Posted by Anonymous on 2007-04-02
Tags: Preparation Due Diligence Board
Prior to accepting capitla from any fund that will require board representation, one should be sure to spend some time doing background checks on the new boardmember(s). Find out what industry they came from (finance, technology, consulting etc.), check out the quality of their other portfolio investments, and be sure to interview CEO's of those portfolio companies to find out how the investor has contributed (or not) to the BOD. Chances are that you will be stuck with your boardmembers for some time, and it's good to know who you are getting into bed with prior to making any decisions.PRIVATE: Members Only
Posted by Anonymous on 2007-04-02
Tags: Preparation Targets
Your first investors in the angel round or Series A will set the tone for your business and all of your fundraising going forward in a big way. These investors will be your long-term partners in any future funding event, helping your company secure future rounds, or, in the worst case, sabotaging future rounds through indecision or desire for control. Members, read on...PRIVATE: Members Only (1833 Characters)
Posted by Anonymous on 2007-04-02
Tags: Preparation Strategy Trends
Venture capitalists tend to invest around trends in the various investment sectors that they cover, which makes sense from a capital concentration standpoint in a given sector. You may be pitching a business that is not related to the current trends, since the trends change every few months, but it is important to understand them. The partners and associates will be actively researching the trends, so a lot of the questions in a pitch meeting will be influenced by the current trends. Questions that may appear irrelevant to you as an entrepreneur may be influenced by the current sector trends. Be prepared.PRIVATE: Members Only (438 Characters)
Posted by Anonymous on 2008-08-02
Tags: Preparation Strategy Effort
As a CEO I make sure I periodically look back at my 'fuck ups' and learn from them. Theres been a few along the way, some small, a couple a little bigger, so I wanted to share one here.
Raising money took way longer than I expected. The search didn't take too long.. the deal completion tooks months and put enormous strain on our resources. Both financially as we bridged our way to funds and on our time and focus. Raising money is a major distraction from running your day to day business. I estimated 2 months to complete the deal. Its taken almost 5 and stretched us thin as well as pulled my attention away from what I am here for - building the business. I'm lucky, we raised money.. but now I get 80+ hour weeks making up lost ground in business development as well as the backlash of robbing Peter to pay Paul the past couple months.
Lesson: Assume 6 - 9 months to search, obtain and close funding and make sure you have both the financial and human resources to run and grow your business during the deal cycle.PRIVATE: Members Only
Posted by Mr. Smith on 2008-10-27
Tags: Preparation Materials
Having done over 150 investor pitches across five companies, a concise and well-organized deck is critical to success. No deck will be "perfect," but here is what I learned.
First, the deck should evolve as you meet with investors and evaluate their reaction to each slide, so use version numbers with the file to avoid confusion when sending the deck around. Next, avoid revealing confidential information, such as pending business deals or secret release features. Finally, make sure that each slide is very concise, using one line of text per bullet and no more than six bullets per slide. If possible, use graphics or a chart instead of text.
The whole deck should take 20 to 30 minutes to get through without questions, assuming that half of the meeting will be questions. The ten slides that you need, in my experience, are:
- 1. Vision: What are you trying to do, and why are you doing it"
2. Market: What is the market you are addressing and the estimated value of this market over the next 5 to 10 years"
3. Team: Who are the key three to five executives (Vision, Operations, Tech, Sales, Marketing), and what are their specific qualifications in the target market"
4. Offering: What is your exact offering" If possible, present a three to five minute pre-recorded video demonstration.
5. Roadmap: Where are you in your offering release cycle and with respect to gaining traction"
6. Deals: What are your major partnerships, relationships, etc." This slide should include various logos.
7. Differentiation: How are you different from your three main competitors" This slide should have a simple table.
8. Stats: What are the basic statistics of your company (Round, Investors, Employees, Location)"
9. Financials: What is your high-level projected P&L for the next two years plus the current and previous year, if available"
10. Capital: How much capital are you raising and what will it be used for"
This type of simple presentation has always worked for me. Please add any other ideas or lessons that have worked for you.PRIVATE: Members Only
Posted by MrJames on 2007-12-10
Aspiring entrepreneurs be warned. Venture capitalists will provide money for your idea, but they often walk away with most of the value, especially if you are not careful. Like an amateur sitting at a table of professionals, the cards are stacked against your success, so be prepared. Know the game.
