon Ventures Los Altos, CA Bob at horizonvc com

Agenda VC financing +’s and –’s How VCs decide The VC dating game

VC financing +’s and –’s

How VCs decide

The VC dating game

Venture Capital Isn’t Required To Build a Great Business … Broadcom No VC money Cisco $5M in revenue, profitable before Sequoia invested Dell Raised money at $60M in revenue eBay $4.5M in revenue and profitable before Benchmark invested Microsoft VC funded after being profitable The MathWorks >$300M in revenue, no VC money Oracle Government contract funded first product SAS Institute > $1.9B in revenue, the largest private software company, no VC money Siebel Customers funded first product

Broadcom

No VC money

Cisco

$5M in revenue, profitable before Sequoia invested

Dell

Raised money at $60M in revenue

eBay

$4.5M in revenue and profitable before Benchmark invested

Microsoft

VC funded after being profitable

The MathWorks

>$300M in revenue, no VC money

Oracle

Government contract funded first product

SAS Institute

> $1.9B in revenue, the largest private software company, no VC money

Siebel

Customers funded first product

VC Financing Comes with Costs… † Fund raising takes time away from serving customers False sense of security: it masks viability Money enables costly mistakes Money removes spending discipline Adds additional master(s) You give up a lot of ownership Sets the exit strategy and timing † Source: Greg Gianforte, CEO RightNow, http://cet.berkeley.edu/Resources/CETLectures.html

Fund raising takes time away from serving customers

False sense of security: it masks viability

Money enables costly mistakes

Money removes spending discipline

Adds additional master(s)

You give up a lot of ownership

Sets the exit strategy and timing

… But it Sure Can Help Cash to fuel growth Strategy / business advice Introductions: investors, customers and partners Recruiting

Cash to fuel growth

Strategy / business advice

Introductions: investors, customers and partners

Recruiting

Agenda VC financing +’s and –’s How VCs Decide The VC dating game

VC financing +’s and –’s

How VCs Decide

The VC dating game

We Live in Unprecedented Times Facing the worst economy since the ’30s No IPO market Average time to M&A is 6 years, IPO is 8 years, Deal Status Most deals in the last 6 months were follow on with existing investors. New investors are asking for 30 – 40% down rounds, or are waiting for prices to fall.

Facing the worst economy since the ’30s

No IPO market

Average time to M&A is 6 years, IPO is 8 years,

Deal Status

Most deals in the last 6 months were follow on with existing investors.

New investors are asking for 30 – 40% down rounds, or are waiting for prices to fall.

Against that backdrop .....

How do Most VCs Decide? You’ll first have to understand VC care abouts ....

You’ll first have to understand VC care abouts ....

VCs Want to do Deals Deliver Big Returns to their LPs SOURCE: TheFunded.com, NVCA / Thompson Reuters Exit Poll and VC Fundraising Q3

Deliver Big Returns to their LPs

Good Deals are Hard to Find “ We kiss a lot of frogs to find the prince” -- Venture capital industry cliché

“ We kiss a lot of frogs to find the prince”

-- Venture capital industry cliché

Venture Grade Deals are 1/200 Source: IRS.gov VC Grade Life Style Companies AKA “Walking Dead”

It’s Hard to Spot Winners Every deal has “hair on it” It’s easy to find many, many problems EBAY: “On-line flea market? Come on!” Google: 5 CEO candidates passed before Eric S. “Search is done” It is not easy to discern a winner: Portfolio returns: 1 @ 10X; 2 @ 1X; [email_address]

Every deal has “hair on it”

It’s easy to find many, many problems

EBAY: “On-line flea market? Come on!”

Google: 5 CEO candidates passed before Eric S. “Search is done”

It is not easy to discern a winner:

Portfolio returns: 1 @ 10X; 2 @ 1X; [email_address]

VC’s Personal Bias is a Factor Will be working together for 6+ years The project must be interesting Team compatibility is critical The unexpected is going to happen Got to get through the hard times

Will be working together for 6+ years

The project must be interesting

Team compatibility is critical

The unexpected is going to happen

Got to get through the hard times

So How do Most VCs Decide? VCs “ fall in love with the deal ”

VCs “ fall in love with the deal ”

Your Start-Up Must Be Attractive Newco!

