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Open Letters

This section is for entrepreneurs and investors with a Certified Profile to post Open Letters about how to improve the fundraising process. Postings should discuss the terms, the treatment, the model, and the practices of venture financings. Here is your chance to share your views on how to make the fundraising process better.

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Start Ups Don't Start

TheFunded.com Open Letter

Posted by carlwimm on 2009-11-09

PUBLIC:

Another article, this time on the Financial times. They expressly don't permit posts ot the web, using cut and paste AND they are subscription so, let me paraphrase

Start-up delays
By Jonathan Moules, enterprise correspondent
Published: November 9 2009

More than half of young people who believe they have a business idea have taken no action to put their plan into practice.

Research suggests entrepreneurial activity is held up by a lack of advice

A great portion of the young people survey population actually had an idea. They gave two reasons for not proceeding.

Of the 56% who do nothing, many said they were waiting for the recession to end.

Half said they were not provided with enough information on self-employment.

Summary
1) Looks like the Founder's institute has a lot of work to do.

2) Looks to me that the socialist idea to overtax the productive and then rechannel the funds into "targeted" places has an unforeseen consequence ... they have produced a generation of non starters.

For myself, I do not fall into the lame category. Further, each of us has a social obligation to teach our children not to be victims. Sad that whole portions of this socialized world are drones by inclination and training.

If you naturally are a CEO ... a start up guy .... bless your luck.

Posted by rocketscientist on 2009-11-09 10:33:04

@carlwimm, normally I agree with your analysis but you are taking an enormous leap here. The article in question is 144 words long, not near enough analysis to bring the battle cry of "socialism" into it. I read it as starting up a company is hard. Any neophyte looking at today’s environment would conclude that it’s harder now. The founders institute is a private resource, kudos to them; they are doing the right thing, a win for everyone. Since you have brought government in to the equation, I'll bite.

Countries success depends upon innovation and growth. It is in a government’s interest to provide a fertile ground for this innovation and provide resources to those with the ideas. Teach them, foster them, and nurture them. If left to the devices of investor and corporate elites there will be a skewed result in the favor to where the dollars reside. That said, in itself is bordering on extremist because we all know that it’s not that cut and dried. We could expand the debate over “trickle down” vs. “empower up” but I choose not to go there.

There must be a partnership between the ones with ideas and drive (startups), the ones with the money (investors), and the ones with a social interest (government). Too rosy a picture you (may) say? The system is broken in a number of places: the greed of VC and ineptitude of government are the culprits of my choice to blame. Let’s continue to spend our resources to fight a war and see how that effects the economy.

To wade into the realm of socialism on thefunded is a fool’s argument. I don’t mean to cut you down but the argument needs to go in another direction. I just think you are on the wrong path. Thanks for getting me riled up on a Monday Morning.

Yes. Luck is a big part of it, and unfortunately I haven't felt too lucky recently.

Posted by tctopdog2009 on 2009-11-09 11:36:51

Desire leads to an idea or vice versa. this is a long way from start up. Most people espousing 'start ups' are clueless as to what they take. Some just barrel along and make money and suddenly that are a bona fide start up. Others get trapped in elaborate strategies. ADVICE IS # 1. Capital is # 2.

Posted by chaz123 on 2009-11-09 11:53:04

Where in the world do you find footing to make the leap from the idea that young people have innovative ideas but don't act on them, to causality in 'socialist ideas to overtax the productive'? Having hired dozens of interns over the last decade+, consider the trends spawn from the capitalist free market that I see fueling this current generation of under performing workers.

The cost of higher education has skyrocked, with universities and the financial institutions with which they collude chasing deeper pockets (parents). The last two decades have seen an onslaught of marketing and lobbying focused on creating a culture that believes that parents must save and pay for higher education. Financial instruments have been pushed on consumers encouraging parents to save money for their children's education with some slight tax advantage, legislation put in place by financial institution and educational institutions lobbyists. Colleges now compete to put the nicest climbing walls in their rec centers, the biggest flat screens up in their student centers, confident that parents will pay the bills as students relax between classes.

The last five interns I hired from the local top 3 engineering school had no idea how to work, having sought a job for a resume builder, I must presume. One called me from a beach in Germany telling me he would not be to work that week. The intern I hired from a local community college this year is putting himself through school, needs the internship for tuition, and is brilliantly productive. With that work ethic, he has a good chance at future success, under 'socialist taxation' or not.

@carlwimm, I suggest you look elsewhere to target your anti tax politics.

Posted by Anonymous on 2009-11-09 12:00:17

Blame it on Obama and his lack of interest in entrepreneurs...

Posted by hexcellent on 2009-11-09 12:23:05

Yes, all Obama's and Socialism's fault. The previous 8 years had nothing to do with the current climate. The recession is his fault. The lack of entrepreneurialism is his fault. I think Global Warming might be his fault too.

Posted by The Founding Member on 2009-11-09 12:32:52

Increased vocational training, inexpensive technology, and low-cost freelance labor make it easier for people to start businesses. However, complex regulations, poor entrepreneurial training, and a challenging operating climate make building world-class technology companies difficult.

TheFunded Founder Institute set out to (1) identify strong entrepreneurs through a quantitative testing model, (2) provide these entrepreneurs with the best training available to build a technology company, and (3) ensure that the graduating entrepreneurs have the proper incentives and support to succeed.

Hopefully, this will lead to increased number of high quality technology businesses formed over the next five years.

Posted by richardluck on 2009-11-09 14:21:38

I agree that @carlwimm makes a huge leap from the article to the "socialist idea to overtax". But there is a correlation here that I believe rings true.

@chas123 touches on it directly: this new generation of workers have an "entitlement" mentality the precludes them from doing what is necessary to get the job done. In some cases (like the kid calling from a beach in Germany to say they weren't going to be into work), there seems to be an outright disdain for responsibility, accountability, and ... err ... work.

And why shouldn't there be? The last four administrations have done as much as they can to assure the upcoming generations that it's "not their fault." Whether that be in the form of guaranteed student loans (it's not your fault education is expensive), the minimum wage (it's not your fault you have fewer skills than the average broom stick), or countless social "benefit" programs (it's not your fault you're a woman, a minority, transgendered, incarcerated, poor, an orphan, an indian, etc.) And if that weren't enough, the endless battles against those who have succeeded (against all odds, in some cases) should drive the point home clearly: "If you succeed, it's entirely your fault, and we're going to make you pay for taking advantage of the rest of us."

