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How To Raise Your First Round of Capital
1. Mastering the VC Game:
How to Raise Your First Round of Capital
Jeffrey Bussgang
Flybridge Capital Partners, General Partner
Harvard 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
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4. Why Raise Money from VC?
Experience Matters:
Deep Pockets: VCs have “seen the
High risk tolerance movie” over and over
and additional again and can help
funding for follow- avoid pitfalls to find
on rounds the path to success
Value-Add: Swing Big:
VCs provide domain VCs don’t invest in
experience, industry niches, they invest in
contacts, and transformative ideas
strategic planning that can build large
companies
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5. VCs vs. Angels
Will want some control (voting, Will want no control (“send me
board, veto) an annual email”)
Will want to own 20-30% Will want to own 1-10%
Very actively engaged (they Maybe engaged or not (often a
get paid to do this!) hobby, sometimes a personal
Can add tremendous value mission)
and be great business partners Can add tremendous value and
Can be total disasters be great business partners
Typically rational actors, Can be total disasters
commercially-driven, but if
inexperienced… 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
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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
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9. Investor‟s Decision Tree
Worth 3 minutes
(email, phone)?
No
Ignore Worth 30 minutes
(phone, in person)?
No
Pass
gracefully Worth 60-90 minutes
(in person)?
No
Pass but stay
In touch Worth 2nd mtg
(in person)?
No
Pass but be helpful Serious due diligence
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
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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
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15. Term Sheet Time
Frequently 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?
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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
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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
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18. LATER STAGE VALUATIONS ARE
INCREASING, WHILE EARLY STAGE REMAINS
CONSISTENT
$70
$60
Median Premoney Valuation ($M)
$50
$40
$30
$20
$10
$-
2002 2003 2004 2005 2006 2007 2008 2009 2010 1H11
Later Stage Second Round First Round Seed Round
Source: Dow Jones VentureSource
20. Mastering the VC Game:
How to Raise Your First Round of Capital
Jeffrey Bussgang
Flybridge Capital Partners, General Partner
Harvard Business School, Senior Lecturer
April 3, 2012
Jeff@flybridge.com @bussgang
Hinweis der Redaktion
And this is showing up in increasing valuations, especially for later stage companies