VC Fund Raising Process

An Insiders View:
How to Raise Money
from VCs
Bob Dahlberg
Venture Partner
Horizon Ventures
Los Altos, CA
Bob at horizonvc com

Key Message:

VC Fundraising is a
Sales Process,
Not a Pitch

Agenda
Venture Capital financing Caveats
n

Raising money is a sales process
n

Four steps to falling in love
n

Feb. 4, 2008 Copyright 2007, 2008 Robert W. Dahlberg 3

Full Disclosure: VC Costs… †

False sense of security: masks viability
n
Fund raising takes time away from serving
n
customers
Adds an additional set of masters
n
Money enables costly mistakes
n
Money removes spending discipline
n
Sets the exit strategy and timing
n
You give up a lot of ownership
n

† Source: Greg Gianforte, CEO RightNow, http://cet.berkeley.edu/Resources/CETLectures.html

Venture Capital Isn’t Required
To Build a Great Business …
Broadcom
n
No VC money
n
Cisco
n
$5M in revenue, profitable before Sequoia invested
n
Dell
n
Raised money at $60M in revenue
n
eBay
n
$4.5M in revenue and profitable before Benchmark
n
invested
Microsoft
n
VC funded after being profitable
n
The MathWorks
n
>$300M in revenue, no VC money
n
Oracle
n
Government contract funded first product
n
SAS Institute
n
> $1.9B in revenue, the largest private software
n
company, no VC money
Siebel
n
Customers funded first product
n


… But it Can Sure Help

Cash to fuel growth
1.

Cash to fuel growth
2.
Strategy / business advice
3.

Introductions: VCs, customers partners
4.

Recruiting
5.


Agenda
n

n Raising money is a sales process
Four steps to falling in love
n


Fundraising = Selling an Investment

It’s likely to be the biggest sale of your life
n

Success demands careful planning and
n
execution


Fundraising is a Grueling Process
1. Requires mental toughness
2. You may have to talk to 10 – 40 firms to find
the match
3. It’s the best business advice you will get!
§ Listen
§ Learn
§ Accept it
§ Bake learnings into your business plan


The Classic Enterprise Sales Process

Initiate Educate/ Justify
Discovery Evaluate Validate


Fundraising is a 4 Step Sales Process

Initiate Educate / Justify
Discovery Evaluate Validate

4
1 2 3
Due
Prepare Approach “The Pitch”
Diligence


Time Scales

4
1 2 3
Due
Diligence

1 to 6 weeks
Per VC

2 to 12 weeks
Per VC

2 to 26 weeks
Per Funding


Agenda
n

Raising money is a sales process
n

n Four steps to falling in love


Step 1: Prepare
Goal: Build an investable company
n

Strategy: Understand the VC’s Mind
n


VC Problem #1
Deliver BIG returns to their Limited Partners in an
n
out of favor investment sector

HUNGRY to do GOOD deals
n

40.0
30.0
20.0
10.0
0.0
-10.0
-20.0
2000 2001 2002 2003 2004 2005 2006

VC Return PE Return
Source: Cambridge Associates

VC Problem #2
“We kiss a lot of frogs to
find the prince”
-- Venture capital industry cliché


Venture Grade Deals are Rare
% 2003 Corporate Tax Returns by
Revenue
100%
81.8%
80%
5.4M Returns
Percent of

60%
Life Style Companies VC
Grade
AKA “Walking Dead”
40%

13.6%
20%

0.5%
2.2% 1.9%
0%
< $1M < $5M < $10M < $50M >$50M
Revenue

Source: IRS.gov

VC Problems #3, 4, 5
No one can pick which start up will make it
n
Every deal has “hair on it” – it’s easy to find problems
n