No - I think @carlwimm's leap may have been great, but the chasm he crossed rings true nonetheless.

Posted by Anon on 2009-11-09 16:33:23

Really? we have to listen to tea-bagging dumbassery here as well. Using socialism as a straw man is starting to get pretty old.

Posted by matthewokeefe on 2009-11-09 16:47:25

Uhhh... what's hard about this: increasing taxes on the fruits of people's labor leads to... less labor.

Re: comment #6: I really wish I had this web site, opportunities like the Founder's Institute, blogs like Paul Graham's and the training his team does, etc. It's just incredibly valuable in and ultimately worth millions in terms of better deals, higher chances of success, etc. So Thank You Founding Member and all the smart, experienced people who post to this web site!

Posted by muse on 2009-11-09 17:09:25

It might be more relevant to talk to people who *actually* have been working with young entrepreneurs to understand the problems they're facing.

20 years ago, a startup meant 3-5 years of effort to get to profitability. This meant you could refine, rework, and refocus your business - you would become a better entrepreneur through the experience, and that was *valued*. If the startup did not succeed, it wasn't held against you - on the contrary, you might end up doing due diligence for your investors or starting another business or teaching.

This is no longer true. Startups are not focused on profitability, but instead of flip-ability - offloading a spin job for mucho bucks to some cash-heavy company for the eyeballs or some such (and this is true even for software / hardware businesses, crazy as that sounds). Since you've got a short timeframe to dumping the biz, the experience earned, the "business character" you acquire - wisdom, patience, fortitude, guile - is discounted since it's all due to "luck or lies".

So what's this mean for the unsuccessful entrepreneur? No second chances for one. Either you're lucky and get another gig, or you're not and you're all the way out.

Is it any wonder young people don't want to commit themselves? Since most startups don't work out as home runs, entrepreneurs who earn their first command and show resilience and initiative aren't promoted to the ranks of funded veterans - they're just losers without a future. And since one funded company looks very much like another nowadays (innovators are not welcome), is it any surprise that even young people are thought of as commodities?

So go ahead, train these guys (most of them are guys BTW). But when you're only looking at one-shots and luck instead of building businesses (hey, read the NYTimes for what equity firms do to "real businesses" - they mine them out, destroy their value and wreck their market, but it's OK because the pirates did OK), loyalty and determination and character get in the way of a quick buck.

Doesn't sound "socialist" to me - just sounds like the short-term greed of a smash-and-grab anarchist using capitalism to destroy our nation instead of build it. Think about it.

Posted by carlwimm on 2009-11-09 18:13:26

tp # 7, richardluck

you nailed part of the the issue that I refer to as 'socialism" .... the entitlement mentality is part of it.

But there is something worse. When you learn that your whole life will be played out with your lips glued to the teat of mother government, you develop a passivity that is really the crux of the issue.

Passivity is a state of mind that is encouraged naturally by a system that turns over the individual to a collective.

The description of socialism as just a system of income redistribution, is a weak, limp definition.

As start up CEOs, we have to face the fact that we are not, by nature or nurture, passive.

Every start up tries to make a difference. Every start up tries to stand out. Every start up is individual.

And every one that we start up, starts out in salute to Woody Allen's famous statement....

80% of life is just showing up.

This is not a tax issue. I made the point that in a collectivized society, people turn out as "non starters", because the hurdle to become a self starter is too high for a drone to leap.

To # 5, hexellent

Pointing at G Bush (the last 8 years) and letting the current "White House Wonder" off the hook as being not so bad by comparison, misses the issues as well.

The USA started to lose its status as a Republic in the early 1900's, when it , among other things, started to become an imperial power, brought in the "great leveler" of income tax , destroyed solid money with a central bank, etc.

Now all the USA has is a democracy.

Every president since the early 1900's has contributed to the problem,... some more and some less.

The rugged individualist of the early 1900 has given way to the sinecure supper club.

What I wrote in the post is true. Society produces drones, in super abundance.

I am glad I was never one of them.

best wishes

Posted by Livu on 2009-11-10 12:26:53

Just my opinion, but I think there are more appropriate forums for this type of discussion, these off topic conversations dilute the premise of thefunded.com

Posted by carlwimm on 2009-11-10 14:44:34

to # 12, Livu

respectfully and forcefully disagree ... that there are other forums

What other resource do we have if not the "start up mentality" in great quantity?

Whatever damages that supply, whatever constrains that supply, hits at the heart of what we do.

If we can't discuss it as entrepreneurs, on an entrepreneur forum, then where ...

economicsophistry.com
meaninglessblog.com

or perhaps we should confine our discussion to the "free speech" zone, always located 6 miles from where the President and the others who do affect our lives, happen to be.

best wishes.

Posted by liberal on 2009-11-12 05:37:20

@matthewokeefe -- lame, lame, lame -- so if you are taxed you rather be homeless and sleeping on the streets.

@carlwimm -- and what is wrong with socialism? sure beats Bush's fascism.

Posted by carlwimm on 2009-11-12 21:27:18

To # 14, liberal

Actually fascism and socialism have the same basic objective in mind ... subjugation of the individual to the collective.

Don't believe me ... look up how and from what the term fascism derives.

And in my opinion, it doesn't much matter what material your chains are made of.

best wishes

Posted by Livu on 2009-11-12 21:44:40

@carlwimm: just to clarify my first post: my recent experience with the fund leads me to conclude that it's a wonderful resource for identifying well defined and discrete ways for us, the entrepreneurs, to move our businesses forward.....particularly in the area of finance. It's not that I want to pretend that macro economic pressures and issues fail to exist, but rather that if the user base of thefunded sinks into the deep underlying factors that led to the present situation, we'll lose our grip on the direct and concise 'toolbox' of info that we have now.
Best wishes to you too, we all need it. (not responsible for spelling and grammatical errors, posting from an iPhone while consuming my share of Corona)

Posted by carlwimm on 2009-11-13 21:52:40

to # 16, Livu (and the Corona)

:)

You make a very good point.

Forward, always forward.

Posted by slammin_bulu_whack on 2009-11-14 00:48:20

Recessions, though, also have the opposite effect: The force people with good ideas who had been sitting too comfortably in corporate jobs and lost them to act, and they significantly cheapen the cost of labor, they increase the supply of talent, and they test all the companies for real strength, whittling down the playing field in favor of the fittest, a form of entrepreneurial natural selection.

