1. 0
STARTUP
READING
LIST
–
JUNE
2012
Funding
and
equity
Before
raising,
approaching
investors,
seed,
angel,
venture
capital,
pitching
and
presentations,
valuation
and
budgeting,
equity
structure,
vesting
and
employee
compensation
2. 1
Contents
Before
raising
.........................................................................................................................................................
6
Lifestyle
vs
VC
companies
–
Andrew
Chen
..........................................................................................................
6
An
Introductory
Guide
to
Startup
Funding
–
Ben
Yoskovitz
...............................................................................
7
How
to
Develop
Your
Fund
Raising
Strategy
–
Mark
Suster
.............................................................................
11
How
To
Finance
Your
Startup
–
Mark
Peter
Davis
............................................................................................
21
Don’t
Try
to
Get
Funding
Before
You
Know
How
It’s
Done
–
Ben
Yoskovitz
.....................................................
22
How
much
funding
is
too
little?
Too
much?
–
Marc
Andreessen
.....................................................................
23
How
Funding
Rounds
Differ:
Seed,
Series
A,
Series
B,
and
C
–
Elad
Gil
............................................................
28
Is
Your
Startup
A
Cash
or
Equity
Business?
–
Elad
Gil
.......................................................................................
30
If
this
is
your
first
time
raising
money
–
Nivi
....................................................................................................
31
20
questions
to
ask
before
raising
money
–
Elad
Gil
........................................................................................
32
VC
vs.
Angel
Money:
A
Primer
–
Brad
Feld
.......................................................................................................
34
What
can
be
solved
with
money
–
Jason
Cohen
...............................................................................................
35
Don’t
forget
to
bootstrap
–
Brad
Feld
..............................................................................................................
38
How
Much
Money
To
Raise
–
Fred
Wilson
.......................................................................................................
38
Do
you
need
VC
–
Mark
Suster
.........................................................................................................................
39
Over
Capitalizing
Lifestyle
Businesses
–
Mark
Peter
Davis
...............................................................................
43
Financing
approaches
most
likely
to
kill
your
company
–
Elad
Gil
...................................................................
44
VC
care
about
upside,
not
mean
–
Chris
Dixon
.................................................................................................
46
On
derisking
–
Charlie
O’Donnell
......................................................................................................................
46
How
venture
capital
works
–
Peter
Thiel
(Blake
Masters)
................................................................................
48
Fundraising
survival
guide
–
Paul
Graham
.......................................................................................................
58
Different
types
of
investors
(and
varying
time
commitments)
–
Brad
Feld
......................................................
68
Approaching
investors
..........................................................................................................................................
70
How
to
make
the
intro
–
Charlie
O’Donnell
......................................................................................................
70
Follow
up
–
Charlie
O’Donnell
..........................................................................................................................
73
Following
up
–
Charlie
O’Donnell
.....................................................................................................................
75
How
to
approach
unconnected
VC
–
Ask
the
VC
..............................................................................................
76
Pitching
to
strangers
–
Ben
Yoskovitz
...............................................................................................................
78
How
to
approach
at
a
conference
–
Charlie
O’Donnell
....................................................................................
79
Nail
the
elevator
pitch
–
Mark
Suster
...............................................................................................................
81
How
to
follow
up
–
Mark
Suster
.......................................................................................................................
83
Preparing
for
the
first
meeting
–
Brad
Feld
......................................................................................................
87
How
to
email
busy
people
–
Jason
Freedman
..................................................................................................
89
3. 2
Time
is
the
enemy
–
Mark
Suster
.....................................................................................................................
91
Why
You
Should
Think
Twice
Before
You
Send
That
Intro
Email
–
Mark
Suster
...............................................
97
Seed
....................................................................................................................................................................
100
How
much
seed?
–
Ben
Yoskovitz
...................................................................................................................
100
The
problem
with
taking
VC
seed
–
Chris
Dixon
.............................................................................................
101
On
raising
seed
–
Chris
Dixon
.........................................................................................................................
102
Don’t
take
seed
from
big
VC
–
Chris
Dixon
....................................................................................................
104
The
right
amount
of
seed
money
–
Chris
Dixon
..............................................................................................
105
Raising
seed
–
Chris
Dixon
..............................................................................................................................
106
When
to
raise
seed
–
Charlie
O’Donnell
.........................................................................................................
108
Questions
pre
seed
–
Chris
Dixon
...................................................................................................................
110
Just
say
no
to
super
pro
rata
–
Brad
Feld
.......................................................................................................
111
Angel
..................................................................................................................................................................
111
The
types
of
angel
investors
–
Elad
Gil
...........................................................................................................
113
Angel
list
–
Dave
McClure
...............................................................................................................................
114
On
the
changes
in
the
VC
landscape
-‐
Dave
McClure
.....................................................................................
120
How
to
select
angels
–
Chris
Dixon
.................................................................................................................
125
Raising
money
from
angels
–
Mark
Suster
.....................................................................................................
126
Raising
an
angel
round
–
Charlie
O’Donnell
...................................................................................................
131
Angel
advice
–
Mark
Suster
............................................................................................................................
133
Reasons
that
angels
will
walk
–
Ty
Danco
......................................................................................................
138
Venture
capital
...................................................................................................................................................
142
8
Tips
for
Successful
Venture
Capital
Meetings–
Ben
Yoskovitz
.....................................................................
142
How
helpful
is
venture
capital
experience
to
building
startups?
-‐
Andrew
Chen
...........................................
144
The
importance
of
investor
signaling
in
venture
pricing
–
Chris
Dixon
..........................................................
147
Types
of
risks
VCs
take
–
Mark
Peter
Davis
....................................................................................................
148
What
no-‐one
tells
you
about
raising
VC
–
Ben
Yoskovitz
...............................................................................
150
Why
to
meet
VC
early
–
Mark
Peter
Davis
.....................................................................................................
151
VC’s
Are
Not
Your
Friends
–
Steve
Blank
........................................................................................................
152
Founder
friendly
VC
–
Steve
Blank
..................................................................................................................
153
Gauging
early
VC
interest
–
Mark
Peter
Davis
...............................................................................................
156
Building
traction
–
Mark
Suster
......................................................................................................................
156
On
influence
and
authority
–
Mark
Suster
.....................................................................................................
159
How
to
approach
a
VC
–
Mark
Suster
............................................................................................................
162
Taking
strategic
money
–
Mark
Suster
...........................................................................................................
165
4. 3
How
to
appeal
to
investors
............................................................................................................................
168
What
is
early
stage
–
Charlie
O’Donnell
.........................................................................................................
175
Raising
venture
–
Chris
Dixon
.........................................................................................................................
178
Raising
VC
intro
–
Mark
Suster
.......................................................................................................................
179
On
raising
venture
capital
–
Gabriel
Weinberg
..............................................................................................
181
When
VC
says
no
-‐
Marc
Andreessen
.............................................................................................................
189
Three
rules
for
investing
–
Reid
Hoffman
.......................................................................................................
194
The
best
questions
from
VC
-‐
GLENN
KELMAN
...............................................................................................
196
What
not
to
disclose
when
raising
–
Fred
Destin
...........................................................................................
199
On
taking
venture
–
Roger
Ehrenberg
............................................................................................................
200
On
VC
experience
–
Dave
McClure
.................................................................................................................
202
Misconceptions
about
venture
–
Charlie
O’Donnell
.......................................................................................
205
Expectations
at
funding
–
Charlie
O’Donnell
..................................................................................................
207
How
to
raise
series
A
–
Elad
Gil
......................................................................................................................
208
Due
diligence
–
what
to
expect
–
Furqan
Nazeeri
..........................................................................................
212
Give
VCs
assignments
–
Brad
Feld
..................................................................................................................
213
VC
terms
that
hurt
–
Fred
Destin
....................................................................................................................
214
Pitching
and
presentations
.................................................................................................................................
218
5
lessons
for
pitching
VC
–
Ben
Yoskovitz
.......................................................................................................
218
15
Quick
Pitch
Tips
for
Kick
Ass
Presentations–
Ben
Yoskovitz
.......................................................................
219
How
to
present
to
investors
–
Paul
Graham
..................................................................................................
222
Good
vs
bad
pitching
–
Mark
Suster
...............................................................................................................
228
Pitching
–
Bruce
Gibney
(Blake
Masters)
.......................................................................................................
231
Ten
Tips
for
Pitching
Your
Company
–
Charlie
O’Donnell
...............................................................................
