raising your first $1mm to $5mm a view from both sides of the table
TRANSCRIPT
My Path
Badge #244 for 7 years, 1st Ex Pat in Europe
Mentor was Vin Prothro - 31%, 30%, 15%….
Rod Canion advice on first 10 employees + conflict
Early Angie’s List - Funded by Austin Ventures, Fremont Ventures & Silicon Valley Bank. Sold to NYSE:OC
Private Client Investment Advisor with > $500mm AUM Mostly Alternative Assets like Venture, Hedge Funds
Makes business networking easier, raised $6.5mm fromView Capital, Kayne Anderson, Romano, Gore, Forehand…
Founder
The undertaking of a business enterprise with a complete, total,
utter lack of respect of the resources you currently control!
My Definition Of Entrepreneurship
Alternative Investment Industry @ 30,000 feet
Understanding The Fundraising Landscape - Let’s Start With The Money Sources
Asset Allocation - Drives 94% of returns
Alternative asset class - Venture is a very small subset
PE / Hedge Fund / Collectables
Fund of Funds (FoF)
Non Correlation
Yield
Investment Consultants / Cambridge Associates
David Swenson “Yale Model” Pioneering Portfolio Management
Pensions / Endowments / Sovereign Funds
Banker / iBanker
Denominator problem - post 2008
.5-5% Fee & 0-44% Carry (2&20 is common but still rich)
A Few Allocator Terms
More Terms
So, a GP takes OPM from LPs and charges a Management Fee to allocate to PCs after Calling funds for Seed/A/B/C+
rounds so they can generate an IPO or M&A Exit to take their Carry….then raise their next fund…
More Terms
So, a GP, takes OPM from LPs and charges a Management Fee to allocate to PCs after Calling funds for Seed/A/B/C+
rounds so they can generate an IPO or M&A Exit to take their Carry….then raise their next fund…
all so they can buy their 3rd vineyard!
B C D E
Venture StageBurning cash
Hit or Miss (VC)
Growth StageReinvesting cash
Premium value (IPO)
MatureExcess cash flow
Not growth or value
Fading WinnerCareful with cashValue play (LBOs)
Forced ChangeInsufficient cash
Deep discount (Vulture)
Cost of Capital
Retu
rn o
n In
vest
men
t
“Left-Side” “Right-Side”
An Investor’s Perspective of Company Life Cycles
A
B C D E
Venture StageBurning cash
Hit or Miss (VC)
Growth StageReinvesting cash
Premium value (IPO)
MatureExcess cash flow
Not growth or value
Fading WinnerCareful with cashValue play (LBOs)
Forced ChangeInsufficient cash
Deep discount (Vulture)
Cost of Capital
Retu
rn o
n In
vest
men
t Microsoft
Intel
Dell
Yahoo
Salesforce
“Left-Side” “Right-Side”
RadioShack
An Investor’s Perspective of Company Life Cycles
A
B C D E
Venture StageBurning cash
Hit or Miss (VC)
Growth StageReinvesting cash
Premium value (IPO)
MatureExcess cash flow
Not growth or value
Fading WinnerCareful with cashValue play (LBOs)
Forced ChangeInsufficient cash
Deep discount (Vulture)
Cost of Capital
Retu
rn o
n In
vest
men
t Microsoft
Intel
Dell
Yahoo
Salesforce
Equity market system set up to unlock the
value of Stage B growth stories
VCs exist to feed left-side demand
Market tends to be critical, even hostile to companies outside its Stage B sweet
spot
PEs exist to exploit right-side discounts and cash
flows
