Posted by Mr. Smith on 2008-09-03
It is one of the single greatest things in fundraising to get a quick "no" from an investor. The prolonged "maybe" is a far worse alternative. Yet, after receiving a quick "no," most CEOs tend to either (1) argue their point ad nauseam or (2) disappear without a trace. Both of these are the wrong course of action.
Before going into what to do, there is such a thing as getting a "no" too quickly. If you 10 minutes into your presentation and an investor says "no," then there is a bigger problem. The problem is probably with your pitch itself, as any investor would not even book a meeting unless there was some basic interest in the idea. In the case of a "no" that comes too quickly, it is really important to try and learn what you did wrong by asking a lot of questions, such as "could you understand me clearly," "was my presentation bad," "did you understand the market opportunity," "did you understand the offering," etc.
For the cases where the quick "no" comes after a couple email exchanges, a call, and maybe a meeting, the best outcome is to:
(1) get some advice on how to improve the presentation / business,
(2) ask for advice on other investors to speak with, and
(3) secure a time to get back in touch and report on progress.
Keep in mind that there is no such thing as a permanent "no" in venture capital, so you always want to leave the door open. Arguing your points or walking away cold will close the potential for future engagement with an investor. When you get the "no," send an email like the following:
"Thank you for taking the time to learn about XYZ Company. We would appreciate any quick thoughts on how to improve our pitch.
We are going to continue executing against our plan over the next couple of months. Let me know if you would like an update on our progress. Also, do you know of any other investors that might be interested in our space" I hope that we will have an opportunity to work together in the future."PRIVATE: Members Only
Posted by fnazeeri on 2008-09-02
Tags: Funding Sources Angels AngelsSoft
This service launched today....I heard about it last week from the company (which was reaching out to bloggers in advance of the launch). While I haven't used the service (and I'm in no way affiliated with the company) it sounds pretty interesting. The company (AngelSoft) has been around for 4-ish years and provides a software solution for about 400 angel networks representing about 10K HNWI. The software is used to manage deal flow, diligence, funding and exit. Now they've launched an addition where entrepreneurs can "insert" their deal into the pipeline.
You can read more here http://www.altgate.com/blog/2008/09/p... including a video overview/demo.PRIVATE: Members Only (331 Characters)
Posted by 4Technology on 2008-08-31
Itâ€™s pretty rare when an investor gives you a second look, so weâ€™re calling our venture debt round with Velocity a real success in todayâ€™s market. It certainly points out there are very specific conditions under which lenders will embrace your technology and help drive it forward. Once you figure those out, the path to funding gets much clearer.
Relationships count. What began as a project to find a venture debt partner for our company turned into an equity round due to often valuable partnerships; and opened the door for a subsequent venture debt round. Having an existing intercreditor agreement with senior lenders also makes a big difference. Again, relationships matter.
Believe it. Jan, JP and Joe at Velocity Financial clealy made the difference. From our first call through extensive due diligence and all the legal docs, it was their belief in our technology that made them feel like part of the team. From the senior due diligence team to the guy getting the paperwork that last mile, these guys make it happen.PRIVATE: Members Only
Posted by fnazeeri on 2008-08-18
Tags: Negotiation Pressure
I saw a question on TF about negotiating w/ VCs which prompted me to write this blog post yesterday.
So you have just finished months of grueling investor presentations and due diligence and finally one (or hopefully more) VCs have signaled their interest in negotiating the terms of an investment in your startup. This interest may be in the form of an actual term sheet that they've sent to you or a call/meeting/email indicating they would like to make an offer but want to talk about terms before shooting something over the transom.
First, congratulations, you are now in a *very* select group of startups. Having been on both sides of the table, here is my list of tips for entrepreneurs negotiating with VCs:
[Full article is here: http://www.altgate.com/blog/2008/08/1...]PRIVATE: Members Only (7720 Characters)
Posted by Anonymous on 2008-08-16
Tags: Operations Public Relations
Can anyone recommend a very high performing but low-priced PR firm" Our budget for the PR firm itself is about $5,000 per month. We need someone with a specialty focus on Consumer Products and Retail.