241
Role
of
an
exec
summary
–
Mark
Peter
Davis
................................................................................................
242
Five
VCs
Explain
What
They
REALLY
Think
About
Your
Pitches
–
Matt
Rosoff
...............................................
243
Quick
tips
on
pitching
–
Ben
Yoskovitz
...........................................................................................................
245
Your
solution
is
not
my
problem-‐
Dave
McClure
............................................................................................
248
Pitching
off
the
back
of
a
napkin
–
Charlie
O’Donnell
....................................................................................
251
What
needs
to
be
in
the
pitch
–
Charlie
O’Donnell
.........................................................................................
252
The
Best
VC
Meetings
are
Debates
not
Sales
–
Mark
Suster
..........................................................................
254
What
Should
I
Send
a
VC
Before
the
Meeting?
–
Mark
Suster
.......................................................................
257
The
first
VC
pitch
(1)
–
Mark
Suster
................................................................................................................
259
The
first
VC
pitch
(2)
–
Mark
Suster
................................................................................................................
260
The
first
VC
pitch
(3)
–
Mark
Suster
................................................................................................................
261
5. 4
The
first
VC
pitch
(4)
–
Mark
Suster
................................................................................................................
263
The
first
VC
pitch
(5)
–
Mark
Suster
................................................................................................................
265
The
first
VC
pitch
(6)
–
Mark
Suster
................................................................................................................
267
Pitch
yourself,
not
the
idea
–
Chris
Dixon
.......................................................................................................
268
Pitching
lessons
learned
–
Steve
Blank
...........................................................................................................
269
The
perfect
investment
pitch
–
PAUL
SAWERS
...............................................................................................
271
Why
pitches
fail
–
Eric
Ries
.............................................................................................................................
277
Presentation
hacks
–
Naval
............................................................................................................................
280
Always
ask
for
referrals
–
Mark
Suster
...........................................................................................................
288
How
to
Handle
a
VC
Presentation
with
No
Deck
–
Mark
Suster
.....................................................................
290
Preparing
for
presentations
–
Ben
Yoskovitz
..................................................................................................
294
Why
sexy
presentations
are
important
–
Ben
Yoskovitz
................................................................................
296
10/20/30
rule
of
powerpoint
–
Guy
Kawasaki
...............................................................................................
301
Complex
products
need
a
simple
summary
–
Steve
Blank
..............................................................................
302
The
slide
deck
isn’t
brainstorming
–
Steve
Blank
...........................................................................................
303
How
to
communicate
traction
–
Quora
Wiki
..................................................................................................
305
Quick
Practical,
Tactical
Tips
for
Presentations
–
Mark
Suster
......................................................................
312
Pitching
a
VC
–
Dealing
with
Competition
–
Mark
Suster
..............................................................................
315
How
to
demo
–
Jason
Calacanis
.....................................................................................................................
318
Addressable
Market:
Making
The
Estimate
–
Mark
Peter
Davis
....................................................................
322
Addressable
Market:
Not
Market
Size
–
Mark
Peter
Davis
............................................................................
323
Questions
VCs
will
ask
–
Elad
Gil
....................................................................................................................
324
Valuation
and
budgeting
....................................................................................................................................
327
On
valuation
(where
value
comes
from)
–
Peter
Thiel
(Blake
Masters)
.........................................................
327
How
do
we
set
the
valuation
for
a
seed
round?–
Nivi
....................................................................................
333
A
framework
for
pricing
seed,
angel
and
venture
rounds
–
Charlie
O’Donnell
..............................................
335
Why
Startups
Should
Raise
Money
at
the
Top
End
of
Normal
–
Mark
Suster
................................................
337
Pricing
A
Follow-‐On
Venture
Investment–
Fred
Wilson
..................................................................................
342
Raising
money
at
the
right
place
–
Simeon
Simeonov
....................................................................................
344
Thinking
About
Valuation
–
Joseph
G.
Hadzima
Jr.
........................................................................................
346
How
Much
Money
Should
a
Startup
Have
in
the
Bank?
–
Jason
Calacanis
....................................................
348
Burn
Rates:
How
Much?
–
Fred
Wilson
..........................................................................................................
352
Budgeting
In
A
Small
Early
Stage
Company
–
Fred
Wilson
.............................................................................
354
Always
have
18
months
cash
in
the
bank
–
Chris
Dixon
.................................................................................
355
Equity
structure,
vesting
and
employee
compensation
......................................................................................
357
6. 5
The
Co-‐Founder
Mythology
–
Mark
Suster
.....................................................................................................
357
Dividing
equity
between
founders
–
Chris
Dixon
............................................................................................
359
Splitting
the
Pie:
Founding
Team
Equity
Splits
–
Noam
Wasserman
..............................................................
360
How
much
equity
to
give
away
–
Paul
Graham
.............................................................................................
363
Founders
equity
splits
–
Eric
Ries
....................................................................................................................
365
Equity
splits
and
stability
–
Noam
Wasserman
..............................................................................................
368
Splitting
equity
–
Noam
Wasserman
..............................................................................................................
369
How
much
equity
is
your
idea
worth
–
Noam
Wasserman
............................................................................
372
Allocating
equity
and
founders
investment
–
Brad
Feld
.................................................................................
374
Dividing
equity
between
founders
–
Chris
Dixon
............................................................................................
375
Getting
the
founding
right
–
Peter
Thiel
(Blake
Masters)
..............................................................................
376
Founder
dilution
–
Fred
Wilson
......................................................................................................................
386
The
founders
memo
–
Joseph
G.
Hadzima,
Jr.
................................................................................................
387
Paying
founders
–
Joseph
G.
Hadzima
Jr.
.......................................................................................................
389
Founder
vesting
–
Chris
Dixon
........................................................................................................................
391
First
rounds
and
vesting
–
Mark
Suster
..........................................................................................................
392
Founder
Agreements
–
Vesting,
Vesting
and
more
Vesting
–
Simeon
Simeonov
...........................................
394
The
best
vesting
schedule
–
Simeon
Simeonov
..............................................................................................
398
The
boomerang
founder
–
David
Cohen
.........................................................................................................
401
Ten
rules
for
better
founding
teams
–
Simeon
Simeonov
...............................................................................
402
Salary
inequality
–
Noam
Wasserman
...........................................................................................................
404
Myths
about
startup
pay
–
Noam
Wasserman
..............................................................................................
408
Equity
grants
–
Chris
Dixon
............................................................................................................................
411
Employee
equity
–
Fred
Wilson
......................................................................................................................
412
Compensation
in
a
very
early
stage
company
–
Brad
Feld
.............................................................................
415
Valuation
and
the
option
pool
–
Fred
Wilson
.................................................................................................
416
Stock
for
employees
–
Joseph
G.
Hadzima
Jr.
.................................................................................................
417
7. 6
Before
raising
Before
raising
Lifestyle
vs
VC
companies
–
Andrew
Chen
http://andrewchenblog.com/2009/10/27/building-‐lifestyle-‐companies-‐versus-‐vc-‐backable-‐startups-‐is-‐it-‐walk-‐
before-‐you-‐run/
BuildinglifestylecompaniesversusVC-backablestartups:Isitwalkbeforeyourun?
Small profitable companies versus VC-backed startups
I recently had an interesting conversation with a friend centered around a key question that’s come up
a couple times before:
How transferable are the skills you learn from building a small, profitable company versus doing a VC-
backable startup?
This question came up because part of his life plan was that he wanted to do a “real” shoot-the-moon
type startup at some point in his career, but before doing that, he wanted to work on a small profitable
company so that he could learn more about the process. We had a discussion around the key
assumptions around a plan like that, which centered around the question above.
In general, it’s my belief that most of the knowledge isn’t that transferable, and you are better off just
trying to do the VC-backable startup from scratch, rather than deferring that experience. In the worst
case, if you fail, you still learn a lot about VC-backable startups and what it takes to succeed.
Compare this to building a small, profitable company, where even if you succeed or fail, you may not
learn what you wanted to learn.
And of course, it’s a perfectly healthy thing to NOT to want to build a VC-backable company, ever.
That is a great idea too But for those who want to have that experience but are deferring it, I would
encourage you to try sooner, not later.
VC-backable startups have weird constraints
Ultimately, the core of my beliefs stem from the fact that VC-backable startups have to deal with a
number of weird constraints:
they should grow really fast – people sometimes say ideally hitting $50M in revenue in <5 years
they should be defensible – ideally having real technology that isn’t easily duplicated
obviously, you want a great, experienced team – ideally experienced operators or cutting edge
technologists
it’s very centered on SF Bay area and less so on a few other areas (Boston/Seattle/NY/SoCal/Austin)
early stage is focused on proving things out to get each new round of funding, not on profitability
(which is a nice to have)
etc.
