3. Agenda
Venture Capital financing Caveats
n
Raising money is a sales process
n
Four steps to falling in love
n
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 3
4. Full Disclosure: VC Costs… †
False sense of security: masks viability
n
Fund raising takes time away from serving
n
customers
Adds an additional set of masters
n
Money enables costly mistakes
n
Money removes spending discipline
n
Sets the exit strategy and timing
n
You give up a lot of ownership
n
† Source: Greg Gianforte, CEO RightNow, http://cet.berkeley.edu/Resources/CETLectures.html
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 4
5. Venture Capital Isn’t Required
To Build a Great Business …
Broadcom
n
No VC money
n
Cisco
n
$5M in revenue, profitable before Sequoia invested
n
Dell
n
Raised money at $60M in revenue
n
eBay
n
$4.5M in revenue and profitable before Benchmark
n
invested
Microsoft
n
VC funded after being profitable
n
The MathWorks
n
>$300M in revenue, no VC money
n
Oracle
n
Government contract funded first product
n
SAS Institute
n
> $1.9B in revenue, the largest private software
n
company, no VC money
Siebel
n
Customers funded first product
n
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 5
6. … But it Can Sure Help
Cash to fuel growth
1.
Cash to fuel growth
2.
Strategy / business advice
3.
Introductions: VCs, customers partners
4.
Recruiting
5.
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 6
7. Agenda
Venture Capital financing Caveats
n
n Raising money is a sales process
Four steps to falling in love
n
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 7
8. Fundraising = Selling an Investment
It’s likely to be the biggest sale of your life
n
Success demands careful planning and
n
execution
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 8
9. Fundraising is a Grueling Process
1. Requires mental toughness
2. You may have to talk to 10 – 40 firms to find
the match
3. It’s the best business advice you will get!
§ Listen
§ Learn
§ Accept it
§ Bake learnings into your business plan
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 9
10. The Classic Enterprise Sales Process
Initiate Educate/ Justify
Discovery Evaluate Validate
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 10
11. Fundraising is a 4 Step Sales Process
Initiate Educate / Justify
Discovery Evaluate Validate
4
1 2 3
Due
Prepare Approach “The Pitch”
Diligence
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 11
12. Time Scales
4
1 2 3
Due
Prepare Approach “The Pitch”
Diligence
1 to 6 weeks
Per VC
2 to 12 weeks
Per VC
2 to 26 weeks
Per Funding
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 12
13. Agenda
Venture Capital financing Caveats
n
Raising money is a sales process
n
n Four steps to falling in love
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 13
14. Step 1: Prepare
Goal: Build an investable company
n
Strategy: Understand the VC’s Mind
n
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 14
15. VC Problem #1
Deliver BIG returns to their Limited Partners in an
n
out of favor investment sector
HUNGRY to do GOOD deals
n
40.0
30.0
20.0
10.0
0.0
-10.0
-20.0
2000 2001 2002 2003 2004 2005 2006
VC Return PE Return
Source: Cambridge Associates
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 15
16. VC Problem #2
“We kiss a lot of frogs to
find the prince”
-- Venture capital industry cliché
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 16
17. Venture Grade Deals are Rare
% 2003 Corporate Tax Returns by
Revenue
100%
81.8%
80%
5.4M Returns
Percent of
60%
Life Style Companies VC
Grade
AKA “Walking Dead”
40%
13.6%
20%
0.5%
2.2% 1.9%
0%
< $1M < $5M < $10M < $50M >$50M
Revenue
Source: IRS.gov
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 17
18. VC Problems #3, 4, 5
No one can pick which start up will make it
n
Every deal has “hair on it” – it’s easy to find problems
n
Portfolio returns: 1 @ 10X; 4 @ 2X; 5@1X; 10 @0X
n
=> VC will rely on their gut in the end
n
Will be working together for 6+ years
n
It has to be an interesting project
n
There has to be compatibility with the team
n
The unexpected is going to happen
n
Got to get through the hard times
n
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 18
19. So How do Most VCs Decide?
VCs “fall in love” with the deal
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 19
20. So the Start-Up Must Be Attractive
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 20
21. Attractive in 2008 Is
Big Market
n
Open to disruption
n
Customers in pain and who buy
n
Growing order trend
n
Strong product offering / technology
n
Differentiated, protected
n
Successful Team
n
“A Players”
n
Successful Investors / Advisors / Board Members
n
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 21
22. #1 Start-Up Failure is the
Lack of (high) Paying Customers
Know your customer!
n
n Walk in your customer’s shoes
n Know why they will buy
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 22
23. Dot Bomb School
“Build it and they will come!”
n
Product Development Model
n
Concept/ Product Alpha/beta
FCS
Bus. Plan Dev. Test
“Get big fast”
n
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 23
24. New School
Customer Development Model †
Customer Customer Customer Company
Discovery Validation Creation Scale
† Steve Blank, The Four Steps to the Epiphany.
