What I should have said about raising money…

On Saturday, I was given an opportunity to speak to a room full of entrepreneurs at the Startup Day, put on by Marcelo Calbucci and the crew at Seattle 2.0. My topic was “raising money from angels and VCs”. I think my presentation was flat and mis-targeted, so here are some of the things I should have said.

Update: Here is a link to the video from the event.

Relationships matter and take lots of time to develop;

  • introduce yourself early (now) to as many funding sources as possible, before you have a great idea
  • develop relationships with successful entrepreneurs (sold companies in the space) as they could be advisors, investors or connectors – use sites like Linkedin to leverage and grow your network and connections, you will need it later and can never really be big enough
  • offer your connections or services to potential funders – if you work at a big company (e.g. Microsoft or Amazon), offer to make introductions for their existing investments to key people, groups, programs, events, brown-bags. If you know key bloggers (which you should), offer to help, it is a really good way to build credibility all the way around
  • if you are a social media person, promote what they are doing. You need to begin a dialog and offering to help is a good first step. If you are not yet a social media person, you need to become one anyway to promote your ideas and picking relevant investments and promoting them, commenting on them is good early content and will begin to establish yourself in a space as a thought leader
  • understand what they are investing in now and why (what stage, what space, what vision…)
  • read and comment on their blog posts
  • retweet their posts on twitter, when relevant
  • suggest other relevant investments that they should/could make in the space you care about
  • share relevant articles/links/event – “Brad, I know you care about X and I thought you would think this is relevant…”
  • promote their ideas into relevant circles. if you care about the same stuff, which will increase your likelihood of a good match 10x, you should be discussing and debating the solutions of the future
  • understand their personal backgrounds – you will be making a 3-5 year commitment with these people, so you may as well understand how much you are going to like to hang out and if you share a similar “world view”
  • go to the same conferences, like www.defrag.com to meet other companies, funders…in your space
  • use products like www.gist.com (shameless plug) to do all this more efficiently
  • read blogs from Brad Feld (Foundry), Fred Wilson (Union Square)

At this point, you have asked them for nothing, done alot to help their companies, established that you are a smart, well-connected person who knows other people who care about future solutions in a particular space. All, before you ever talk directly about any one idea. I guarantee that you will learn alot as well about trends, companies and their strategies.

In choosing between raising money from angels and VCs, here are some things to consider;

  • if your idea is good, well articulated and with a high likelihood of success, the time to raise angel and VC money should be the same and it may actually be faster to raise VC money
  • Raising money will take 6-9 months from the time you start to the time you have $ in the bank. Starting way before you need money, but start very softly with steps from above.
  • if you choose angel – work hard to get 1 large lead (~25% of the total round) before you engage all the others. Until you have a good line on at least 3 of these people, don’t even start the process
  • angel groups can be good (e.g. Keiretsu Forum) but look for a sponsor who is in the group, who should be a lead angel investor and develop that relationship first.
  • big ideas play into spaces with big competitors, so you may need VC to be able to react and/or create enough momentum to compete
  • simple rule of thumb – if you need <1m>
  • make your company plans “stage appropriate” – most Series A VC rounds are between $3-5M, so craft your plans to match this amount. $3 gets you A, B, C and $5M gets you A, B, C, D and E or the same timeframe (~18 months). Be firm on your stated “what you need”, but flexible in these ranges
  • try and set you plans to achieve strong results in 18 months, at which point you will either need more capital or will be cash flow positive
  • the easiest way to raise money is to have a good business so focus on customers and better yet, paying customers. If you can’t actually get paying customers, line up as many real people (potential customers) who say they would pay for your solution if it actually worked like you say it will in PPT
  • Focus on real customer vs. the overall market size. Know them by name and try and quantify what they will pay. Better yet, get a PO or some other commitment in hand that indicates a real willingness to pay

Once you have chosen to raise money;

  • focus on the sales process, this is a numbers game with relationship strength and your skills being the key things to increase the odds
  • it takes a ton of time (50-90% of the CEOs time) for 6-9 months.
  • work in groups of 20 with a focused horizon (~3 months) to separate the likely from unlikely.
  • if you have done your homework and understood the landscape (while you were building your plans), you should know the 20 likely firms/people, based on stage, size, history…now is your time for engagement. Hit them hard with a big push of info and momentum.
  • Once you have made the first pass (email intro), first meetings and seen the traction, then you can move on to the next 20 with an updated pitch
  • focus on warm introductions only. If you do not have a direct connection, you have not done your homework and built your network. Ask other CEOs, service providers…to help you find the right connections
  • set the timescale – send bi-weekly updates to everyone of your prospects who has not said “NO” yet. Show progress, achievements both internal and external, talk about what you need to succeed (team, marketing, sales, product dev…) all the things that their investment will enable
  • “we would like to see more traction” is a likely NO, likely move on
  • “we would like to see more traction”- ask for the specifics on what this means. “does this mean you need to see XX customers, or YY product improvement or ZZ partnership signed…” and then determine if you can achieve in your time window
  • keep showing progress to date on all different aspects. Investors love to see a team that can set a plan and execute on time and on budget
  • collect your responses and “gang up” your answers in the next update, investors can wait a few days
  • send your updates on Sunday afternoon to time your them for partner meetings (which usually happen on Monday)
  • the better the VC, the better the feedback. Take it and use it to your advantage
  • focus on the hard problems with your plan (we all have them) and how you want to solve them and where you need help (we all need it)
  • with regard to market size – focus on the successful companies and exits vs. bullshit from some analyst firm. Include small, medium and large company comps (focus on medium, publicly traded as you can gain tons of market data from there). For example, Salesforce.com has 1.3M paying subscribers, will make $1B in revenue this year and has a $5B market cap, that is the kind of business we are trying to create (assuming you were going to sell something to salespeople like we are doing at Gist)

Don’t worry about;

  • NDAs – good investors will not sign these anyway and they have no real interest in “stealing your ideas”. In fact, the best possible investors have tons of knowledge about other players in the space, will have likely looked at investing in all your competitors, know what the big players are doing, know the hard problems…and they got all this information because they didn’t sign the other guys NDA either. You want these investors!
  • Patents – while it is a good idea to get some things on file early and use time to your advantage, don’t spend too much time talking about this during a VC pitch. If they care, they will ask. We used http://www.olympicpatentworks.com/ and got great value.
  • Terms – if you are lucky enough to get a term sheet, it will outline all these items. You cannot control it, so don’t worry about it. Your job is to create value! Value on your side of the table will drive the terms in your favor. Brad Feld and other VCs have written extensively about their philosophy on terms and term sheets.
  • VCs wanting to replace founders – if you are doing the right things, they will love you and make sure you have lots of equity to keep pushing the business ahead. If you suck or the business sucks, you should all be looking for someone to make the equity more valuable. Most VCs want the founder to lead the thing all the way, it is a better story.
  • The exit – if you create a great business, the exit will take care of itself. That said, if you have done a good job understanding your market and large competitors, you should be able to explain a likely exit with historical acquisitions. This is more of a commentary on the space, trajectory and pace of innovation than the exit itself.

Certainly more than I could fit into 15 minutes. Game changing ideas will likely need capital, expertise and people and great angels and VCs (Foundry and Vulcan) can provide that. Let me know if you need an intro. I have included the deck I presented and I am happy to try and answer any additional questions or make other introductions to people in my network. Good luck.

Funding your ideas (angel or VC) – thoughts and ideas

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