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How to raise your first round of capital - February 2017

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How to raise your first round of capital - February 2017

  1. 1. How to Raise Your First Round of Capital Jeffrey Bussgang Flybridge Capital Partners, General Partner Harvard Business School, Senior Lecturer February 22, 2017
  2. 2.  General Partner at Flybridge Capital Partners, early- stage VC firm based in Boston and NYC $625m raised across 4 funds in our 15 year history 100+ portfolio companies (e.g., MongoDB, DataXu, Codecademy)  Senior Lecturer at HBS – Launching Tech Ventures  Former entrepreneur Cofounder Upromise (acq’d by SallieMae), Exec team at Open Market (IPO ‘96)  Author: Mastering the VC Game  Blog: SeeingBothSides.com Context For My Perspective
  3. 3. 8 Why Raise Money from VC? Deep Pockets: High risk tolerance and additional funding for follow- on rounds Swing Big: VCs don’t invest in niches, they invest in transformative ideas that can build large companies Value Experience: VCs have “seen the movie” over and over again and can help avoid pitfalls to find the path to success Value-Add: VCs provide domain experience, industry contacts, and strategic planning
  4. 4. VCs vs. Angels  Will want some control (voting, board, veto)  Will want to own 15-25%  Very actively engaged (they get paid to do this), leveraging the power of the firm’s network  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
  5. 5.  Most VCs and Angels have ADD – operate on “BLINK” instincts  Want to SEE everything, but actually INVEST in 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 Context About VCs and Angels
  6. 6. 6 Ridiculously large returns (> 10x) are very, very rare (4%) – but are always the goal A Game of Outliers
  7. 7. 7 VC Fund Math 101 To achieve target of 3x the fund, need to see multiple big exits (10x+) after years 9-12 Prototypical, $100M Early Stage Fund Source: Industry Ventures
  8. 8. 9  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 04/09/10 9 Find the Sweet Spot
  9. 9. VC Introduction Algorithm 1. Entrepreneurs who have made them money 2. Entrepreneurs in their portfolio 3. Entrepreneurs they respect 4. Customers/Partners they respect 5. Service providers they respect 6. Existing investors …  Cold emails/social networks …  Investors who are not investing 9
  10. 10. 10 Investor’s Decision Tree
  11. 11. Elements of the Pitch  Intro  who are you, why are you here and why are you special?  Problem  what is the customer pain?  Solution  what’s your disruptive, breakthrough compelling solution? Is the “Gain vs. Pain” ratio 10x?  Opportunity / market size  top down and bottoms up  Competitive advantage  what is your unique differentiation? what’s your “competitive moat”?  Go to market plan  how are you going to reach the customer?  Business model  how are you going to make money?  Financials  what’s the bottom line, what are your key assumptions? How are you going to make ME money?  The ask  how much do you want, how long will it last you and how much will you achieve? 11
  12. 12. Top 3 Things To Do  Be gracious and personable  Say something that makes you smile…authentically  Tell your personal history, your narrative  Demonstrate strong founder-market fit  Be crisp and on point  Personal intro should take < 5 minutes  Team introduction < 5 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
  13. 13. 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, attract great talent  Do not name drop  No one is going to be impressed with who you know unless the relationships are both real and relevant.
  14. 14. Typical Investment Criteria  Tangible things investors like to see:  Very big market (> $500M? $1B? – support $100+M revenue)  Unfair advantage (why you? why now?)  Attractive business model (recurring, high margins, network effects)  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  X-Factor
  15. 15. 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  Create a sense of urgency (run a competitive process) 15
  16. 16. Then, Expect More Due Diligence  Customers / partners  Team  Technology  Business model  Market size / analysts As you would do in a sales process, package up the information, make it easy on the VC – provide reference list, financial models, detailed market size analysis – all in readable, compelling, digestible form 16
  17. 17. Partners Meeting  Ask your champion for the main objections in advance  Customize your pitch to address them  Command the room  Be open about risks – and your plan to mitigate 17  Ask your champion where they’re at (strong positive? slight positive? still questioning?)
  18. 18. The Vote 18 Partner A Partner B Partner C Partner D Average Market 4 4 4 4 4.0 Team 4 4 3 5 4.0 Product/Tech 2 4 4 2 3.0 Business Model 5 5 3 3 4.0 Competition 4 3 3 4 3.5 Deal/Cap Markets 4 4 3 3 3.5 Disruption 4 4 4 4 4.0 Network Effects 2 3 4 4 3.3 Total 29 31 28 29 29.3 Two most important critera Debate and disparity can be a good thing
  19. 19. Term Sheet Time Frequently Asked Questions…  Should I include VCs in my first round or just angels?  Should I do a convertible note with a cap, no cap or a priced round?  How big should the option pool be?  How should I think about valuation?  “Promote” definition  How should I think about control? 19
  20. 20. 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  What experiments are you going to run and what results do you expect from those experiments? 20
  21. 21. Who’s Ready to Raise Money?
  22. 22. Mastering the VC Game: How to Raise Your First Round of Capital Jeffrey Bussgang Flybridge Capital Partners, General Partner Harvard Business School, Senior Lecturer jeff@flybridge.com @bussgang February 22, 2017

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