©2009, Jason Mendelson. All Stupidity contained within is his own and not that of Foundry Group Jason Mendelson Guest of Silicon Flatirons February 24, 2009 Boulder, Colorado Venture Capital Crash Course - Everything that you wanted to know about VCs, but were afraid to ask

Today’s Agenda: What Makes VCs tick? How do VCs answer to? How do you impress them? How do you know if you are talking to the right one? How is today’s economy affecting them? What’s Hot? What companies are getting funded? How do I make my company more attractive? Do I need a team before I approach a VC? What’s Not? Exits and IPOs What’s VCs don’t want to tell you How they value your company Failure isn’t always bad Returns, Ownership and Fundraising ©2009, Jason Mendelson. All Stupidity contained within is his own and not that of Foundry Group

Today’s Agenda:

What Makes VCs tick?

How do VCs answer to?

How do you impress them?

How do you know if you are talking to the right one?

How is today’s economy affecting them?

What’s Hot?

What companies are getting funded?

How do I make my company more attractive?

Do I need a team before I approach a VC?

What’s Not?

Exits and IPOs

What’s VCs don’t want to tell you

How they value your company

Failure isn’t always bad

Returns, Ownership and Fundraising

About Me Co-Founder and Managing Director of Foundry Group Managing Director, CAO and GC at Mobius Venture Capital Adjunct Professor at CU Co-author of www.askthevc.com Lawyer at Cooley Godward Kronish Software Engineer at Accenture Frustrated Musician House-poor home remodeler www.jasonmendelson.com ©2009, Jason Mendelson. All Stupidity contained within is his own and not that of Foundry Group

Co-Founder and Managing Director of Foundry Group

Managing Director, CAO and GC at Mobius Venture Capital

Adjunct Professor at CU

Co-author of www.askthevc.com

Lawyer at Cooley Godward Kronish

Software Engineer at Accenture

Frustrated Musician

House-poor home remodeler

www.jasonmendelson.com

What Makes VCs Tick ©2009, Jason Mendelson. All Stupidity contained within is his own and not that of Foundry Group Fund Raising Cash Equity Returns Investors Venture Capitalists Firms ( aka Start-Ups; Portfolio Companies) Who Do VCs Answer to?

What Makes VCs Tick ©2009, Jason Mendelson. All Stupidity contained within is his own and not that of Foundry Group Besides cash, What do we do?

What Makes VCs Tick How Do You Impress? Know the “rules” beforehand Short communications, versus long. Emails versus phone calls, Executive Summaries versus Business Plans Well crafted communications, just doesn’t save VC time, but shows quality of thought of the entrepreneur Don’t make rookie mistakes like asking for a NDA Know your market, know you competitors and be original Being the 256 th social network is not original Saying you have “no competition” is not believable Not knowing the market is not wise (especially for you!) VCs need to invest in transformative companies, not “next best” It’s hard to sell stuff as a startup. Be compelling Be smart, but don’t be arrogant VCs have large egos and some even are smart ©2009, Jason Mendelson. All Stupidity contained within is his own and not that of Foundry Group

How Do You Impress?

Know the “rules” beforehand

Short communications, versus long. Emails versus phone calls, Executive Summaries versus Business Plans

Well crafted communications, just doesn’t save VC time, but shows quality of thought of the entrepreneur

Don’t make rookie mistakes like asking for a NDA

Know your market, know you competitors and be original

Being the 256 th social network is not original

Saying you have “no competition” is not believable

Not knowing the market is not wise (especially for you!)

VCs need to invest in transformative companies, not “next best”

It’s hard to sell stuff as a startup. Be compelling

Be smart, but don’t be arrogant

VCs have large egos and some even are smart

What Makes VCs Tick How Do You Know If You Are Talking To the Right VC? Do they invest in your similar companies? You don’t want a VC that’s invested in a competitor, but worry that the VC hasn’t a clue about what you are doing Do they invest in your stage? Do they have money to invest? Don’t be afraid to ask about the status of their fund Do they have the power to get a deal done? Partner versus Associate Lots of Associates go “fishing” Do you like them? Would you rather have a beer with your mother-in-law? ©2009, Jason Mendelson. All Stupidity contained within is his own and not that of Foundry Group

How Do You Know If You Are Talking To the Right VC?

Do they invest in your similar companies?

You don’t want a VC that’s invested in a competitor, but worry that the VC hasn’t a clue about what you are doing

Do they invest in your stage?

Do they have money to invest?

Don’t be afraid to ask about the status of their fund

Do they have the power to get a deal done?

Partner versus Associate

Lots of Associates go “fishing”

Do you like them?

Would you rather have a beer with your mother-in-law?