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 24
25. Customers that are Buying is
The Essential Investment Criteria
www.cafepress.com/kandsranch
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 25
26. Step 2: Approach
n Goal: Get the first meeting
n Strategy: Approach the right VC, right
Due
Prepare Approach “The Pitch”
Diligence
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 26
27. The Right VC, Right
1. Right VCs,
2. Right Time,
3. The Right Way
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 27
28. 1. The Right VC
has Greener Money
VC money is not a bank loan
n
Do your homework!
n
Talk to start-up CEOs
n
n Actively investing
n Fund has money
n VC has capacity (not too many board seats)
Right sector (life sciences vs. semiconductor)
n
n Relevant portfolio, expertise, and synergies
n Early vs. late stage
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 28
29. Approach the Right VC, Right
1. Right VCs,
2. Right Time,
3. The Right Way
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 29
30. 2. The Right Time - 1
“Seek financing
on the backside
of a milestone”
– John Hall,
Horizon Ventures
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 30
31. 2. The Right Time - 2
“VC money is very expensive fuel to be
used for taxiing around an airport.”
– Peter Rip, Crosslink Capital
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 31
32. 2. The Right Time - 3
Seek VC financing after Customer Validation
n
Funding
“Taxiing Phase”
Customer Customer Customer Company
Discovery Validation Creation Scale
† Steve Blank, The Four Steps to the Epiphany.
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 32
33. Software Seed Rounds Fell 27% YoY
Software VC Investments by Company Stage
400
350
300
250 Seed
Early Stage
200
Expansion
150
Later
100
50
0
2004 2005 2006 2007(75%)
• Early Stage company investments increased 28% YoY.
• Expansion company investments decreased 15% YoY and 20% from 2004.
Source: PricewaterhouseCoopers/Thomson Venture Economics/National Venture Capital Association MoneyTree™Survey
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 33
34. Funding to Customer Validation
Customers
n
Consulting engagements
n
Non-Recurring Engineering (NRE) engagements
n
Retainer fees from customers
n
Government
n
Small Business Innovation Research Grants (SBIR)
n
Big Companies
n
Value-Added Reseller (VAR) agreements
n
Divestitures – protected supplier contract with parent for a
n
defined period
Moonlighting
n
Founders waive compensation
n
Family, Friends and Fools
n
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 34
35. Approach the Right VC, Right
nRight VCs,
nRight Time,
nThe Right Way
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 35
36. The Right Way
“We only look at deals that are
introduced to us by people we know”
– Mike Schuh, Foundation Capital
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 36
37. The Right Way:
Introduction by Referral
Successful entrepreneurs
1.
Lawyers that work with VCs and start-ups
2.
Angel investors
3.
Other service providers:
4.
bankers, head hunters, …
n
Avoid Brokers (= Mothers-in-Law)
Create a buffer layer in between you and VCs.
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 37
38. Sales Tool:
The Executive Summary
Tool Objective: To get a meeting
n
One pager that covers:
n
Contact information
n
Customer problem
n
Your solution (product/technology)
n
Market size
n
Competitors
n
Team
n
Customer proof points
n
Funding status
n
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 38
39. Executive Summary Template
Company Overview: Logo
Tagline
Pain:
Solution :
Technology
Company Information:
Newco, Inc.
Address :
Phone:
Fax:
Website:
Email
Basic Details:
Founded In: Defensibility
# Of Employees: 15 (X US / Y off shore)
Funding History:
Total Amount Raised to Date:
Funding History:
Total Seeking: $ Raised to Date:
Total Amount
Participants Amount
Individuals:
Committed Funds (If Any):
VCs:
Competition
Others:
Use of funds: E
Valuation Expectations:
Total Seeking:
Committed Funds (If Any):
Use of funds:
Financials:
Cumulative Revenue:
Burn Rate: $
Cash Flow Positive in: Year ?
