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How to Master the VC Game: Essential Tips for Fundraising Success

Learn insider insights on raising capital from a seasoned VC partner. Discover the keys to impressing investors, avoiding pitfalls, and building a winning team for your startup.

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How to Master the VC Game: Essential Tips for Fundraising Success

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  1. Mastering the VC Game:How to Raise Your First Round of CapitalJeffrey BussgangFlybridge Capital Partners, General PartnerHarvard Business School, Senior Lecturer April 3, 2012

  2. Context For My Perspective • General Partner at Flybridge Capital Partners, early-stage VC firm based in Boston and NYC • 40+ active portfolio companies, Fund III: $280M, 5 GPs • Senior Lecturer at HBS – Launching Tech Ventures • Former entrepreneur • Cofounder Upromise (acq’d by SallieMae), VP at Open Market (IPO ‘96) • Author: Mastering the VC Game • Blog: SeeingBothSides.com • HBS ’95, Harvard ‘91

  3. Goals For Today’s Session • As an entrepreneur, I found venture capital to be a black box • As a VC, I now see the other side and wanted to help entrepreneurs understand how to finance and build great companies • Today’s mission: to demystify the VC/angel world for entrepreneurs 3

  4. Why Raise Money from VC? Experience Matters: VCs have “seen the movie” over and over again and can help avoid pitfalls to find the path to success Deep Pockets: High risk tolerance and additional funding for follow-on rounds Value-Add: VCs provide domain experience, industry contacts, and strategic planning Swing Big: VCs don’t invest in niches, they invest in transformative ideas that can build large companies 8

  5. VCs vs. Angels • Will want some control (voting, board, veto) • Will want to own 20-30% • Very actively engaged (they get paid to do this!) • Can add tremendous value and be great business partners • Can be total disasters • Typically rational actors, commercially-driven, but if inexperienced… • Will want no control (“send me an annual email”) • Will want to own 1-10% • Maybe engaged or not (often a hobby, sometimes a personal mission) • Can add tremendous value and be great business partners • Can be total disasters • Typically rational, but if unsophisticated: naïve irrational, emotional

  6. Raising $ from VCs: Find the Sweet Spot • Scope out the firm – size matters, as does the individual • Arrange for a warm introduction • Prepare, be brief (VCs Blink) • Don’t downplay risk • Mutual due diligence is fair play 9 04/09/10 9

  7. Context About VCs and Angels • Most VCs and Angels have ADD – operate on “BLINK” instincts • Want to SEE everything, but DO very, very few deals • Make their decision within the first 10-15 minutes • Typical VC and angel will invest in one out of every 300-500 deals they see • Long odds – you need to really stand out • Like college applicants – triage quickly

  8. The Right People: an Unfair Advantage • Ideas are a dime a dozen • Having a world-class team is golden • Laser focus of the young entrepreneur is very powerful • E.g., Bill Gates, Michael Dell, and Mark Zuckerberg 10 04/09/10 10

  9. Investor’s Decision Tree Worth 3 minutes (email, phone)? No Worth 30 minutes (phone, in person)? Ignore No Worth 60-90 minutes (in person)? Pass gracefully No Worth 2nd mtg (in person)? Pass but stay In touch No Serious due diligence Pass but be helpful

  10. Top 3 Things To Do • Be gracious and personable • Say something that makes you smile…authentically • Tell your personal history, tell a story • Be crisp and on point • Personal intro should take < 5 minutes • Team introduction 10 minutes • Make it relevant – don’t go off on tangents • If you can’t show good summarization skills, • how will you handle a board room? • Know your stuff • They will push you to test you • John Doerr/Upromise case study

  11. Top 3 Things To Avoid • Do not exaggerate • Assume everything you say will be verified in due diligence • Assume the listener is a cynic and a professional BS detector • There’s no “I” in team • If you are self-aggrandizing, investors will assume you can’t build teams • Do not name drop • No one is going to be impressed • with who you know unless • the relationships are both real • and relevant.

  12. Typical Investment Criteria • Tangible things investors like to see: • Very big market (> $500m) • Unfair advantage (why you? why now?) • Attractive business model (recurring, high gross margin) • Unique technology or business model approach • Intangible things investors like to see: • “Pied Piper” – an ability to recruit and retain a great team, partners • Interpersonal chemistry • Movie, not a snapshot

  13. So You’ve Had a Good Meeting…Then What? • Treat fundraising like a sales process – build a pipeline, work people through the pipeline, build up to crescendo • VCs get distracted – typically only pursue 2-3 high priority new investment opportunities at any given time • Stay connected, top of mind, build a sense of momentum • Need to sell the individual “champion”, then the help them sell the partnership • Address objections with specific data • Make the investment case for them • Give them tools/materials to share with their partners 13

  14. Then, Expect More Due Diligence • Customers / partners • Team • Technology • Business model • Market size / analysts As with sales, package up the information, make it easy on the VC – provide reference list, financial models, detailed market size analysis – all in readable form 14

  15. Term Sheet TimeFrequently Asked Questions… • Should I include VCs in my first round or just angels? • How big should the option pool be? • How should I think about valuation? • “Promote” definition - http://bit.ly/8NpdM • Should I do a convertible note with a cap, no cap or a priced round? • How should I think about control? 15

  16. Expectations and Milestones • Have well-documented milestones that represent what you expect to achieve during the initial funding period • Team building • Technical progress/product development • Customers, revenue • Budget • Talk to the investor about the next round before you close this round • Expectations, amount, price 16

  17. What Is Market? • Rough Numbers (vary slightly by coast and sector): • Seed: $500k-$2m raise on $3-5m pre-money (or cap) • Series A: $3-6m raise on $6-10m pre-money • Series B: $8-12m raise on $15-20m pre-money Option pool: 10-20% • The smaller the pool, the more confidence in the founding team • Do an “option pool budget” to determine the right pool 17

  18. Later Stage Valuations Are Increasing, While Early Stage Remains Consistent Source: Dow Jones VentureSource

  19. Who’s Ready to Raise Money?

  20. Mastering the VC Game:How to Raise Your First Round of CapitalJeffrey BussgangFlybridge Capital Partners, General PartnerHarvard Business School, Senior Lecturer April 3, 2012 @bussgang Jeff@flybridge.com

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