The Best VC Meetings are Debates not Sales

August 25, 2009

nixon kennedyThis is part of my blog series “Pitching a VC.”

I’ve sat through a lot of VC pitches and having been CEO of an enterprise software firm for many years I’ve also sat through many customer meetings with sales teams.

There is one classic mistake that I see across both types of meetings – “the tell & sell”  presentation.  This involves a person who leads a PowerPoint presentation in which the presenter feels more comfortable racing through pre-practiced slides and rattling off charts & bullet points than having a discussion.

The presenter comes out of the meeting proud at having gotten through all 30 slides (and maybe even a demo) with a bunch of smiling faces and nodding heads and no discussion.  After the sales meetings I would ask the exec afterward, “how do you think it went?” and always be surprised when they’d say, “great, I think they really liked it.  They seemed to agree with everything I said.”

In our internal sales training sessions I would always teach our young sales execs that this seemingly good meeting was probably not as good as they thought.  People are much more likely to buy into you as a person and us as a firm when they’ve been involved in a discussion with you about their problems, your solutions, who else has been using your product, etc.  They might even like to challenge some of your assumptions.

The advice I gave to my sales execs is the same advice I would give to you:  smiling, nodding heads are normally not a great sign.  In the best case they might prefer to ask you questions but you didn’t prompt them and they’re being polite (although this is less likely in VC who are not known for being wallflowers!).

The VC might have tried a few times to prompt a discussion and you didn’t take the cue but instead reverted back to slides.  This happens often and I bet most presenters never realize it.  Most worryingly, many times it means that they have decided that they are not interested in your product (or investing in your company) so why bother having a debate / discussion with you.

It is easier for them to finish up 45 minutes, politely shake your hand and say, “we’ll get back to you”  once they’ve had a chance to “noodle on it.”  Ever heard that?  Far better that you noodle with them.  I believe that the best meetings are debates.  The following are some tips for the discussion style VC meeting

UPDATE: My initial post talked more about a debate than a discussion.  David commmented here that the problem with my phrasing it as a debate is that I don’t want to encourage any entrepreneurs to think that they should try to “win” the discussion by proving they are right (as you might do in a debate).  So I’m softening my message to “discussion.”  See note at the end of the post for a funny story on this.

Tips in a discussion led VC Meeting

questions1. Tee up your slides to prompt questions – The best way to avoid racing through your slides in a tell & sell style is to tee up your slides to prompt questions.  We used to do this in our sales slides.  After walking through the “problem statement” slide, the build on the bottom of the slide would always say, “Have you experienced similar issues in your company?”

It was just a way to remind the sales rep to create a dialogue.  If you get nervous in meetings or have a hard time remembering to stop you can simply build the prompt into your slides.

2. Stop often and seek feedback on direction – In addition to asking questions to prompt a debate you should always check for feedback from the VC.  Examples are “would you like me to go into more details about how we calculated the market size?”, “would you like me to tell you more about the team members who aren’t here,” or “would you like me to jump into a product demo now or tell you more about our market first?”  Be careful not to jump into a long-winded discussion on any topic without seeking cues from your audience on whether they’d like to go deeper on the topic or move on.  I think this is one of the single biggest mistakes that presenters make.

3. Be careful about the way you ask questions – I’ve sat through many meetings with groups of people where the presenter would say something like, “Do you know what REST is?” or “You know the company Constant Contact, right?”  Questions like this in a crowd often elicit “yes” answers even when people haven’t heard of the technology or company.  Most people in general don’t want to admit in front of peers that they haven’t heard of something that they think they should know.  If your presentation requires an explanation of RSS vs. ATOM always best to say, “let me quickly state how RSS and ATOM are different.  I know you might be aware of the differences but let me quickly cover it and if you want me to go deeper I’d be happy to.”  If the VC knows the difference TRUST ME they’ll tell you.

