The open secret of VC financing: it's a byproduct of company development, not an event by and of itself.

1. The Golden Equation:
Product + Market + Team = Deal
Tim Dick, General Partner
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2. The Missing Link…
A few weeks ago, I was asked to speak to a venture
accelerator cohort on financing. I thought about doing
Termsheets: The Good, The Bad & The Ugly that has
proven so popular, but that didn’t seem to fit the bill.
Then I got stuck, because financing is usually discussed as
an a la carte element of startup development similar to
getting first product out or making a key hire.
But it’s not…
Copyright © 2009-2013 Startup Capital Ventures
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3. The Secret…
Financing Is A Byproduct Of
Startup Development…
…Development Brings Financing,
Not The Other Way Around
Copyright © 2009-2013 Startup Capital Ventures
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4. Agenda
Product + Market + Team
= Deal
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5. The Golden Equation
For some years, I have been using the equation:
Product + Market + Team = Deal
for the simple reason that those three things
together determine the success or failure of every
company.
Copyright © 2009-2013 Startup Capital Ventures
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6. The Formula: Prove Your Team &
Product Can Fill A Market Vacuum
Product: credible evidence that you have a unique
painkiller for a real need
• Real entry barriers (e.g. IP, structural, regulatory)
Market: show you can effectively access a large &
growing market
• Clearly identify market segments & potential customers
• Economical customer acquisition & retention strategy
• Strategy to beat competitors
Team: evidence you can build a balanced team that can
deliver the product to market
Copyright © 2009-2013 Startup Capital Ventures
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7. Three Axes Of Company
Development
Product
Version 2.0
Production
Revenue Beta
Prototype
Concept
Repeat Buys
Paid Customers
Core Team
Successful trials
CEO
Sales Economics
Developers
Size/Segments
Founder
Market
Full Team
Team
Copyright © 2009-2013 Startup Capital Ventures
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8. Balanced Development Drives
Financing Rounds
Product
Version 2.0
Financing Round
Expansion
Production
First
Revenue Beta
Seed
Prototype
Concept
Pre-Seed!
Founder
Repeat Buys
Team
Paid Customers
Full Team
Successful trials
Core Team
Sales Economics
CEO
Size/Segments
Developers
Market
No “Lame Troikas”: Fill Your Gaps!
Copyright © 2009-2013 Startup Capital Ventures
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9. PRODUCT: How You Plan To Fill
The Market “Vacuum”
Prerequisites
• A painkiller for a specific customer pain (vs. a vitamin which we
“should” take)
• Scalable product with high margins
• Distinctively different from competition
Seed round
• Working beta with customer feedback
• Patent applications where possible
First Round
• Version 1.0 production product
• Positive customer feedback
Expansion
• Product line extension prototypes
• Growing revenue / repeat buys from customers
Copyright © 2009-2013 Startup Capital Ventures
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10. PRODUCT: Notes From The Field
Only two eras in company development (Marc
Andreessen)
1. Before Product-Market Fit (change everything
until this works, because nothing else matters)
2. After Product-Market Fit (a key to financing)
Entrepreneurs are in love with their product but, set
rigid development deadlines and SHIP IT!
Protect and patent your products: Value is created
by what you keep, not what you create
Copyright © 2009-2013 Startup Capital Ventures
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11. MARKET: Large & Growing, Have A
Defensible Entry Strategy
Pre-requisite for institutional venture capital: Clear target
market and a $10B total available market (TAM)
Seed round
• Well defined and segmented market
• Economical customer acquisition & retention strategy
First
• Demonstrating customer acquisition cost & value
• Defined sales force strategy
Expansion
• Sales growth through established channels
• Building a recognized brand name
• Clear path to profitability
Copyright © 2009-2013 Startup Capital Ventures
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12. MARKET: Notes From The Field
The #1 company-killer is lack of market (Andy Rachleff,
Benchmark Capital):
• When a great team meets a lousy market, market wins
• When a lousy team meets a great market, market wins
• When a great team meets a great market, something special
happens
Startups need to show breakeven potential on revenue of $100M
in 5-7 years because only 1-2 out of 10 deals hits
• Credibility fail: “$300M revenue in two years with one round!”
