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TheFunded.com is an online community of over 20,000 CEOs, Founders and entrepreneurs to discuss fundraising, rate and review angel investors and venture capitalists, and discuss strategies to grow a startup business. Enjoy the site, and be sure to join us at our Founder Showcase events to meet the community.

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84
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Reverse Diligence: Research Your New Boardmember(S)

TheFunded.com Advice

Posted by Anonymous on 2007-04-02

Tags: Preparation Due Diligence Board

PUBLIC:

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

19
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0
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Value of VC's with No Entrepreneurial Background

TheFunded.com Discussion

Posted by Anonymous on 2008-11-03

Tags: Funding Sources Experience

16
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0
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Suggestion: the Funded Should Filter Based on Recent Fundings

TheFunded.com Discussion

Posted by Anonymous on 2009-01-30

Tags: TheFunded.com Fund Diligence

13
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0
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Avoid if Possible

TheFunded.com Discussion

Posted by Anonymous on 2008-12-07

Tags: Venture Business

13
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3
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The Game of Innocence

TheFunded.com Advice

Posted by MrJames on 2007-12-10

Tags: Preparation Strategy Venture Business

PUBLIC:

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.

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12
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Confidentiality and Business Plans

TheFunded.com Advice

Posted by MedTech Expert on 2008-01-01

Tags: Pitching Busines Plan Confidentiality

PUBLIC:

Do not count on an NDA to keep your business plan out of the hands of those you would least like to see it. Early in my venture career, I believed, falsely, that this would inhibit VCs from sharing the plan. I learned the truth later, when I ran a VC funded company. My investors and those who wanted to ingratiate themselves to me would send confidential material they received directly to me for review. Some times it was to help advise them on certain technologies, and at other times, it was to provide a heads-up on competitive technologies.

Just assume that whatever you write/present will end up with someone (including large corporations) that you would least like to see it. You are better off posting it on Internet!

PRIVATE: Members Only

11
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The Limited Partner Shuffle: It Affects You...

TheFunded.com Advice

Posted by Mr. Smith on 2008-12-02

Tags: Venture Business Limited Partners

PUBLIC:

Investors in venture funds, called limited partners, are pulling out or selling their commitments to provide essential capital to the venture model, causing the "Limited Partner Shuffle." Some experts are quoted as saying as much as 10% of all private equity positions will change hands this year in hasty transactions to generate liquidity, including premium positions by top-tier institutions like Harvard. See below:

http://www.bloomberg.com/apps/news"pid=newsarchive&sid=azBqn85_aRXE

What does this mean and why is it relevant to entrepreneurs" A quick overview of venture capital will help to answer these questions.

Venture firms raise money to invest from limited partners (LPs), who are normally endowments, pension funds, insurance companies, and other institutions that manage large amounts of capital. An investment in venture capital is considered a high risk asset class with the potential for high returns. The professional consulting firms that publish guidelines for how limited partners should allocate money across asset classes generally recommend that a small portion go into venture capital, sometimes less than 1%. This small percentage still amounts to many billions of dollars per year being entrusted to venture firms by limited partners, who control trillions of dollars.

Generally speaking, a commitment to invest in a venture fund does not require the limited partner to transfer money until the venture firm makes an investment in a portfolio company. So, a $100 MM venture fund does not have $100 MM sitting in the bank. Instead, as venture firms make successive investments, they collect money from their limited partners and distribute that money to portfolio companies in rounds. To cover operating expenses, the venture firms separately collect approximately 2% of the invested capital as a management fee.

In order to ensure that each limited partner honors their obligation to provide money when needed, which is referred to as a capital call, venture funds implement onerous terms for forfeit or default. The most common default protection is to wipe out any returns from all previous invested capital. This encourages an active secondary market for limited partner positions, since it makes more sense to sell a commitment than to lose the value of the money invested to date.

Fast forward to Q4 2008, and you have the perfect storm of venture capital destruction. First, a relatively large number of limited partners, such as AIG and Lehman Brothers, are facing solvency issues, and they can no longer honor any capital calls to venture capital funds. The large scale dissolution of limited partners is something new.

Second, as the equity and debt markets have collapsed, the allocation of limited partners to venture capital has increased as a percentage. If an LP has $1 billion under management and 1%, or $10 MM, committed to venture capital and if that $1 billion suddenly becomes $500 MM, the allocation schedule of 1% stipulates that the LP now only invest $5 MM into venture capital. Many LPs have charters that strictly govern these percentages, forcing the LP to sell commitments in the secondary market to comply.