4. Don’t be defensive – Don’t view any question by a VC as an affront to you.  I know that they could have worded it more politely and in a less condescended tone, but view the question as an opportunity to have a great discussion.  View the question as engagement!  Remember that a VC doesn’t always care that you have “the right” answer provided that you have a high quality thought process.

parliamentHaving a discussion is a great way to build rapport with the person asking the question.  It’s OK to say things like, “I could see why you might think that Google would go into our market.  It’s a valid concern and we worry about it, too.  Here’s why I think Google won’t initially be a threat to us and how we would respond if they entered our market …”. So the next time you get a zinger from a VC – be thankful.

5. Answering with a question – Another suggestion is the “answer a question with a question” technique.  First, you must actually answer the question that was asked with you before you ask a question back.  It’s really annoying in any meeting when you answer a question directly with a question.  But it’s OK at the end of your statement and it’s a great way to get people talking.


VC, “Do you really think that customers will pay $5,000 / month for your product when there are free versions of X,Y,Z on the market?

You, “We’re not too worried about the free products because they target a lower-end segment than we’re targeting.  We tested the $5k price point with a handful of customers and they didn’t seem price sensitive … From your experience do you think $5k price point will likely be an issue for us?”

6. Don’t be afraid to say “I don’t know” – I don’t think any VC is looking for the entrepreneur who knows everything.  In a way I think most VC’s want to see that you’re mentally flexible, sufficiently humble and not afraid to admit when you’re wrong or don’t know something.  For many difficult or unknowable questions don’t be afraid to say “I don’t know.”  Some obvious things that are not acceptable for the don’t know answers: “how will you spend the $2 million once you raise it?”, “Who are your competitors” or “Who do you need to hire first after fund raising.”  You’d be surprised how many people don’t answer these questions confidently.

7. Get back  with an answer – There are two great things about saying you don’t know the answer to a difficult question.  The first is that you have a chance to ask, “do you have any views on the topic?” and thus hit the goal of getting the VC talking.  Even more importantly you have the ability to say, “that’s a great question.  I’m not actually sure what the answer is.  I’ll look into it and get back to you.”  It gives you an opportunity to email the VC after the meeting with more information and the potential to continue the dialog.

UPDATE:  We once had a company present to us in a full partner meeting.  The presenting team had a partner champion at GRP that was advocating the deal so we were positively predisposed to seeing the pitch.  It mid 2008 and one of my partners asked what they were going to do about costs given the recession.  The COO of the company said that he had read some economic council’s forecasts and technically we weren’t in a recession.  My partner shot back with data of his own.  A real debate ensued.  It wasn’t pretty.  I kept wondering, “why would this guy want to have a debate over a topic like this that had no relevance to proving whether his business idea was sound?”  In the end we didn’t invest.  A large determinant was this gentleman’s lack of EQ in this situation.


First Round Funding Terms and Founder Vesting

August 17, 2009

legal docThis is part of my ongoing series “Pitching a VC“.

There’s a great meme developing this morning on the need to simplify funding terms and documents.  The meme was kicked off by Chris Dixon with this post saying that term sheets need to be simplified and align investor / founder interests.  That prompted Fred Wilson’s blog post appealing to the industry to make these simplified term sheets standard.  Last to weigh in was Brad Feld whose blog post argues that the only 2 terms that should be negotiated are amount raised & valuation.

I totally agree but want to cover a different issue.  If you’ve read any of my blog posts before you’ll probably recognize that I’m from this school of thought where founders & investors need to be more aligned and I’ve been very cynical of historic VC practices.

2006 was the last time I went out to raise venture capital.  I had multiple term sheets to do my Series A financing.  Many had the typical investor-friendly terms where entrepreneurs would get screwed and not even understand how they got screwed until many years later.  This was pre Venture Hacks so not a lot of help on terms on the Net.  The best series was done by Brad Feld on his blog here.   But it was my second company so I had already learned all o f the lessons the hard way.