8. 7
Again, most of the above are nice to haves and they are always on some investor checklist
somewhere, and are followed loosely/casually in most cases. Similarly, to get in the game, there are
significant “community” effects that kick in too – it’s good to have the right angel investors, because
they can help connect you with the right VCs. But angel investors are just random people (albeit
random successful people), and they sometimes don’t like to give money to strange people from other
cities. So they like to invest locally, and only through people they already know.
So the point on all of the above is, VC-backable companies have all sorts of weird constraints on what
you have to be able to do.
Understanding these constraints, and working with them, requires a different mindset than if you are
just targeting for profitability.
There’s different constraints on Lifestyle companies, aka Small/profitable companies, aka
Passive income companies, aka whatever you want to call them
I think most of the constraints above are pretty silly if the only goal is to build a self-sustaining
company that can get profitable and kick off passive income. In those cases, you really don’t need all
the constraints above, which really take you down a different path.
In those cases, you could really execute your company anywhere – you don’t have to be in the Bay
Area. Rapid growth is both unnecessary, and possibly not desired if new users are creating costs!
Instead, you might prefer to charge users upfront, so that you can be sure that you can stay cashflow
positive. Similarly, it’s fine to just work with your buddies, or family, or whatever you want – there’s
less of a need for them to scale the business quickly, nor will their experience level play a role in
whether investors fund the company.
What both the two styles of company do share, however, is that you still need to be able to build a
product, and build a business for cheap, even if you are going after different goals.
But even with product development, when you are going for a smaller, self-sustaining company, it’s
more OK to target niche markets or build high-quality products for slow-growth businesses. You
probably don’t want to build for a new market, since that can take a lot of time and capital to get right.
How much do you really learn?
To net this discussion out, my point is that the two styles of companies are different in as many ways
as they are similar. Instead of “walk before you run” it’s more like “learn to sail versus learn to bike.”
Learning to sail does not increase your chances of success at cycling, and vice versa, as well.
So for all the engineers out there who are thinking about doing small web projects before trying to
take over the world – go for the latter
An
Introductory
Guide
to
Startup
Funding
–
Ben
Yoskovitz
http://www.instigatorblog.com/an-‐introductory-‐guide-‐to-‐startup-‐funding/2007/10/17/
An Introductory Guide to Startup Funding
9. 8
Getting a startup funded isn’t easy. There’s no shortage of hype, and multiple announcementsdaily of
new companies getting money. And there’s an equal (and growing) amount of chatterabout a “new
bubble” that we’re entering. Still, raising money is far from a cakewalk.
Most people I’ve spoken to say it takes a solid 4-6 months to raise money. Mark MacLeod, CFO at
Mobivox, echoes those thoughts (Mobivox recently raised $11 million dollars.)
Sure, it can happen faster than that. In the hottest startup hubs it might seem like everyone and their
brother is getting funded for something. Don’t let that fool you.
You might also think that everyone knows everything about startup funding, but that’s not the case.
Recently someone sent in a question asking about the differences between angel and venture
financing. With that in mind, I’ve put together a brief, introductory guide to startup funding.
1. Can You Boostrap It? Should You?
Boostrapping means you fund your startup on your own. Scrimp, save and squeeze by on the
minimum you can. Guy Kawasaki does a good job of explaining how to bootstrap, and in most cases,
every business starts out this way.
The principles behind bootstrapping – watching every penny, weighing spending options versus return
on investment, doing more with less – have merit regardless of your funding situation. Companies that
raise lots of money tend to overspend (and spend poorly); they forget about running lean & mean.
Sramana Mitra says bootstrapping is becoming sexy again. Certainly, second and third-time
entrepreneurs are bootstrapping more; in many cases they can afford it. I think the bigger trend is in
small angel/seed financing rounds to help kickstart companies.
The advantage of bootstrapping is simple: you retain control. You’re not diluted (by investors),
there are no additional chiefs (read: board of directors, influencers, etc.), you can go at whatever pace
you see fit and retain your vision. Bootstrapping gives you control.
But the disadvantage of bootstrapping is a lack of capital (unless you’re rich.) That lack of
capital can be a significant constraint. Of course creativity loves constraints but there’s a limit on
10. 9
that. If you can’t afford to keep the business moving forward, you’re in trouble. And first-time
bootstrappers frequently under-estimate what things will cost.
A final note on bootstrapping: You might think it’s an “either or” option — bootstrapping vs.
raising money — but it’s not. Venture capitalist, Matt Winn makes this point clear in his VC view of
bootstrapping.
2. Love Money
I love money, too, but that’s not what I mean. “Love money” is money you get from friends and family.
This is an extremely common way of raising money. From Connecting People I found out that:
“…$100 billion ‘friends and family’ money is used annually to fund 3 million start ups. This
compares to only $25 billion through venture capitalists. The average amount invested by
friends and family is between $20,000 and $25,000, and further, 58% of the fastest-growing
companies in the U.S. started with $20,000 or less.”
If you can get, go for it. The benefit is that it should be easier to get the money (vs. raising from
outside sources), and you’ll gain some experience pitching in a friendly environment. The
disadvantage is that you run the risk of ruining personal relationships. And, unless your friends and
family are wealthy, $20-$25k won’t get you that far .
3. Angel Financing
This is where the real action and opportunity lies for entrepreneurs. We’re seeing the most movement
in the angel & seed financing space.
Venture capital firms are moving into the space, developing early stage programs (some already exist
like Charles River Venture’s QuickStart Program). And of course, we have the now-famous, Y
Combinator which turned the entire early stage funding market on its head. It was followed by a
similar program called TechStars (and others.)
And in-between Y Combinator and VCs we’re seeing angel funds pop up like Montreal Startupwhich
attempt to blend the VC and angel worlds into one. Jeff Clavier’s new SoftTech VC II fundis another
good example of this — a $12 million dollar fund dedicated to seed funding between $100k-$500k.
VCs are moving into early stage financing to get access to the freshest deals and brightest, new
entrepreneurs. It makes complete sense, although they still have to change the way they invest and
their mentality towards investment. Bernard Lunn makes the point clearly in his article: New VC Model
For Small Scale Financing:
Early stage Web 2.0 companies need way less money to get started.
The pace that companies get to market and develop is much faster.
There’s less risk putting $250k at work versus $2.5 million.
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Be wary of the VC that claims they’re interested in early stage financing but has yet to complete a
deal. Or the VC that still wants to overload you with paperwork, complex terms and endless amounts
of due diligence.
Carl Showalter does a good job of explaining why you don’t need big money from VCs to get started.
Angel and seed financing comes into play before a business has launched its product, or shortly
thereafter. It’s the money you need to make it happen out of the gate. Generally, there are a few
sources of angel money:
Venture Capitalists. I’ve already mentioned this group. You can expect “heavier” deals by involving
VCs, but they’re more accessible than other investors.
Strategic Angels. A strategic angel is someone with industry or domain expertise in what you’re
doing. For example, if you’re starting an e-commerce business, Pierre Omidyar would be a very, very
strategy investor. In the Web 2.0 world another strategic investor would be Reid Hoffman. Having
strategic angels is great, because not only will they provide some cash, they’ll provide expertise,
contacts and legitimacy to your fledgling startup.
Non-Strategic Angels. When most people think about angel financing, this is who they think about —
wealthy people looking to diversify their portfolios (and perhaps have some fun) by investing in
startups. Lots of people fit into this category: businesspeople, doctors, entrepreneurs, etc. If they have
money and want to part ways with it for a “piece of the action” they’re potential angel investors.
Often, these angels work together in groups – angel networks – to share opportunities. The problem
is that it might be hard to find non-strategic angels, even if they might be the easiest to raise money
from (since they’re typically the least scrutinizing.) But they don’t often publicize their interest in angel
investing, so finding them can be tricky.
A few more points about angel and seed financing:
Amounts range from $25,000-$1,000,000. Venture capitalists that play in this area will often look at
the $250,000+ range, whereas individual investors will be (typically) less. The higher you go, the
closer it gets to a Series A (described below), which means more effort and paperwork to close.
The most popular structure for angel and seed financing deals is convertible debt. At least that’s the
current trend. I’ll let others (more knowledgeable in this stuff) explainconvertible debt.
