How To Raise Your First Round of Capital
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How To Raise Your First Round of Capital

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  • And this is showing up in increasing valuations, especially for later stage companies

How To Raise Your First Round of Capital How To Raise Your First Round of Capital Presentation Transcript

  • Mastering the VC Game:How to Raise Your First Round of Capital Jeffrey Bussgang Flybridge Capital Partners, General Partner Harvard Business School, Senior Lecturer April 3, 2012
  • Context For My Perspective General Partner at Flybridge Capital Partners, early- stage VC firm based in Boston and NYC 40+ active portfolio companies, Fund III: $280M, 5 GPs Senior Lecturer at HBS – Launching Tech Ventures Former entrepreneur Cofounder Upromise (acq‟d by SallieMae), VP at Open Market (IPO „96) Author: Mastering the VC Game Blog: SeeingBothSides.com HBS ‟95, Harvard „91
  • Goals For Today‟s Session As an entrepreneur, I found venture capital to be a black box As a VC, I now see the other side and wanted to help entrepreneurs understand how to finance and build great companies Today‟s mission: to demystify the VC/angel world for entrepreneurs 3
  • Why Raise Money from VC? Experience Matters:Deep Pockets: VCs have “seen theHigh risk tolerance movie” over and overand additional again and can helpfunding for follow- avoid pitfalls to findon rounds the path to success Value-Add: Swing Big: VCs provide domain VCs don’t invest in experience, industry niches, they invest in contacts, and transformative ideas strategic planning that can build large companies 8
  • VCs vs. Angels Will want some control (voting,  Will want no control (“send me board, veto) an annual email”) Will want to own 20-30%  Will want to own 1-10% Very actively engaged (they  Maybe engaged or not (often a get paid to do this!) hobby, sometimes a personal Can add tremendous value mission) and be great business partners  Can add tremendous value and Can be total disasters be great business partners Typically rational actors,  Can be total disasters commercially-driven, but if inexperienced…  Typically rational, but if unsophisticated: naïve irrational, emotional
  • Raising $ from VCs: Find the Sweet Spot  Scope out the firm – size matters, as does the individual  Arrange for a warm introduction  Prepare, be brief (VCs Blink)  Don‟t downplay risk  Mutual due diligence is fair play04/09/10 9 9
  • Context About VCs and Angels Most VCs and Angels have ADD – operate on “BLINK” instincts  Want to SEE everything, but DO very, very few deals  Make their decision within the first 10-15 minutes Typical VC and angel will invest in one out of every 300-500 deals they see  Long odds – you need to really stand out  Like college applicants – triage quickly
  • The Right People: an Unfair Advantage  Ideas are a dime a dozen  Having a world-class team is golden  Laser focus of the young entrepreneur is very powerful  E.g., Bill Gates, Michael Dell, and Mark Zuckerberg04/09/10 10 10
  • Investor‟s Decision Tree Worth 3 minutes (email, phone)? No Ignore Worth 30 minutes (phone, in person)? No Pass gracefully Worth 60-90 minutes (in person)? No Pass but stay In touch Worth 2nd mtg (in person)? NoPass but be helpful Serious due diligence
  • Top 3 Things To Do Be gracious and personable  Say something that makes you smile…authentically  Tell your personal history, tell a story Be crisp and on point  Personal intro should take < 5 minutes  Team introduction 10 minutes  Make it relevant – don‟t go off on tangents  If you can‟t show good summarization skills, how will you handle a board room? Know your stuff  They will push you to test you  John Doerr/Upromise case study
  • Top 3 Things To Avoid Do not exaggerate  Assume everything you say will be verified in due diligence  Assume the listener is a cynic and a professional BS detector There‟s no “I” in team  If you are self-aggrandizing, investors will assume you can‟t build teams Do not name drop  No one is going to be impressed with who you know unless the relationships are both real and relevant.
  • Typical Investment Criteria Tangible things investors like to see:  Very big market (> $500m)  Unfair advantage (why you? why now?)  Attractive business model (recurring, high gross margin)  Unique technology or business model approach Intangible things investors like to see:  “Pied Piper” – an ability to recruit and retain a great team, partners  Interpersonal chemistry  Movie, not a snapshot
  • So You‟ve Had a Good Meeting… Then What? Treat fundraising like a sales process – build a pipeline, work people through the pipeline, build up to crescendo VCs get distracted – typically only pursue 2-3 high priority new investment opportunities at any given time Stay connected, top of mind, build a sense of momentum Need to sell the individual “champion”, then the help them sell the partnership Address objections with specific data  Make the investment case for them  Give them tools/materials to share with their partners 13
  • Then, Expect More Due Diligence Customers / partners Team Technology Business model Market size / analystsAs with sales, package up the information, make it easy on the VC – provide reference list, financial models, detailed market size analysis – all in readable form 14
  • Term Sheet Time Frequently Asked Questions… Should I include VCs in my first round or just angels? How big should the option pool be? How should I think about valuation?  “Promote” definition - http://bit.ly/8NpdM Should I do a convertible note with a cap, no cap or a priced round? How should I think about control? 15
  • Expectations and Milestones Have well-documented milestones that represent what you expect to achieve during the initial funding period  Team building  Technical progress/product development  Customers, revenue  Budget Talk to the investor about the next round before you close this round  Expectations, amount, price 16
  • What Is Market?Rough Numbers (vary slightly by coast and sector):  Seed: $500k-$2m raise on $3-5m pre-money (or cap)  Series A: $3-6m raise on $6-10m pre-money  Series B: $8-12m raise on $15-20m pre-moneyOption pool: 10-20%  The smaller the pool, the more confidence in the founding team  Do an “option pool budget” to determine the right pool 17
  • LATER STAGE VALUATIONS ARE INCREASING, WHILE EARLY STAGE REMAINS CONSISTENT $70 $60 Median Premoney Valuation ($M) $50 $40 $30 $20 $10 $- 2002 2003 2004 2005 2006 2007 2008 2009 2010 1H11 Later Stage Second Round First Round Seed RoundSource: Dow Jones VentureSource
  • Who‟s Ready to Raise Money?
  • Mastering the VC Game: How to Raise Your First Round of Capital Jeffrey Bussgang Flybridge Capital Partners, General Partner Harvard Business School, Senior Lecturer April 3, 2012Jeff@flybridge.com @bussgang