Presentation originally written for How To Web conference 2011 in Bucharest Romania. Basic overview of venture capital with analogies to common features of games. Slides are primarily visual, probably not too helpful without the audio.
Afternoon. I’m going to talk about how to play the VC game. But first…
This is a little bit about myself. Everyone here can read, but since you’re probably too busy looking at twitter, I’ll read it out to you. As a firm, we’ve invested in over 30 companies all across Europe, I work with the consumer facing ones in the internet and mobile space. Soundcloud – an audio platform based in Berlin, Handmade, a mobile flirting and dating company based in London, MegaZebra, a social games developer based in Munich and Seedcamp, a Pan-European accelerator based in London.I’m going to talk to you about fundraising and how to play the VC game. But before I do that, I want to thank the How-to-Web organizers.I like to play games, all kinds of them. Board games, traditional video games, casual games, social games. Most people I know like to play games. Most entrepreneurs I know like to play games. But most entrepreneurs I know don’t like to fundraise. In fact, they find it a combination of terrifying and painful. But playing games and fundraising are actually very similar. I’m going to use some familiar concepts from different types of gaming to help explain a bit about VC fundraising. But first, a little health warning. I’m going to give a talk about fundraising from a VC. Which means: if you aren’t a company that needs venture capital money, this isn’t a game you should be playing. So the first key takeaway: Figure out if your company is one that actually needs VC money.
Onto the VC game. What kind of game is it? Is it a game of chance or a game of strategy? I think it’s a mix of the two. You can definitely improve your odds by building up your skill level. But I believe luck always plays a role. Perhaps Facebook announces something is hugely beneficial to your company just as you’re beginning your fundraising process. Good luck. Maybe your biggest competitor raises a monster round and scares the crap out of all the VCs you’re talking to. Bad luck. But you can’t control your luck…though I know many entrepreneurs who try. But you can work on your strategy and the rest of this talk highlights some of the strategies you can use to improve your odds.
The first thing to understand is that the VC game is a social game. So, similar to a social game, you spend hours and hours on pointless tasks and when you finally snap out of it, you think…”wow, that was a waste of time!”…just kidding. The way it’s similar to a social game is that the larger the network of people you know playing the same game, the better off you are. And I’m not just talking about VCs. In fact, your should include lots of angels, other entrepreneurs (both active and not), business development people at major companies that work with startups…these are the people that VCs listen to. I get a lot of deals every day. I get lots of people emailing me about their startup. I have no frame of reference from them. But if someone I know, a trusted person from my network, tells me about a company, that company goes to the top of my list. Because they’ve been filtered. And as I go through this talk, you’ll see that there are lots of different filters VCs employ and it’s for a simple reason: there’s a lot companies out there and it’s very difficult to process them all. Filters help. So talk to lots of people and when you’re raising money, ask for intros. Sidenote: there are some areas where I disagree strongly with “popular wisdom” or what a lot of the industry thinks. I’ll try to highlight both views (if I remember). Here’s one: I don’t recommend employing a banker, particularly at the early stage. It’s true that they have relationships with VCs, but I don’t think their filters are aligned with VCs’ and I think they can get I the way of building relationships. I have personal experience with this: I used to be a banker. My job was to get in the way. I prefer deals that come in from an entrepreneur or angel investor. Key takeaway: fundraising is social, before you start, invest time in building your network
There’s a concept in social games, and the consumer world in general, called viral loops. You’re playing a game and at some point, you’re motivated to share something. Maybe you’re bragging about a high score, maybe you’re sending a virtual gift to someone or asking for help building your farm. Whatever it is, you share it and everyone else sees it in their Facebook stream. And some percentage of the people who see it, click on it, start playing the game…and the cycle repeats. This is the core game mechanic upon which Cityville empires have been built. The VC game operates on a very similar viral loop. Someone talks about your company…it could be another VC, an entrepreneur, a tech blog…VCs hear about it…and some percentage will meet with you. For better or worse, this is one of the core game mechanics upon which VC-ville empires have been built. Seriously, many VCs are pack animals. If there is a company a lot of people are talking about, they want to be in on it. They want to know. Most of all…they want social proof. They want to know that they aren’t the only ones interested in a company. It’s not easy to create a viral loop around your company, but it is possible. This is another area where your network can become really valuable. Key takeaway: create a buzz around your company. Your network is one way. Another way is…
Badges! What is the equivalent of a badge for startups? I think its accelerator programs. There are a lot of accelerator programs, all over Europe and the US. The better ones have very quickly evolved into a stamp of quality. They’re another filter that VCs use and often times, they address geographies (like Romania!) that I wouldn’t be able to cover on my own. My own experience with these programs is that they go through huge volumes of applicants and often times surface excellent companies that I’d probably never have found. In fact, the only two Romanian startups I know, Brainient and UberVu, are Seedcamp winners. Key takeaway: if you’re an entrepreneur with no network or a limited network, or you’re from a geography that doesn’t have an active startup ecosystem, consider accelerator programs as a way to jumpstart your VC fundraising.