Third, many potential buyers in the secondary market have liquidity issues of their own. The purchase of a commitment requires resources to buy the asset, resources to pay for future capital calls, and resources to cover management fees at a time where the future is uncertain. The lack of liquidity and uncertainty has caused a collapse in the secondary market values, with many commitments selling for $.50 on the invested dollar or less. This in turn has encouraged limited partners that might otherwise commit to new positions in venture funds to consider purchasing discounted positions in existing funds.

Lastly, venture capital returns have been hard hit by the downturn, reducing or eliminating the ability of certain funds to get back any of the original invested capital. Portfolio company acquisitions are on hold, and the IPO market is frozen. For many limited partners, investing more money into certain venture firms is literally throwing good money after bad when cash is king.

Most venture firms worldwide are facing problems as a result of this "Limited Partner Shuffle." The best firms are distracted by helping limited partners transfer commitments. Other firms will cease making investments for some period of time, possibly forever. Still other firms will not be able to collect their management fees and go under in the next fews months. Nearly everyone will be fundraising and spending a lot less time with their portfolio companies.

Many entrepreneurs are now pitching firms without a future, wasting invaluable time. These "Walking Dead Funds" are going through the motions until the other shoe drops, forcing them out of business. Other entrepreneurs are counting on investments or participation from funds that have no ability to deliver any capital. Lastly, there are entrepreneurs with soon-to-be-insolvent firms that hold controlling preferred equity positions and Board seats, leaving a potentially deadly vacancy in governance and voting control. How do you sell when your primary shareholder is no longer around to grant approval"

As an entrepreneur in today's market, you need to understand the relative health of the investors that you deal with. Start by asking them directly about their financial resources and the state of their limited partners. Don't hesitate to ask other entrepreneurs and other funds as well. You future may depend on having good information about the solvency of investors that you deal with.

[Please reprint any or all of this post. Entrepreneurs need to know.]

PRIVATE: Members Only

11
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Avoid an Llc for VC

TheFunded.com Advice

Posted by Anonymous on 2007-12-05

Tags: Preparation Corporate Structure Lawyers

PUBLIC:

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

10
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1
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Remember to Have a Social Life...

TheFunded.com Advice

Posted by RichieBlueEyes on 2007-12-16

Tags: Operations Socialization Work Habits

PUBLIC:

This post isn't meant so much to learn about investors but is key to starting a company and attempting to not destroy your current relationships and your company in the process. Yes, I'm aware I'm posting this at 12:37AM on a Saturday night (I suppose I have no life so my advice here take as you wish :) ... well, in my defense my gf is sleeping beside me.

But most of us crazy entrepreneurs, myself included tend to get tunnel vision, tune out the world and forget about family and friends and hyper focus while we are in the honeymoon period with our idea (according to my GF, i'm in a relationship with my macbook more than with her - to be honest I'm not sure why she stuck by me during my last venture but that's a story for a beer, not here). So while in the honeymoon period, try to take 15 minutes a day out and kiss your gf, your wife, your mother, your dog, call a friend, LEAVE YOUR LAPTOP and go for a walk and attempt to have a semblance of a life. I'm still struggling with this issue myself but if you're a first time entrepreneur especially, make sure you have an outlet, a hobby, a hookup buddy, anything to leave your computer alone. No, a girl across the country on AIM doesn't count nor does poking random girls on facebook.

One great way to kill a company (and i've done this) is by being so focused on it, you can't see the writing on the walls where there are issues and they blow up when they didn't have too. Too much work hurts more than helps. Life is about balance.

With that said, i think all entrepreneurs (including myself) need shrinks. Now, I've been saying this for a while but I haven't gone to see one so I suppose it's far harder to do than suggest. I do need one, ya know, the frequent highs/low, tunnel vision, ADHD etc...

Maybe attached to term sheets should come a prescription for Ritalin and a weekly appointment with a shrink" (just kidding...or am i" :)

Goodnight folks.

Richie

PRIVATE: Members Only

9
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Notes From Trying to Raise a Series A

TheFunded.com Discussion

Posted by Anonymous on 2009-06-12

Tags: Venture Business VC Shrink Angels

9
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1
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Say No to Giving Your Tax Dollars to VC's and Angels

TheFunded.com Discussion

Posted by Anonymous on 2009-04-21

Tags: Venture Business Early Stage Economy Government

9
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0
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The Collapse of the VC Ecosystem & What It Will Look Like Post Recovery

TheFunded.com Advice

Posted by fnazeeri on 2009-03-08

Tags: Venture Business Crisis

PUBLIC:

I wrote this post on how the VC market is imploding which is not news to anyone on TheFunded, but I tried to take it a step further and talk about what it will look like post recovery. I read a great post on Seth Godin's blog about how everyone talks about the "crisis in our face" but not the "crisis in the distance." Anyway, here's a crack...let me know what you think.