If you’re raising a seed or angel round, keep it as simple as possible. You can’t afford to get buried in
process and paperwork at this stage. But please, please, please make sure you understand it fully
and you’re comfortable with it. This could very well be the most important money you raise.
Just because you’re keeping it simple and only raising a seed round doesn’t mean it won’t take 4-6
months to complete. Craig Hayashi has a nice angel investment timelineyou should take a look at.
4. Series A Financing
Series A investments can happen at a fairly early stage – just after launch, for example – depending
on how long the company has existed beforehand. A company with lots of technology and heavy
intellectual property (IP) might have taken a couple years to get off the ground and already need a
Series A when it launches.
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But in most cases, a Series A is used once the company has shown some traction and needs more
money to expand. It’s the money that will take you to new heights, massive revenues, cash flow
positivity and a huge payday via acquisition (or some other exit.) At least, we hope that’s the case!
Series A financing ranges a great deal: think $2 million to $10 million or more. Depends on how much
money you need, the valuation you can get for your company and what investors are willing to put in.
Series A financing typically comes from venture capitalists. And at this stage, you’ll want to bring in
the strongest partner possible; the VC firm with the most experience in your space, the highest
pedigree and the most success stories.
Final Funding Tips
Here are some final thoughts I can leave you with:
Be prepared to pitch a lot. Don’t get discouraged. Refine your pitch. You will get better at it.
Get organized. This sounds silly, perhaps, but the more organized and professional you look, the
more comfortable investors will feel. This is especially true when it comes topresenting financials. Use
a real financial model (not the back of a napkin!)
Get help. Seek out the advice of mentors, advisers and lawyers. A good lawyer can really help with
more complicated deals.
Do your own due diligence. You’re about to get into bed with someone, you might want to check
what they have under the covers. Don’t be afraid to ask for references. Go ahead and contact other
companies your potential investors have put money into. Make sure you’re comfortable; because your
investors are going to be major influencers on your company’s success.
Never stop fundraising. I’m definitely not in love with the fundraising process, but there’s no point
stopping. Keep building relationships with investors, keep nosing around for opportunities. When the
time is right to raise more money you don’t want to be starting at zero.
How
to
Develop
Your
Fund
Raising
Strategy
–
Mark
Suster
http://www.bothsidesofthetable.com/2012/01/16/how-‐to-‐develop-‐your-‐fund-‐raising-‐strategy/
How to Develop Your Fund Raising Strategy
by MARK SUSTER on JANUARY 16, 2012
Raising money is hard. And when you’re relatively new to the process it’s easy to be confused by the
process. There is all sorts of advice on the Internet about how to raise capital. Of course much of it is
conflicting.
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I’ve raised money as a “hot
company” and I’ve raised capital when no one would return my phone calls. I’ve raised in boom
markets and when everybody thought the Internet was a fraud. I’ve raised seed rounds and A-D
rounds. I raised money as an entrepreneur, like you, in 1999, 2000, 2001, 2003 and 2005 for two
different companies.
And of course I’ve sat on the other side of the table: As a VC. I now observes the fund raising process
as a profession. And I also now have to raise money myself, but this time from bigger institutions
that our industry calls LPs (limited partners).
I’ve tried to make this advice as well-rounded and biased free as I can. This is not just the
perspective of a VC although I can’t say I have zero VC bias. This is the fund raising perspective from
both sides of the table.
Executive Summary
For those that want the answer without reading a long post – here it is. Fund raising (as is much of
life) is a sale – pure and simple. The sooner you understand that the sooner you can plan your
campaign.
As with any sales campaign you need to:
Qualify your buyers early so you focus your scarce resources on people likely to buy your product
Spend time researching your buyers and not just pitching them
Call high. Partners make investment decisions.
Meet in person. They’re not buying a book on Amazon or shoes on Zappos. They’re buying you. And
that doesn’t work remotely.
Build a relationship with your investors over time. “People buy from people they like, trust, respect
and … believe.” (Zig Ziglar). Trust doesn’t come from one 45-minute Powerpoint pitch or 30-minute
demo.
Create scarcity. Three rules in sales: Why buy anything? Why buy me? Why buy now? If you haven’t
read my post about that, you should. The hardest is the last: Why Buy Now. People avoid difficult
decisions until they have to make them.
Every company is different so it’s hard to listen to advice from the uber-successful fund raisers.
Their story will likely be very different from yours. Fund raising is bloody hard. It takes a lot of
work. Don’t believe otherwise.
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If you want to watch the video version summary of my advice on fund raising it’s here. It’s an hour
and has tons of insights on the process. Tell a friend!
And now, the details …
1. Identify the right target investors
Every investor is different. I never suggest that entrepreneurs just randomly pitch VCs. Start by
trying to narrowing the list of total prospective VCs. Create a spreadsheet or list them in a CRM. The
total universe of VCs are what we call in sales “suspects” – otherwise known as “the top end of your
funnel.” But focusing on too many is a mistake. You want to narrow the suspects into a group called
“prospects.” These are people with whom there is a likely match for your product or service. This
narrowing follows the three golden rules of sales: qualify, qualify, qualify.
Remember again that the three major steps to a sale are: Why buy anything? Why buy me? Why
buy now? If you can solve these three major questions you’ll sell. The first step in the qualification is
“why buy anything?”
In VC terms that means the key questions you need to answer are, is this investor:
Geographically focused and have they invested in my geography before? (most Seed or A round
deals will be done by an investor in your region so that should help you to focus. Other investors
have national practices. Know which one you’re talking with)
Right for my stage? (approaching an investor who normally does $20 million C rounds for your $2
million funding round is a waste).
Focused on my industry? (I get approached about clean tech or biotech periodically – I don’t focus
on these. You’re wasting your time with me).
Already invested in one of my key competitors? VCs are unlikely to invest in direct competitors so
you will normally be qualified out.
Do they have money to invest? (look at how many deals the firm has done in the past 12 months. If it
isn’t many (or any) that should tell you something. You can also find out when they raised their last
fund. If it was more than 5 years ago you probably want to ask around a bit to see whether they’re
still investing).
Also recognize that WITHIN a VC you have partners who focus on different areas. For example, if
you’re looking to approach Kleiner Perkins it’s worth knowing that my friend Matt Murphy runs
their iFund and therefore is the in-house expert on all things mobile. I’m sure there are many
partners at KP that know the mobile space but if you’re a “mobile first” company you’d be well
served by focusing on Matt. In Accel that’s Rich Wong. At GRP that’s largely me.
If you’re raising money in Financial Services I’ve never met a more knowledgeable investor than my
partner, Brian McLoughlin. He’s focused on that sector (not exclusively but predominantly) and
therefore has an amazing network at large financial services firms to help you with business
development. He knows the history of all of the payment gateways, mobile payment platforms,
credit offerings, remittance companies, etc. Others that are experts in this field include Matt
Harris at Village Ventures and Jim Robinson at RRE. Approaching random VCs who aren’t experts
in FS makes little sense.
In ad tech there’s Seth Levine at Foundry Group and both Dana Settle & Ian Sigalow at Greycroft.
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And so on. Not trying to be comprehensive here – just making sure you know that partners & firms
are often focused. Fred Wilson likes, “large networks of socially connected people” while Foundry
lists its 5 key themes on its website. Do your homework.
I do the same. When raising money for GRP, I look at my suspect list and say, “Do they like VC
versus buy-out funds? Have they invested in new VC relationships versus just doing investments in
firms in which they have long-standing investments? Do they invest in funds that are $200-300
million versus $50 million or $500 million.” I use the same methodology I am advocating to you.
2. Determine how to get access to them
In the era of social networks, LinkedIn, Facebook messaging, Quora and email addresses that are
easily guessable, it’s easy to think that maybe you should just approach a VC directly. They seem so
reachable. Yet this approach in my mind is the equivalent of spam. I get many Tweets directed at me
that say, “come check out my product.” Even if I wanted to be this accessible, I could never find
enough time in the day to evaluate every single person who approached me. Neither can any VC. So
they develop short-hand ways to qualify things better. The main way they qualify is to determine
who introduced them and the veracity of the introduction.
As I like to say, in the era of social networks and transparency if you can’t figure out how to get
introduced to a VC then hang up your cleats now. You’ll never make a great entrepreneur. I wrote a
longer post on how to access VCs that you should read.