Posted by eco on 2010-02-18 18:21:39

We as Entrepreneurs and CEO's are just more thoughtful now. I have at least 3 or 4 ideas in my head and I am running my company now for the past 5 years. I just need to think things through and am not interested in just putting up a web site and say advertising will generate revenue. I have seen so many companies that are nothing more than web site and no idea of their business model. I am interested in a real business model that will enable launching a company that can start generating cash right away. It has more to do with how to build it in phases and not do it the old fashioned way where you just build it and hopefully money will come. I want a very agile development where each increment generates cash. It takes time to think it through but execution, once started, will be rapid.

4
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Taxing Carried Interest

TheFunded.com Open Letter

Posted by Anonymous on 2009-04-05

PUBLIC:

VCs and Hedge Funds get management fees based on the fund size *plus* a share in the returns that they generate by investing other people's money, called carried interest or the carry. To date, VCs had their carry taxed at the capital gains rate even though they were not investing their own money. The carry is a performance bonus, plain and simple.

The government has caught on, and Democratic Rep. Sander Levin has introduced a bill in House of Representatives to tax these windfall profits at the higher ordinary income rate. If VCs are not using their own money, they should not get the special investor tax rate.

If you agree, agree with this post. Let's send a message to regulators.

http://tinyurl.com/chmmdr

Posted by Krassen on 2009-04-05 07:16:32

Absolutely, the capital gains tax preference is there to reward putting capital at risk. However, we all know that the issue is not that big, since for years there has hardly been much gains to talk about...

Posted by goodform on 2009-04-05 09:16:34

I agree completely - your money - get capital gains tax . . . .other people's money - pay normal tax rates

Posted by hoffmang on 2009-04-05 10:53:37

Why would entrepreneurs want to increase the cost of capital?

Posted by fnazeeri on 2009-04-05 11:24:28

Any tax is an inefficiency but sometimes it is worth it to disincent behavior, for example there is a tax on NO2 and SO2 emissions in the US which is what eliminated the "acid rain" problem of the 70s and 80s. I'm not sure what benefit would become form taxing carried interest at ordinary income rates. It would likely mean less money invested in private equity and hedge funds (which in turn means higher cost of capital for entrepreneurs).

Posted by gorilla44 on 2009-04-05 13:56:25

I agree with fnazeeri. Higher capital gains tax on anything is not good for entrepreneurs.

I wish all capital gains taxes on startup company investments would be eliminated. That would definitely increase both angel and VC investments in companies.

Posted by pankowboy on 2009-04-05 15:39:52

I completely disagree with the post. Raising taxes on capital, even whilst chanting "fairness" will result in reduced funding for entrepreneurs. But I fully expect that within a year or two BHO and his communist friends will do far worse. Venture funding as we have known it will be largely gone from the US. Sad that so many deluded valley types supported the dems.

Posted by Anoni on 2009-04-06 01:56:58

Taxing carried interest will raise the cost of capital and reduce the pool of money available for start-ups - already only a tiny percent of tech companies get funded. We should be sending a message to regulators against this. Don't worry the worst VC will be going out of business soon anyway ;-).

Posted by Anonymous on 2009-04-06 03:00:33

Out of curiosity, I don't see how taxing the carry will raise the cost of capital? I get that it makes being a VC less attractive, but...

Will VCs go out of business? Will less new VCs enter the market? Will more LPs cut back their VC investments?

Posted by anonymou$ on 2009-04-07 14:32:31

Taxing carry is simply eliminating a stimilus. The question is whether the stimulus was productive or counter-productive. I'm not convinced that it hurts entrepreneurs. If the government passed a law rewarding venture capitalists by forgiving them all taxes, you'd have a stimulus that would create a horde of newly-minted VCs who wouldn't know a server from a waiter. Such stimulus could then tilt the landscape against efficiency, since newbie VCs would potentially suck funds from more qualified VCs, and also cloud the entrepreneur's outlook by over-funding competitors willy-nilly. If we let the professionals stay in the game for the right reasons, I think all parties benefit in the long run. In fact, the VCs faced with a lower take-home on carry, would now have to produce real capital gains, i.e., choose/incubate winners, versus sitting and collecting a paycheck.

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You Threaten. We Walk.

TheFunded.com Open Letter

Posted by Anonymous on 2008-08-20

PUBLIC:

Dear Venture Capitalist,

It appears that some of your compatriots, such as EDF Ventures, Dolphin Equity, Hercules, Matrix, Steamboat, Greylock, and Greenhills, are actually THREATENING ENTREPRENEURS to try and silence their opinion. In some cases, they have unsuccessfully moved to take legal action. Let me give you a piece of advice. This is a really, really bad idea, and it places the whole venture capital industry in a bad light.

Last I checked, your job as a VC is to help entrepreneurs and to consider different viewpoints, not to whitewash the truth. No entrepreneur in their right mind should work with a venture fund that threatens legal action over expressing an opinion. Imagine what will happen in the boardroom or with a difficult decision" Are you going to sue every time that you do not like something, someone, some opinion, or some situation"

Maybe you should talk among yourselves and agree that this is a foolish reaction to feedback. Maybe all of the entrepreneurs on thefunded should agree never to pitch EDF Ventures, Dolphin Equity, Hercules, Matrix, Steamboat, Greylock, Greenhills, and any other fund that engages in this practice.

You threaten. We Walk. What do others think"

4
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4
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VC Economics. Give Something Back.

TheFunded.com Open Letter

Posted by Mr. Smith on 2008-08-03

PUBLIC:

AVC Blog Post

Fred Wilson has explained the economics of a venture fund in detail, even publishing the initial assumptions of Union Square Ventures. On a $100 MM fund, Fred expects for him and his partners to make $64 MM, and his investors, the limited partners, are expected to get back their original $100 MM plus another $178 MM. The bad news is that it might take a few years to get all of these returns, but the good news is that the limited partners only need to put money in when asked by Fred and required by their companies, so the risk and the reward are spread over time. If you follow the logic that Fred gets slightly less than a third of the returns, as there are three partners, then Fred is earning $20 MM every 3-5 years.

The way that I look at it, portfolio company entrepreneurs should get a carry in these funds. Instead of $64 MM going to administrators of other people's money, make it $44 and give $20 MM to the entrepreneurs. What is wrong with that" You are choosing to back these entrepreneurs anyway.

180
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My Materials are Confidential, Please!