Before you meet with a VC, check your heads up display. For those of you that are pre-launch, this isn’t relevant. For the rest: make sure your metrics are going in the right direction. If you aren’t growing, I wouldn’t even bother talking to a VC. VCs are interested in companies that grow…and grow fast. If your numbers are flat at the early stage, you probably haven’t found product / market fit yet. The word VCs use a lot is TRACTION. And without it, you won’t get much interest from VCs. It’s also important to know which metrics are important for your sector and what scale is appropriate for your type of company. If you’re a freemium consumer company and you’ve launched, 10k users doesn’t make much difference. On the other hand, if you’re a B2B company, a few hundred paying users might be enough. The first investment I did was a company called SoundCloud which I talked about a bit earlier. Soundcloud is now the largest sound platform for the web. When I first met them two years ago though, they were a bit different - they were a music-creator focused collaboration platform. They helped people who work with music easily share tracks and work together. The market for that is significantly smaller than the consumer market. So when I met them, they had 50k users. I thought that was pretty awesome. And they were adding a hundred users a day. Also awesome. Now they have 8 million users and add thousands a day, so things have moved on…but the important thing is the frame of reference when we made the investment. Relative to the market they were addressing, their growth was amazing. Key takeaway: if you’ve launched, make sure your metrics are moving in the right direction. And know what the right frame of reference is for your market.
I’m not sure what game the woman on the left is playing, but I’m pretty sure it’s not Gears of War. Different people play different games. And similarly, different VCs have different areas of expertise. If you’re an infrastructure software company, you could talk to me for 3 hours and I’ll still only have a very basic understanding of what you do. If you made a social game about infrastructure software, I’d get it in 30 seconds…and probably not invest. Make sure you are talking to the right VC at the firm, the VC that has the most relevant experience for your company. And do not rely on them to do it for you. Over and over again, I’ve seen VCs that have zero experience in an area take a meeting with a company that is in that area. And despite the fact that they know nothing about what you do, they probably won’t hesitate in having an opinion and passing judgement on your company. Key takeaway: when approaching a VC fund, make sure you’re speaking to the right person at the firm.
I can’t emphasise this one enough. Practice, practice, practice. When you play a game a lot, you get better at it. Pitching your company is the same. So pitch your company…a lot. Pitch it to people from different parts of the ecosystem. Look for patterns in the questions people ask you – these are the areas where you need to put some time and effort into explaining better. Be able to explain your company in 30 seconds, 3 minutes and 30 minutes. Be able to explain it from different angles – product, business model, marketing strategy…these are the different angles VCs will view it from, depending on their own background. Key takeaway: Practice! Practice explaining what your company does. Okay, so let’s say you go through the process, you build your network, you get the intros, your numbers are going in the right direction, you’ve practiced and you’ve convinced at least one person at a fund that your company is awesome. Let’s say it’s me. We’ve met, I get you, I get your company vision and I’m on board. So then I say to you…I want you to come in and meet the team. Now if you’ve played some traditional video games, you’ll recognize this moment. When I ask you to come in and meet the team, it means you’ve reached….
