1. How to raise venture capital
Demystifying the dark arts
Planningness 9/11/14

2. Who am I?
@jamiedavidson
jdavidson [at] redpoint [dot] com
www.correlatedcausation.com
Background:
– redpointvc – consumer tech
– hoteltonight - product
• acq primatable – founder
– kpcb – digital investing
– google
• youtube – product (search)
• adwords – eng / data
– princeton – ORFE

3. “I’m a great believer in luck, and I find the harder I work, the more I have
of it..”
Thomas Jefferson

4. Raising venture capital
• Who – shared context
• What – details
• When
• Why
• How – tactics

5. Raising venture capital
• Who
• What
• When
• Why
• How

6. Who – the capital
1. Angels
2. Venture Capital

7. “Where you invest your love you invest your life.”
Mumford & Sons

8. Who – angels
• Friends and family
• Independently wealthy
• AngelList
• Accredited investors!

9. “Prediction is very difficult, especially if it’s about the future.”
Niels Bohr

10. Who – venture capital
• Capital: Institution investors - Limited Partners
(LPs)
– based on past returns
– anti-correlation with other asset classes
• Economics: The typical model is “2 and 20”
– 2% annual management fee of the fund
– 20% of the gains beyond the investment (carry)

11. “Compound interest is the eighth wonder of the world. He who
understands it, earns it… he who doesn’t … pays it.”
Albert Einstein

12. Who - venture math
• Power law of startup returns
– 1/3, 1/3, 1/3
• Targeting >3x the fund in 7 -10 years
– 20% annual return
1. http://blakemasters.com/post/21869934240/peter-thiels-cs183-startup-class-7-notes-essay

13. Who – venture math
Fund Size $50 M $500 M
Exit Multiple 3 3
Implied Portfolio Value $150 M $1500 M
Average Ownership 10% 25%
Total Market Cap of Portfolio $1500 M $6000 M
Avg Investment Size (inc. reserves) $2.5 M $10 M
Number Investments 20 50
Investment Failure Rate 50% 70%
Successful Investments 10 15
Avg Market Cap of Exit $150 M $400 M
1. http://tomtunguz.com/how-to-align-founder-and-vc-incentives-why-fund-size-matters/

14. “You just have to pay attention to what people need and what has not
been done.”
Russell Simmons

15. Who – a startup
“A startup is a company designed to grow fast.”
- Paul Graham Y Combinator
1. Targeting a big market
2. Reach and serve that market - scalable
• Relatively efficient market implies that a startup
needs a novel idea or market change
– startups create new ways of doing things
– technology facilitates rapid change

16. Raising venture capital
• Who
• What
• When
• Why
• How

17. “Price is what you pay. Value is what you get.”
Warren Buffett

18. What
1. Convertible Debt
– Cap and discount
2. Equity
– Amount and valuation
– Dilution
Raise enough capital to hit milestones to mitigate
risks to growth
1. http://correlatedcausation.com/how-much-to-raise-using-crunchbase-data/

19. What – an example
At Incorporation Ownership
Founders 100%
Seed Terms
Pre Money $4 M
Raising $1 M
Option Pool 20%
Post Seed Ownership
Founders 60%
Option Pool 20%
Seed Investors 20%

20. Raising venture capital
• Who
• What
• When
• Why
• How

21. “You've got to know when to hold 'em, know when to fold 'em”
Kenny Rogers

22. When
• Don’t need money!
• Materially mitigate risk and can use capital
1. Seed - product market fit
2. Series A - build team and business
3. Series B - scale the business
4. Series C - profitability
5. IPO - liquidity

23. Raising venture capital
• Who
• What
• When
• Why
• How

24. “The reasonable man adapts himself to the world; the unreasonable one
persists in trying to adapt the world to himself. Therefore, all progress
depends on the unreasonable man.”
George Bernard Shaw

25. Why
Recall startups = growth
Implies:
1. Targeting a really large market
2. Valuable markets will be competitive
Funding is fuel for growth
Raising VC means you target a big outcome

26. Raising venture capital
• Who
• What
• When
• Why
• How

27. “A-B-C. A-Always, B-Be, C-Closing. Always be closing. ALWAYS BE
CLOSING.”
Glengarry Glen Ross

28. How
• Warm intro
• Relationship building
• The pitch
• Competitive process

29. How – venture process
1. Screen
2. Socialized
3. Diligence
4. Decision

31. How – tell a story
Aristotle's mode of persuasion
• Logos – facts and reason
• Ethos – character
• Pathos – emotion
Reasoning by analogy vs. reasoning from first principles.
• This for that.
Consider Homejoy
1. Uber for home services
2. Home cleaning is a offline fragment market. We improve rates
cleaners receive by XX% and make it cheaper and easier to
customers by YY%. This is a $ZZB market.

32. “Well done is better than well said.”
Benjamin Franklin

33. How – the pitch
[Vision] What is the problem and is it worth solving? Why now?
[Team] Does the team have the unique ability to build this company?
[Traction] Who is the customer? Which customers have used the product and how
have they received it? How much is each customer worth?
[Distribution] How does the company acquire customers cost effectively? What are
the unit economics (customer acquisition cost, contribution revenue, and churn
rates)?
[Business model] Does the company have the business model to build a big (>$100M
annual revenue) business with good margins (gross ~ 50 to 60% / net ~15 to 25%)
under reasonable assumptions?
[Market] Can the market enable $100M revenue? Is the company in a quickly growing
market or riding a disruptive wave?
[Competition] What is the competitive angle (competitive barrier to entry and/or go-to-
market) that will enable this company to succeed where others have tried and
failed?
[Ask] What do you need and how will you use it?
1. http://tomtunguz.com/pitch-deck/

34. Questions?

35. “The best way to predict the future is to create it.”
Abraham Lincoln

36. Breakout
• Vision or “the uber” pitch
Pitch either
1. an idea / startup you know
2. an existing company

37. Thanks
@jamiedavidson
jdavidson@redpoint.com
www.correlatedcausation.com