There was one firm that offered me an entrepreneur friendly “vanilla” term sheet and that was True Ventures, which is why I believe they are attracting great early-stage entrepreneurs.  They said they believed in aligning investor and entrepreneur incentives.  I told another potential investor that I was accepting True’s term sheet.  They immediately agreed to match True’s terms.  I thought to myself, “OK, you were willing to F me when you thought I didn’t understand these terms and now you’re going to be friendly?  I wonder what will happen 3 years from now when we hit our next contentious issue?”

I believe that there is a new breed of VC emerging including True Ventures, Founder’s Fund, Union Square Ventures, Foundry Group and several others that have this founder / investor alignment ethos.  I have this mentality, too.

One very important item from Chris’s original post that wasn’t picked up by Fred or Brad is founder vesting.  Chris writes that early-stage deals should have:

Founder vesting w/ acceleration on change of control.  I talk about this in detail here.   If your lawyer tries to talk you out of founder vesting (as some seem to be doing lately), I suggest you get a new lawyer.

I totally agree.  Unfortunately I’ve lost two deals in the past 18 months over this issue.  I don’t think that entrepreneurs properly understand the issue.  Having spent way more time on the entrepreneur side of the table I believe I am a good arbiter of the issue.  I sum it up here (but read Chris’s link above)

  • I’m putting millions of dollars in your company.  My thesis is YOU.   I need some protection that you’re not fully or mostly vested where you could simply walk away with a large stake in the company, screwing not just me but the entire employee base of the company.  I’m not Sequoia.  I’m not looking to bring in a new team to replace you.  If you leave my thesis is largely out the door.
  • Without proper vesting you also place a risk on all other co-founders.  In my first company there was no vesting in the seed round.  One of  the co-founders walked within the first year.  He walked with 1/3rd of the company.  It was naive and stupid on my part.  I didn’t understand the issue back then.
  • I do believe in protecting the founder.  The most common way is to grant acceleration on change of control.  That means if the company is purchased all of your shares become fully vested.  Usually it is done as a “double trigger” meaning if your company is bought AND you’re asked to leave the company.  Chris described the “single trigger” scenario.  I regularly bring this up with founders as I want them to be protected.
  • You can also cement rights for yourself in the case where you’re fired without cause to protect some or all of your shares.  In my experience this issue is likely to be a source of negotiation.
  • If you have founder vesting and protection on change of control + protection against losing your shares of you’re fired then we’re completely aligned.  I’m protected against your walking (as are your co-founders protecting each other).  You’re protected against my asking you to go or a company buying you and taking away your value.

I tried to argue my views on vesting to a company I tried to invest in 2 years ago.  It was an A round deal but the founder was already 75% vested.  They had brought in a new CEO who was 66% vested.  They eventually took money from non-traditional VC based in the UK.  Founder vesting was one of the emotional hot buttons for them.  When the markets turned sour and they didn’t hit their objectives the non-standard investor decided not to follow its investment.  They now own 100% of worthless stock.

I more recently lost another deal where this was a major issue.  So I’m trying to reconcile it all in my head.  I believe the trade I described above is not only fair but protects everybody’s interests.  If you feel differently, please weigh in with comments.

Angel Funding Advice

August 14, 2009

cashAngelThis is part of my ongoing series Pitching a VC.

Last night I attended a DealMaker Media (whom I love because they always host such great discussions) panel on raising angel money moderated by Dan Gould and with panelists Rob Hayes (First Round Capital, more seed or A round than angel), Scot Sangster (with OrganicStartup and the best spokesperson for Tech Coast Angels that I have met to date), Tom McInerney (TGM) and Jarl Mohn (who invests on his own “account” and whose track record is truly humbling).

I recently wrote a post on angel financing covering the topic of convertible notes but I realized I was thinking about the issue more from investor perspective and a very narrow topic of how to price the round.

