Later-stage rounds and “setting the bar too high” I recently had a number of conversations with CEOs of later-stage startups (generating significant revenue) that went something like this. They want to raise more money, and VCs are offering them money at a high valuation. The CEO is worried that taking money at that valuation will “set the bar too high” and make it difficult to sell the company – if the time comes when he/she thinks it makes sense to sell – at a price that isn’t a significant multiple of that valuation.
These CEOs are worrying too much. VCs know what they are doing and almost always invest with a financial instrument – preferred shares – that protects them even when the valuation is very high. Preferred shares behave like a stock on the upside and a bond on the downside. Here is what the payout function looks like for common stock (for example, what you get when you buy stocks in public markets): And here is what the payout function looks like for preferred shares: Will investors be thrilled with scenario 2? How To Reply to Angel Investor Intro Emails. I have had a lot of entrepreneurs ask me for introductions to various investors. In some cases the entrepreneurs use their reply to the intro email as a mechanism to gain social proof, emphasize urgency, and to reduce the friction to meeting the investor and closing their round (see e.g.
VentureHacks for great tips). Unfortunately, a lot of otherwise savvy entrepreneurs don't follow up with investors well. You have to remember that every thing you do can signal to an investor a lack of urgency/interest in your company, the fact that you are taking your startup casually, desperation, or a lack of ability to follow through. Also, if you don't create urgency or a sense that the investor may miss out on something interesting, then the angel may drag their feet in meeting with you, extending the time of your fundraise.
This post is focused on the small tactics that go a long way upon receiving an introduction. Example Of a Bad Reply To An Investor Intro "Thanks Ivan Introducer for the intro!
Chris dixon's blog / Notes on raising seed financing. Last night I taught a class via Skillshare (disclosure: Founder Collective is an investor) about how to raise a seed round. After a long day I wasn’t particularly looking forward to it, but it turned out to be a lot of fun and I stayed well past the scheduled end time. I think it worked well because the audience was full of people actually starting companies, and they came well prepared (they were all avid readers of tech blogs and had seemed to have done a lot of research). I sketched some notes for the class which I’m posting below. I’ve written ad nauseum on this blog (see contents page) about venture financing so hadn’t planned to blog more on the topic. 1. 2. 3. 4. By far the biggest influence on investors’ opinions of a startup is the opinion of other investors. 5. Make sure you have good Google results (this is your first impression in tech). 6. 6. 7. 8. 9.
Have a short slide deck, not a business plan. 10. 11. 12. Why Startups Should Raise Money at the Top End of Normal. Editor’s Note: This is a guest post by Mark Suster (@msuster), a 2x entrepreneur, now VC at GRP Partners. Read more about Suster at his Startup Blog, BothSidesoftheTable. I have conversations with entrepreneurs and other VCs on a daily basis about fund raising, the prices of deals, how much companies should raise, etc. I’ve stopped talking about this as much publicly because it’s such a heated, emotional topic where the points-of-view are strictly subjective and for which the answers will only be revealed in the future.
I’ve decided to take all of my private points-of-view on the topic and make them public in a keynote speech at the Founder Showcase in San Francisco on June 15th. I thought I’d post on one of the topics beforehand. Huh? Here’s what I mean. Every day shareholders vote on the value of the company by buying or selling shares. Private markets for stocks are the opposite. There is no great science to it. There is no such thing as a uniform price. Here’s the problem. Nat Turner (Thoughts on best ways to manage a VC round) We spent too much time raising money at Invite. Raising money when running a startup is extremely distracting, because every minute you’re fundraising you’re not working on your product. Sometimes I like to think about what else we could have done at Invite if we didn’t spend probably a third of our company’s lifespan fundraising, either full-time or part-time. However, the flip-side is that if you’re building a startup there’s a pretty damn good chance that you’re going to need to raise money.
So, this post is dedicated to how you as the entrepreneur can best manage the fundraising process in order to accomplish two things: (1) get what you want, and (2) get it as quickly as possible. Know what you want before you start the process. I hope this helps.
(4) Startups: How to Communicate Traction... by Brendan Baker. Best practices for raising a VC round. Having raised a number of VC rounds personally and observed many more as an investor or friend, I’ve come to think there are a set of dominant best practices that entrepreneurs should follow. 1. Valuation: Come up with what minimum valuation you’d be happy with but never share that number with any investor. If the number is too low, you’ve set a low ceiling. If your number is too high, you scare people off.