Portfolio returns: 1 @ 10X; 4 @ 2X; 5@1X; 10 @0X
n

=> VC will rely on their gut in the end
n

Will be working together for 6+ years
n
It has to be an interesting project
n

There has to be compatibility with the team
n

The unexpected is going to happen
n
Got to get through the hard times
n


So How do Most VCs Decide?
VCs “fall in love” with the deal


So the Start-Up Must Be Attractive


Attractive in 2008 Is
Big Market
n
Open to disruption
n

Customers in pain and who buy
n
Growing order trend
n

Strong product offering / technology
n
Differentiated, protected
n

Successful Team
n
“A Players”
n

Successful Investors / Advisors / Board Members
n


#1 Start-Up Failure is the
Lack of (high) Paying Customers

Know your customer!
n

n Walk in your customer’s shoes

n Know why they will buy


Dot Bomb School
“Build it and they will come!”
n
Product Development Model
n

Concept/ Product Alpha/beta
FCS
Bus. Plan Dev. Test

“Get big fast”
n


New School

Customer Development Model †

Customer Customer Customer Company
Discovery Validation Creation Scale

† Steve Blank, The Four Steps to the Epiphany.

Customers that are Buying is
The Essential Investment Criteria

www.cafepress.com/kandsranch


Step 2: Approach

n Goal: Get the first meeting

n Strategy: Approach the right VC, right

Due
Diligence


The Right VC, Right

1. Right VCs,

2. Right Time,

3. The Right Way


1. The Right VC
has Greener Money
VC money is not a bank loan
n
Do your homework!
n
Talk to start-up CEOs
n
n Actively investing
n Fund has money
n VC has capacity (not too many board seats)

Right sector (life sciences vs. semiconductor)
n
n Relevant portfolio, expertise, and synergies
n Early vs. late stage


Approach the Right VC, Right

1. Right VCs,

2. Right Time,

3. The Right Way


2. The Right Time - 1
“Seek financing
on the backside
of a milestone”
– John Hall,
Horizon Ventures


“VC money is very expensive fuel to be
used for taxiing around an airport.”
– Peter Rip, Crosslink Capital


Seek VC financing after Customer Validation
n

Funding
“Taxiing Phase”

Customer Customer Customer Company
Discovery Validation Creation Scale

† Steve Blank, The Four Steps to the Epiphany.

Software Seed Rounds Fell 27% YoY
Software VC Investments by Company Stage
400
350
300
250 Seed
Early Stage
200
Expansion
150
Later
100
50
0
2004 2005 2006 2007(75%)
• Early Stage company investments increased 28% YoY.
• Expansion company investments decreased 15% YoY and 20% from 2004.

Source: PricewaterhouseCoopers/Thomson Venture Economics/National Venture Capital Association MoneyTree™Survey


Funding to Customer Validation
Customers
n
Consulting engagements
n
Non-Recurring Engineering (NRE) engagements
n
Retainer fees from customers
n
Government
n
Small Business Innovation Research Grants (SBIR)
n
Big Companies
n
Value-Added Reseller (VAR) agreements
n
Divestitures – protected supplier contract with parent for a
n
defined period
Moonlighting
n
Founders waive compensation
n
Family, Friends and Fools
n

Approach the Right VC, Right

nRight VCs,

nRight Time,

nThe Right Way


The Right Way
“We only look at deals that are
introduced to us by people we know”
– Mike Schuh, Foundation Capital


The Right Way:
Introduction by Referral
Successful entrepreneurs
1.

Lawyers that work with VCs and start-ups
2.

Angel investors
3.

Other service providers:
4.
bankers, head hunters, …
n

Avoid Brokers (= Mothers-in-Law)
Create a buffer layer in between you and VCs.


Sales Tool:
The Executive Summary
Tool Objective: To get a meeting
n
One pager that covers:
n
Contact information
n
Customer problem
n
Your solution (product/technology)
n
Market size
n
Competitors
n
Team
n
Customer proof points
n
Funding status
n


Executive Summary Template
Company Overview: Logo
Tagline

Pain:

Solution :

Technology
Company Information:

Newco, Inc.
Address :
Phone:
Fax:
Website:
Email
Basic Details:
Founded In: Defensibility
# Of Employees: 15 (X US / Y off shore)

Funding History:
Total Amount Raised to Date:
Funding History:

Total Seeking: $ Raised to Date:
Total Amount
Participants Amount
Individuals:
Committed Funds (If Any):
VCs:
Competition
Others:
Use of funds: E
Valuation Expectations:
Total Seeking:
Committed Funds (If Any):
Use of funds:
Financials:
Cumulative Revenue:
Burn Rate: $
Cash Flow Positive in: Year ?
Business Model
3-Year Revenue Forecast:
Year 1: $
Year 2: $
Year 3: $

Team:

Milestones
• Company founded ____
• ___ Patents filed on ___
• Product Introduction ____
• $ in sales in x
• $ in sales in x+1
• $ in sales in x + 2

www.bandangels.com

How VCs Vet
Your Exec Summary
Is the referral source credible?
n
Is this company in my geography?
n
< 1 -2 hours travel time
n
Is this a scalable business?
n
Is the team credible?
n
Are the existing investors credible?
n
Can I possibly love the:
n
CEO
n
Target market
n
Problem being solved
n
The technology being developed
n


VC’s Tool: VentureSource


Rejection
“We can’t kiss all the pretty girls”
-Bob Kagle, Benchmark


Step 3: The Pitch
Goal: Get follow-on meetings
n

Strategy: Sketch out a compelling,
n
exciting picture
4
1 2 3
Due
Diligence


PowerPoint “Pitch” Advice
is Abundant
SVASE
n
www.svase.org/components/uploads/SVASE%2010%20Sli
de%20Template.ppt
David Cowan, Bessemer Venture Partners
n
whohastimeforthis.blogspot.com/2005/11/how-to-not-write-
business-plan.html
Brad Feld, Mobius Venture Capital
n
www.feld.com/blog/archives/2004/06/the_torturous_w.html
Guy Kawasaki, Garage Technology Ventures
n
blog.guykawasaki.com/2005/12/the_102030_rule.html


Your Goal:
Get the Next Date

Tell a simple yet compelling story
n
VCs easily drown in details
n

Your key points get forgotten
n

Boredom sets in
n

Listen and learn
n


K.I.S.S. Principle:
Tell a Simple Story
Avoid 3 Blind VCs and (You’re) the
n
Elephant
n Too common at first VC meetings:
You know your business best
n

n Assume nothing!

VC Start-Up
K.I.S.S. = Keep it Simple Stupid


Peter Lynch’s Investment Advice

“Never invest in
any idea you
can't illustrate
with a crayon.”


Jerry Weissman Coach to
IPO Road Show CEOs


Expect to Go off the Rails
1. VCs are curious, smart and impatient
They will ask a lot of questions when confused
n

2. VCs are testing you:
Are you an effective leader?
n

Able to listen to “board room” feedback?
n

Able to listen to customer feedback?
n

Re-arrange the slide order to address
n
issues that come up early


Listen Carefully!
It’s the best business advice you will get!
n

§ Listen

§ Learn

§ Accept it

§ Bake learnings into your business plan


Four Reasons for Love

Market

+
Team Technology Financials


1. Market Size is Every VC’s Concern

Is the market big enough to build a big
n
company?
n Is there any potential to grow fast?

n Is there room for this start-up?

n Is the market big enough to maneuver
if the first niche doesn’t work out?


1. Lack of Customers
is the #1 Cause of Failure
Does the team really know the customer?
n

Is there a logical reason behind the
n
customer list?
Strategic or opportunistic?
n

n Any notion of customer segmentation?

Are the customers tier 1?
n

How much are the customers helping?
n


2. Team
Every team claims to be “world class”
n

Demonstrate Success
n
Company pedigree – worked at market leaders
n

n Personal results

n Personal success

n Start -up mentality vs. Big company mentality

Expect your backgrounds to be rigorously
n
checked.


3. Product Test:
Aspirin or Vitamin??

Inertia is huge
n

Customers change only when they have to
n

“Don’t fix what isn’t broke.”
n


3. Product
Feature or a Company?
A Feature?
n
n Can the incumbent add this feature to an
existing product easily?
A Product?
n
n Part of a full-product portfolio?
A Company?
n
n Canthe value prop create a substantial
business?