We're closing our Series A now and our products are just about to hit retail shelves. Suggestions are very much appreciated!PRIVATE: Members Only
Posted by Anonymous on 2008-08-15
Tags: Closing Compensation Founders
I am about to close on a $4M Series A in the NYC area and am trying to understand how much equity founders typically retain after the round. I have founded the company with one other person and we split our duties equally. (CTO/CEO) Since then we have brought on several other engineers. Thanks for any input.PRIVATE: Members Only
Posted by Anonymous on 2008-08-02
Tags: Preparation Strategy Effort
As a CEO I make sure I periodically look back at my 'fuck ups' and learn from them. Theres been a few along the way, some small, a couple a little bigger, so I wanted to share one here.
Raising money took way longer than I expected. The search didn't take too long.. the deal completion tooks months and put enormous strain on our resources. Both financially as we bridged our way to funds and on our time and focus. Raising money is a major distraction from running your day to day business. I estimated 2 months to complete the deal. Its taken almost 5 and stretched us thin as well as pulled my attention away from what I am here for - building the business. I'm lucky, we raised money.. but now I get 80+ hour weeks making up lost ground in business development as well as the backlash of robbing Peter to pay Paul the past couple months.
Lesson: Assume 6 - 9 months to search, obtain and close funding and make sure you have both the financial and human resources to run and grow your business during the deal cycle.PRIVATE: Members Only
Posted by Anonymous on 2008-07-29
Tags: Preparation Developers
After chasing VC's and Angels for about 18 months with no success, I found a way to launch my Company without either. Its called Purchase Order Financing or contract financing and it fits our Business Model perfectly. We offer a high margin consumer product sold through retail chain stores such as Lowes, Ace , etc. Thinking I needed a 1MM advertising budget to launch the product, I beat every bush twice trying to interest a VC or angel group and although I came close, I never got a term sheet.
Enter my now co-founder and VP Sales/Marketing with deep experience selling to chains who told me all we needed was some package advertrising and store displays. He met with some of his associates at a hardware convention and made some new contacts and within a week we had a nation-wide rep sales force. He also told me many former companies he had worked for often financed production of new products by using finace firms that specialize in contract financing (google Purchase Order Fianancing). They pay suppliers directly and as soon as you ship the goods the deal converts to a straight factoring situation and they send you a check for the difference between what you owe them and what you sold the goods for. We plan to use this option within the next 3 months.
Its a little expensive of course - 3%/month, but when your done, your done! No term sheets, no lawyers, no interest bearing notes, no new board members, etc. And when it comes time to give yourselves a bonus, guess what" Nobody to tell you haw much its got to be.
As luck would have it, we now have an angel group doing due diligence! I expect this is our Plan B but, in any case we can negotiate much better terms than we could have without the contract financing option that I have informed the angels we are also pursuing .
If your plan includes a short (90 day) delivery on a contract with a credit worthy customer, look at this possibility.
Posted by Mr. Smith on 2008-07-27
Tags: Closing Governance
A lot of CEOs get busy right after closing an investment, leaving Independent Board seats unfilled. It is in the best interest of investors to wait and fill the Independent seats, as the investors get time to evaluate the company performance and nominate loyalists with relevant skills while the CEO is too busy to resist. Meanwhile, it is in the best interest of CEO to fill Independent seats right away with a highly qualified industry expert that will support the Company first and foremost.
Many new and experienced CEOs let the governance slip and make small compromises in governance "to get the deal done" or "get the problem off of your plate." From experience, these compromises WILL come back to haunt you. As many as two thirds of all start-up CEOs get replaced, and this process starts with the governance.
The most substantial job of a Board is to fire and recruit the CEO. A seasoned investor with control of an independent seat will orchestrate a management switch faster than you can blink an eye if the results are disappointing. Here are three things that every funded CEO should be doing: (see private)PRIVATE: Members Only (616 Characters)
Posted by Mr. Smith on 2008-07-27
A lot of new entrepreneurs start pitching venture capitalists or angel groups and rejected over and over again, myself included. Entrepreneurs hear the same criticisms across dozens of meetings, which is discouraging. In some cases, you may even have second thoughts about your business, but, before you reconsider your model, consider what is going on.