TheFunded.com Open Letter

Posted by Anonymous on 2007-07-27

PUBLIC:

A number of posts have come up about how venture funds are sharing pitch materials, business plans, and even financials with the competition. This may seem crazy, except for the fact that, as a venture funded CEO, I get these materials from venture capitalists, too. I actually know many of my competitor's financials as a result, and I want to go on the record and say that this needs to stop.

I am not even sure if it is OK to give me a high-level verbal synopsis of a competitor's financials, which I have also received on multiple occasions. I do think it is OK to provide me with high-level insights on the market that is derived from seeing multiple business plans.

It's like rubber necking. You know you shouldn't look, but when a plan hits your inbox, you open it, see what it is, and then you can't turn away. I commit to deleting all such emails in the future (and I have been for some time), but, more importantly, the venture industry needs to stop this practice. Members, if you agree with me, agree with this post - both as an entrepreneur that receives the materials and as an entrepreneur that has probably had their materials shared.

4
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Help Ban Non Competes in Massachusetts

TheFunded.com Open Letter

Posted by fnazeeri on 2009-01-14

PUBLIC:

A bill has been introduced that if passed would ban non-competes in the Commonwealth of Massachusetts. This bill would basically bring Massachusetts in line with California and put the state on equal footing.

You can read more here.

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The Start Up Economy: for Better or Worse?

TheFunded.com Open Letter

Posted by Mr. Smith on 2008-09-30

PUBLIC:

There is a lot of speculation about the state of start-ups these days. Venture capitalists, CEOs, and reporters alike are asking if the broader economic climate is affecting start-ups, and there are a lot of naysayers out there. It is a bearish market, so it's easy to spread doom and gloom. Let's look at some realities.

In any start-up situation, there are five basic components: the idea, the team, the costs, the revenues, and the ability to raise capital. How have these fundamentals changed for the better or for the worse in the current economic downturn"

-- The Idea (IMPROVED): The current economic downturn has created opportunities for new ideas to take root, as established businesses, consumers, and governments look for new solutions to save money, to gain efficiency, and to re-invent troubled sectors. In strong economic times, new ideas take longer to be adopted, as there is less incentive for change. This particular downturn is causing previously closed industries, like banking, trading, financial services, real estate, and lending, to be completely revamped, creating ripe opportunities for start-ups. As in most downturns, people have more time on their hands in a slower economy, which creates new opportunities for consumer entertainment as well.

-- The Team (IMPROVED): Many well-educated and well-trained people from top banking and financial institutions worldwide will find themselves without a job and looking for new careers. This alone presents a unique market condition for start-ups to find key executives. As large public companies, like auto makers and established technology companies, pair back their labor costs to generate profits demanded by the market, new engineers and management talent will be available for start-ups to access that would be difficult, if not impossible, to recruit in strong economic times. While some of the talent may be too expensive or not the right fit for a start-up culture, the access to previously unavailable human capital outweighs any drawbacks.

-- The Costs (IMPROVED): The cost of doing business was dropping before the downturn, and the downturn only makes this phenomenon better for start-ups. For example, commercial real estate costs are dropping. The cost of labor will inevitably drop.

-- The Revenue (SAME): Generating revenue has always been and will always be challenging for start-ups, and nothing is different in a slow economy. Hard is hard. The desire to save money and to be efficient may actually create revenue opportunities for start-ups that compete with larger organizations, since start-ups have lower costs and can offer lower prices. Some naysayers have noted that start-ups based on online advertising revenues will suffer in this downturn, and that is not necessarily true. While large advertising budgets across traditional media will likely shrink, targeted advertising to focused audiences has been growing and grew through the last downturn because it generates results at a lower cost.

-- Raising Capital (SAME): Over 2,000 companies have been funded in 2008, and the pace of venture capital investment has continued at the highest level in history according to the NVCA. With resources like the Funded, raising capital has never been easier, though it's still more difficult than it needs to be. The downturn will slow down the pace of angel investing, since most angels take high risks with spare capital. However, a lot of venture funds have started seed programs, like Quick Start from Charles River Ventures, that make smaller investments in a convertible debt format to replace the need for angels. And, VCs have more money to call than ever before. VCs may be more picky, but they have cash burning a hole in their pocket, and a lot of great companies looking for expansion capital.

Some start-ups won't get funded, and that was always the case. Some start-ups will go out of business, and that was always the case. It's definitely going to be challenging times, but I don't buy the naysaying arguments against the start-up economy. What do other members think"

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Please Don't Pontificate

TheFunded.com Open Letter

Posted by Anonymous on 2007-07-24

PUBLIC:

As an entrepreneur, when I ask a simple question, please don't pontificate. My time is valuable, too. For example, if I ask whether you want to participate in the next round, I don't need a half hour answer about your theory on returns. It may be interesting to you, but not to me. Just say: "yes" or "no" or "I will get back to you by Thursday." When I want to hear your theories or advice, I will ask explicitly for them. When I need a simple answer, please oblige. I appreciate that you need to think through the rationale, but I don't need to be in the room or on the phone while you do that.

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VC Perspective Series: Why Engineers Make the Best Marketers

TheFunded.com Open Letter

Posted by Rebecca Lynn on 2011-03-22

PUBLIC:

The VC Perspective Series invites selected venture capitalists to offer their opinion and advice on fundraising and the venture capital industry. If you would like to suggest a topic, please email it to marc[at]thefunded[dot]com.

Engineers make the best marketers because, contrary to conventional wisdom, marketing is not a “soft science.” As a VC, I’ve done due diligence on hundreds of startups and am most impressed with those that run their marketing departments like engineering shops.

Taking an engineering approach to marketing simply means:
- Test everything
- Make decisions based on numbers
- Abide by the rule that the customer is always right

The same tenets I learned in the offline world with Proctor & Gamble and later in the hyperactive online world with NextCard (the third-largest online direct marketer at the time behind Yahoo and Microsoft), still apply today. Whether promoting paper towels, online credit cards or a hot new Web-based service, infusing marketing with analytical discipline will set your startup apart.

Let me give you an example: I sometimes hear marketing people say they chose one direct marketing campaign over another based on what they thought was better design. Decisions should be based on tests, not educated guesses because we usually guess wrong. While at NextCard, the largest issuer of online credit cards at the time, we created a somewhat cheesy ad very early on with a picture of a thermometer and the tag, “How low can you go?” We always thought we would replace it with something more sophisticated. But time after time, it was the ad that tested the best, so we kept it in our rotation of ads. That ad converted more customers than any other. And the customer is always right.

