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How To Raise Capital - Harvard Business School lecture


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A review of the process of raising money from angels and/or venture capitalists for entrepreneurs

Published in: Business
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  • Spot on. This is more balanced and more substantive than the vast majority of presentations on the subject. Entrepreneurs should take to heart the slides explaining the economics of managing a VC fund.
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How To Raise Capital - Harvard Business School lecture

  1. 1. How to Raise Your First Round of Capital Jeffrey Bussgang Flybridge Capital Partners, General Partner Harvard Business School, Senior Lecturer January 2019
  2. 2.  General Partner at Flybridge Capital Partners, early- stage VC firm based in Boston and NYC $700m raised across 5 funds in our 16 year history 100+ portfolio companies (e.g., MongoDB, Codecademy, Splice)  Senior Lecturer at HBS – Launching Tech Ventures, RVP  Former entrepreneur Cofounder Upromise (acq’d by SallieMae), Exec team at Open Market (IPO ‘96)  Author: Mastering the VC Game  Author: Entering StartUpLand  Blog: Context For My Perspective
  3. 3. 3 Fundraising Patterns and Players • $250-500k pre-seed • Convertible note / SAFE @ $2-4m cap • If your friends, family and ex-colleagues won’t back you – why should I? • $1-3m seed @ $4-8m pre-money • Either note, SAFE/SAFT or priced round • Micro-seed funds, seed funds, super angels • $5-10m Series A @ $10-20m pre-money • Priced round, board, control structure • Seed funds, Series A funds, Series B funds • $20-40m Series B @ $40-100m pre-money • Priced round, board, control structure • Series B funds, growth funds, crossover PE
  4. 4. VCs vs. Angels  Will want some control (voting, board, veto)  Will want to own 10-20%  Very actively engaged (they get paid to do this), leveraging the power of the firm’s network  Can add tremendous value and be great business partners  Can be total disasters  Typically rational actors, commercially-driven, but if inexperienced can do great harm  Will want no control (“send me an annual email”)  Will want to own 1-10%  Maybe engaged or not (often a hobby, sometimes a personal mission)  Can add tremendous value and be great business partners  Can be total disasters  Typically rational, but if unsophisticated: naïve irrational, emotional
  5. 5. VC Is Not The Only Option! 5 Source: Founder Collective
  6. 6. 6 Ridiculously large returns (> 10x) are very, very rare (4%) – but are always the goal A Game of Outliers
  7. 7. 7 VC Fund Math 101 To achieve target of 3x the fund, need to see multiple big exits (10x+) after years 9-12 Prototypical, $100M Early Stage Fund Source: Industry Ventures
  8. 8.  Most VCs and Angels have ADD – operate on “BLINK” instincts  Want to SEE everything, but actually INVEST in 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 Investor Decision Making
  9. 9.  It’s never too early to build a relationship (and get advice) – especially when you’re not asking for money.  That said, there is no such thing as a casual meeting – every meeting with an investor is a pitch / presentation  Leave them with your next milestones…and achieve them!  Only when you’ve established a relationship and some operational credibility should you ask for money 9 “Ask for money, get advice. Ask for advice, get money twice.” When Do You Talk To Investors?
  10. 10. 9  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 play 04/09/10 9 Find the Sweet Spot
  11. 11. VC Introduction Algorithm 1. Entrepreneurs who have made them money 2. Entrepreneurs in their portfolio 3. Entrepreneurs they respect 4. Customers/Partners they respect 5. Service providers they respect 6. Existing investors …  Cold emails/social networks …  Investors who are not investing 11
  12. 12. 12 Investor’s Decision Tree
  13. 13. 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? 13
  14. 14. Case Study: Analytical Space 14
  15. 15. Pre-Seed to Seed Process
  16. 16. Top 3 Things To Do  Set context  Tell your narrative to prove founder-market fit – i.e., why you?  Tell industry context to prove why now?  Be crisp and on point  Personal intro should take < 5 minutes  Team introduction < 5 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  Know competition, show domain expertise  They will push you to test you  John Doerr/Upromise case study
  17. 17. 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, attract great talent  Do not name drop  No one is going to be impressed with who you know unless the relationships are both real and relevant.  Assume everyone does their due diligence
  18. 18. Typical Investment Criteria  Tangible things investors like to see:  Very big market (> $500M? $1B? – support $100+M revenue)  Unfair advantage (why you? why now?)  Attractive business model (recurring, high margins, network effects)  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  X-Factor / Super power
  19. 19. 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  Create a sense of urgency (run a competitive process) 19
  20. 20. Then, Expect More Due Diligence  Customers / partners  Team  Technology  Business model  Market size / analysts As you would do in a sales process, package up the information, make it easy on the VC – provide reference list, financial models, detailed market size analysis – all in readable, compelling, digestible form 20
  21. 21. Partners Meeting  Ask your champion for the main objections in advance  Customize your pitch to address them  Command the room  Be open about risks – and your plan to mitigate 21  Ask your champion where they’re at (strong positive? slight positive? still questioning?)
  22. 22. The Vote 22 Partner A Partner B Partner C Partner D Average Market 4 4 4 4 4.0 Team 4 4 3 5 4.0 Product/Tech 2 4 4 2 3.0 Business Model 5 5 3 3 4.0 Competition 4 3 3 4 3.5 Deal/Cap Markets 4 4 3 3 3.5 Disruption 4 4 4 4 4.0 Network Effects 2 3 4 4 3.3 Total 29 31 28 29 29.3 Two most important critera Debate and disparity can be a good thing
  23. 23. Term Sheet Time - FAQs  Should I include VCs in my first round or just angels?  Should I do a convertible note with a cap, no cap or a priced round?  How big should the option pool be?  How much do I set aside for team, advisors, board?  How should I think about valuation?  “Promote” definition  How should I think about control? 23
  24. 24. 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  What experiments are you going to run and what results do you expect from those experiments? 24
  25. 25. Who’s Ready to Raise Money?
  26. 26. Mastering the VC Game: How to Raise Your First Round of Capital Jeffrey Bussgang Flybridge Capital Partners, General Partner Harvard Business School, Senior Lecturer @bussgang January 2019