Here are some anecdotal facts. There are five times as many people working in venture capital as there are CEO's that are funded each year (~16,500 vs ~3,000). The average venture funded CEO is fortunate to make 1/10th to 1/20th the return on exit as the venture capitalists. Just the legal fees on a later stage deal will run $50,000 or more per party involved, and the venture capitalists always flip the bill, directly or indirectly. Who do the lawyers work for again"
No matter how nice, no matter how fair, and no matter how genuine a venture capitalist appears, you are being out-smarted, out-lawyered, and out-maneuvered the second you sit down and ask for money. The first step in winning is to understand their motivations: (1) control, (2) risk, and (3) opportunity, in that order. Let's take a look at all three.
The entirety of a venture investment centers around control, and control takes many forms: control of the board, control of the voting, control of the investment capital, and, most importantly, control of the management. Venture capitalists are "control freaks," and the psychology of control is embedded in nearly every aspect of the deal legal structure. Assume that most financing terms, from Board meeting frequency to protective provisions have some origin in control, and analyze them as such. Ask yourself: in good times and in bad, how do these terms affect my behavior as a CEO" For example, did Google really need to have 14 Board meetings in one year... ever"
Venture capitalists are excellent at managing risk. It is assumed that at most venture investments fail, but approximately one in ten succeed. Following this simplistic logic, a venture capitalist would need to make at least $10 from every $1 invested in a success to recover from the 9 losses. Now, not every deal is a total loss, but a lot are. Complex protections are inevitably put in place. Let's look at a common scenario: a company receives $10 MM for 50% of the stock in a participating preferred with a 2x liquidation preference. The company sells for $25 MM right after the investment. How much does the founding team make" Nothing. The "50%" is legalese.
Venture capitalists are not very good at spotting opportunities, or they might have better odds than 1 in 10. However, they are very good at "managing" opportunities as a result. Here are some examples. Venture capitalists do not say "no" (for risk of losing an opportunity). They postpone meetings until you are achieving success, and they flock around markets with success stories. Ever wonder why a venture capitalist calls you out of the blue asking about your company" It's probably because a competitor is succeeding. Every wonder what "demonstrate traction" actually means" It means a nine figure IPO or liquidity event in your sector. Your dream is just potential, and you will be held on the sidelines until "the time is right" for the venture capitalists to make money.
The irony is that the venture capital behavior is largely a response to other abuses by CEO's. At this point, however, the venture capitalists have gone too far. The opportunities in building a venture funded start-up are gone for the great entrepreneurs. It simply makes more sense to go it alone.
You can quote me without attribution.PRIVATE: Members Only
Posted by Anonymous on 2007-12-05
I feel like I have been suckered into starting LLC's by law firms over and over again, and here is what happens every time: (1) it costs twice as much to get all of the papers done, (2) we start growing and need to layer in complex partnership concepts for the equivalent of employee options, (3) we have to convert to a C Corporation to take any real external financing, and (4) the conversion costs twice as much as you expect since you need to transform a convoluted partnership structure into an equity structure.
Using an LLC structure for a fast growing start-up seems like a trick play to generate ten or twenty times the legal fees. My next company is going to be a corporation, starting with an S corp for preferential tax treatment and migrating to a C corp when the business starts to scale. Any other thoughts on this strategy are welcomed in the feedback.PRIVATE: Members Only
Posted by Mr. Smith on 2008-05-13
Tags: Preparation Introductions Email
Almost every introduction to a venture capitalist is done through email, and most introductory emails are poorly crafted. The two most common mistakes are: (1) overwhelming a potential investor with too much irrelevant information or (2) avoiding any valuable company information and focusing on the pleasantries.