The best marketing people I’ve come across at startups also share a similar language with engineers. They talk about raw data, hard numbers and whether test results are “directionally” or “significantly” meaningful. They have formulas and systems in place to give them up-to-the-minute information on what ad unit is converting customers at what rate and at what cost. (BTW, “directionally” meaningful simply means the sample size used was not statistically sufficient but informative, while “significantly” meaningful means the sample size was statistically adequate and dependable.)

When I worked at Proctor & Gamble, the majority of the people in brand marketing held engineering degrees. And it’s for good reason. A superior analytical, data-driven mindset leads to great marketing.

About the author: Rebecca Lynn is a partner at Morgenthaler Ventures. Based in Menlo Park, CA, she focuses on early-stage investments in consumer verticals including financial services, advertising, healthcare IT and education. Previous to Morgenthaler, Rebecca worked at Proctor & Gamble, served as the VP of Marketing at NextCard, and ran an online marketing consultancy. She has a JD/MBA from the University of California at Berkeley as well as an engineering degree from the University of Missouri. You can read and subscribe to her blog at here.

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Don't Fire the Founder (Period)

TheFunded.com Open Letter

Posted by Anonymous on 2010-04-30

PUBLIC:

There is a great post by Ben Horowitz with supporting data on why founder CEOs should not be fired.

http://bhorowitz.com/2010/04/28/why-w...

Two thirds of founders in a CEO position are removed by professional investors. There has never been any strong evidence that this makes sense for the company, and it is good to see an investor taking the time to outline why it's frequently bad.

From my experience, professional investors attempt to remove founders as the CEO when:

1. they want to own more equity in the company,
2. they want to force a financing, sale or IPO,
3. they want to hibernate the business to make their portfolio look better,
4. they want to give a job to someone they know,
and least likely,
5. the founder is actually not competent or did something unethical.

Since professional investors complete due diligence before investing, it's unlikely that the founder is incompetent. The investor would be incompetent for doing the deal, then. The reality is that the investors choose their own self interest over the greater good of the company.

It is very common to see companies with the founder removed die a slow death. The professional replacement can do a good job, but the soul of the organization is often lost and the morale is damaged.

Let's send a message. If you think it's time for professional investors to stop firing founder CEOs based on weak justifications and greedy self interest, please AGREE with this post.

Posted by Anonymous on 2010-04-30 13:03:12

there should be a section on the funded that points out the firms who do this. I know of 3 from first hand interaction. each time, the founder went on to create a new more successful company with the right investors. each one was different and they learned from it. The investor groups (not just vc's but angel groups - which are the worst at this) need to be named in the spirit of this site. thoughts for all on this before i name names --

Posted by optimisticskeptic on 2010-04-30 13:55:20

I agree with naming names of VC's who as a matter of course fire founders. This has not happened to me (yet) but I remember a VC coming by a booth at a trade show once. One of his VC friends happened by and the first guy started bragging about all the CEO's he fired. It was like a notch on the gun kind of mentality. Guys like that should be called out. In this case I cannot remember who the guy was, as this was a while back.

Posted by poptech on 2010-04-30 13:59:42

We should maybe add they want to buy the entire business at a significant discount to current valuation.

Posted by Black Squirrel on 2010-04-30 17:42:19

Maybe there should be a disclaimer on term sheets - warning, hazardous to your continued employment as CEO. But you already knew that, right?

An alternative possibility is that the system functions effectively overall. No doubt there are instances where founder CEOs are removed incorrectly - and those are unhappy stories - but in the grand scheme of things, perhaps the founder isn't *supposed* to stay for the full ride?

My personal view is once you take the (expensive) money that you need to fund your venture, you must do so with the full knowledge that you may not be around to see the end of it.

Posted by will on 2010-05-01 09:17:20

BSquirrel - so true.

The only real way to assure that the CEO (founder) gets a fair shake is to make sure the board is "fair" and not stacked against you. If unreasonable investors have little power to be unreasonable, then you are fine. Also, if you suck as a ceo, then with a fair and balanced board, you will be and should be removed. As a founder, if you cannot take an investment under these terms -- don't take the money. If you have to take the money under these terms, then you get what you get!

Posted by Dr. Steve on 2010-05-01 11:07:11

I agree - mostly. What founder/CEOs need to work on is sales and marketing. Products & services never sell themselves. They require nonstop marketing and sales efforts. The founder/CEO who "gets that" is a lot less likely to get bounced out. The founder's passion needs to extend to all aspects of the enterprise, including investor relations and fiduciary responsibility. Those are the founder/CEOs that are "investment grade".

Posted by pogo on 2010-05-01 12:04:18

Sorry to be the contrarian here. I've founded a few companies and run about a half dozen others so I TRY to look at this issue from both sides.

In this case, I think the author left out the most important and common reason the founder is replaced and that's because investors think there is someone better than the founder to run their company. You can view that as an investor bringing in a friend, but that's a pretty cynical view.

First, investors don't boot founders so they can buy more equity. Today investors can buy equity at private companies at pretty cheap prices. It's a buyer's market. They don't need to eliminate the founder to do that, they just dilute the crap out of them.

Second, the founder, by definition, has accepted the terms of their financings which often include adding new directors to their board (losing control) and bringing in a new chief executive. If a founder doesn't like those terms, they shouldn't accept the money.

Finally, for every founder like Steve Jobs that has led their company to extraordinary success, there is a professional manager like Eric Schmidt who parachuted in and took their company to the next level. I don't think investors care if it's a founder at the helm, they just want to optimize their chances of success (read: high stock price = large capital gain). If Jeff Bezos (Amazon) decides to start another company, I'm sure his new investors won't want to replace him. On the other hand, if Julie Wainwright (Pets.com) starts another company, she may be the first to go.

Posted by MedTech Expert on 2010-05-01 17:16:39

The key to this dilemma is the Founder and his/her attributes, attitude, and the complexity of the task. It is very rare to see the founder take his/her company forward to commercialization in the life sciences. Founders typically do not have the breadth of skills (nor appreciate what is required) required to guide the company's development through the regulatory maze it faces - both here and abroad.

Posted by wolf pack on 2010-05-01 18:24:03

I "agreed" with the post, but a VC who is giving me some *side help* said to expect it and keep a seat on the board and be a CTO or other role that suits your temperment/background.