Just like on eBay, you only get to your desired price by starting lower and getting a competitive process going. When people ask about price, simply tell them your last round post-money valuation and talk about the progress you’ve made since then. 2. 3. 4. 5. 6. 7. 8. 9. 10. 365 Days, $10 Million, 3 Rounds, 2 Companies, All With 5 Magic Slides. Editor’s note: The following is a guest post by Socialcast founder Tim Young detailing how he raised 3 rounds totaling $10M in VC money in a year’s time with a 5-slide deck. This was originally published at “Knowledge Is Social.” “I have a short five-slide deck to share that provides a solid framework for understanding our business.”
Since moving to San Francisco a little over a year ago, I have spent every day helping to build Socialcast and about.me. During this time, I have raised more than $10 million combined over 3 funding rounds for both Socialcast and about.me. Convincing venture capitalists to invest in two startups in less than 365 days was a challenging task, but one that quickly taught me the dos and don’ts of raising money. Here is an overview of the unique lessons I learned during the fundraising process, mostly focused on the initial meeting, which is the most crucial as you are introducing your company and vision for the first time. Understanding an investor’s perspective.
Questions VCs Will Ask You. The Four Main Things that Investors Look for in a Startup. I obviously don’t speak for all investors. But in my experience as an entrepreneur and now spending my time amongst investors I can generalize that almost all VC investments in early stage technology & Internet investments come down to just four key factors. And they’re easy to remember because they all begin with an M: management, market, money and above all else momentum. This post was prompted by an email exchange I had with a young entrepreneur.
It’s a conversation that creeps up from time-to-time. This person had been introduced to me several times by angels and I was told that I’d be the perfect seed investor. I was interested in learning more. So I wrote to the entrepreneur and said, “Congrats. I do understand. I understand. Not everybody agrees that entrepreneurs should take investor meetings outside of “funding season” when they’re raising capital. But if you identify investors with whom you’d like to work here’s my advice: 1. 2. 3. 4. BUT WAIT? Investors invest in The Big Mo.
StartupCFO: Tricky 1st meeting questions. StartupCFO: Know your numbers. Let's just add in a little virality. It happens all the time. I’m meeting with an entrepreneur, who is telling me about a really innovative product idea for a consumer website. And I’m liking it. We’re going back and forth on product ideas. And before I know it, we’re approaching the end of our meeting. I then ask them, “So, how are you going to acquire customers.” The most disappointing answer is when they say “Oh, we’ll just make it viral.” Virality is something that has to be engineered from the beginning…and it’s harder to create virality than it is to create a good product. That’s why First Round Capital’s website has always said: “Too many companies treat marketing and sales as a tactical afterthought. Customer acquisition (also called distribution) is the number one challenge facing consumer web properties.
Save Your Spin for Someone Who Cares. Handling PR with VCs I recently got a phone call from an entrepreneur whom I respect and who runs a company that I hope will do great things one day. He had pitched me in the past and I told him that for a variety of reasons his company was too early stage for me, but that I would happily keep track of their progress. He started the call by telling me he had exciting news. He was about to be featured in a major US news magazine as one of their “hot” picks. I don’t think that’s what he was expecting. Press doesn’t mean anything other than free advertising. Our call recovered and we spent the rest of the time talking about the development of their management team and their product. 1. In another post I’ll talk about how PR has changed dramatically in the past 10 years or you can just read Brian Solis’s blog or buy his book on the subject. 2. Many entrepreneurs have a PR page in the PowerPoint deck. PR is subtle. When the page comes up say, End. 3.
Negotiating a Better Series A Deal. Sim Simeonov11/12/09 [Updated 11/18/09, see below] This post is about how to get a better deal from VCs investing in your first round of financing. It is also about how to make the deal into a win-win. The idea for the post came from an exchange with @bakespace about some of the resources for entrepreneurs on FastIgnite. This is About Series A Deals Seed investments can be all over the map in terms of size ($50K – $1M+), structure (convertible debt or common/preferred equity), valuation, and investor rights.
It’s hard to make generalizations about seed deals. First-money-in Series A deals, on the other hand, tend to be much more cookie-cutter. . • Not much has been raised previously—at most a few hundred thousands and ideally nothing. • The product has not been (fully) built. • The size of the round is at least $3M but preferably larger. • You are talking to professional VCs with funds > $100M. What is Your Startup Worth? This is a question entrepreneurs think a lot about. 1. 2. 3. 4. 5. Venture Capital and Technology : A VC. Eliminate Ranges From Your Negotiating Vocabulary. I was fortunate that two of my early mentors were master dealmakers. They had different styles and approaches so I learned an incredible amount from each of them. Before I met them I’d never made an investment, acquired a company, or sold a company.