First, investors use the same critical reasoning for different businesses in related industries as a way of saying "no" politely. For example, with online advertising businesses, your site is not sticky enough. With subscription business, conversion will be too low.
Second, investors are not operational or modeling experts, so their opinion on your business is worth as much as you pay for it: $0. They are experts at convincing entrepreneurs to give them a large portion of a company and the control for the least amount of money.
Third, investors say "no" many times per day, so they are very good at doing it without revealing the real reasoning. Reasoning rarely has anything to do with a model, but it usually has to do with (a) partner personality matches, (b) firm investment focus, (c) other investments by the firm, (d) sector heat, and (e) control.
In general, a new entrepreneur pitching a business should expect to hear "no" between 30 and 60 times before receiving investment. Each "no" meeting can be an opportunity to get closer to a "yes" by learning which aspects of your pitch generate the confusion, resistance, and questions. With each additional meeting, your pitch should get shorter and better. Don't give up. Be Strong in the face of "Trained Skeptics."PRIVATE: Members Only
Posted by fnazeeri on 2008-06-24
Tags: Venture Business Humor
Posted by fnazeeri on 2008-06-20
Tags: Preparation Convertible Debt
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)
Posted by MikeGlanz on 2008-06-18
Tags: TheFunded.com Connect
For those of you who are experimenting with the new "Connect" feature on TheFunded... I have put together a few recommendations that might make your life a little easier and/or answer some questions you may have...
Login to view the recommendations (in the private sections)
To see my final result view:
Feel free to post all the criticism you can muster up - it'll only make me stronger!PRIVATE: Members Only (1885 Characters)
Posted by chimala on 2008-06-18
Tags: Operations Founders Equity
You probably heard of this concept - founders of VC funded startups contribute some of their stock to a 'fund' and thereby share the risk/reward. This kinda works like an insurance in case your startup goes to the dead pool.
The question is, as a startup entrepreneur, would you be in favor of such a proposal"PRIVATE: Members Only
Posted by level on 2008-06-13
Tags: Venture Business
The gist - A bill was passed by the House that would decrease the number of SBIR's, increase the amounts, and change the definition of small business to include companies with a majority VC and/or University ownership. The Senate wants to rework the Bill - several senators think it went way overboard in pandering to the VC lobby.
Some concerns for entrepreneurs (from the Bill as passed in the House) are potential loss of leverage with VC's at the very early stages, potential disenfranchisement of Academic inventors, competition from VC owned firms squeezing out SBIR bootstrapping.
Some of my comments on the bill follow in private.
Excerpted. Complete newsletter (and archives) by following link at bottom.
HOUSE SBIR REAUTHORIZATION BILL GETS "COOL" RECEPTION IN THE SENATE
... Case in point is H.R. 5819, the House's version of SBIR Reauthorization. Most of the Senate "players" we heard from, on both sides of the aisle, agree that the House went overboard on their bill and consequently it is a non-starter. ...
The Senate Committee on Small Business and Entrepreneurship (SBE) led by its chair, John Kerry [D-MA], and ranking member Olympia Snowe [R-ME], give the impression that there is little hope for a bicameral solution via H.R. 5819, and thus discussions are underway in the Senate for a more workable bill.
... The House leadership refused to even utter the "C" word (Compromise), preferring to concentrate on what some call the "CW" phrase (Corporate Welfare for VCs). The VC push was so strong that at least one representative was stabbed in the back by someone in their own party!
(also some useful SBIR reaources)
Posted by Anonymous on 2008-06-12
Tags: Venture Business Events Advisor
Posted by rocketscientist on 2008-06-03
I might be missing something but the search function seaches only for firms. I can only wonder if my question has been asked beforePRIVATE: Members Only
Posted by fnazeeri on 2008-05-26
Tags: Operations Venture Debt
I always thought it was crazy for early stage companies to take on venture debt. Here's a company that just raised $5MM of venture capital, is burning $300K per month and they think it's smart to raise debt"!" I admit that my view is colored by my one experience raising venture debt in 1999 which did not end well (for anyone). So recently, I decided to take a look at venture debt and talked to about a dozen lenders, quite a few startups and some other industry experts. To my surprise, I found that in some cases, it does make sense.