4. Financial Forecasts

“I don’t have Excel on my computer!”
-- Mark Stevens, Sequoia Capital


Cash flow is king

Revenue forecast will likely not materialize, So
n

n Is this plan realistic?

n Revenue must not be too big, but not too small

Spending plan will be scrutinized.
n

n Cash is King
n Successful CEOs are frugal


The Morning After …


What Can You Do?
React to the business advice you received
n
Adjust your business strategy as is necessary
n

Polish your pitch for the next VC
n
Incorporate learning from each interaction
n

n Simplify, Simplify
n Clarifyconfusing points
n Address objection items

n Rearrange the slide order


What Will Most VCs Do?

Go silent or an innocuous turn down
n
They don’t want to burn any bridges
n

Go at their own pace, no urgency
n
Risk reduces as time passes
n
n Wait for a milestone
n quartersales results
n prototype works


Rejection
Accept rejection gracefully
n

There is no rationale argument to bring the
n
VC back


What Might Happen?
When a VC senses love, you’ll hear back
n

Be responsive!
n
VC’s like working with responsive people
n

n You’re building a relationship

n Respond to requests < 24 hours


Step 4: Due Diligence
n Goal: Get a term sheet
n Strategy: Two way test drive

Due
Diligence


Due Diligence =
Two Way Test Drive
Can I work with this team / VC for the next
n
6 years?
Is this a quality team / VC?
n

Do team / VC listen?
n

Is the team/VC honest, ethical, reliable?
n
dependable?
How do they react being under fire?
n


Prepare in Advance
Customer / technology references
n
Keep references updated on your progress
n

n Use them judiciously

Executive resumes & references
n
Line up references in advance,
n

n Contact people VCs will find

Financial Quarterlies
n

Capitalization table
n


Typical Due Diligence Process
More information (Exec. resumes, financials, cap table,
n
personal references, etc.)
Meet with VC’s “expert(s)”: Portfolio
n
companies, friends, paid experts
Follow up meeting(s) at your office / their
n
office
Calls to customers and personal references
n

Calls to back-channel references
n


Getting “Married”
Locate a Syndicate Partner
n

Term Sheet
n
Legal due diligence
n

Cash in the bank
n


Syndication:
Two Parents are Better than One
For the entrepreneur
n
More strategic minds around the table
n

n Hedge against one VC walking out

For the VC
n
Validates that the start up has legs
n
n More powder available


And Remember…
Venture Capital Isn’t Required
Broadcom
n
n No VC money
Cisco
n
n $5M in revenue, profitable before Sequoia
invested
Dell
n
n Raised money at $60M in revenue
eBay
n
n $4.5M in revenue and profitable before
Benchmark invested
Microsoft
n
n VC funded after being profitable
The MathWorks
n
n >$300M in revenue, no VC money
Oracle
n
n Government contract funded first product
SAS Institute
n
n > $1.9B in revenue, the largest private software
company, no VC money
Siebel
n
n Customers funded first product

Entrepreneur Resources
Law firm outreach
n
DLA Piper Venture Pipeline
n
www.venturepipeline.com
Fenwick & West LLP
n
“Darrell Kong” < dkong _ fenwick.com >
<dkong fenwick.com>
Orrick, Herrington & Sutcliffe LLP’s “Total Access”
n
quot;Chad Lynchquot; <clynch _ orrick.com>
<clynch orrick.com>
Pillsbury Winthrop Shaw Pittman LLP’s “Back Stage Pass”
n
kiran.kamboj _ pillsburylaw.com
Wilson, Sonsini, Goodrich, and Rosati
n
wsgr.com/WSGR/Display.aspx?SectionName=practice/venturecapital.htm
wsgr.com/WSGR/Display.aspx?SectionName=practice/venturecapital.htm

SDForum
n
www.sdforum.org
n
Silicon Valley Bank’s Venture Exchange
n
Shai Goldman, Director, sgoldman _ svb.com
n
SVASE, Silicon Valley Association of Startup Entrepreneurs.
n Entrepreneurs.

www.svase.org
The Enterprise Network of Silicon Valley
n
Tensv.org
Women’s Technology Cluster
n
www.wtc-
www.wtc-sf.org


To Your New Venture
Success!


VC Fund Raising Process

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