VC Fund Raising Process

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An insiders view: How to raise money from VCs by Bob Dahlberg, Horizon Ventures

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VC Fund Raising Process

  1. 1. An Insiders View: How to Raise Money from VCs Bob Dahlberg Venture Partner Horizon Ventures Los Altos, CA Bob at horizonvc com
  2. 2. Key Message: VC Fundraising is a Sales Process, Not a Pitch
  3. 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. 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. 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. 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. 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. 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. 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. 10. The Classic Enterprise Sales Process Initiate Educate/ Justify Discovery Evaluate Validate Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 10
  11. 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. 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. 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. 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. 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. 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. 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. 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. 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. 20. So the Start-Up Must Be Attractive Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 20
  21. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 35. Approach the Right VC, Right nRight VCs, nRight Time, nThe Right Way Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 35
  36. 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. 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. 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. 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. 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
  41. 41. VC’s Tool: VentureSource Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 41
  42. 42. Rejection “We can’t kiss all the pretty girls” -Bob Kagle, Benchmark Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 42
  43. 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. 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. 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. 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. 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. 48. Jerry Weissman Coach to IPO Road Show CEOs Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 48
  49. 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. 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. 51. Four Reasons for Love Market + Team Technology Financials Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 51
  52. 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. 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. 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. 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. 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. 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. 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. 59. The Morning After … Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 59
  60. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 72. To Your New Venture Success! Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 72

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