Attractive is.... Big Market Open to disruption Customers in pain and who buy Growing order trend Strong product offering / technology Differentiated, protected Successful Team “ A Players” Successful Investors / Advisors / Board Members

Big Market

Open to disruption

Customers in pain and who buy

Growing order trend

Strong product offering / technology

Differentiated, protected

Successful Team

“ A Players”

Successful Investors / Advisors / Board Members

Agenda VC financing +’s and –’s How VCs Decide The VC dating game

VC financing +’s and –’s

How VCs Decide

The VC dating game

VC Dating is a Grueling Process Requires mental toughness You may have to talk to 10 – 40 firms to find the match Success demands careful planning and execution

Requires mental toughness

You may have to talk to 10 – 40 firms to find the match

Success demands careful planning and execution

Time Scales 1 Introduction 2 First Date 3 Dating 1 to 6 weeks 2 to 12 weeks Per VC Per VC Per Funding 2 to 26 weeks

It Will Be the Best Business Advice You’ll ever Get Listen Learn Accept it Bake learnings into your business plan

Listen

Learn

Accept it

Bake learnings into your business plan

Step 1: Introduction Goal : Get the first date Strategy : Approach the right VC, right Introduction “ The Pitch” Due Diligence

Goal : Get the first date

Strategy : Approach the right VC, right

The Right VC, Right Right VCs, The Right Way

Right VCs,

The Right Way

The Right VC has Greener Money VC money is not a bank loan Do your homework ! Talk to start-up CEOs Actively investing Right sector (life sciences vs. semiconductor) Relevant portfolio, expertise, and synergies Early vs. late stage

VC money is not a bank loan

Do your homework !

Talk to start-up CEOs

Actively investing

Right sector (life sciences vs. semiconductor)

Relevant portfolio, expertise, and synergies

Early vs. late stage

Funding to Customer Validation Customers Consulting engagements Non-Recurring Engineering (NRE) engagements Retainer fees from customers Government Small Business Innovation Research Grants (SBIR) Big Companies Value-Added Reseller (VAR) agreements Divestitures – protected supplier contract with parent for a defined period Moonlighting Founders waive compensation Family, Friends and Fools

Customers

Consulting engagements

Non-Recurring Engineering (NRE) engagements

Retainer fees from customers

Government

Small Business Innovation Research Grants (SBIR)

Big Companies

Value-Added Reseller (VAR) agreements

Divestitures – protected supplier contract with parent for a defined period

Moonlighting

Founders waive compensation

Family, Friends and Fools

Approach the Right VC, Right Right VCs, The Right Way

Right VCs,

The Right Way

The Right Way “ We only look at deals that are introduced to us by people we know” – Mike Schuh, Foundation Capital

“ We only look at deals that are

introduced to us by people we know”

– Mike Schuh, Foundation Capital

Study Finds Business Plans a Waste See: http://www.rhsmith.umd.edu/news/releases/2009/040809.aspx Social connections trump business plans by a long shot, says Goldfarb. Thus it is that people who already know VCs and angels have an easier time raising money . The irony, says Goldfarb, is that people who don’t have connections need to go out and make them, which may require that they have a business plan to discuss. But the plan is sort of like a business card, he says – just something that business protocol dictates you carry around.

The Right Way: Introduction by Referral Successful entrepreneurs Lawyers that work with VCs and start-ups Angel investors VCs Other service providers: bankers, head hunters, … Avoid Brokers (= Mothers-in-Law) Create a buffer layer in between you and VCs.

Successful entrepreneurs

Lawyers that work with VCs and start-ups

Angel investors

VCs

Other service providers:

bankers, head hunters, …

Avoid Brokers (= Mothers-in-Law)

Create a buffer layer in between you and VCs.

Sales Tool: The Executive Summary Tool Objective : To get a meeting One pager that covers: Contact information Customer problem Your solution (product/technology) Market size Competitors Team Customer proof points Funding status

Tool Objective : To get a meeting

One pager that covers:

Contact information

Customer problem

Your solution (product/technology)

Market size

Competitors

Team

Customer proof points

Funding status

Executive Summary Template www.bandangels.com

How VCs Vet Your Exec Summary Is the referral source credible? Is this company in my geography? < 1 -2 hours travel time Is this a scalable business? Is the team credible? Are the existing investors credible? Can I possibly fall in love with the: CEO Target market Problem being solved The technology being developed

Is the referral source credible?

Is this company in my geography?

< 1 -2 hours travel time

Is this a scalable business?

Is the team credible?

Are the existing investors credible?