“Left-Side” “Right-Side”
RadioShack
An Investor’s Perspective of Company Life Cycles
A
Venture Capital Firm
(General Partner)
Limited Partners (Investors) (public pension funds, corporate pension funds, insurance companies, high net-worth individuals, family offices, endowments, foundations,
fund-of-funds, sovereign wealth funds, etc)
Ownership of the Fund
Fund / Investment Management
Investment Investment Investment
Venture Capital Fund (Limited Partnership)
The Fund’s ownership of the portfolio investments
Generic Venture Capital / PE Firm Structure
Barbell Market Forming
A Shrinking Market in the Middle
Large VCs Getting Larger
More Angels and Micro Funds
Raising Early Stage Funds @ 30,000 feet
Understanding The Fundraising Landscape - Now Let’s Spend Time On Entrepreneurs
Fiduciary ~Ship Captain
Traction - Speaks louder than words, it yells in fact Term sheet
Details are another presentation
Debt Secured debt Convertible debt
Equity Preferred Equity Common Equity
Founders Shares
Warrants
Option Pool / Vesting / Cliff
Sample Entrepreneur Terms
Fiduciary ~Ship Captain
Traction - Speaks louder than words, it yells in fact Term sheet
Not going to discuss term sheets in detail as that is another detailed presentation
Debt Secured debt Convertible debt
Equity Preferred Equity Common Equity
Founders Shares
Warrants
Option Pool / Vesting / Cliff
Sample Entrepreneur Terms
Capital Stack
Capitalization Table (Cap Table)
Accredited Investor $1mm, $200k / $300k (J.O.B.S Act will help here)
Due Diligence (DD)
LTV / CaC
Burn Rate
Fume Date
Sample Entrepreneur Terms
1) Vision of how the future > today
2) State a significant problem Pain killer > vitamin
3) How you solve that problem
4) How you will generate an unfair competitive advantage
5) Market opportunity Remember my Vin Prothro comment on 31%, 30%, 15%?
6) Qualifications of the team
7) Money needed & milestones to achieve
Use the “west coast fund raising offense” and focus your efforts on the
highest % investors. The others are typically a waste of time.
7 Things Before You Pitch
Make Sure You Understand These: 1) Technology risk
2) Product risk
3) Market Risk
4) Management risk
5) Scale risk
6) Capital risk
7) Exit risk
- What does the investor get for their money - What are the milestones to achieve with that money
7 Risks +2 Items Investors Look For
SEED STAGE:
Your own money (keep your burn low, consulting)
“ MCI Round”
Angels
MicroVC
FO = Family Office
MFO = Multi Family Office
Venture Fund (Be wary of Seed spread allocations)
Equity and Debt Crowdfunding (J.O.B.S Act)
Product based Crowdfunding (e.g. Kickstarter)
Gov programs, SBIC, SBA loans/grants DBE (disadvantaged business enterprise) Minority Owned, Veteran Owned, Service Disabled Veteran Owned
Options To Finance Your Business
“Venture capital is not the most risk-taking part of the equation. We VCs wait until things are more developed” says Wilson. “I trust angels I know and the early legwork and diligence they do. I don’t know where ‘lazy’ comes from. They’re probably the most important part of the capital stack because they believe in entrepreneurs before VCs do.”
