How To Raise Your First Round of Capital


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Tips and techniques for raising your first round of financing from entrepreneur turned VC Jeff Bussgang of Flybridge Capital and Harvard Business School.

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How To Raise Your First Round of Capital

  1. 1. 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 10, 2013
  2. 2. 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 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: HBS ‟95, Harvard „91
  3. 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
  4. 4. 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
  5. 5. 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
  6. 6. 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
  7. 7. 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
  8. 8. 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
  9. 9. Elements of the Pitch Intro  who are you, why are you here and why are you special? Problem  what is the customer pain? Solution  what‟s your disruptive, breakthrough compelling solution? Is the “Gain vs. Pain” ratio 10x? Opportunity / market size  top down and bottoms up Competitive advantage  what is your unique differentiation? what‟s your “competitive moat”? Go to market plan  how are you going to reach the customer? Business model  how are you going to make money? Financials  what‟s the bottom line, what are your key assumptions? How are you going to make ME money? The ask  how much do you want, how long will it last you and how much will you achieve? 9
  10. 10. 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 5-10 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
  11. 11. 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.
  12. 12. 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
  13. 13. 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
  14. 14. 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
  15. 15. The Vote A B JB D E AverageMarket 4 4 4 4 4 4.0Team 4 4 4 4 5 4.2Product/Tech 2 3 4 4 2 3.0Business Model 5 4 5 3 3 4.0CompetitiveLandscape 4 3 3 3 4 3.4Finance/Cap Markets 4 3 4 3 3 3.4Disruption 4 4 4 4 4 4.0Network Effects 2 4 3 4 4 3.4Total 29 29 31 29 29 29.4 15
  16. 16. 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 Should I do a convertible note with a cap, no cap or a priced round? How should I think about control? 16
  17. 17. 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 17
  18. 18. Who‟s Ready to Raise Money?
  19. 19. 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 10, @bussgang