Posted by Mr. Smith on 2008-10-08
Tags: Venture Business Crisis
Posted by TDZach on 2008-10-17
Tags: Preparation Lawyers
Posted by J on 2008-09-14
Tags: Preparation Strategy Early Stage
Raising money for early stage companies has become more challenging. Traditional angels are more organized and difficult to reach. Most early stage venture funds have exited the field, and the remaining funds are (1) overwhelmed, (2) extremely focused, (3) incompetent, or (4) incubators.
Within this challenging environment, it is still possible to succeed if you know the "new" rules of the game. Here are some tips to consider with your early stage fundraising.
Structure: Almost all professional North American investments are made into Delaware C corporations. Lawyers greedily sell LLCs to charge you for conversion. If needed at inception of your fundraising, convert to a Delaware C corp structure with 2 to 5 million authorized shares to avoid closing friction.
Geography: Most angel and early stage investors focus on a strict investment region so that they can spend time with portfolio companies. Unless you are SERIOUSLY planning to move, don't bother to pitch a firm more than 100 miles away in the early stage. It's literally a waste of your time and theirs.
Traction: Every early stage investor will want to see traction before they invest, whether that is a prototype, a patent, or a committed team of experts. Gone are the days of funding a dream and a PowerPoint pitch. You alone are going to need to make the initial investment in your idea, committing both time and money to get your idea off the ground.
Relationship: Having a standing relationship with your early stage investors makes a big difference, so start attending regional entrepreneur networking events as soon as you have an idea. Don't wait until your idea is ready for prime time, as this is already too late.
Format: Avoid embarrassment by knowing about round types and raise amounts. A friends and family round is usually a purchase of common to get the company off of the ground, but can also be part of the angel round. Angel investors tend to participate in convertible debt or equity rounds that raise between $100K and $1.5 MM. Venture capitalists lead Series A rounds for $750K to $5 MM in preferred equity, sometimes more. The average Series A round varies widely by sector and geography.
Focus: More and more early stage investors are focusing, and they will rarely invest in competing businesses. This means that you should do your homework before pitching a fund. Just check their portfolio page to get a sense of what they are doing.
Pitfalls: Be very weary of convertible debt from venture funds, since, if that fund does not invest in future rounds, you will be completely unable to raise further capital. Avoid corporate venture firms, as these investors scare off other professional investors, since everyone will ask why the big parent corporation just doesn't buy you.PRIVATE: Members Only
Posted by J on 2008-09-13
Tags: Venture Business Angels AngelsSoft
I have been trying to pitch organized angel groups, more and more of whom are using Angelsoft. When I contact someone from the group, I normally get a response to put my deal into the Angelsoft system, which also apparently powers www.open-deals.com.
The problem is that nobody responds:
I have been an angel investor in the past, and it has always been more about coaching and personal relationships. It's not about scrutinizing a young financial model that arrives through email to evaluate hypothetical returns. It is about helping an entrepreneur to realize those hypothetical returns by sharing experiences and providing some capital.
With Angelsoft, all of the personal aspects of angel investing seem to be removed from the equation. My materials are submitted through Angelsoft forms, and then disappear into some system that encourages a group of busy angels evaluate the opportunity in a black box. Do they like it" Do they hate it" Do they even read it" I have no idea, since I have never heard anything!
My advice is for angel groups try to find a way to interact with the entrepreneurs that pitch, and entrepreneurs should try to get in front of angels if they really want to close a deal...PRIVATE: Members Only
Posted by J on 2008-09-13
Many entrepreneurs send a long introductory email and attach a ton of information when contacting an investor for the first time. There is the infamous multi-paragraph email and the 30+ slide PowerPoint that includes information on the vision, strategy, technology, and financials. Sometimes there is also the executive summary and even a full business plan.
The reality is "less is more." If you can say three words and get to the next meeting, then you have succeeded. Send just enough information on the business in the body of an email to get to the next encounter. Here are some reasons why:
Relationship: Investors want to get to know the people involved as much as they want to know the business details, so most investors want to have a few interactions before making any decision. It's very rare to close a financing in one meeting and even less likely after one email. Your goal should always be to get to the next encounter.
Mistakes: Providing too much information gives ample opportunity for a professional investor to find mistakes in your work. An active investor will see dozens, if not hundreds, of deals in one month, so it's likely that you have less perfect information than they do. Don't be judged too early on by perfectly reasonable mistakes caused by your lack of information.
Trash: Given the large volume of dealflow that professional investors are seeing, professional investors are likely to look at simple deals first, coming back to deals with a lot of clutter and materials later on. If you overload your initial email, it may be either (1) thrown immediately in the trash or (2) dumped on a junior associate "to process."
Confidentiality: Your initial materials, even your initial email itself, will likely end up with a competitor and certainly with another investor. Investor confidentiality is correlated (1) the length and (2) the strength of your relationship with that investor. Even in cases of an excellent relationship that has survived over time, confidential information still manages to leak.PRIVATE: Members Only
Posted by Anonymous on 2008-09-07
By diligently negotiating the cap on investor legal fees, you will dramatically accelerate both the diligence and the closing timeline. Most investors will easily agree to a cap of $25,000 to $50,000, and you can be sure that all of this money (and time) get chewed through on both sides. Factoring in your own legal costs, you could be looking at a $50,000 to $100,000 deal that takes between two and four months to close.
However, negotiate hard when you get a term sheet to cap the investor legal expenses at $10,000. With fees at this level, all of the work needs to go into drafting documents versus negotiating detailed terms. The lawyers themselves will feel pressure to close faster, rather than work endlessly to reach the agreed cap level. All in all, you will be looking at a cleaner deal that closes in two weeks to one month.PRIVATE: Members Only
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)