Companies would be much better served by including a standardized and brief paragraph that described the business in a way that a potential investor can digest quickly. Read on...PRIVATE: Members Only (1937 Characters)
Posted by Mr.Smith on 2008-01-24
Tags: Preparation Resources
The Funded has some excellent resources for a first-time fundraise. You need to dig a little, as not all of these posts have floated to the top. Members should agree with the good posts more so that they stick out! Also, you need to be a member to see the discussion, where a lot of the good pointers are.
Overview of Fundraising:
-- The Game of Innocence
-- Avoid An Llc For Vc
-- Venture Legal: A Conflict Of Interest And A Complicated Mess
Raising the Capital:
-- Practice In The Second Tier
-- Reduce Time By Going Online
-- Pick The First Investors Really Wisely
-- Don't Confuse Raising Money With Running Your Business
-- Keep Funding Prospects Informed Of Your Progress
Negotiating the Deal:
-- The Term Sheet Shuffle
-- How To Set Valuations
-- Need Advice: What Kind Of Valuation Can I Expect"
-- Kill The Participating Preferred
-- Avoid "Participating Preferred"
-- Avoid Exclusivity
-- Closing Costs
Posted by Anonymous on 2009-02-13
Tags: Preparation Angels Location
Posted by Anonymous on 2008-08-26
Tags: Preparation Work Habits
Posted by Anonymous on 2008-08-15
Tags: Preparation Lawyers
Posted by fnazeeri on 2008-06-20
Tags: Preparation Convertible Debt
I just posted this over on my blog [http://tinyurl.com/3n4wsz] but figured some folks might be interested here as well.
There are two scenarios where convertible debt is typically used: bridge financing and angel financing. I've raised convertible debt a few times and I have to say that in most angel funding scenarios it sucks as a way to finance a startup (I think it's okay for bridge funding, but I'd avoid that too if possible). Why"PRIVATE: Members Only (3971 Characters)
Posted by MedTech Expert on 2008-01-01
Tags: Preparation Experience
Many venture funds today "employ" people with little or no venture experience, much less actual in-the-trenches operating experience. Many newcomers are merely resource allocators and could function just as well in a mutual fund.
Take the time to seek out those partners who have real business experience and, if at all possible, venture experience. These people are jewels when faced with problems to be solved. Those without experience can freeze. They lack know-how in working through the tough issues and tend to become dysfunctional and a major distraction.
Don't let the newcomers gain their experience with your company as there may be big price you pay for their education.PRIVATE: Members Only
Posted by Anonymous on 2007-12-23
Tags: Preparation Lawyers
With the average venture closing costing more than $50,000 and with the bills being paid for all parties by the investors, there appears to be a conflict of interest. AND, there is. A number of my entrepreneur friends have commented how they feel under-represented when it comes to the many issues relating to a closing. A common complaint is that their lawyers cave on important yet small issues that come back to haunt them months or years later. So, what is actually going on"
First, it's important to keep in mind that any competent venture lawyer makes a lot more from venture capitalists than from any one company, especially in the early stages. If a venture lawyer really fought for your interests, they would risk being blackballed by VCs from doing other venture deals. Imagine a VC saying that will not work with your lawyer. What would you do" Fire them, of course. Hmmm. Second, there is always a rush to get the deal done these days after a cumbersome diligence process, which forces the company to compromise. Lastly, every point that you fight as a company costs you double, since the bill for everyone comes out of the fundraising proceeds. It's like losing a full time employee, a marketing campaign, and nicer offices to make the terms reasonable. Ouch!