But the short answer is that the best intro is from a portfolio company of that VC or by other
entrepreneurs whom that VC respects. So your journey to fund raising begins by strengthening your
relationships with other entrepreneurs. You need to build genuine relationships with these portfolio
startup founders as well as trust with them and the rest will follow. Earn the right to the intro. I
often recommend that entrepreneurs try to focus on building relationships with younger companies
that aren’t already “big time” because they’ll have more time and willingness to help.
Approaching Dennis Crowley to figure out how to get access to his earliest investor, Bryce Roberts?
Not so much. And trust me, if you’re early stage you DO want to meet Bryce. He’s awesome for
early-stage entrepreneurs.
3. Meet early
There is much controversy on this topic. I have laid out my philosophy in, “I Invest in Lines, Not
Dots.” If you haven’t read that you should – it’s one of my most re-tweeted posts. There is the school
of people who tell you that you should only meet with VCs when you’re ready to raise. Their
arguments are:
a. Fund raising is too time consuming and meeting early is wasting time
b. The VC will get a bad impression of you and you should wait until you’re on your best footing to
raise.
Both of these arguments are logical and thus many entrepreneurs buy them. They’re both flawed,
though.
“Fund raising is too time consuming” … yes, fund raising takes time. If you save it all for some
mythical 6-week period every 18 months where you hit up all the VCs at once – sure, it will consume
much of those six weeks. But as I’ve argued before, you need to ABR (always be raising). By
constantly taking focused VC meetings you’ll have relationships established for when you are ready
to raise. As the CEO you have many tasks you need to do on a regular basis. Call it your functional
pie chart. These include building products, recruiting, managing your finances, marketing, selling,
getting feedback from customers and … fund raising.
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It will be at least 5% of your week so if you work a 60-hour week (I know, I know, you work more)
then you should dedicate 3 hours per week to fund raising. Maybe up to 6 hours.
Remember that if you’re meeting with targeted investors you’re meeting people who can challenge
your thinking. You’re meeting with people who can help you with introductions. You’re meeting
people who can give you market insights and information. REAL information. Not what you read in
the press. And of course you’re meeting people who can give you money. It takes money to grow a
business.
Most VC partners do 2-3 deals per year max (except for the higher volume shops). So the odds are
never great for you. But VCs want to be helpful – even when they can’t invest. So they go out of their
way to offer advice and introductions. The shortest path to meeting hard-to-meet entrepreneurs or
senior executives at a big company is to have a VC who likes you, but isn’t yet ready to invest in your
company, introduce you.
“VCs will get a bad impression of you” … also logical but slightly misleading. So let me be
clear. DO NOT show up at a VC meeting unprepared. Do not “wing it” and see how the meeting goes.
Know your plan in advance. Know what you’re going to discuss. Know how much information
you’re going to give. Know that it is HUGELY important to make a good impression.
What I advocate is letting the VC know that, “you’re not yet fund raising but you’re building early
relationships because you’re going to be fund raising in the near future and you want to start
determining where there are good matches in the industry for your firm.” All VCs want early access.
If they see you when you’ve already got your first term sheet and they’ve got 3 weeks to decide then
by definition they have no relationship with you. So winning means they’re paying the highest price.
Sure, some people work this way. I think it’s a terrible way to work. When I get these inevitable
emails or calls I respond the same way, “It’s a shame for me that I’m too late to your process. Why
don’t we meet right after you raise your money so we can start a relationship early for your next
round.” And I mean it.
Fab wrote a popular post on fund raising in which they advocated a very different approach to
mine. Their approach worked for them because their business is super hot and on fire. I introduced
one of my dearest friends and one of the most talented guys I have worked with, David Lapter, to the
company and he became CFO. So I know how first-hand how awesome Fab is. And the CEO is
experienced. If your business is totally killing it please follow Fab’s advice. It’s ideal for people who
have VCs all chasing them.
For everybody else I would encourage you to meet early and often.
4. Press the flesh
It’s tempting to want to stay in your offices and fund raise via email or web conferencing. But fund
raising is a contact sport. You’ve got to get out there and shake hands and kiss babies. If you’re in the
Bay Area this may be easier. If you’re not you’re going to have to put in some miles and some time
away from home. Raising money is a “direct sale” not a telephone sale. They are buying YOU. So
interacting with you in person is paramount. Many VCs don’t like to tell people to travel to them.
They may even suggest phone calls. This is part out of guilt of not wanting to make you travel and
part because they know they can have shorter meetings on the phone – it’s harder to cut a meeting
short if you have traveled.
Always do your important meetings in person. I can’t over state the importance of the human
connection in being able to develop a relationship. If you have to travel tell the VC you’re already
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planning to be in town. They feel less obligation to you and therefore are more likely to say yes to an
in-person meeting.
5. Avoid the two big “donuts” in the year
There are two times every year where raising VC from partnerships with more than two partners is
exceedingly hard. July 15-Aug 31 and Thanksgiving to New Years. I’m not saying VCs are lazy. They
are not. But they are highly likely to be in the age bracket of 35-55 and often have kids. That means
that they take their holidays with their families and these are the big seasons.
Most VCs I know these days answer emails on vacation. Good or bad – it just is. But there is a
different reason not to raise in those periods. In order to get a VC to agree to fund you, you need to
get the entire partnership on board. And so while your VC partner may not be gone the entire month
of August, you can bet that at any time at least a few of their partners will be gone.
And because all sales processes rely on momentum, you don’t want to have a process that has a
“dead spot” in the middle of it. I call these “fund raising donuts.” Plan your timing accordingly. If
you’re concerned about this issue I wrote a longer post on the topic.
6. Have a narrative / make it simple
Nobody will buy what they don’t understand. It’s your job to take the complexity of your company &
industry and develop a “narrative” that helps investors better understand the context. It’s basically
story telling. Don’t under-estimate the power of stories. When I was reading the Fab.com website I
noticed that the CEO refers to Fab’s “one thing” as being design. By talking in this way, he can create
a storyline that investors can say, “oh, Fab.com. They’re the place focused on design. They think
design wins. They think there’s any underserved market for young urban professionals who care
about quality design and don’t want to buy cookie-cutter, Idea furniture and accessories” (or
whatever their pitch is).
Investors can agree or disagree but they know what they’re evaluating. As do journalists.
The best company pitches are those that have this narrative. Why does the world need another X? Or
why are the market conditions ripe for a new entrant who does Y when Y hasn’t existed in the past
20 years? I spoke at length about the narrative here.
Trust me when I say that the narrative is vital to your business. It’s important in aligning internal
strategy, communicating with others, talking with partner, recruiting and, yes, raising VC.
7. Create a sustained campaign
Many people equate a great pitch meeting with success. They then lament the fact that the process
died shortly thereafter. All sales campaigns are processes that occur over time. It’s your job to find a
continued way to stay on the radar screen of the VC.
You had your great meeting. If it felt great it probably was. But in the three weeks since your
meeting that VC has seen 12 other companies, had 3 board (bored) meetings and had to deal with
some enquiries from his own investors. So when you’re wondering what they’re thinking about –
unfortunately it’s not likely you.
Think about it this way. Let’s say you have a product in which the CMO of a company is your buyer.
You wouldn’t imagine they’re sitting around 3 weeks after your meeting daydreaming about you.
They’re under pressure to do tons of stuff. You were a priority when they agreed to meet you but
since then they’ve been putting out other fires. If you start to think of VCs as a person who might buy
your product like this CMO then you can plan your sales campaign accordingly.
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Some relevant posts to help you on this topic:
I met a VC, what happens next?
How do you build long-term relationships with VCs
But the summary for you is:
- get an intro
- create materials for your first partner meeting. This is a demo + a high-level deck
- create materials that would be used in a follow-up meeting. This includes stuff like detailed
financial plans, product roadmaps, etc.
- prepare a list of reference clients and a reference list of people they could call to ask about you
Then make sure to send out VERY high-level summary emails to update key investors on your
company progress. Ask for 30-minute update meetings from time-to-time. Stick to your time slot
unless they say they want longer.
Investors back companies where they see traction. What better way to show traction than to meet a
VC early, baseline your performance and then update them on your positive achievements?
8. Lobby
If it were a sales campaign to a CMO you would naturally think about having customer references.
You’d even probably go as far as to ask your best customers if they wouldn’t mind proactively
reaching out to your prospects to subtly tell them how great you are. I call it “marketing heroes” and
I wrote about it here.
So why would raising venture capital be any different. If the best intros to VCs come through
qualified referrals from people they trust, then it follows that the best way to keep VCs interested in
you is to have similar people tell them how great you are. So determine the VCs you want to
influence, identify who influences them, figure out how you’re going to get these people loving your
product, your company and you.