PRIVATE: Members Only

9
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"Venture Capitalists Make Sheep Look Like Independent Thinkers"

TheFunded.com Discussion

Posted by Anonymous on 2009-01-22

Tags: Venture Business Trends Private Equity

9
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0
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Sucker Bet

TheFunded.com Advice

Posted by Anonymous on 2008-06-12

Tags: Venture Business Events Advisor

PRIVATE: Members Only (1766 Characters)

8
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0
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Is the VC Model Broken or Its Execution?

TheFunded.com Discussion

Posted by Anonymous on 2009-12-06

Tags: Funding Sources Model VC

8
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2
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The Obama Administration Has It All Wrong

TheFunded.com Discussion

Posted by Anonymous on 2009-03-06

Tags: Venture Business Economy Crisis

8
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0
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A Fundraising Survival Guide

TheFunded.com Discussion

Posted by Anonymous on 2008-08-09

Tags: Venture Business Resources

8
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0
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The Roulette Wheel of VC Funding

TheFunded.com Advice

Posted by Mr. Smith on 2008-03-14

Tags: Venture Business

PUBLIC:

As a funded CEO and as a careful observer of the venture market, it looks to me like a giant game of Roulette. When a new game begins, venture capitalists throw large sums of money at start-ups in a particular industry, just like throwing chips on numbers across a Roulette table. When the wheel starts spinning and the little white ball is rolling, more and more money gets thrown across companies in the chosen industry, until the table is brimming with chips and the dealer calls "no more bets." The ball lands, bouncing around for suspense, and the winners are called. As the table is cleared and a new game starts, a new industry is chosen, sometimes related and sometimes not.

This bizarre financing phenomenon makes some sense. Flooding an industry, like social networking or Web 2.0, with money helps raise industry awareness. Invested capital gets spread around between firms in an industry through licensing and other strategic deals. Venture partners learn the ropes as industry know-how and events emerge. And, covering the entire market with investments ensures that the one big winner will be venture backed. Having that winner in a VC portfolio makes up for all of the bigtime losses that the VC has racked up over the years, too.

I wonder who kickstarts the industry selection...

(You can quote me without atrribution.)

PRIVATE: Members Only

8
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Angel Groups

TheFunded.com Advice

Posted by Anonymous on 2007-11-09

Tags: Funding Sources Angels

PUBLIC:

Just reading a post about having many shareholders as a result of pitching angel groups, and it got me thinking about my own experiences. In my last company, we had two separate angel groups invested with a total of nearly 50 shareholders between the two, some shareholders with just a $25,000 total stake. This presented a tremendous headache when trying to secure shareholder approval for future rounds or a the ultimate merger. Read on for some advice.

PRIVATE: Members Only (746 Characters)

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The Funniest VC Presentation Ever

TheFunded.com Discussion

Posted by Anonymous on 2009-03-22

Tags: Venture Business Presentation

7
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0
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Funding Innovation: Hit the Reset Button

TheFunded.com Open Letter

Posted by The Founding Member on 2008-12-14

PUBLIC:

On Sunday, December 14th, the following presentation was delivered in Tel Aviv to 150 CEOs and VCs during the Globes "Israel Business Conference." It talks about the need to reset back to the fundamental partnership between the entrepreneur and capital in the current economic crisis. Enjoy!

7
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Proof that VC's Don't Add Value

TheFunded.com Discussion

Posted by Anonymous on 2008-12-07

Tags: Venture Business

7
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3
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Just Get Through 2009

TheFunded.com Advice

Posted by Anonymous on 2008-12-04

Tags: Operations Crisis Burn Rate

PUBLIC:

I'm fundraising right now and it is absolutely brutal. I want to to tell all entrepreneurs, "Fight through this. You can raise capital." But that isn't true. You may not be able to raise capital until 2010 no matter how good your product or company is. It is not a reflection of you, just the external factors that are largely out of your control.

Survive until 2010 and position your company to take off as the next economic cycle does. These things always come back. While it is bad now, it will eventually get better. The Wall Street guys will get tired of losing money and companies will start hiring again.

I hope I am wrong. (Boy, do I hope I'm wrong.) Maybe Obama will follow through on his plan to eliminate capital gains tax on investments to startups. That would help us immensely. But I have heard nothing about that since it was mentioned during the campaign.

PRIVATE: Members Only

7
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"Rodney Dangerfield" Syndrome: Sometimes Not Much Respect

TheFunded.com Discussion

Posted by Anonymous on 2008-08-26

Tags: Preparation Work Habits

7
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3
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5 Reasons Convertible Debt Sucks

TheFunded.com Advice

Posted by fnazeeri on 2008-06-20

Tags: Preparation Convertible Debt

PUBLIC:

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)