The best you can do as an entrepreneur is to come to the table prepared with your eyes open, and this takes a decent amount of tedious research BEFORE you get your first terms. Terms that appear harmless on paper, like a mandatory cumulative dividend, can eat away at your returns as a founder and make your life much more complicated as you do later rounds. You need to know what the terms mean in good times and in bad, and you need to be prepared to lead the fight directly during the term sheet negotiation. Don't rely on your advisors, as that is a craps shoot.
Fortunately, there are resources to help. The best overview that I have found is a tediously long document by the law firm of Fenwick and West, outlining all of the terms, sample outcomes, historical data, and even sample term sheets. Here is a link to the 70-add page document:
For a quick primer, you can take a look at an article from VenutreHacks below:
It is far too common for entrepreneurs, whether they are seasoned or inexperienced, to get nailed by some unexpected term. It's the unbridled optimism that nails the seasoned guys, thinking that they can beat the 3x clearing for participation, for example. I certainly have been nailed. Does any other Members have some resources or opinions to share"PRIVATE: Members Only
Posted by Anonymous on 2007-09-11
Tags: Preparation Convertible Debt
I've had a few people recommend this as a viable (and even preferable) option for us. I know there have to be others out there who are looking for honest feedback as well.
Experienced entrepreneurs - post your thoughts (as comments) on whether its a good, a bad, or (as I suspect) a conditional thing.PRIVATE: Members Only (151 Characters)
Posted by J on 2008-09-14
Tags: Preparation Strategy Early Stage
Raising money for early stage companies has become more challenging. Traditional angels are more organized and difficult to reach. Most early stage venture funds have exited the field, and the remaining funds are (1) overwhelmed, (2) extremely focused, (3) incompetent, or (4) incubators.
Within this challenging environment, it is still possible to succeed if you know the "new" rules of the game. Here are some tips to consider with your early stage fundraising.
Structure: Almost all professional North American investments are made into Delaware C corporations. Lawyers greedily sell LLCs to charge you for conversion. If needed at inception of your fundraising, convert to a Delaware C corp structure with 2 to 5 million authorized shares to avoid closing friction.
Geography: Most angel and early stage investors focus on a strict investment region so that they can spend time with portfolio companies. Unless you are SERIOUSLY planning to move, don't bother to pitch a firm more than 100 miles away in the early stage. It's literally a waste of your time and theirs.
Traction: Every early stage investor will want to see traction before they invest, whether that is a prototype, a patent, or a committed team of experts. Gone are the days of funding a dream and a PowerPoint pitch. You alone are going to need to make the initial investment in your idea, committing both time and money to get your idea off the ground.
Relationship: Having a standing relationship with your early stage investors makes a big difference, so start attending regional entrepreneur networking events as soon as you have an idea. Don't wait until your idea is ready for prime time, as this is already too late.
Format: Avoid embarrassment by knowing about round types and raise amounts. A friends and family round is usually a purchase of common to get the company off of the ground, but can also be part of the angel round. Angel investors tend to participate in convertible debt or equity rounds that raise between $100K and $1.5 MM. Venture capitalists lead Series A rounds for $750K to $5 MM in preferred equity, sometimes more. The average Series A round varies widely by sector and geography.
Focus: More and more early stage investors are focusing, and they will rarely invest in competing businesses. This means that you should do your homework before pitching a fund. Just check their portfolio page to get a sense of what they are doing.
Pitfalls: Be very weary of convertible debt from venture funds, since, if that fund does not invest in future rounds, you will be completely unable to raise further capital. Avoid corporate venture firms, as these investors scare off other professional investors, since everyone will ask why the big parent corporation just doesn't buy you.PRIVATE: Members Only
Posted by MedTech Expert on 2008-03-02
Tags: Preparation Vision
Silicon Valley is where most everyone's goal is to be wildly successful in changing the world - creating a runaway success and being rewarded with a big payday. All know the odds, and the daily struggle of insatiable demands for the next big thing with the very least investment, and industry-wide contempt for those who have failed. Despite this, all are driven to grasp for the shiny brass ring that's always, though sometimes barely, out of reach. It is an environment of soaring hopes, crashing defeats, and maddening near-misses.