– Fred Wilson
Importance Of Respected Angels
LATER STAGE = New Options
Later stage venture
PE / Growth equity firm
Hedge funds (relatively new and not always good for venture)
Investment banks (esp if they see a public exit)
Mutual funds (only for mega hits)
Royalty funds
Options To Finance Your Business
Worry Less About Valuation And More About Investor Fit
Business Goal = Sustainable Business Model + Exit
But Only Fools Focus On The Exit
Superior Execution = More Liquidity Options
.000006 chance to build a $1b in revenue business
Business Goal = Sustainable Business Model + Exit
But Only Fools Focus On The Exit
Superior Execution = More Liquidity Options
Self Harvest - What Great Family Dynasties Are Built On
Mergers & Acquisition “M&A”
Initial Public Offering “IPO”
SecondMarkets / SharesPost (now NASDAQ Private Market)
ESO Funds
“ReCap” (e.g. SurveyMonkey exit)
“Acquihire” = no bueno, but last alternative before wind down or “BK”
Right Exit Is What YOU Want For Your Business
Don’t ask for money until you’ve left your job Unless from mom and dad
Don’t get excited about a VC taking a meeting - it is their job Qualify them and don’t waste YOUR time
Introductions are critical, esp the right one Portfolio company CEOs make great introductions
Check your emotion when you see the Caller ID My approach to mentors vs. advisors
Hints, Not Rules
$500k is the old $5mm - part of MicroVC rise, AWS
NDAs - no real investor will sign one except for some corporates
Pro forma P&Ls
People who say they can help you raise money are generally WOTs
Hints, Not Rules
A Taxi Driver Can Have a Great Idea It Is Mostly About The Team, Market & Idea Execution
This team did pretty well
Questions to Ask Angels, FOs, MFOs
How many deals have you done in the last year? Market, stage, geography
3 Reasons why investing in highest risk stage Generally less for returns than other reasons
Call CEOs of 3 deals that went south on them Did they flee the foxhole or keep fighting
How involved or uninvolved do you want to be?
How can you help me the most?
Sample Qualification Questions to Avoid Dr No
Questions to Ask Funds
How many deals have you done in the last year? Market, stage, geography
How do you pitch your LPs on your unique value? Why will you add more value to my business than the other funds? What vintage fund is it + how much is left for new investments? How carry is allocated? Equal % among GPs or Not?
Helps you understand who’s really on your team Call CEOs of 3 deals that went south on them
Did they flee the foxhole or keep reasonably fighting
Sample Qualification Questions to Avoid Dr No
1. A Great One-LinerThink of it as your elevator pitch… in one sentence.It’s a hybrid of:
- Your product / vision - Your company purpose- A starting point for the pitch
Common framework: “We are X for Y”* *assuming X is attractive and Y is a big enough opportunity!
2. Know Your Audience
Before crafting a pitch deck, understand:- Who you are meeting with?- What is the investor’s and the firm’s focus?- Are there related investments?- How much time do you have?
These influence your deck, the discussion and likely questions you’ll be asked.
3. 10-15 Slides
The deck is important... But the conversation is more important.Budget your time accordingly. Allow for discussion alongside each slide.
10-15 slides. Max. Will provide suggested structure later in deck
4. Beware the Demo
For early stage companies, it’s all about product.And the best mark of product is market validation.Demos are great… but remember these four rules:
1. Be careful of time.2. Don’t get lost in product.3. Have backup if (when!) something goes wrong.4. Give even weight to product & traction / data.
5. Expect the Deck to be Shared
Whether you like it or not (!),your deck will be shared (i.e. among partnership).Goal: be equally compelling with/without voiceover.
How?- deck should tell its own story.- do *not* rely on builds, intricate slides.- make the file size manageable for email.- PDF or secure URL are great alternatives to PPT.
When raising private equity (VC), always remember a VC is a political animal trapped inside a limited partnership.
- On a hot streak or a cold streak - Always wanting to be the one to find the next big deal - Always worried they’ll be embarrassed in partner meeting
Mitigate that risk for them and they will work on being your sponsor
It takes an average of 21 months for established entrepreneurs to secure VC funding compared to 37 months for first-timers
Always Remember The Politics
Fred Wilson of Union Square Ventures http://avc.com/
Mark Suster http://www.bothsidesofthetable.com/
Brad Feld http://www.feld.com/
Bill Gurley http://abovethecrowd.com/
Ben Horowitz http://www.bhorowitz.com/ (The Hard Thing about Hard Things)
First Round Review http://firstround.com/review/
Naval & Babak from AngelList http://venturehacks.com/
Steve Blank, Lean StartUp http://steveblank.com/
Eric Reis, Lean StartUp http://www.startuplessonslearned.com/
Blogs to Read and Learn Much More
Want This Deck Or Access To My Evernote Advice Folder?
follow me on Twitter@leeblaylock
& email me at [email protected]