Posted by Anonymous on 2010-05-02 11:50:03

@pogo: Investors boot founder CEOs all the time for more equity, even in the market today. Most private companies don't sell equity to just anyone. So, if a hot company does a new round and the old investors do not get good pro-rata rights in the deal, they will act to remove the founder CEO. It's happening to a friend of mine right now.

Also, your definition of "investors think there is someone better than the founder to run their company" leaves something to be desired. What do you mean by "better?" From a VC perspective, this means someone who can get the company to a sale or IPO faster, which is the point of the poster. Sometimes, a company should not sell or hasten an IPO, but the investor needs liquidity. This is not better for the company; it's only better for the investor.

I am willing to bet that most (~75%) of the venture IPOs filing S1s right now are being forced out by investors. The founder CEOs would rather not go public, but going public is not a horrible outcome, either. I know of at least two that are in this camp for sure.

Posted by TheDragon on 2010-05-02 19:05:32

Don't fire the founder. Pure and simple. Chances are that if a founder feels inadequate, s/he loves the company so much that s/he will urgently ask to bring in someone else. re: Larry / Sergey.

Again, just don't fire the founder. Pure and simple. It's not difficult to understand.

Posted by optimisticskeptic on 2010-05-02 21:55:18

Another blog post on this topic

http://yoda.posterous.com/

Posted by pogo on 2010-05-03 11:57:05

I'll stand on my statement.

I never said that founders don't get fired for the reasons stated in the original post. I said that there is a FAR more common reason and that is that investors want to bring someone in who is more capable to run the company.

@10. You said "from a VC perspective, this means someone who can get the company to a sale or IPO faster." Duh. Yes, that's PRECISELY their motivation. You didn't know that? If they weren't seeking liquidity, they wouldn't be called INVESTORS. They are looking for someone to get it done as fast and as big as possible. Period. They have NO OTHER motivation.

As I said, if the founder doesn't like those terms, don't take the money.

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On Fred's Blog Post "Swinging for the Fences"

TheFunded.com Open Letter

Posted by GK on 2009-10-30

PUBLIC:

This post was upsetting to me on many levels... Although I respect his opinion and experience, I think this tendency for VCs to "profile" is tragic:

http://bit.ly/2OssE3

Here was my response posted to his article, in full below:

"Fred - I respect your opinion and I'm sure it's rooted in deep experience, but I can't help but feel this is simply formulaic, narrow-minded thinking and borderline age discrimination. Not to mention, the very foundation of your argument is flawed since it maintains that young, but naive entrepreneurs are willing to take bigger risks while serial entrepreneurs (who have failed in the past or are moderately successful), are more disciplined and conservative risk takers. Isn't this is a bit of an oxymoron? The idea that there is an ideal startup "profile" is offensive and exclusive, frankly. Hardly entrepreneurial. Why can't VC's support great ideas backed by great talent, irrespective of a tendency to "profile"?

Regardless, I've heard similar, yet unfortunate, comments from other VCs and mentors, including Marc Andreesen. Yet, one need only take a slight spin on this kind of sentiment to suggest why there aren't more funded startups founded by women, African or Latin Americans, etc. Is it because they don't fit into an ideal startup profile???... And do VCs subconsciously dismiss them, regardless of how good their ideas or backgrounds are? I.e., if VCs are biased towards a certain startup age, gender or whatever, then I find this a sad endemic problem within the VC community and the reason for some of its own failures and lack of greater innovation. Not to demonize VCs, but comments like yours make it easier to compare VC firms with Wall Street short sellers.

In short, until "prejudices" like these are called out and changed, we'll continue to keep missing a broader range of talent and potential in this country. "

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Ny Times Article Bootstrapping and Angels

TheFunded.com Open Letter

Posted by carlwimm on 2009-10-29

PUBLIC:

I love it when people agree with me. It gives me that warm and fuzzy feeling.

http://www.nytimes.com/2009/10/29/bus...

This is a must read for start ups. It tells exactly what to do to Succeed. Success, for those of you who don't know it, is a successful business, not just bagging some VC cash.

here is a quote from the article:

“Work hard to figure out if there’s a business plan you can pursue where your capital requirements are zero,” said Ian Sobieski, founder and managing director of the Silicon Valley-based Band of Angels Fund. “The easiest way to raise money is to not absolutely have to raise money.”

Posted by MeetingWave on 2009-10-29 10:57:27

Thanks. Great article. And congrats to innRoad (described on page 2) for sticking it out.

Posted by Anonymous on 2009-10-29 11:20:27

@carlwimm: While I totally agree, you can't build a consumer electronics company on revenues, nor an electric car company, nor a medical device company, nor a... There are thousands of big ideas that genuinely need capital to get off the ground.

There are many ideas that can be and should be bootstrapped as well, such as Web 2.0 businesses with a premium model. Many of these businesses are funded because they show legitimate "traction." Venture capitalists are taking very safe bets and starving capital intensive new ideas on the whole.

Here is my challenge to the venture community: make one risky investment in Q4 2009. Show the world what the "venture" really means.

Posted by Lionel on 2009-10-29 12:21:13

I agree with #2; if anyone knows of a business where capital requirements are zero I'd like to hear it.

Posted by anonymous on 2009-10-29 13:38:21

Carlwimm - great. many thanks once again.

Posted by carlwimm on 2009-10-29 17:47:02

to # 3, Lionel

perhaps, as the 11,000 start up CEOs on TheFunded continue to work, we will be like the old samurai.

Every day of our lives will be spent, sharpening our skills ... a little faster, a little smoother, always more precise.

in the end, one of us will attain 'start up enlightenment" and put a deal together, with no capital whatsoever.

The heavens will open, the angels will sing in chorus, all of mankind will exult in triumph, and ...

the gatekeepers (we all know who they are) will writhe in the dust, wailing to no one's ears and gnashing their teeth.

best wishes

Posted by gelatierenumerouno on 2009-10-31 02:43:54

Excellent article. I espouse to the "bootstrap" method. Build it and the $$$ will come.

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The Four P in the System

TheFunded.com Open Letter

Posted by Krassen on 2009-07-29

PUBLIC:

Reading TheFunded comments, I cannot help but notice a lot of generalizations. Here’s a half-light/half-serious attempt to provide some classifications, I’ll call them the four Ps.