And then ask for their help in reminding the VC how great you are. And remember my golden rule,
“you don’t ask, you don’t get.” Nobody proactively bugs a VC to tell them how great you are. You
have to ask for it.
Will the VC know you asked them? Who cares. Any great VC will know that’s how the world works
and if that’s how you influence them it’s probably the tool you use to influence journalists, customers,
prospective employees and corporate suitors for M&A one day.
The only people you don’t need to lobby are people whom you don’t want to invest.
9. Recognize that fund raising is a part of your ongoing duties
As I’ve said before, ABR. Always be fund raising. It’s just a part of your ongoing activities as a
founder. Sure, you might not like it. It might not seem “core” to your business success. It is. Building
a business is not about only building a product and seeing if customers like it. You can’t just do those
things in business that you enjoy. Make fund raising a habit. Don’t only engage every 18 months.
10. Test interest
One of the best sales coaches I ever worked with used to talk to me about “testing prospects.” What
he meant was that since your scarcest resource as a manager or sales rep is your time you need to
qualify better. Most people are afraid of asking the tough questions because they prefer to imagine
that you might be a buyer than to know that you’re 100% not. I prefer the latter. I once did a project
with Carly Fiorina when she was president at Lucent. Her quote that always stuck with me was,
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“I’d rather get a firm no then a muddy yes.”
So true. At least you can move on and focus your time on energy on people who might say yes.
So how do you test a VC?
It’s actually OK to say something at the end of your meeting such as, “I know that you’re not likely to
give me a strong indication at this meeting, but I’d love to know if this is the sort of opportunity you
could imagine doing if I was able to persuade you over time or would I be best off focusing my
attention on other VCs?”
Said politely and I promise you people will appreciate it.
Similarly, it’s OK to email a non-responsive VC by saying, “I’ve email you a couple of times and left a
voicemail. I know we all get busy. I just wanted to confirm whether you were super busy or whether
this was a sign that maybe I’m not a good fit for your firm? If that’s the situation – I’d understand.
But if so I’d love to know so that I can focus my limited time on other VCs. (if you are still open, I’d
love the chance for a 30-minute meeting to give you a status update. I think you’ll be impressed.)
Other ways of testing a VC?
- if they show interest and have spent time with you, why not ask if you can set up a customer call
for them so they can hear directly what they think of your product? Willingness = they are engaged.
Not willing either equals, “not now” or “not ever.” Better that you know. A firm no is better than a
muddy yes.
- how about setting them up to use your product? (if it’s possible). Then you have a reason to check in
every couple of weeks, “I noticed you didn’t yet get a chance to log in to the product. Would you mind
if I had a senior training rep call you for 30-minutes to give you a quick demo to get you up to
speed?
There are a million ways to test. And a million more to drive engagement. I’d say <5% of people ever
do. These are people who are more likely to raise VC. People who manage processes make more
sales. As I articulated here.
11. Take appropriate risks
I always encourage people to take risks in sales and fund raising is no different. Remember those
three rules of sales?
why buy anything?
why buy me?
why buy now?
Well if the “why buy anything” is testing whether you’re even compatible with a VC, the “why buy
me” has got to be extreme differentiation. VCs see companies all the time. They all start to sound the
same. Be bold. Make your positioning strong. Stand out. It may turn off some VCs but for others it
may be a positive.
I’ll give you an example from my own fund raising.
Conventional wisdom says that you can only build big businesses in Silicon Valley so as a VC you
need to be there. But of course that’s horse puckey. Some of the biggest wins of the past 5 years were
built outside of the Valley. GroupOn, Living Social, AdMeld, Gilt Group, Demand Media, ShoeDazzle,
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Tumblr, FourSquare, etc. And the great monetization engines of the Internet were built in LA –
Overture (AdWords) & Applied Semantics (AdSense).
But many VCs outside of Silicon Valley are afraid to raise against this conventional wisdom so they
say, “yeah, I’m in the Valley all the time. And I went to Stanford so my network is there.”
We went the opposite way. Our biggest returns were outside Silicon Valley: Overture (LA),
CitySearch (LA), BillMeLater (Baltimore), Ulta (Chicago), Envestnet (Chicago), HDI (Las Vegas), PF
Changs (Arizona), TrueCar (LA).
So I argued with my partners we should stand firm. Our fund has always made money mostly
outside the Valley. So my standard pitch is:
“If you’re looking for another Sand Hill Road firm we’re not for you. There’s 80 firms
there – have your pick. But if you’re looking for something differentiated in your
portfolio I think we’d be a great fit. We’re the largest fund in Southern California.
We were found to be the 5th most consistently performing fund in the country over the
past 20 years by Prequin. Our 2000 fund is the single best fund of its vintage. Our 2008
fund looks spectacular.
We have followed this strategy for 15 years. And now it’s even easier to build a big
business outside of the Valley. Our next fund will follow the same strategy. We invest
in the Bay Area but more than 50% of it will be outside of Silicon Valley.”
So if I take a pool of investors I might turn off 8 with this positioning. But they were never going to
be convinced anyways once they did due diligence and realized we’re not a SV-focused fund. And
with these hard positioning I might get 3/20 into the “yes column” because they understand the
“why buy me” better. Take risks.
12. Understand the important of marketing
Nobody thinks they are influenced by marketing. Everybody is. Even if it’s subconscious. We tend to
be more excited about things that we read in the press and/or articles being forwarded to us by our
peers. It’s human nature. So make sure you have a solid PR strategy.
I have two articles on the topic:
1. Understanding PR & Crisis Management
2. How to Work with PR Firms
Make sure good PR is underpinning your fund raising efforts. The articles about you create great
collateral that you can email out in your VC update emails and they create collateral for your
contacts to mail to your VC prospects on your behalf. And PR also has a way of generating inbound
funding opportunities.
And trust me if they’re thinking about investing in you and an investor Googles you and gets “bagel”
– so, too, will you.
13. Create urgency
The final rule of why buy anything, why by me is … why buy NOW! It’s the hardest rule of sales.
Why should I buy a new TV when my current one works well? I know I want one but I can always
buy it next year. In fact, there will be a newer, fancier model. Same with a new car. Same with an
21. 20
investment. Why invest now when I can see how your company develops? Or see the next company
that rolls through.
The only way to get VCs to move is to make sure subtly that they feel a deal is or may become
competitive. Life works the way it did in high school. A guy has three options to ask to the prom. He
waits as long as possible. Why ask a girl today when I can decide tomorrow? Then the rumor mill
starts and he hears his rival is going to ask one of his top picks today. Guaranteed that he’ll ask her
before lunch.
Maybe life shouldn’t work this way. It does. You need to create a sense of competition.
That is best done through back channeling, where possible. I know some VCs will tell you this isn’t
necessary or a good idea. They are probably “book smart” VCs who don’t even understand
themselves the psychology of buying.
Conclusion
Fund raising is hard business. And perhaps it should be. Too many competitors getting funded leads
to incrementalism and me-too competitors. There are some wildly successful companies out there
that also become hot. It’s hard to take advice from them because the process one goes through when
you’re the belle of the ball is different than when you’re having to sneak your way into the party.
I once had an LP tell me that when Sequoia fund raises they place the first call and say “we’re closing
in 6 weeks – you need to decide quickly if you want an allocation.” I don’t know if that’s true, but it
wouldn’t surprise me. When you’ve had the consistent success of Sequoia (or similar) over so many
decades I guess you earn that right.
But when I fund raise I’ll be right out there with you.
Plotting out where I think I have a strong fit between my prospects & my product
Shaking hands and kissing babies
Following through with email, phone call, follow-on meetings and lobbying
Always pushing forward but never taking things for granted
Always raising, even when I’m not.
And praying like hell there’s no “Black Swan” event like the Greeks defaulting on their debt, the
Italians pulling out of the Euro, a Lehman-like bankruptcy or a devastating terror attack that
screws up fund raising timing for everybody. Damn you, Black Swans!
Like you I’d want to get it done as early as I could. Never taking a day for granted. Knowing that
“time is the enemy of all deals.”
And then waking up one day many months later and seeing whether all of the hard fund-raising
effort paid off.
ABR.
** post script **
Yes, I’m sure there were many typos. No, I’m not stupid. My grammar is generally quite good. But I
hope you enjoyed the content enough to forgive my lack of time for editing. And anyways, you’re still
reading, aren’t you? thanks for your understanding
22. 21
How
To
Finance
Your
Startup
–
Mark
Peter
Davis
http://www.markpeterdavis.com/getventure/2009/07/how-‐to-‐finance-‐your-‐company.html
How To Finance Your Startup
How entrepreneurs finance their company is one of the most critical decisions that they will make
during the course of their startup. The structure of their financing will be one of the key drivers of the
financial return from their venture.