Can I possibly fall in love with the:

CEO

Target market

Problem being solved

The technology being developed

Rejection “ We can’t kiss all the pretty girls” -Bob Kagle, Benchmark

“ We can’t kiss all the pretty girls”

-Bob Kagle, Benchmark

Step 2: The Pitch Goal : Get the second date Strategy : Sketch out a compelling, exciting vision 1 Introduction 2 “ The Pitch” 3 Due Diligence

Goal : Get the second date

Strategy : Sketch out a compelling, exciting vision

“ Pitch” Advice is Abundant -- and not duplicated here Guy Kawasaki, Garage Technology Ventures www.garage.com/resources/building.shtml Brad Feld, Mobius Venture Capital www.feld.com/blog/archives/2004/06/the_torturous_w.html David Cowan, Bessemer Venture Partners whohastimeforthis.blogspot.com/2005/11/how-to-not-write-business-plan.html Sequoia Capital sequoiacap.com /ideas/ SVASE www.svase.org/components/uploads/SVASE%2010%20Slide%20Template.ppt

Guy Kawasaki, Garage Technology Ventures

www.garage.com/resources/building.shtml

Brad Feld, Mobius Venture Capital

www.feld.com/blog/archives/2004/06/the_torturous_w.html

David Cowan, Bessemer Venture Partners

whohastimeforthis.blogspot.com/2005/11/how-to-not-write-business-plan.html

Sequoia Capital

sequoiacap.com /ideas/

SVASE www.svase.org/components/uploads/SVASE%2010%20Slide%20Template.ppt

Tell a Simple, yet Compelling Story Your Start-Up is everything to you But just another pretty face to the VC VCs easily drown in details Boredom sets in Your goal is simple: Get the next date VC Start-Up

Your Start-Up is everything to you

But just another pretty face to the VC

VCs easily drown in details

Boredom sets in

Your goal is simple:

Get the next date

Story Telling is a Skill Jerry Weissman Coach to CEOs on an IPO Road Show

Jerry Weissman Coach to CEOs on an IPO Road Show

The Story VCs Want to Hear Big Market Open to disruption Customers in pain and who buy Growing order trend Strong product offering / technology Differentiated, protected Successful Team “ A Players” Successful Investors / Advisors / Board Members

Big Market

Open to disruption

Customers in pain and who buy

Growing order trend

Strong product offering / technology

Differentiated, protected

Successful Team

“ A Players”

Successful Investors / Advisors / Board Members

Four Pillars to any VC Pitch + Team Technology Product Financials Market

+

Market Size is Every VC’s Concern Source: IRS.gov VC Grade 1:200 Market

Market Vetting Competition VC cliché’: “No competition = No Market” Is there room for this start-up? Is there any potential to grow fast? Is the market big enough to maneuver if the first niche doesn’t work out? Market

Market Vetting

Competition

VC cliché’: “No competition = No Market”

Is there room for this start-up?

Is there any potential to grow fast?

Is the market big enough to maneuver if the first niche doesn’t work out?

Example: Competition / Ecosystem RTLS/RFID YMS TMS WMS Custom Asset Mgmt ERP Over The Road Trailer/Tractor Tracking Middleware/ Fusion Ekahau Aeorscout Laudis Fluensee SystemId Retalix Yardview C3 Red Prairie Manhattan Others… Oracle SAP OAT QualComm Trimble SkyBitz Zebra Newco Asset Control Asset Location Asset Management Oracle WMS Players I2 BEA Microsoft Motorola IBM HP ThingMagic Impinj Alien Size of oval does not represent size of company but rather functional coverage in segment

#1 Cause of Failure is the Lack of Customers Demonstrate you know your customer cold There’s a logical reason behind the customer list Articulated customer segmentation Strategic approach List your marquee customers Show that customers are helping Market

Demonstrate you know your customer cold

There’s a logical reason behind the customer list

Articulated customer segmentation

Strategic approach

List your marquee customers

Show that customers are helping

Example: Customers Manufacturing Retail Logistics Transportation

2. Team Show off your leadership aptitude Personal results, personal success Start-up mentality vs. Big company mentality Company pedigree – worked at market leaders Backed by blue ribbon advisors Key: people investors trust Expect your backgrounds to be rigorously checked. Team

Show off your leadership aptitude

Personal results, personal success

Start-up mentality vs. Big company mentality

Company pedigree – worked at market leaders

Backed by blue ribbon advisors

Key: people investors trust

Expect your backgrounds to be rigorously checked.

Example: Corporate Organization Disclose: Experience & Holes David Engineering Doug Sales Bob CEO TBH Marketing 11 Engineers Cory Joe CTO Rob Mark CFO 2 Application Engineers 1 Marketing 2 Salespeople

Disclose: Experience & Holes

Product Test: Aspirin or Vitamin?? The product has to be compelling Customer inertia is huge Customers change only when they have to “ Don’t fix what isn’t broke.” Technology Product

Product Test: Aspirin or Vitamin??