Business Model
3-Year Revenue Forecast:
Year 1: $
Year 2: $
Year 3: $
Team:
Milestones
• Company founded ____
• ___ Patents filed on ___
• Product Introduction ____
• $ in sales in x
• $ in sales in x+1
• $ in sales in x + 2
www.bandangels.com
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 39
40. How VCs Vet
Your Exec Summary
Is the referral source credible?
n
Is this company in my geography?
n
< 1 -2 hours travel time
n
Is this a scalable business?
n
Is the team credible?
n
Are the existing investors credible?
n
Can I possibly love the:
n
CEO
n
Target market
n
Problem being solved
n
The technology being developed
n
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 40
42. Rejection
“We can’t kiss all the pretty girls”
-Bob Kagle, Benchmark
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 42
43. Step 3: The Pitch
Goal: Get follow-on meetings
n
Strategy: Sketch out a compelling,
n
exciting picture
4
1 2 3
Due
Prepare Approach “The Pitch”
Diligence
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 43
44. PowerPoint “Pitch” Advice
is Abundant
SVASE
n
www.svase.org/components/uploads/SVASE%2010%20Sli
de%20Template.ppt
David Cowan, Bessemer Venture Partners
n
whohastimeforthis.blogspot.com/2005/11/how-to-not-write-
business-plan.html
Brad Feld, Mobius Venture Capital
n
www.feld.com/blog/archives/2004/06/the_torturous_w.html
Guy Kawasaki, Garage Technology Ventures
n
blog.guykawasaki.com/2005/12/the_102030_rule.html
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 44
45. Your Goal:
Get the Next Date
Tell a simple yet compelling story
n
VCs easily drown in details
n
Your key points get forgotten
n
Boredom sets in
n
Listen and learn
n
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 45
46. K.I.S.S. Principle:
Tell a Simple Story
Avoid 3 Blind VCs and (You’re) the
n
Elephant
n Too common at first VC meetings:
You know your business best
n
n Assume nothing!
VC Start-Up
K.I.S.S. = Keep it Simple Stupid
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 46
47. Peter Lynch’s Investment Advice
“Never invest in
any idea you
can't illustrate
with a crayon.”
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 47
48. Jerry Weissman Coach to
IPO Road Show CEOs
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 48
49. Expect to Go off the Rails
1. VCs are curious, smart and impatient
They will ask a lot of questions when confused
n
2. VCs are testing you:
Are you an effective leader?
n
Able to listen to “board room” feedback?
n
Able to listen to customer feedback?
n
Re-arrange the slide order to address
n
issues that come up early
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 49
50. Listen Carefully!
It’s the best business advice you will get!
n
§ Listen
§ Learn
§ Accept it
§ Bake learnings into your business plan
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 50
51. Four Reasons for Love
Market
+
Team Technology Financials
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 51
52. 1. Market Size is Every VC’s Concern
Is the market big enough to build a big
n
company?
n Is there any potential to grow fast?
n Is there room for this start-up?
n Is the market big enough to maneuver
if the first niche doesn’t work out?
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 52
53. 1. Lack of Customers
is the #1 Cause of Failure
Does the team really know the customer?
n
Is there a logical reason behind the
n
customer list?
Strategic or opportunistic?
n
n Any notion of customer segmentation?
Are the customers tier 1?
n
How much are the customers helping?
n
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 53
54. 2. Team
Every team claims to be “world class”
n
Demonstrate Success
n
Company pedigree – worked at market leaders
n
n Personal results
n Personal success
n Start -up mentality vs. Big company mentality
Expect your backgrounds to be rigorously
n
checked.
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 54
55. 3. Product Test:
Aspirin or Vitamin??
Inertia is huge
n
Customers change only when they have to
n
“Don’t fix what isn’t broke.”
n
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 55
56. 3. Product
Feature or a Company?
A Feature?
n
n Can the incumbent add this feature to an
existing product easily?
A Product?
n
n Part of a full-product portfolio?
A Company?
n
n Canthe value prop create a substantial
business?
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 56
57. 4. Financial Forecasts
“I don’t have Excel on my computer!”