Selling into a declining market is almost impossible
Identify competitors’ positions as you explain how you can win
against them
• Credibility fail: “We have no competitors”
Copyright © 2009-2013 Startup Capital Ventures
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13. TEAM: Balance Is Critical, Fill The
Gaps
•
Prerequisites
– Committed founders
– Domain experts in the product, service, or technology
•
Seed round
– Original product/technology developers
– Some general management & sales talent
•
First Round
– Experienced sales and marketing teams
– Fundable CEO with relevant experience
•
Expansion Round
– Strong, balanced team
– Solid sales force
– Experienced CFO as the business become metrics-driven
Copyright © 2009-2013 Startup Capital Ventures
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14. TEAM: Leverage Your Team With
Great Partners
Build a GREAT board for “the voice of experience” and the ability
to open doors
• “It’s hard to see the picture if you’re inside the frame” - Eugene
Kleiner
• USE YOUR BOARD! – they have been there & have great
networks
• Weekly board updates and monthly board meetings correlate
highly with startup success
Entrepreneur-focused partners can help you more than you think
• The right law firm will help you do more than incorporate
• PR Firm - little companies need big voices & good messages
• Accounting firm: startups need conservative books
• Some banks understand entrepreneurs (e.g. SVB, CPB)
Copyright © 2009-2013 Startup Capital Ventures
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15. Agenda
Product + Market + Team
= Deal
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16. Inside the Head of a VC…
Copyright © 2009-2013 Startup Capital Ventures
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17. …What Are They Really Thinking?
He or she has a $100 million early-stage fund dedicated to
enterprise software and medical devices
The firm must invest the fund within 5 years – about per year for a
total of around 20 deals (4 per year)
• The investment typically buys 20% of the company
He plans to put around $5 million to work in each company in three
rounds (say $1.5M, $1.5M, and $2M including reserves)
• Many companies won’t make it past round two...
• He’s hoping that 2 in 20 deals will be a home run - and “return
the fund” of $100M
• 8 will probably die or be sold at low value
• 10 will probably do “OK”
So every deal must have the potential of achieving a $100M
exit from the VC’s 20% share = $500M valuation
Copyright © 2009-2013 Startup Capital Ventures
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18. Financing Steps
1: Plan
2: Contact 3: Pitch
Research
Leverage
contacts
Communications
Sequence
4: Term
Sheet
5: Due
Diligence
Crisp
Listen!!
Benchmark Be
Norms
Responsive
Prepare!
Right
Legal
Pitch Team Counsel
Copyright © 2009-2013 Startup Capital Ventures
Dig deep
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19. Step 1: Plan Because It Will Take 6+
Months To Deliver
Research the firms who fund your sector
• Are they making investments?
• Have they funded a competitor?
• Who is their expert in your space?
Sequence your fundraising
• Talk to a few VCs to get feedback & edit
• Save your best shots for after you have feedback
Get intros to sources of funding whenever possible
• Avoid cold calls: “send me the executive summary”
Copyright © 2009-2013 Startup Capital Ventures
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20. Step 2 Contact: Find Financiers That
Match Your Industry & Stage
Industry Segment
Deal Size
Pre-Seed
(<$500K)
Series A
($1-3M)
Series B
($3-8M)
BIO-MED
SOFTWARE /
CLOUD
CONSUMER
Angels
Acclerators
Angels
500 Startups
Accelerators
Angels
500 Startups
MPM
NEA
Sprout
Epic
MPM
Andreessen
Horowitz
Emergence
Epic
Kleiner
Andreessen Horowitz
Crosspoint
NEA
Sprout
Greylock
InterWest
ITV
Accel
Accel
Sequoia
Maveron
KPCB
Copyright © 2009-2013 Startup Capital Ventures
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21. Step 3: Develop Clear
Communications
Elevator Pitch: you may have 10 seconds to interest a source
Executive summary: one or two pager that tells the story (no 6
point font!)