There are financing structures for companies that have small potential and structures for companies
that have big potential. There is not a one-size fits all strategy for capitalizing a company.
Ultimately, financing a startup properly boils down to aligning the financing structure with the business
opportunity and capital needs. In other words, the way in which you elect to finance your company
should at a high-level be determined by 1) how big of a business opportunity it presents and 2) how
much capital is required to breakeven. While there are a number of other considerations, but I would
argue that these are the first two dimensions to consider as they should help entrepreneurs more
quickly find the right direction for their financial strategy.
The 2x2 chart below should help to illustrate how to think about which fundraising category that they
are in.
Venture Capital
If you have a big idea that can generate at least $50M in revenue and the business requires millions
of dollars to get the company to a cash flow positive position, you should probably pursue venture
capital.
Not Viable
If your business requires significant capital, but is not poised to become a large business you may not
be able to find a viable funding source. You will either need to find dumb money or trick savvy
23. 22
investors into believing your company has bigger prospects. If your company falls into this category,
you should probably go back to the drawing board and find another opportunity to pursue.
Bootstrap
If you have the potential to build a small business - one that generates single-digit or low double-digit
millions in revenue - while requiring little capital to achieve breakeven, you have a lifestyle
business. In my opinion lifestyles business are best financed when the founders take as little outside
capital as possible - these are companies where it's really only exciting for founders if they own a
large percentage of the equity. Additionally, by raising less capital entrepreneurs will be able to avoid
accruing a large amount of liquidity preference. If there is a significant amount of liquidity preference
in the company, it may be difficult for the entrepreneurs to realize a meaningful payout when the sell
the company.
Depends On Barriers
If your company has the potential to become a big business and requires little capital to get there the
decision between bootstrapping the company and raising venture capital generally boils down to your
expected barriers. If there is little risk of a competitor beating you to scale and taking the opportunity,
because you have a unique approach, protected IP or otherwise, then you may want to bootstrap the
company in order to maximize your ownership of the company. If your barriers are limited, however,
and additional capital can help you capture market share more quickly, securing the opportunity, then
you should consider venture capital.
I frequently meet entrepreneurs that should be bootstrapping who are seeking venture capital or
entrepreneurs that should be seeking venture capital when they are bootstrapping. The former could
limit their returns by loading too much liquidity preference into the business, the latter is often building
the business too slowly to capture the opportunity properly.
Picking the right fundraising strategy is often as significant of an indicator of the founder's payout as
selecting the right business strategy. Take the time to understand what type of company you are
building and finance it properly.
Don’t
Try
to
Get
Funding
Before
You
Know
How
It’s
Done
–
Ben
Yoskovitz
http://www.instigatorblog.com/know-‐how-‐to-‐get-‐funding-‐first/2009/11/30/
Don’t Try to Get Funding Before You Know How It’s Done
If you don’t know how the process works to raise capital and get funding from angel investors
or venture capital investors, you will never succeed at raising capital. What this means is that if
you feel like raising angel investment or venture investment is critical for the success of your
business, you need to go out and learn how the process works. There
are tons and tons and tons and tons of resourcesout there on this subject. Read them all. And
then read more. It will take awhile, but it’s worth the time. Either you’ll realize that raising capital isn’t
something that’s going to happen for you (or it’s not necessary or right for your business), or you’ll
decide it’s absolutely the right thing to do and you’ll be better prepared to do so.
I get quite a few questions and requests for help in terms of how to raise financing. I don’t mind – I
think it’s great that what I’ve written to-date on this site encourages people to reach out. But here are
a few problems I see with most of the queries, and hopefully by answering all of these publicly it will
help people in the future:
24. 23
Cold-pitching investors rarely works. This is really the same principle as cold-pitching prospects.
What’s the percentage success of cold emails or cold calls? Most of the time it’s not very good. I’d
have to say it’s even worse in the case of raising capital.
Investors won’t sign non-disclosure agreements. This has been said before, but it needs
repeating. No investor will provide you with a “guarantee of confidentiality”. It’s just not going to
happen. So get out there and pitch the crap out of your idea. And hone that pitch until it’s perfect.
Don’t try and raise money if “you don’t know what to do next.” Investors put money into the
people first. So the most important thing in most investments is the people involved in the company. If
you’re going to admit to an investor, “I need money because I don’t know what to do next,” you’re
basically telling them you’re incapable of running the business. Money doesn’t provide all the tools to
run a business, only one.
Don’t try and raise money if you don’t know any investors. This is of course tied with point #1
above. The best way to raise money is to get involved in the local startup community, build up your
own brand (and the brand of your startup) and connect with as many entrepreneurs and investors as
possible. See point #3 too – Investors invest in people. So if they know you, like you, and trust you
already, your chances just went up. You can get to investors through entrepreneurs (who have raised
money), as well as service providers like lawyers and accountants who do business with the
investors. You have to figure out the world of personal branding, social capital and leverage.
Raising money can’t be a precursor to starting your business. It’s very difficult to raise money
when you haven’t started anything. You should really be focusing on starting your business, testing
your hypotheses, getting customers and key metrics that help validate what you’re up to. Then give it
a try. If raising money is your first step, an step two is start the business, you’ve got the steps in the
wrong order.
Play your odds and be realistic. One of the key reasons why point #5 is so important is because so
few deals are ever completed. Angelsoft has some great statistics on this: In the last 12 months out of
21,562 submissions to their system, 496 deals have been completed. That’s a 2.3% investment rate.
So those are your odds. They might be a bit higher, but even at 3% your odds of raising capital flat
out suck.
Learn how to sell. Before you go to raise money do as much as you can to become a master
salesperson. If you can’t sell and/or can’t effectively (and passionately) communicate ideas, you will
have a very hard time raising capital.
The process of raising capital – from angel investors or venture capital investors – isn’t rocket science
or a total mystery. Help is out there. There are some very clear things that you need to know, learn
and understand as fully as possible before you even begin the process. The more prepared you are,
the better your chances of success. Good luck!
How
much
funding
is
too
little?
Too
much?
–
Marc
Andreessen
http://pmarca-‐archive.posterous.com/the-‐pmarca-‐guide-‐to-‐startups-‐part-‐6-‐how-‐much
October
13,
2009
The
Pmarca
Guide
to
Startups,
part
6:
How
much
funding
is
too
little?
Too
much?
25. 24
In this post, I answer these questions:
How much funding for a startup is too little?
How much funding for a startup is too much?
And how can you know, and what can you do about it?
The first question to ask is, what is the correct , or appropriate, amount of funding for a startup?
The answer to that question, in my view, is based my theory that a startup's life can be divided into
two parts -- Before Product/Market Fit , and After Product/Market Fit .
Before Product/Market Fit, a startup should ideally raise at least enough money to get to
Product/Market Fit.
After Product/Market Fit, a startup should ideally raise at least enough money to fully exploit the
opportunity in front of it, and then to get to profitability while still fully exploiting that opportunity.
I will further argue that the definition of "at least enough money" in each case should include a
substantial amount of extra money beyond your default plan, so that you can withstand bad
surprises. In other words, insurance . This is particularly true for startups that have not yet achieved
Product/Market Fit, since you have no real idea how long that will take.
These answers all sound obvious, but in my experience, a surprising number of startups go out to
raise funding and do not have an underlying theory of how much money they are raising and for
precisely what purpose they are raising it.
What if you can't raise that much money at once?
Obviously, many startups find that they cannot raise enough money at one time to accomplish these
objectives -- but I believe this is still the correct underlying theory for how much money a startup
should raise and around which you should orient your thinking.
If you are Before Product/Market Fit and you can't raise enough money in one shot to get to
Product/Market Fit, then you will need get as far as you can on each round and demonstrate
progress towards Product/Market Fit when you raise each new round.
If you are After Product/Market Fit and you can't raise enough money in one shot to fully
exploit your opportunity, you have a high-class problem and will probably -- but not definitely -- find
that it gets continually easier to raise new money as you need it.
What if you don't want to raise that much money at once?
You can argue you should raise a smaller amount of money at a time, because if you are making
progress -- either BPMF or APMF -- you can raise the rest of the money you need later, at a higher
valuation, and give away less of the company.