First, a bit about venture lenders. Various estimates put the number of firms that have serious venture lending businesses at 20-30 in the US. My take is that there are three categories of lenders: (1) banks, (2) dedicated funds with "stable capital" and (3) dedicated funds without "stable capital." By stable capital, I mean a fund that raises capital from limited partners similar to a venture capital fund. The capital is committed for a specific period of time (like 5 or 7 years or more). Bank-backed venture lenders are regulated and tend to invest in less risky areas (like capital equipment or receivables financing). Dedicated funds tend to be more aggressive and invest in "growth capital" (more on this later). The permanency of capital is an important factor as this can have an impact on the borrowers stability of capital and the willingness of a lender to work with the borrower should the company hit a rough patch.
For startups, there are three main types of venture debt: (1) equipment financing, (2) receivables factoring and (3) growth capital. There are other types of borrowing (e.g. acquisition financing, but I'm focusing on these three categories for now). Equipment financing is borrowing tied to a specific capex purchase, e.g. building out a NOC. Receivables financing is useful for companies that have material A/R against which they can usually borrow as much as 80-85%. Growth capital (also referred to as "stretch equity") has availability tied to venture metrics and is useful when the startup can use the extra capital to reach specific business benchmarks beyond those achievable with equity financing alone and that will provide a material step up in valuation (or insurance that they meet those already committed to).
Some key terms/rules-of-thumb for venture debt include:
* Availability: A/R factoring - up to 85% of receivables; equipment financing - up to 100% of specific capex; and growth capital - up to the cumulative amount of capital invested by the lead investor (minus any other debt).
* Repayment: 3 to 12 month interest only period followed by up to 36 month interest plus amortized principal period (i.e. up to 48 months).
* Rates: For working capital financing, a good rate would be prime +1% and for growth capital, a good rate would be prime +3%.
* Warrants: Expect 6-12% warrant coverage on growth capital. That means take 6-12% of the loan principal and convert that into an at-the-money warrant to purchase an amount of shares at the price of the last equity round.
* Covenants: With growth capital, you can avoid them (including a "MAC" clause), however, most working capital loans will have them.
The process for raising venture debt is straight forward. The borrower will require some material (which you probably already have from raising your last equity round) including:
* Powerpoint pitch deck
* Financials since inception
* Current cap table
* Board approved forecast
* 1-hour meeting with the CEO to get the "pitch"
After reviewing the materials and the initial meeting above, a lender will issue / negotiate a term sheet. Once accepted, that will be followed by a half-day diligence meeting with the management team, legal documentation and closing. The whole process typically takes 4-6 weeks from term sheet to close.
So in terms of who to borrow from, my assessment is that banks will offer the best price but on the least favorable terms. The dedicated funds will offer the most flexibility, but will cost more. Consequently, I'd go to banks for equipment or receivables financing, but to the dedicated funds for growth capital. If you think you'll need both (i.e. both equipment/receivables financing as well as growth capital), I'd go to the dedicated funds for growth capital first and then work w/ banks to get additional financing later.PRIVATE: Members Only (3302 Characters)
Posted by fnazeeri on 2008-05-21
Tags: Negotiation Terms Dividends
Somehow when you see that little clause on the term sheet about an 8% dividend for the preferred shares, it doesn't seem that big of a deal at the time. But to put it in perspective, let's take a typical "success" story and see how that dividend affects the deal.
Imagine a scenario where a startup raises $14.5MM in 4 rounds (seed plus A, B and C) and that each round has the 8% compounding dividend paid on exit. Further, let's imagine the company sells for $75MM. Here's the cash flow:
[Once again, a table doesn't format here. Does anyone know how to insert a table using Textile or something similar" In the meantime you can go to http://www.altgate.com/ to see the table.]PRIVATE: Members Only (465 Characters)
Posted by The Founding Member on 2008-05-17
Tags: TheFunded.com Recommendations
TheFunded.com has compiled Member advice and discussions on how to write a venture firm review. There are six major themes:
Add further insights on writing a good fund review in the Feedback, below. Enjoy!PRIVATE: Members Only
Posted by fnazeeri on 2008-05-14
Liquidation preferences are a key term in the definition of preferred stock (it's generally acknowledged to be the second most important economic term). Earlier, I wrote about this and other terms in a post on negotiating a term sheet, but here I want to give some specific examples to illustrate why this is such an important term.