Business Plan: Power Point 10-20 slide pitch
• Many investors will decide go / no-go ten minutes into a pitch
• Fact-based: no exaggerations or “we have no competition”
• Cover Market Opportunity, USP, Sales Strategy, Competition,
Team, Revenue & financials, financing plan, milestones & use
of proceeds, exit strategy & comparables
Back-up materials for deeper questions
Copyright © 2009-2013 Startup Capital Ventures
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22. Step 4: The Term Sheet
Investor may want to introduce you to other potential
investors to syndicate the deal & test their own judgement
You may have a valuation in mind, but the golden rule
applies: he (or she) who has the gold makes the rules
Investors will propose terms include valuation, board seats,
liquidity preferences, registration rights, anti-dilution
provisons, etc.
• Get familiar with the terms and the norms
• Find example term sheets from law firms online
• Check “Term Sheets: The Good, The Bad & The Ugly”
Copyright © 2009-2013 Startup Capital Ventures
If you don’t have an attorney, get one!
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23. Valuation “Push-Me / Pull You”
Ask For More $, Not Less
In early stages, you can
“push” your company’s value
The 60/40 rule: Your “ask” can
be $2M or $5M but the “money”
will take 40%+ either way
Have a full capital plan (multiple
rounds) that funds to cash-flow
positive
When your company has real
revenues, the market will
start to “pull” your value
Market becomes more efficient
due to comparable deals
Analytical measures are
measurable (EPS, ROI)
A few quarters of profitable
growth can get close to a
liquidity event
Copyright © 2009-2013 Startup Capital Ventures
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24. Step 5: Due Diligence
Lead investor does this for syndicate
Will want to get comfortable with you and your team
VC will study and learn your space, want to talk with your
customers, see all paperwork, etc.
Follow up promptly and thoroughly with all data requests
• Have your books in order and be prepared to provide all
contracts, investor lists, references, and as much time as
the investor wants
Copyright © 2009-2013 Startup Capital Ventures
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25. The Fear-Greed-O-Meter Of Deal
Psychology…
My deal might not
get done
You!
!
!
!
!
!
VC!
I can get a higher
value for my deal
My milestones don’t
support the valuation
I want
I’m going to ding that
low-ball offer
I might miss out on
this good deal
Fear
Greed
Will there be another
deal like this?
Copyright © 2009-2013 Startup Capital Ventures
I can get this deal
cheap if I wait a
little longer
I’ll fund a copycat
deal cheaper
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26. “Meat’s Not Meat ‘Til It’s In The Pan”
Painting: Charles Russell

27. The Author
Tim is a partner at Startup Capital Ventures where he sits / sat on the Boards
of SilverTail Systems, (acquired EMC), TagArray (acquired MXIM), Adama
Materials, and TuneIn.
He has raised over $300M in capital with $1.2B in exit value. Tim previously
founded Hawaii Superferry, Grassroots.com (acquired by Edelman),
WorldPages.com, (NYSE: WPZ then acquired by BT). He has advised and
invested in companies including match.com (first angel investor, acquired by
IAC), Accept.com (acquired AMZN).
Previously, Tim was a principal at the Boston Consulting Group (BCG) where
he advised clients including Microsoft and Disney. Earlier he was an
engineer at Beckman Instruments, where he developed the first electronic
speech synthesizer for use ICUs, and the world's first instrument-on-a-chip.
A believer in social responsibility, Tim co-founded TRUSTe.com the internet’s
privacy standard. He is currently chair of Entrepreneurs Foundation of
Hawaii and a board member of HiBEAM. He sponsors the student program
at Hawaii Venture Capital Association
Tim holds an MBA from Stanford and a BSEE from the University of
California
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