Insiders Guide On How To Raise Venture Capital

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

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

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

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

Agenda
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.

Against that backdrop .....

How do Most VCs Decide?
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

Good Deals are Hard to Find
“ 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]

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

So How do Most VCs Decide?
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

Agenda
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

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

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

The Right VC, Right
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

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

Approach the Right VC, Right
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

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.

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

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

Rejection
“ 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

“ 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

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

Story Telling is a Skill
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

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

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

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

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

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

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

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

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

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

Rejection
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

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

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

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

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

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?

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

Getting “Married”
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

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”
"Chad Lynch" <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!

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Insiders Guide On How To Raise Venture Capital

by Bob Dahlberg

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