True out-of-box successes provide people in the business (both entrepreneurs and VCs) with a wonderfully rich smorgasbord of opportunities for bitterness, resentment, despair, and self-loathing. These successes go against the grain and were, early in their development cycle, disdained as not having the right stuff. They represent lost investment opportunities to those who passed (believing they were smarter than those who invested) and those who viewed them as non-threatening competitive businesses (believing a different view of the world). The same old dramas of love, fear, loss, anger, desire, ambition and envy are played out here.
In this business, there is no defined path for navigating the entrepreneurial career. Triumph and failure follow one another- in fact, feed one another - in a maddening erratic way. This is a notoriously fickle industry, where you can earn vast sums for a few years, then face a sudden and inexplicable loss of marketability, followed by a severe cash drought. Wondering whether to continue struggling against repeated rejections, chronic frustration, and financial hardship on the off chance of "making it," or else giving up and getting into something, anything more dependable - is the name of the game here.
Despite this, entrepreneurs never lose their yearning to change the world and be entrepreneurs. While they love the perceived freedom, they live in the constant state of self-consciousness (they may deny it), feeling their entire worth as a human being is being judged by people who are risk averse, lack vision, and not technically one's peers.
Fortunately for society, these talented people, once having tasted the wild nectar of forging a new path and trying to create a new world, find it almost impossible to quit the field, even when the odds are stacked against them.PRIVATE: Members Only
Posted by Anonymous on 2010-09-01
Tags: Preparation Founders Sources
Posted by Anonymous on 2009-01-13
Tags: Preparation Lawyers
Posted by Anonymous on 2008-02-05
Tags: Preparation Targets
Your current investors will often have different motives with a new financing round that you do, so be extremely careful. Maybe they want to get more equity at a good price. Maybe they have internal fund pressure to show portfolio growth with a higher valuation. Maybe they want to gain some more investor control to force a liquidity event. Many times, old investors will pressure a company to raise new capital, and almost always the motives of existing investors in a fundraise is not what they appear to be.
The best advice is to take the time to engage in a proper fundraising process, even if you have "insider interest." Most of all, do not accept an internal offer without at least trying to secure one or two additional external offers. Your existing investors can be counted on to help make some introductions to other funds, and you should encourage them to participate at their pro-rata allocation.
It's your job to get the best possible terms, and there is no question that you are better off with multiple interested parties bidding up the price, even when you are busy growing the business.PRIVATE: Members Only
Posted by Anonymous on 2007-10-06
Tags: Preparation Fund Diligence
Funds at venture firms are often designed with a narrow focus for both the returns and types of deals they need. On top of that, there is the usual hot areas of interest. Find out what is most interesting to the decision makers and find out not only what they have done by looking at their portfolio, find out what's in the works. Learn what are the reasons for the interest in the active deals. Just ask, they won't tell you the company name, but they'll tell you what is interesting to them in broad sweeps. That will help you see if you fit and also help you revise your pitch to better fit the mold. It also helps you understand what other firms will find interesting. It's copycat all over the place out there. Oh, and if you didn't notice, look for the next thing in clean tech, not in enterprise software or web2.0. Go where the interest is high and the deal competiton is low. Find the firms that get that and don't agree to a meeting until you have qualified them early. Build a target list of the best say 10 firms and figure out how to get introduced to a partner. Narrow focus your efforts and get in there. You should also split your list into two batches, maybe 5-10 in each one. This way if your model bombs in the first run, you still have a chance to clean it up and go again without having polluting your chances by broadcasting that you still haven't gotten funded. Go small and focused and target the exceptional firms and then get in to the key partners or not at all. The more you know about who is interested in your category and type of deal, the more you will know how to leverage one firm against another as you start to get traction. Get one of them to give you a term sheet and the rest will then jump in line to catch up. Then slow down and make careful decisions and your company success may well depend on what you do at that point.PRIVATE: Members Only