…the boss level. Just for clarification, this is not what a typical VC partnership looks like…though I know some entrepreneurs that would say otherwise. This is the make or break moment. And the degree to which the people you are talking to are familiar with your company can vary a lot. Different funds work in different ways. At Doughty Hanson, we have a pretty good flow for internet and mobile companies which I’ll take you through now. Let’s say I really like your company. I present it to the team for about an hour and a half. If it’s possible, everyone on the team has to use the product…or at least try to. If there are lots of questions and the team’s not sure, I might go off, do some more work, meet with you again, this time on more specific topics. After another session with the team, we decide whether or not to bring you in. So at least at DH, there’s a good basic understanding of the product and market by the time you come. So when you come in, what everyone is really judging is you. Now I’m well aware of how nerve-racking the boss level of VC fundraising can be. So I try to help as much as possible. I’ll often look through the pitch deck and give constructive feedback. I also make sure the founders know the background, personalities and areas of expertise of each of the partners, so they can be prepared. Key takeaway: Whenever you go into a partner meeting, make sure you’re prepared. And you should ask your champion, the person from the fund you have the strongest relationship with, to help you as much as they can.
Everything I just talked about is fairly numbers oriented. In other words, if you follow the strategies I outlined, you’re optimizing for meeting a high number of VCs. Casting your net wide so that statistics are on your side. Bombing the playing field. But there’s another way to play the game. And it’s not to play the game, but play the player. Target the VCs that you think are the most likely to invest and pursue them. But how do you know which VCs are most likely to invest in your company? Well, when VCs talk about entrepreneurs, they often put them in three buckets: successful serial entrepreneurs, first time entrepreneurs and the ones that lose money. What they don’t talk about too often is that VCs fall into the same three buckets. There’s the ones who have made money, the ones who are new and the ones that have lost money. There’s very few people in the first bucket, a bunch more in the second and lots in the third. The third group is the hardest one to raise money from. And it’s with good reason. Lots of VCs that have lost money have lost it backing companies that were supposed to be world-changing companies. They weren’t supposed to lose money, they were supposed to change the world. But after it fails to happen time and time again…and again…and again…it’s easy to stop being quite as optimistic. It becomes harder to believe that a company can change the world. And so a lot of VCs are quite sceptical. The two groups that aren’t are the VCs that have backed winners and the VCs who haven’t had a chance to fail yet. I used to be in the second group and hopefully moving into the first, which is probably why I’m a pretty optimistic person. And I’m pretty lucky because the team at DH, despite having backed some really big ideas that failed, continues to be really optimistic.I think the best example of this is Soundcloud. I get asked about SoundCloud a lot, because we backed it quite early. We also backed it a few months after one of the worst financial crises the world’s ever seen. At the time, a lot of people were pretty sceptical about their vision. A lot of people were also scared shitless because they thought the world was going to end. I think the team at DH not being fearful was a big advantage. But I also think being naïve was an advantage. I believed they could change the world because I had no reason not to. I don’t think the founders of SoundCloud knew any of this, by the way, so it was just luck on their part. Key takeaway: Consider being a bit more strategic in your VC fundraising.A couple more quick thoughts
In gaming, there are lots of websites that have cheat codes, ways of progressing further in the game faster. There are similar sites for fundraising. This is one of them, called (appropriately), Venture Hacks. There’s more…many more. Sites, blogs, books. There’s a lot of information out there. Educate yourself. There’s no reason any entrepreneur should be making the easy mistakes anymore. Don’t ask me to sign an NDA. Don’t have a 50 slide presentation deck with very small font. Don’t get screwed on the legal negotiations. And it goes on and on.Key takeaway: educate yourself
Also similar to games, you’re probably going to lose. A lot. You will get a lot of “Nos”. I invested in MegaZebra after we’d said no to them...I think twice. But after the Nos, they made awesome progress, their numbers improved and, most importantly, they didn’t give up. It’s a similar story with SoundCloud – they had been fundraising for months before I met them. Alex and Eric were relentless, they didn’t give up even after a lot of people said no them. Key takeaway: Don’t give up. Insert another quarter…or lei and try again.