The product has to be compelling

Customer inertia is huge

Customers change only when they have to

“ Don’t fix what isn’t broke.”

Feature or a Company? A Feature? Can the incumbent add this feature to an existing product easily? A Product? Part of a full-product portfolio? A Company? Can the value prop create a substantial business? Technology Product

A Feature?

Can the incumbent add this feature to an existing product easily?

A Product?

Part of a full-product portfolio?

A Company?

Can the value prop create a substantial business?

4. Financials Financials

Cash is King Revenue forecast will likely not materialize, So Is this plan realistic? Revenue must not be too big, but not too small Spending plan will be scrutinized. Cash is King Successful CEOs are frugal Financials

Revenue forecast will likely not materialize, So

Is this plan realistic?

Revenue must not be too big, but not too small

Spending plan will be scrutinized.

Cash is King

Successful CEOs are frugal

Sequoia Capital’s Directive to CEOs 10/2008

Example: HOW WE MAKE MONEY PRODUCT $ Newco 1.0 SAME PRODUCT 3 REVENUE STREAMS ECU/hours Newco DELPLOYED IN A PUBLIC CLOUD APPLICATION DELPLOYED IN A PUBLIC CLOUD Newco X Newco X Newco X ON-DEMAND $ Additional ECU’s Licensed Server ENTERPRISE DELPLOYED AT CUSTOMER SITE APPLICATION DELPLOYED IN A PRIVATE or PUBLIC CLOUD Newco 2.0 On-Premise Q4 2008 $

Example: BUILD + SELL Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 On-demand LAMP VMWare Beta MySQL Postgres EDB Amazon Platform EDB Private Branding V2.0 Release On-premise Glassfish Tomcat OLAP/DW Bundle License Server 3-6 New Components 3-6 New Components 3-6 New Components 3-6 New Components 2-3 Core Enhancements Xen? MSFT? 2-3 Core Enhancements 2-3 Core Enhancements 2-3 Core Enhancements VMWare Production 1 2 3 5 5 6 6 3 $0.3 $0.6 $1.2 $1.2 $1.5 $1.5 $1.8 $1.8 1 2 3 $0.75 $0.75 $1.5 $2.25 $3.0 $2.25 $0.75 ENGINEERING TEAMS SALES TEAMS PRODUCT 4 JBoss TOTAL TEAM EMPLOYEES COST($M): REVENUE ($M): PRODUCT

The Morning After …

What Can You Do? React to the business advice you received Adjust as necessary, your business strategy Polish your pitch for the next VC Incorporate learning from each interaction Simplify, Simplify Clarify confusing points Address objection items Rearrange the slide order

React to the business advice you received

Adjust as necessary, your business strategy

Polish your pitch for the next VC

Incorporate learning from each interaction

Simplify, Simplify

Clarify confusing points

Address objection items

Rearrange the slide order

What Will Most VCs Do? Best case: “Fast no, slow yes” Typical: Innocuous turn down, if at all They don’t want to burn any bridges Typical: No urgency Risk reduces as time passes Wait for a milestone quarter results prototype works

Best case: “Fast no, slow yes”

Typical: Innocuous turn down, if at all

They don’t want to burn any bridges

Typical: No urgency

Risk reduces as time passes

Wait for a milestone

quarter results

prototype works

Rejection Accept rejection gracefully There is no rationale argument to bring the VC back

Accept rejection gracefully

There is no rationale argument to bring the VC back

What Might Happen? When a VC senses love, you’ll hear back Be responsive! VC’s like working with responsive people You’re building a relationship Respond to requests < 24 hours

When a VC senses love, you’ll hear back

Be responsive!

VC’s like working with responsive people

You’re building a relationship

Respond to requests < 24 hours

Step 3: Due Diligence Goal : Receive a term sheet Strategy : Two way test drive Approach “ The Pitch” Due Diligence

Goal : Receive a term sheet

Strategy : Two way test drive

Prepare in Advance Executive resumes & references Line up references in advance, Contact people VCs will find Financial Quarterlies Capitalization table Customer / technology references Keep them updated on your progress, Use them judiciously

Executive resumes & references

Line up references in advance,

Contact people VCs will find

Financial Quarterlies

Capitalization table

Customer / technology references

Keep them updated on your progress,

Use them judiciously

Typical Due Diligence Process More information (Exec. resumes, financials, cap table, personal references, etc.) Meet with VC’s “expert(s)” Portfolio companies, friends, paid experts Follow up meeting(s) at your office Calls to customers and personal references Calls to back-channel references

More information (Exec. resumes, financials, cap table, personal references, etc.)