This post is for those who want to raise angel money.  My goal is to describe how, with whom, how to find them, how much to raise and at what value. Definitionally not a short post (sorry for letting you down, Ari ;-).  So if you’re casually reading and don’t really care about angel financing – abort now! I’ll make my next posting shorter.

If you really want to know about the topic I hope this will be worth your time.


1. Good idea & plan: You must start with a good idea and a PowerPoint deck (my outline is here, scroll down mid way).  Jarl Mohn says he hates seeing PowerPoint.  I get that.  But some people will want to see it.  So you need to do one and have it in your back pocket ready to whip out your presentation or your laptop at any moment and go through it in case you’re asked or in case you’re not building the rapport you hope to just verbally.  It is also the best thing to send in advance see here.

2. Team: You need a team.  Very few people fund individuals.  I won’t say never but having a team validates that you can attract people to the cause.  Better if they’re full time rather than moonlighting but take what you can get.

3. Product:  You should build a product or a prototype.  I’m a software guy so I’m sure there are cases where building isn’t feasible.  But for most businesses it is.  In most cases if you can’t get a prototype done you’re probably not an entrepreneur.  That’s OK.  99.8% of people aren’t.  But there really are very few excuses in this day and age for not having a prototype.

I know you’re not a tech guy and haven’t done anything other than an HTML course you once took, but if you’re inspirational and a leader you’ll find somebody to moonlight for free to get your prototype built.  If you can’t do wireframes, learn how.  If you don’t know what wireframes are you should.  Go research it.  You cannot be just a biz dev type, salesperson, marketing genius or whatever and divorce yourself from product.  Great companies are built by having great products.  And a great product starts with the founder.

4. Market validation – This one is optional but important.  At an angel round you can get away with no market validation.  But if you CAN find a way to even get your 0.1 release out the door and get some customers using it, or friendly people piloting it then at least there is some validation to the product and some people to speak to about their experiences.

If you can’t get product released and validated then do user studies.  Poll people on the problem you’re solving and get their feedback on why they’d want your product and their willingness to pay for it.  One great company, AppFolio, filmed all of this user interaction and made the DVD available to me.  Granted, it was for an A round (not angel) but anyone could easily do that for angel rounds.  Stand out from the crowd.  Differentiate.  Do more than you are asked to do.  And you’ll actually learn more more from the process than you’d imagine.

With Whom?

dentistThis is a much debated topic.  For some reason in last night’s discussion it descended into a discussion of “hairy” dentists and pig farmers (details below).

Here’s a breakdown.  If you can raise your money from higher on the list, the better.  But in the end money is money and better that you raise some and get going than wait too long and lost momentum.  Quick caveats: having fewer investors (3-5) is better than many investors (10-15) and PLEASE make sure you hire a great lawyer who has experience in doing start-ups to avoid pitfalls that will make VC harder down the line.  Also, make sure that your investors are accredited.

1. Professional angels / former entrepreneurs / seed funds – In Silicon Valley there are people like Ron Conway, Jeff Clavier, Mike Maples and many more.  In SoCal we have Crosscut Ventures, Matt Coffin, Mike Jones, Klaus Schauser, etc.  They exist in every town.  They are people who built and sold companies and have a bit of money.  They have advice to share.  They know that the money they invest may be lost.  Their time is too valuable to call you every day wondering if you spent their $20-$100k wisely.  They know all the VCs for intros.  Their name alone is enough to get meetings set up.  They are calling cards.  They are full of wisdom.  Find out how to meet them in the next section.  They are your best bet.  They might be as hard as raising VC.  They are not for everybody.  Don’t be despondent if you can’t get their money.  But if you can, you should.

2. Existing tech or industry executives – Do you have strong relationships in your industry?  Do you work in the comedy industry and know all the venue owners or comedians?  Do you work as a civil engineer on water projects and have great access to wealthy project developers?  The key to getting money is that the people writing the check trust you.  Trust is best earned close to home where people already know your work.  Make sure these people understand the nature of early-stage angel investing.