This is the reason some entrepreneurs who can raise a lot of money choose to hold back.
Here's why you shouldn't do that:
26. 25
What are the consequences of not raising enough money?
Not raising enough money risks the survival of your company, for the following reasons:
First, you may have -- and probably will have -- unanticipated setbacks within your business.
Maybe a new product release slips, or you have unexpected quality issues, or one of your major
customers goes bankrupt, or a challenging new competitor emerges, or you get sued by a big
company for patent infringement, or you lose a key engineer.
Second, the funding window may not be open when you need more money.
Sometimes investors are highly enthusiastic about funding new businesses, and sometimes they're
just not.
When they're not -- when the "window is shut", as the saying goes -- it is very hard to convince them
otherwise, even though those are many of the best times to invest in startups because of the
prevailing atmosphere of fear and dread that is holding everyone else back.
Those of us who were in startups that lived through 2001-2003 know exactly what this can be like.
Third, something completely unanticipated, and bad, might happen.
Another major terrorist attack is the one that I frankly worry about the most. A superbug. All-out war in
the Middle East. North Korea demonstrating the ability to launch a true nuclear-tipped ICBM. Giant
flaming meteorites. Such worst-case scenarios will not only close the funding window, they might
keep it closed for a long time.
Funny story: it turns out that a lot of Internet business models from the late 90's that looked silly at the
time actually work really well -- either in their original form or with some tweaking.
And there are quite a few startups from the late 90's that are doing just great today -- examples being
OpenTable (which is about to go public) and TellMe (which recently sold itself to Microsoft for $800
million), and my own company Opsware -- which would be bankrupt today if we hadn't raised a ton of
money when we could, and instead just did its first $100 million revenue year and has a roughly $1
billion public market value.
I'll go so far as to say that the big difference between the startups from that era that are doing well
today versus the ones that no longer exist, is that the former group raised a ton of money when they
could, and the latter did not.
So how much money should I raise?
In general, as much as you can.
Without giving away control of your company, and without being insane.
Entrepreneurs who try to play it too aggressive and hold back on raising money when they can
because they think they can raise it later occasionally do very well, but are gambling their whole
company on that strategy in addition to all the normal startup risks .
27. 26
Suppose you raise a lot of money and you do really well. You'll be really happy and make a lot of
money, even if you don't make quite as much money as if you had rolled the dice and raised less
money up front.
Suppose you don't raise a lot of money when you can and it backfires. You lose your company, and
you'll be really, really sad.
Is it really worth that risk?
There is one additional consequence to raising a lot of money that you should bear in mind, although
it is more important for some companies than others.
That is liquidation preference. In the scenario where your company ultimately gets acquired: the
more money you raise from outside investors, the higher the acquisition price has to be for the
founders and employees to make money on top of the initial payout to the investors.
In other words, raising a lot of money can make it much harder to effectively sell your company for
less than a very high price, which you may not be able to get when the time comes.
If you are convinced that your company is going to get bought, and you don't think the purchase price
will be that high, then raising less money is a good idea purely in terms of optimizing for your own
financial outcome. However, that strategy has lots of other risks and will be addressed in another
entertaining post, to be entitled "Why building to flip is a bad idea".
Taking these factors into account, though, in a normal scenario, raising more money rather than
less usually makes sense, since you are buying yourself insurance against both internal and
external potential bad events -- and that is more important than worrying too much about dilution or
liquidation preference.
How much money is too much?
There are downside consequences to raising too much money.
I already discussed two of them -- possibly incremental dilution (which I dismissed as a real concern
in most situations), and possibly excessively high liquidation preference (which should be monitored
but not obsessed over).
The big downside consequence to too much money, though, is cultural corrosion .
You don't have to be in this industry very long before you run into the startup that has raised a ton of
money and has become infected with a culture of complacency, laziness, and arrogance.
Raising a ton of money feels really good -- you feel like you've done something, that you've
accomplished something, that you're successful when a lot of other people weren't.
And of course, none of those things are true.
Raising money is never an accomplishment in and of itself -- it just raises the stakes for all the
hard work you would have had to do anyway: actually building your business.
Some signs of cultural corrosion caused by raising too much money:
28. 27
Hiring too many people -- slows everything down and makes it much harder for you to react and
change. You are almost certainly setting yourself up for layoffs in the future, even if you are
successful , because you probably won't accurately allocate the hiring among functions for what you
will really need as your business grows.
Lazy management culture -- it is easy for a management culture to get set where the manager's job is
simply to hire people, and then every other aspect of management suffers, with potentially disastrous
long-term consequences to morale and effectiveness.
Engineering team bloat -- another side effect of hiring too many people; it's very easy for engineering
teams to get too large, and it happens very fast. And then the "Mythical Man Month" effect kicks in
and everything slows to a crawl, your best people get frustrated and quit, and you're in huge trouble.
Lack of focus on product and customers -- it's a lot easier to not be completely obsessed with your
product and your customers when you have a lot of money in the bank and don't have to worry about
your doors closing imminently.
Too many salespeople too soon -- out selling a product that isn't quite ready yet, hasn't yet achieved
Product/Market Fit -- alienating early adopters and making it much harder to go back when the
product does get right.
Product schedule slippage -- what's the urgency? We have all this cash! Creating a golden
opportunity for a smaller, scrappier startup to come along and kick your rear.
So what should you do if you do raise a lot of money?
As my old boss Jim Barksdale used to say, the main thing is to keep the main thing the main
thing -- be just as focused on product and customers when you raise a lot of money as you would be
if you hadn't raised a lot of money.
Easy to say, hard to do, but worth it.
Continue to run as lean as you can, bank as much of the money as possible, and save it for a rainy
day -- or a nuclear winter.
Tell everyone inside the company, over and over and over, until they can't stand it anymore, and then
tell them some more, that raising money does not count as an accomplishment and that you
haven't actually done anything yet other than raise the stakes and increase the pressure.
Illustrate that point by staying as scrappy as possible on material items -- office space, furniture, etc.
The two areas to splurge, in my opinion, are big-screen monitors and ergonomic office chairs. Other
than that, it should be Ikea all the way.
The easiest way to lose control of your spending when you raise too much money is to hire too
many people . The second easiest way is to pay people too much . Worry more about the first one
than the second one; more people multiply spending a lot faster than a few raises.
Generally speaking, act like you haven't raised nearly as much money as you actually have -- in
how you talk, act, and spend.
29. 28
In particular, pay close attention to deadlines . The easiest thing to go wrong when you raise a lot
of money is that suddenly things don't seem so urgent anymore. Oh, they are. Competitors still lurk
behind every bush and every tree, metaphorically speaking. Keeping moving fast if you want to
survive.
There are certain startups that raised an excessive amount of money, proceeded to spend it
like drunken sailors, and went on to become hugely successful. Odds are, you're not them.
Don't bet your company on it.
There are a lot more startups that raised an excessive amount of money, burned through it, and went
under.
Remember Geocast? General Magic? Microunity? HAL? Trilogy Systems?
Exactly.
How
Funding
Rounds
Differ:
Seed,
Series
A,
Series
B,
and
C
–
Elad
Gil
http://blog.eladgil.com/2011/03/how-‐funding-‐rounds-‐differ-‐seed-‐series.html
How Funding Rounds Differ: Seed, Series A, Series B, and C...
Over the weekend, I have written a series of posts about how to raise a series A, and why this differs
pretty dramatically from raising a seed round. I thought it might help to first clarify the difference
between the various funding rounds and their characteristics.
What Is the Difference Between Series Seed, Series A, Series B and Series C-Z funding
rounds?
To some extent, the names of rounds are kind of arbitrary. E.g. in some cases a round is called
“series A” simply because it is the first, or “A” funding the company has taken from external sources
versus a specific stage of traction for the company. However, in most cases a Series A will reflect the
stage of a company and its product.
Series Seed: Figuring out the product and getting to user/product fit.
Purpose: The purpose of the series seed is for the company to figure out the product it is building, the
market it is in, and the user base. Typically, a seed round helps the company scale to a few
employees past the founders and to build and launch an early product. As the product starts to get
more and more users, a company will then raise a series A.
Amounts: Typically the range is $250K-$2 million (median today of probably $750K to $1million). The
high end of this range used to be more typically $1million, but we are in the inflationary period of
a venture cycle, and this number may move up into the millions of dollars before we have a
correction.
Who invests: Angels, SuperAngels, and early stage VCs all invest in seed rounds.
Series A: Scaling the product and getting to a business model. (AKA getting to true
product/market fit)