Meet with VC’s “expert(s)”

Portfolio companies, friends, paid experts

Follow up meeting(s) at your office

Calls to customers and personal references

Calls to back-channel references

Remember VCs come with Costs… † Fund raising takes time away from serving customers False sense of security: it masks viability Money enables costly mistakes Money removes spending discipline Adds additional master(s) You give up a lot of ownership Sets the exit strategy and timing † Source: Greg Gianforte, CEO RightNow, http://cet.berkeley.edu/Resources/CETLectures.html

Fund raising takes time away from serving customers

False sense of security: it masks viability

Money enables costly mistakes

Money removes spending discipline

Adds additional master(s)

You give up a lot of ownership

Sets the exit strategy and timing

So Use Due Diligence as a Two Way Test Drive Can I work with this team / VC for the next 6 years? Is this a quality team / VC? Do team / VC listen? Is the team/VC honest, ethical, reliable? dependable? How do they react being under fire?

Can I work with this team / VC for the next 6 years?

Is this a quality team / VC?

Do team / VC listen?

Is the team/VC honest, ethical, reliable? dependable?

How do they react being under fire?

Syndication: Two Parents are Better than One For the entrepreneur More strategic minds around the table Hedge against one VC walking out For the VC Validates that the start up has legs More powder available

For the entrepreneur

More strategic minds around the table

Hedge against one VC walking out

For the VC

Validates that the start up has legs

More powder available

Getting “Married” Locate a Syndicate Partner Term Sheet Legal due diligence Cash in the bank

Locate a Syndicate Partner

Term Sheet

Legal due diligence

Cash in the bank

And Remember… Venture Capital Isn’t Required Broadcom No VC money Cisco $5M in revenue, profitable before Sequoia invested Dell Raised money at $60M in revenue eBay $4.5M in revenue and profitable before Benchmark invested Microsoft VC funded after being profitable The MathWorks >$300M in revenue, no VC money Oracle Government contract funded first product SAS Institute > $1.9B in revenue, the largest private software company, no VC money Siebel Customers funded first product

Broadcom

No VC money

Cisco

$5M in revenue, profitable before Sequoia invested

Dell

Raised money at $60M in revenue

eBay

$4.5M in revenue and profitable before Benchmark invested

Microsoft

VC funded after being profitable

The MathWorks

>$300M in revenue, no VC money

Oracle

Government contract funded first product

SAS Institute

> $1.9B in revenue, the largest private software company, no VC money

Siebel

Customers funded first product

Entrepreneur Resources Law firm outreach DLA Piper Venture Pipeline www.venturepipeline.com Fenwick & West LLP “ Darrell Kong” < dkong@fenwick.com> Orrick, Herrington & Sutcliffe LLP’s “Total Access” &quot;Chad Lynch&quot; <clynch@orrick.com> Pillsbury Winthrop Shaw Pittman LLP’s “Back Stage Pass” [email_address] Wilson, Sonsini, Goodrich, and Rosati wsgr.com/WSGR/Display.aspx?SectionName=practice/venturecapital.htm SDForum www.sdforum.org Silicon Valley Bank’s Venture Exchange Shai Goldman, Director, sgoldman@svb.com SVASE, Silicon Valley Association of Startup Entrepreneurs . www.svase.org The Enterprise Network of Silicon Valley Tensv.org Women’s Technology Cluster www.wtc-sf.org

Law firm outreach

DLA Piper Venture Pipeline

www.venturepipeline.com

Fenwick & West LLP

“ Darrell Kong” < dkong@fenwick.com>

Orrick, Herrington & Sutcliffe LLP’s “Total Access”

&quot;Chad Lynch&quot; <clynch@orrick.com>

Pillsbury Winthrop Shaw Pittman LLP’s “Back Stage Pass”

[email_address]

Wilson, Sonsini, Goodrich, and Rosati

wsgr.com/WSGR/Display.aspx?SectionName=practice/venturecapital.htm

SDForum

www.sdforum.org

Silicon Valley Bank’s Venture Exchange

Shai Goldman, Director, sgoldman@svb.com

SVASE, Silicon Valley Association of Startup Entrepreneurs .

www.svase.org

The Enterprise Network of Silicon Valley

Tensv.org

Women’s Technology Cluster

www.wtc-sf.org

To Your New Venture Success!