You probably already know this, but it's worth repeating that liquidation preference refers to the procedure for paying investors off in a sale or winding up of the company. It typically includes two components: a preference (which is an amount that gets paid before others) and participation (the ability to "double dip"). Many folks have written on preferences in terms of definitions, so instead I'm going to give some simple examples.
For simplicity sake, imagine a VC has $10MM invested in one class of preferred stock in a company, owns 40% and the company is sold for $50MM. Hereâ€™s how the three different scenarios in my previous post work (in a specific example):PRIVATE: Members Only (2424 Characters)
Posted by fnazeeri on 2008-05-13
Tags: Closing Due Diligence
You just signed a term sheet for your first round of venture capital. Congratulations! Now what"
While every fund has their own process and each deal works a bit differently, what you can expect between signing a term sheet and closing the round (to which I refer in aggregate as "diligence") basically falls into four buckets:
(1) Confirmatory due diligence. What this means is the investor is switching gears from "why should I do this deal"" mode to "why shouldn't I do this deal"" mode. There is a pretty standard set of items the investor will request. You can go to my blog and download the generic diligence request list that Softbank uses (http://tinyurl.com/4t5nud). Depending upon the stage of the company, there are usually a 100+ documents that need to be collected and delivered. I'm a big fan of using Microsoft Sharepoint to manage document delivery. In fact, I recommend using it to deliver documents from the beginning of the fund raising process. For example, when a VC asks for your "financial model" you should point them to Sharepoint instead of emailing the file. One benefit is you can check who's accessed the file and you can turn off access if they pass. For $40 per month you can buy a hosted version of Sharepoint.
(2) Syndication. For many deals, particularly the first institutional round, the full amount of the raise won't be spoken for. For example, if the raise is $8MM, the lead investor might be committed to $4-5MM. Syndication is the process of finding one or more additional investors to complete the round. If you had the good fortune of receiving multiple term sheets to begin with (and assuming you like one of the others) the easiest way to complete the syndicate is to invite those folks to participate on your newly signed term sheet. Failing that, you should reach out to the firms with whom you got close, but not all the way. The expectation is that the entrepreneur leads and directs the syndication process. The good news is that having a signed term sheet (hopefully from a reputable firm) makes it a lot easier than getting the term sheet to begin with.
(3) Documentation. Generating about 2-inches of legal agreements codifying the investment. Usually company counsel will take the lead on drafting documents; although it's not unheard of for the lead investor to do the first draft. You should ask that the syndicate use one law firm, but if they insist on each using there own, plan on the process taking a week or two longer than it would otherwise.
(4) Closing. Signing the paperwork and wiring the money. Yeah! It used to be that closings were held in person at some attorney's office (at least that was my experience early in my career) but today that almost never happens. The closing is usually held over a couple of days after everything has been agreed and then they sign and fax their signature pages to company counsel. Depending upon how many signatures, it can take a few days to complete.PRIVATE: Members Only (739 Characters)
Posted by msjane on 2008-05-13
Tags: Negotiation Disclosure
Many posts have brought up the risk involved in disclosure of ideas to possible investors. It's implied in most of these posts that the writer feels they have a property of some kind that is unique and vulnerable to duplication if news of its existence gets out.
A tempering argument against uniqueness is at
Mal Gladwell cites a sobering argument against eponymy, i.e., naming scientific advances after one person. It seems as if great ideas, are in fact, 10 cents for twelve.
Even though Gladwell argues that his -- and others'-- analysis won't hold up in the realm of "art" I can say that in personal experience, commonality still turns up.
Some time ago, a hotshot literary agent discovered my "notes" on an otherwise OK screenplay had enabled them to close a million dollar "spec" sale. He thought I was Rumplestiltskin and started shoveling (1500+) circulating scripts at me.