-- Mark Stevens, Sequoia Capital
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 57
58. Cash flow is king
Revenue forecast will likely not materialize, So
n
n Is this plan realistic?
n Revenue must not be too big, but not too small
Spending plan will be scrutinized.
n
n Cash is King
n Successful CEOs are frugal
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 58
59. The Morning After …
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 59
60. What Can You Do?
React to the business advice you received
n
Adjust your business strategy as is necessary
n
Polish your pitch for the next VC
n
Incorporate learning from each interaction
n
n Simplify, Simplify
n Clarifyconfusing points
n Address objection items
n Rearrange the slide order
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 60
61. What Will Most VCs Do?
Go silent or an innocuous turn down
n
They don’t want to burn any bridges
n
Go at their own pace, no urgency
n
Risk reduces as time passes
n
n Wait for a milestone
n quartersales results
n prototype works
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 61
62. Rejection
Accept rejection gracefully
n
There is no rationale argument to bring the
n
VC back
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 62
63. What Might Happen?
When a VC senses love, you’ll hear back
n
Be responsive!
n
VC’s like working with responsive people
n
n You’re building a relationship
n Respond to requests < 24 hours
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 63
64. Step 4: Due Diligence
n Goal: Get a term sheet
n Strategy: Two way test drive
Due
Prepare Approach “The Pitch”
Diligence
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 64
65. Due Diligence =
Two Way Test Drive
Can I work with this team / VC for the next
n
6 years?
Is this a quality team / VC?
n
Do team / VC listen?
n
Is the team/VC honest, ethical, reliable?
n
dependable?
How do they react being under fire?
n
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 65
66. Prepare in Advance
Customer / technology references
n
Keep references updated on your progress
n
n Use them judiciously
Executive resumes & references
n
Line up references in advance,
n
n Contact people VCs will find
Financial Quarterlies
n
Capitalization table
n
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 66
67. Typical Due Diligence Process
More information (Exec. resumes, financials, cap table,
n
personal references, etc.)
Meet with VC’s “expert(s)”: Portfolio
n
companies, friends, paid experts
Follow up meeting(s) at your office / their
n
office
Calls to customers and personal references
n
Calls to back-channel references
n
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 67
68. Getting “Married”
Locate a Syndicate Partner
n
Term Sheet
n
Legal due diligence
n
Cash in the bank
n
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 68
69. Syndication:
Two Parents are Better than One
For the entrepreneur
n
More strategic minds around the table
n
n Hedge against one VC walking out
For the VC
n
Validates that the start up has legs
n
n More powder available
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 69
70. And Remember…
Venture Capital Isn’t Required
Broadcom
n
n No VC money
Cisco
n
n $5M in revenue, profitable before Sequoia
invested
Dell
n
n Raised money at $60M in revenue
eBay
n
n $4.5M in revenue and profitable before
Benchmark invested
Microsoft
n
n VC funded after being profitable
The MathWorks
n
n >$300M in revenue, no VC money
Oracle
n
n Government contract funded first product
SAS Institute
n
n > $1.9B in revenue, the largest private software
company, no VC money
Siebel
n
n Customers funded first product
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 70
71. Entrepreneur Resources
Law firm outreach
n
DLA Piper Venture Pipeline
n
www.venturepipeline.com
Fenwick & West LLP
n
“Darrell Kong” < dkong _ fenwick.com >
<dkong fenwick.com>
Orrick, Herrington & Sutcliffe LLP’s “Total Access”
n
quot;Chad Lynchquot; <clynch _ orrick.com>
<clynch orrick.com>
Pillsbury Winthrop Shaw Pittman LLP’s “Back Stage Pass”
n
kiran.kamboj _ pillsburylaw.com
Wilson, Sonsini, Goodrich, and Rosati
n
wsgr.com/WSGR/Display.aspx?SectionName=practice/venturecapital.htm
wsgr.com/WSGR/Display.aspx?SectionName=practice/venturecapital.htm
SDForum
n
www.sdforum.org
n
Silicon Valley Bank’s Venture Exchange
n
Shai Goldman, Director, sgoldman _ svb.com
n
SVASE, Silicon Valley Association of Startup Entrepreneurs.
n Entrepreneurs.
www.svase.org
The Enterprise Network of Silicon Valley
n
Tensv.org
Women’s Technology Cluster
n
www.wtc-
www.wtc-sf.org
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 71
72. To Your New Venture
Success!
Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 72