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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 LecturerApril 3, 2012
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
3
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
8
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
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
04/09/10 9
Raising $ from VCs: Find the Sweet Spot
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
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
1004/09/10 10
The Right People: an Unfair Advantage
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
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
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.
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
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
13
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
14
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?
15
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
16
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
Later Stage Valuations Are Increasing, While Early Stage Remains Consistent
Who’s Ready to Raise Money?
Mastering the VC Game:How to Raise Your First Round of Capital
Jeffrey BussgangFlybridge Capital Partners, General PartnerHarvard Business School, Senior LecturerApril 3, 2012
Jeff@flybridge.com @bussgang
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