First, we have the PRODUCERS. That’s us: entrepreneurs, technologists, scientists, engineers. We are the class creating value and driving innovation.

Second, we have the PARTNERS. These are sophisticated and knowledgeable VCs, who can help in value-creation via sage advice, connections, fresh ideas, etc.

Third, we have the PARASITES. This is a rather large class of VC, who don’t bring anything to the table, and are simply opportunistic middlemen between capital (pension funds, endowments, etc) and the PRODUCERS. The word “parasite” has an inflammatory connotation, however parasitism is a legitimate evolutionary strategy, which basis is that a host would rather not expend more resources fending off a parasite, than simply tolerating it. For example, humans have thousands of microbial species inhabiting our guts and “eating” our food, yet our immune system does not expend resources on fighting them. Are PARASITE VCs overpaid for what they do? Sure! Yet, entrepreneurs should not get boggled in that, but rather focus on value creation.

Finally, we have the PATHOGENS. These are the VCs who destroy value - through unwarranted, incompetent meddling, injecting their useless friends and enforcers in the business, etc. The PATHOGENS cause inflammation, exhaustion of resources and could kill the business.

So, when we vent against VCs, we should probably remember these classifications and use them appropriately. For example, “such and such is not really a PARTNER (he/she brings no value), but at least is not a PATHOGEN; I would rate them as a mild PARASITE…”

Posted by Anonymous on 2009-07-29 10:47:42

Great classification system. However, I don't believe any VC fits into the partner category. You're lucky if you get a parasite... most are pathogens.

Posted by nkannan on 2009-07-29 10:56:00

Just to be balanced, let me communicate the views of some of my VC contacts that I respect, arguably the dark side.

Entrepreneurs fall into these categories from the POV of VCs..

1) Pathological solipsists: Most entrepreneurs are so sure of their own ideas and abilities that they are impervious to any and all questions regarding viability or the business merits of the ideas. If love is blind, entrepreneurial self-love is doubly blind, which is essential for their work and also can undermine success.

2) Contempt for VCs: Entrepreneurs view VCs as middlemen adding little value, but LPs view them as fiduciaries who will work hard to find and invest their money in ventures with high probability of success by sifting through thousands of opportunities presented by eager entrepreneurs

3) Entrepreneurs assume automatic value creation: Typically entrepreneurs assume that their unique products, services, or ideas will create value by their compelling benefits they ostensibly offer. Not so. Value creation is not automatic and it takes incredible effort to create sustainable and growing revenue streams and do so profitably. VCs have invested in too many good ideas and lost their shirts and thus are skeptical.

4) LPs should cut out parasitic middlemen like VCs: Not really. LPs need dispassionate middlemen who are not in love with one or two ideas and who will go over a cliff clinging to their business plans. LPs depend on VCs to search and sort among infinite opportunities for investments. Entrepreneurs, by their very nature, are incapable of such a role as they are romantically involved with their own ideas.

In sum, some entrepreneurs are great value creators just as some VCs are great identifiers of potentially successful ventures. We need both of them to create new industries, wealth, and prosperity for the foreseeable future.

Posted by Anonymous on 2009-07-29 14:18:06

@nkannan --

I agree. Every day an entrepreneur should look themselves in the mirror and ask if the best thing for their company is to replace themselves. This is true even without investors.

However, I disagree with you about the value of VCs from the perspective of the entrepreneur. Why as an entrepreneur should I care at all about the VC-LP love fest? That will not affect how well my company succeeds. Nor should I care about how jaded a VC is because of past bad experience UNLESS they use that experience to help MY company avoid a pitfall. In which case they are a PARTNER or PRODUCER.

Maybe a jaded VC should take that as a sign that it is time for a career change.

In the meantime, it is really hard to feel sorry at all for anyone driving a Porsche and living in Atherton. Cry me a river... Boo-hoo.

Posted by nkannan on 2009-07-29 15:33:48

Less than 1% of the VCs in the US live in Atherton or similar towns. They get wealthy by making their portfolio companies succeed. They have a vested interest in your success and they are under pressure from LPs.

I do agree that many of the VCs should go find something else to do. At a minimum get some real world experience.

Posted by ECCE-O on 2009-07-29 18:18:45

First, great classification system.

Of the four institutional investors in the company, I have one Partner, one Parasite, one Pathogen, and one kinda completely harmless investor who looks around for direction. Need a P to describe this sort of investor - maybe Puppet? So, as long as I keep the Puppet aligned with the Partner and manage the Parasite, the Pathogen's efforts to derail the company fall on deaf ears.

Posted by Krassen on 2009-07-29 22:01:47

wow, @nkannan, thank you for your comment, and boy, do your contacts fit the mould perfectly!

Notice that my classification is based on how much value the various groups bring to the table, while the VCs comments are based on entirely superficial and mostly psychological things. Does it really matter what an entrepreneur thinks about the VC, or the VC's relationship with the LP? Is being passionate, really a pathology?
Isn't the only pathology here the extreme insecurity and frailty of the VC egos?

It's funny how in the world of pro-sports GMs are a lot more mature about these things? It is assumed that most top athletes think that they can always win. Is that a knock on them? Have you heard a GM or a coach complain that such and such athlete is too sure of his abilities. You take that for granted and try to make decisions based on talent and skill, not on some superficial psychoanalysis.

And what about appreciation? Do you ever hear an athlete credit the suits in the front office? Publicly it's: God, my teammates, the fans, sometimes the coach. Privately, it's probably: me and God. So what? What matters is winning. How petty and unproductive would be if GMs rated players, based on "respect for the suits". Would anyone - owner, fans, media - tolerate such GMs even for a month?

Posted by carlwimm on 2009-07-30 01:45:45

to Krassen:

It is an old theme on my part, posted here in public and in private, but once you understand a VCs money, once you understand that a VC is completely imprisoned by the promises he has made to his LP, you understand that a VC can NEVER be a producer.

He has to be a parasite, or is he is really not very good, a pathogen.

Posted by carlwimm on 2009-07-30 02:14:51

To Nkannan:

Let me go over your comments and perhaps you can see what it is that you have really said

1) The Entrepreneur as solipsist.

This cannot be a complaint. What do you ever want to have to do with an entrepreneur who is not totally convionced of the rightness of his cause.

The filter for a VC should be to kick out any entrepreneur who is not a fanatic about his project.

If he is a cynic, hire him as another VC.

