Download - How To Raise Your First Round of Capital
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Mastering the VC Game:How to Raise Your First Round of Capital
Jeffrey BussgangFlybridge Capital Partners, General PartnerHarvard Business School, Senior Lecturer
April 3, 2012
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General Partner at Flybridge Capital Partners, early-stage VC firm based in Boston and NYC40+ active portfolio companies, Fund III: $280M, 5 GPs
Senior Lecturer at HBS – Launching Tech Ventures
Former entrepreneurCofounder Upromise (acq’d by SallieMae),
VP at Open Market (IPO ‘96)
Author: Mastering the VC Game Blog: SeeingBothSides.com HBS ’95, Harvard ‘91
Context For My Perspective
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Goals For Today’s Session
As an entrepreneur, I found venture capital to be a black box
As a VC, I now see the other side and wanted to help entrepreneurs understand how to finance and build great companies
Today’s mission: to demystify the VC/angel world for entrepreneurs
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Why Raise Money from VC?
Deep Pockets:High risk tolerance and additional funding for follow-on rounds
Swing Big:VCs don’t invest in niches, they invest in transformative ideas that can build large companies
Experience Matters:VCs have “seen the movie” over and over again and can help avoid pitfalls to find the path to success
Value-Add:VCs provide domain experience, industry contacts, and strategic planning
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VCs vs. Angels
Will want some control (voting, board, veto)
Will want to own 20-30%
Very actively engaged (they get paid to do this!)
Can add tremendous value and be great business partners
Can be total disasters
Typically rational actors, commercially-driven, but if inexperienced…
Will want no control (“send me an annual email”)
Will want to own 1-10%
Maybe engaged or not (often a hobby, sometimes a personal mission)
Can add tremendous value and be great business partners
Can be total disasters
Typically rational, but if unsophisticated: naïve irrational, emotional
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Scope out the firm – size matters, as does the individual
Arrange for a warm introduction
Prepare, be brief (VCs Blink)
Don’t downplay risk Mutual due diligence
is fair play
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Raising $ from VCs: Find the Sweet Spot
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Most VCs and Angels have ADD – operate on “BLINK” instincts Want to SEE everything, but DO very, very few
deals Make their decision within the first 10-15 minutes
Typical VC and angel will invest in one out of every 300-500 deals they see Long odds – you need to really stand out Like college applicants – triage quickly
Context About VCs and Angels
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Ideas are a dime a dozen Having a world-class team is golden Laser focus of the young entrepreneur is very
powerful E.g., Bill Gates, Michael Dell, and Mark
Zuckerberg
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The Right People: an Unfair Advantage
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Investor’s Decision Tree
Worth 3 minutes(email, phone)?
Worth 30 minutes(phone, in person)?
Worth 60-90 minutes(in person)?
Worth 2nd mtg(in person)?
Ignore
Pass gracefully
Pass but stayIn touch
Serious due diligencePass but be helpful
No
No
No
No
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Top 3 Things To Do
Be gracious and personable Say something that makes you smile…authentically Tell your personal history, tell a story
Be crisp and on point Personal intro should take < 5 minutes Team introduction 10 minutes Make it relevant – don’t go off on tangents If you can’t show good summarization skills,
how will you handle a board room?
Know your stuff They will push you to test you John Doerr/Upromise case study
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Top 3 Things To Avoid
Do not exaggerate Assume everything you say will be verified in due diligence Assume the listener is a cynic and a professional BS detector
There’s no “I” in team If you are self-aggrandizing, investors will assume you can’t
build teams
Do not name drop No one is going to be impressed
with who you know unless
the relationships are both real
and relevant.
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Typical Investment Criteria
Tangible things investors like to see: Very big market (> $500m) Unfair advantage (why you? why now?) Attractive business model (recurring, high gross margin) Unique technology or business model approach
Intangible things investors like to see: “Pied Piper” – an ability to recruit and retain a great team,
partners Interpersonal chemistry Movie, not a snapshot
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So You’ve Had a Good Meeting…Then What?
Treat fundraising like a sales process – build a pipeline, work people through the pipeline, build up to crescendo
VCs get distracted – typically only pursue 2-3 high priority new investment opportunities at any given time
Stay connected, top of mind, build a sense of momentum Need to sell the individual “champion”, then the help
them sell the partnership Address objections with specific data
Make the investment case for them Give them tools/materials to share with their partners
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Then, Expect More Due Diligence
Customers / partners Team Technology Business model Market size / analysts
As with sales, package up the information, make it easy on the VC – provide reference list, financial models, detailed market size analysis – all in readable form
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Term Sheet TimeFrequently Asked Questions…
Should I include VCs in my first round or just angels? How big should the option pool be? How should I think about valuation?
“Promote” definition - http://bit.ly/8NpdM Should I do a convertible note with a cap, no cap or a
priced round? How should I think about control?
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Expectations and Milestones
Have well-documented milestones that represent what you expect to achieve during the initial funding period Team building Technical progress/product development Customers, revenue Budget
Talk to the investor about the next round before you close this round Expectations, amount, price
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What Is Market?
Rough Numbers (vary slightly by coast and sector): Seed: $500k-$2m raise on $3-5m pre-money (or cap) Series A: $3-6m raise on $6-10m pre-money Series B: $8-12m raise on $15-20m pre-money
Option pool: 10-20% The smaller the pool, the more confidence in the
founding team Do an “option pool budget” to determine the right pool
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Source: Dow Jones VentureSource
2002 2003 2004 2005 2006 2007 2008 2009 2010 1H11 $-
$10
$20
$30
$40
$50
$60
$70
Later Stage Second Round First Round Seed Round
Med
ian
Prem
oney
Val
uatio
n ($
M)
LATER STAGE VALUATIONS ARE INCREASING, WHILE EARLY STAGE
REMAINS CONSISTENT
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Who’s Ready to Raise Money?
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Mastering the VC Game:How to Raise Your First Round of Capital
Jeffrey BussgangFlybridge Capital Partners, General PartnerHarvard Business School, Senior Lecturer
April 3, 2012
[email protected] @bussgang