How To Raise Your First Round of Capital

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

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How To Raise Your First Round of Capital

by Jeffrey Bussgang

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