What Makes VCs Tick How Is the Economy Affecting VCs? Depends who you are: If you are an early stage fund with plenty of money, life is good If you aren’t, life is less good Later stage investors don’t see exits VCs without money are finding fundraising brutally hard Limited Partners are cash constrained. Rumors of missed capital commitments abound Boulder versus the rest of the U.S. versus the World All about the same – it’s tough all over Interesting factoid: Most of Boulder VC money comes from out of state ©2009, Jason Mendelson. All Stupidity contained within is his own and not that of Foundry Group

How Is the Economy Affecting VCs?

Depends who you are:

If you are an early stage fund with plenty of money, life is good

If you aren’t, life is less good

Later stage investors don’t see exits

VCs without money are finding fundraising brutally hard

Limited Partners are cash constrained. Rumors of missed capital commitments abound

Boulder versus the rest of the U.S. versus the World

All about the same – it’s tough all over

Interesting factoid:

Most of Boulder VC money comes from out of state

What’s Hot First before we go “there,” are you sure you want VC funding? Bootstrapping How much do you want to raise? Many VCs need to invest substantial amount of cash What companies are getting funded these days? Capital Efficient Businesses Much hard for VCs to get their deals funded by others Bank financing is harder to come by Experienced management teams Early Stage versus Later Stage Sector Review: Cleantech, Software / IT, Medical / Bio, Mobile, Gaming, Retail, Sustainable Markets Experience Entrepreneurs who lived through tough times before ©2009, Jason Mendelson. All Stupidity contained within is his own and not that of Foundry Group

First before we go “there,” are you sure you want VC funding?

Bootstrapping

How much do you want to raise?

Many VCs need to invest substantial amount of cash

What companies are getting funded these days?

Capital Efficient Businesses

Much hard for VCs to get their deals funded by others

Bank financing is harder to come by

Experienced management teams

Early Stage versus Later Stage

Sector Review:

Cleantech, Software / IT, Medical / Bio, Mobile, Gaming, Retail, Sustainable Markets

Experience Entrepreneurs who lived through tough times before

What’s Hot How do I make my company more attractive? Do your homework Talk to people – even VCs! Informal conversations are good Fundraising conversations before ready are bad Do all that YOU can do / don’t sweat what you can’t Be crisp VCs have two limited resources – time and money Do I need a team? You need at least one partner No one person knows everything Also proves that someone else believes in what you are doing A good management team has comprehensive experience and great self awareness ©2009, Jason Mendelson. All Stupidity contained within is his own and not that of Foundry Group

How do I make my company more attractive?

Do your homework

Talk to people – even VCs!

Informal conversations are good

Fundraising conversations before ready are bad

Do all that YOU can do / don’t sweat what you can’t

Be crisp

VCs have two limited resources – time and money

Do I need a team?

You need at least one partner

No one person knows everything

Also proves that someone else believes in what you are doing

A good management team has comprehensive experience and great self awareness

What’s Not There are no exits IPO Market is gone Mergers are scarce What is the affect on VCs and your fundraising? Going to scare some VCs Going to really scare late stage investors What normally are VC expectations of exits? 50% of companies return zero 70% probably don’t return that “much” Really need big returns on the rest (5x? 10x? 100x?) Old days and exit was around 5 years, now more like 7 years ©2009, Jason Mendelson. All Stupidity contained within is his own and not that of Foundry Group

There are no exits

IPO Market is gone

Mergers are scarce

What is the affect on VCs and your fundraising?

Going to scare some VCs

Going to really scare late stage investors

What normally are VC expectations of exits?

50% of companies return zero

70% probably don’t return that “much”

Really need big returns on the rest (5x? 10x? 100x?)

Old days and exit was around 5 years, now more like 7 years

What VCs Don’t Want To Tell You We aren’t valuation experts. We don’t know your valuation, either It’s part art and part science. Okay, it’s mostly art We don’t know the right amount of money for you to raise as well as you do. We have past experience as our largest guide Get to a milestone. Don’t get stranded Raise an amount appropriate to the particular VC You can know everything we know about negotiating term sheets www.feld.com (Term Sheet Series) VCs have certain ideas regarding ownership 10% / 20% / 30% - more? Nothing is better than an intro from a VC’s friend / trusted source However, an introduction from another VC who is not investing in your company is usually bad Failure is not always Failure. It can be attractive ©2009, Jason Mendelson. All Stupidity contained within is his own and not that of Foundry Group

We aren’t valuation experts. We don’t know your valuation, either

It’s part art and part science. Okay, it’s mostly art

We don’t know the right amount of money for you to raise as well as you do. We have past experience as our largest guide

Get to a milestone. Don’t get stranded

Raise an amount appropriate to the particular VC

You can know everything we know about negotiating term sheets

www.feld.com (Term Sheet Series)

VCs have certain ideas regarding ownership

10% / 20% / 30% - more?

Nothing is better than an intro from a VC’s friend / trusted source

However, an introduction from another VC who is not investing in your company is usually bad

Failure is not always Failure. It can be attractive

Questions and Answers Q&A ©2009, Jason Mendelson. All Stupidity contained within is his own and not that of Foundry Group

Q&A