In the past 17 years since I met them, I’ve done a ton of each. React to the following: “We’d like to buy your company for between $35m and $50m.” That means $50m to you, right? Or ponder “We’d like to invest between $5m and $7m at a valuation of between $10m and $15m.” Or what do you think when someone says “about $10m” instead of “between $9m and $11m”? Given the extensive negotiation theory that exists, I’ve never understood why people talk in ranges when they are proposing a deal.
Now, let’s translate this into something useful for the entrepreneur raising money. So, before tossing out a range in any negotiation, think again about the starting position you are trying to establish. Retro: My Favorite Blog Post on Raising VC. On December 2nd, 2006 I wrote the blog post published later in this post when I was CEO of startup Koral about my experiences in pitching VCs. After my company was acquired by Salesforce.com I was asked to stop blogging and they took over my blog as an asset in the sale of the company.
My blog was wiped out. I am very grateful to my friend Zoli Erdos for finding this retro posting for me at web.archive.org. I had kept a personal blog for more than a year and was new at keeping a professional blog. I had previously raised VC in 1999, 2000, 2001 and 2005. But we also had some negative experiences, too. I decided to write about my experience and to be blunt. On December 3rd Brad Feld wrote a one paragraph blog post titled “Raising Venture Capital” in which he linked to my blog. It became a huge kerfuffle with many VC partners writing to thank me for the post, which exposed those that gave their industry a bad name. The Original Post: Venture Capital, By Mark Suster (December 2nd, 2006) 3. 4. Choose Your VC Investor Carefully.
Beware of VC Seagulls, who shit on you and then fly away (or worse yet leave you with Red Herrings) This is part of my ongoing series Startup Advice. I write this post as a warning to pick your VC’s carefully. I like to say to first-time entrepreneurs, picking a VC is more permanent than marriage. If you pick the wrong spouse at least you can get divorced. Keeping a blog has been great because so many entrepreneurs have written me with questions about their companies and I’ve gotten to know many of you personally through the process.
In these many exchanges similar questions crop up. One theme that I always get is, “I’ve gotten an offer from a VC, but they want me to do X, what do you think?” For example, a recent phone call I had with a young entrepreneur straight out of one of the most prestigious engineering schools in America he asked, “I have an offer for $400,000 in seed money but the VC wants me to agree now to bring in a new CEO.” There are many great VCs. Gus has been amazing. What’s the right amount of seed money to raise? cdixon.org – chr. Short answer: enough to get your startup to an accretive milestone plus some fudge factor. “Accretive milestone” is a fancy way of saying getting your company to a point at which you can raise money at a higher valuation. As a rule of thumb, I would say a successful Series A is one where good VCs invest at a pre-money that is at least twice the post-money of the seed round.
So if for your seed round you raised $1M at $2M pre ($3M post-money valuation), for the Series A you should be shooting for a minimum of $6M pre (but hopefully you’ll get significantly higher). The worst thing a seed-stage company can do is raise too little money and only reach part way to a milestone. Pitching new investors in that case is very hard; often the only way keep the company alive is to get the existing investors to reinvest at the last round valuation (“reopen the last round”). How do you determine what an accretive milestone is? Now to the “fudge factor.” Making a great business plan pitch | Startable - Healy Jones' & Pitch tips for meetings with venture capitalists | Startable - H. A VC’s Advice On How To Pitch VCs. Inside the venture capital process - Viewsflow. Focus on your share price, not your valuation.
Getting a higher seed round valuation | Startable - Healy Jones' 5 New Year’s resolutions for startups closing deals in 2010 - Ve. Five ways to generate momentum in your venture or angel round | How much money should we raise? How do we set the valuation for a seed round? FSI. Size markets using narratives, not numbers cdixon.org – chris di. Narratives Over Numbers. @GeeknRolla: European start-ups seeking US investment – is it wo. A Guide to Using Authority & Social Proof in Fund Raising. How VC's Value Early Stage Companies - robgo.org. Not getting screwed. Is Strategic Money an Oxymoron? Inside versus outside financings: the nightclub effect cdixon.or.