2) Contempt for VCs

Let me get this straight. The universal feeling of all entrepreneurs who deal with VCs is contempt .

Of course, they are all WRONG.

There is an international conspiracy of entrepreneurs, Bilderbergers, Trilateralists and bankers to feel contempt for VCs.

Rubbish.

If the feeling is uniform, then it must have a good reason for being so.

If the VCs just want a touchy feely, self actualization experience ... take a pill.

If they are serioous about being investments proffessionals that do what a rpofessioanl must do. Take a look at the criticism seriously.

VC, heal thyself.

3) VCs have invested in too many good ideas and have lost their shirt.

Nkannan, nkannan, nkannan.

The truth is that VCs have a certain kind of deal they need - which has nothing to do with venture or investing.

And people game the system. They dress up their deals to look just like the VC template.

And so, VCs spend 50 million on pet foods dot com (and other "good" ideas)

Every idea looks good going in. No general ever started a battle he knew he would lose.

VCs lose because they fail to see the flaws. But wait a minute. The VCs are supposed to be the experts.

They are supposed to see the flaws. Other than that, you could just use a dart board - and save the 2 and 20.

4) Parasitic middlemen.

Actually most LPs should not be in the venture business at all. Their blue blood approach to money management is 4 generations removed from wealth creation.

Wealth creation belongs to the men with "face", not the faceless. Wealth creation belongs to men with character, not the amorphous salary man.

Whether created or made, the man who is destined for wealth creation is the only one who should be trusted with it.

Bureaucrats, pension fund mangers and widows at country clubs need excitement too, of course. Let them play bridge and have tea parties.

How many VCs would sleep in an office for a year, not knowing if one year or twenty years would be enough to make the difference.

Entrepreneurs are explorers and, as the saying goes, "explorers have to be prepared to die lost". (and poor and disgraced and alone).

I have no complaint about LPs. Let them spend their days chasing waiters around for more ice for their G and Ts.

But do not presume to be "one of us" just because you have so much money that you can invest in something of which you know nothing.

The difference between "them" and "us" is not money or lack of it. The difference is that we believe, "they" cannot.

5) Why did you write this posting

Nkannan - this was a puff piece posting, written by VCs, but submitted by you.

Do try and remember that the web site for "Sycophants for VCs" has a much different URL.

Posted by GoodReading on 2009-07-30 03:38:22

Wow, best post in a while.

Re: ECCE-O's Puppet: I agree that Puppet is another descriptive and large category. I've worked with many puppets, many parasites, a couple of pathogens, and one partner. The Partner is on my board today, I feel fortunate.

Re: CarlWimm: I don't think Krassen ever intended to classify VCs as Producers. I've certainly never met one in that category, although many would rate themselves as such!

Finally, Adeo, give serious thought to adding this rating system to the VC partner ratings on TheFunded.

Keep it up guys and girls, this is great summer reading!

Posted by matthewokeefe on 2009-07-30 12:33:16

Carl Wimm: great post! Never really thought of building a business as "exploration" but that is exactly what it is and what I've been doing. And I second the last post, great summer reading on TheFunded this year.

Posted by L2fL on 2009-09-30 12:40:11

@carlwimm

I would like to pin this on my office door "Wealth creation belongs to the men with "face", not the faceless. Wealth creation belongs to men with character, not the amorphous salary man."

I have always believed that humility is the character of a man with "face" whether in our relationships with ourselves or with others.

Adding on that, I do believe there can be a healthy relationship between VC's and the rest of us. Its starts with us understanding the risks investors take to believe in us and investors understanding the sacrifices we make when we chose to do what we do.

For us, we should never be afraid to fail and to change. For the VC, you should never be afraid to risk and evolve.

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Ibanker vs. Ibanker

TheFunded.com Open Letter

Posted by RichieBlueEyes on 2009-04-03

PUBLIC:

So here is a paradox ... if you ask a VC "do they like bankers," the vast majority say, "no." They will often go further and say "we don't look at deals from bankers." Now let's take a step back for a second and ask the same VC, when was the last time they sold a company or took one public WITHOUT a banker? Never. I find it funny.

There are 2 primary reasons to avoid bankers.

1) shopping - bankers shop deals and they often shop them without proper targeting - this is in fact annoying and valid

2) expense - bankers make deals more expensive in 2 ways: first, they charge fees and, second, they know what they are doing (usually) and how to negotiate (i should hope) and thus the investor pays more.

Truth is, most investors will look at deals from bankers they trust. The challenge is in the seed / early / Series A, where it is generally no mans land and there are very few bankers in the first place (mainly finders). No one wants a cold, shotgun-shopped deal no matter what.

My feeling is, if you can bring on a banker that can find you money, do it. It will save you a headache, and they probably will get a better deal for you even after their fees.

PS. I can't wait to see the response to this one.

Posted by Mr. Smith on 2009-04-03 03:16:31

You make valid points, but the big problem is that (1) there are more bad bankers than good bankers, (2) investors often prefer to deal with the management directly, and (3) most investors refuse to pay the fees.

So, if you managed to find a great banker, which is like funding a needle in the haystack, you still have to do a lot of work, you may hurt your chances, and it will cost you real money, potentially from your pocket.

A better idea would be to study up on tactics and then at least try to do it on your own...

Posted by gorilla44 on 2009-04-03 09:43:58

I strongly recommend not using bankers for your fundraising, especially for seed, Series A or most Series B deals. If you're raising a $50M later stage round, then you probably need bankers. If you're at that level, you're probably already talking to bankers about M&A and other options.

I've worked on both sides of the fence - evaluating deals for a venture capital firm and angel groups and raising capital (over $10 million) for 2 companies that I ran as CEO.

From these experiences I've observed that most VCs like their screening system the way that it is. Many believe that if the entrepreneur can't network or maneuver their way to get a "warm" introduction to a VC, then they are probably not worth investing in.

Being a CEO (whose chief job is fundraising) of a high tech or life science startup takes a ton of intelligence, creativity, networking ability, and guts. If a CEO can't network their way to a VC (who, in my experience, usually want to see good deals), then how can they network their way to see customers and partners?

Is the fundraising process hard? You bet. If it was easy, then everyone would do it and venture returns would be even worse than they are now.

Posted by fnazeeri on 2009-04-03 10:18:27

I think bankers are helpful in selling companies but for Series A rounds there is no company it's just a few people and an idea. If the team is good, the bankers get in the way. If the team is bad, bankers can't make up for that.

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