Alas, only 10 were worth any work at all. One writer alone was willing to go back and do some more work. What did turn up though, were clusters of themes. Cupid makes Venus a bet about making two unlikely mortals fall in love. A homeless person becomes wealthy. Etc. There were several groups. None of the writers knew each other.
So, protecting one's property is critical -- up to a point. Odds are, others are at work on something very, very similar.
Greed minus fear = deal.
Be prudent but get funded.
Posted by Mr. Smith on 2008-05-13
Tags: Preparation Introductions Email
Almost every introduction to a venture capitalist is done through email, and most introductory emails are poorly crafted. The two most common mistakes are: (1) overwhelming a potential investor with too much irrelevant information or (2) avoiding any valuable company information and focusing on the pleasantries.
Companies would be much better served by including a standardized and brief paragraph that described the business in a way that a potential investor can digest quickly. Read on...PRIVATE: Members Only (1937 Characters)
Posted by fnazeeri on 2008-05-12
Tags: Negotiation Terms
By the time I was in the 9th grade, I had been playing chess for a few years (as in I knew the rules) but I didn't play seriously and more often than not I lost. Then one day at the library (remember, pre-internet) I happened to find a book on chess. So I read the book and almost overnight I became one of the chess "stars" in high school. In one of the funnier incidents, I started playing chess during lunch hour and was "hustling" money which on one occasion resulted in a kid pulling a knife on me after I relieved him of a few bucks. True story.
What was it in that book that allowed me to take advantage of the situation" Well, there was a lot of basic stuff, some general rules and even some strategy, however, the most useful bit of information, initially, was a table on the relative value of pieces. You know, a pawn is worth 1, a knight/bishop 3, rook 5, a queen 9 and the king "infinite" unless it's the endgame then it's more like a 4. Experienced players have a "feel" for this from many games played and they can also break the "rules" by, for example, sacrificing a queen for a rook to get better position. But these are all things learned from experience and best not tried by a novice. If you are new to the game, you have no idea. When you are starting out, having some rules of thumb can make all the difference between winning and getting hustled.
What does this have to do with negotiating term sheets" Well, I think a lot of newbies get hustled when negotiating term sheets because they don't know the relative importance of the various terms. Have you heard the joke about the VC who says, "I'll let you pick the pre money valuation if I get to pick the terms"" My goal here is to provide a framework that gives relative value of various terms on a term sheet and allows you to compare them on two dimensions: economics and control (or as my friend Noam Wasserman likes to say, "rich" versus "king"). In the same way that a chess grand master doesn't need rules of thumb from someone else, if you're a seasoned negotiator of term sheets then this is probably equally useless. And no, this is not based on any academic or scientific study. It's based on my own experience and, more importantly, that of a few other experts like Dave Kimelberg (Softbank's GC).
In my view there are 12 important terms on a typical Series A / B term sheet. Yes there are other terms and yes sometimes they are important, but if you go with the thesis of keep it simple, then 12 is the magic number. In terms of rating, the rich/king differentiation is important as different people are after different things so depending upon your motivation you may be inclined to pay more attention to one column than the other. So without further adieu, below is a table showing them as well as the relative importance:
[Sadly I couldn't get the table to format here. You can see the matrix on my blog at http://www.altgate.com/]
Here a 10 means it is really important to get as favorable a result as possible on this term, a 1 means it is not so important and a "-" means it doesn't apply (i.e. a zero). The cool thing about having something like this is you can use it as a tool to compare term sheets (provided you can determine how favorable or unfavorable each individual term is...more on that below).
The next part of this post is to provide a range of typical results for each term which will give you a means to rank each term in each term sheet with a "1,3 or 5" where 1 is "unfavorable", 3 is "fair" and 5 is "favorable." If you aren't already familiar with the terms in a term sheet, you should check out the model term sheet (basically a template) put together by the National Venture Capital Association. They have other model agreements too, but you will see with the term sheet that they include various options, some discussed here. Below is a scale for each of the 12 key terms across the two dimensions:PRIVATE: Members Only (7217 Characters)