I still prefer angel route 1 (above) but this is the next best option in my mind.  Don’t worry if they can’t help in your daily business.  There are other ways you can get help.  Surround yourself with great advisors or other entrepreneurs.  Join local organizations like OCTANe, TechStars or Launchpad LA.  If you’re really an entrepreneur you’ll find a way to network with the right people.

3. Professional angel associations – This one is the source of much controversy.  Some angel groups have a reputation for slow decision making processes and not enough value add.  I’ve been to panels where people feel that some angel groups ask for onerous terms that make the VC round more difficult – this came up at last night’s panel.

I can’t really speak generically to this because the Tech Coast Angels / Pasadena in SoCal have produced Green Dot, MyShape and many other successes.  And each town has their own group.  I can say that you should do your homework to find out the reputation.  And just like with VC’s – it is as much the partner your working wit as the group more broadly.

So I don’t think you can say a group like Tech Coast Angels is good or bad.  They have great people and probably some duffers.   Scott Sangster has made a good case for himself at the two events I’ve seen him speak at recently and I know that people love Bryce Benjamin and say he’s hands on / helpful.

pig-farmer-400ds06224. Hairy dentists / Pig farmers – I told the story last night how when I set up my first company the seed investor was a pig farmer from Ireland.  That is a true story.  It helps that my first company was actually founded in Ireland! but the point is the same.  He was a very nice guy but zero value add.  And whenever I needed to round up signatures for future fund raisings it was difficult to track him down / get him to care.  The pure delays due to admin if I would have had 3-4 pig farmers would have killed me.

I don’t know where the term “hairy dentist” came from last night, but it was a funny euphemism.  I think it stands for those people who have money but not the sophistication to understand the world of early-stage tech funding.  When I write an angel round check I always tell me wife, “let’s assume that money is lost.”  So goes angel investing.  I don’t think that hairy dentists really expect that.  They have an expectation that the IPO will be in 3 years and they were in at the ground floor.  If all goes well from day 1 they’ll love you.  If, like many businesses, you go through some rough patches, hairy dentists can make life more difficult.  But none more difficult and … option 5.

5. Friends, family & fools – I know everybody likes to start by thinking of the 3 F’s, but I dont recommend the first 2 F’s – unless it is your last option.  Keep your friends you friends and your family your family.  If either are sophisticated then I put them in buckets 1-3 but usually they are not. F&F makes it hard to call it quits when you should.  It makes it hard to do downrounds to survive when necessary.  It is even harder to ask them to re-up if you need more cash quickly.  And it makes weddings and bar mitzvah’s a whole lot less fun.

How to find them

The biggest question that I get asked is how to find the angels I outlined in steps 1-3 above.  It is really easier and should be a test of your entrepreneurial chops to figure this out but I’ll give you a cheat sheet.

1. Find local deals – Look at which deals have been done in town.  All deals – especially (but not only) those that got venture funded.  Lists are available everywhere.  In LA we have but in every market there’s some sort of database.  There’s obviously things like and Venture Source, Venture Wire and many others.

2. Find out who funded them – Contact the management teams.  Take them for a coffee.  Ask them for advice.  Not just funding but learn their story.  Take no more than 30 minutes to respect their time.  Approach companies that aren’t yet extremely well know.  Example companies to avoid would be people like Twitter,, Boxee, BillShrink.  All are great companies – probably too busy for a lot of random approaches.  Make sure some of the questions you ask are, “Did you raise angel money?  From whom?  Who did you talk to that didn’t fund? What were they looking for? How much do they like to invest? Have they added value?  Anyone angels you know that you didn’t fund?”  Most important question – “do you know any other early-stage start ups that you recommend I talk with?”

3. Social Networks / Search / Blogs – Obvious, huh? I’m surprised at the number of people who aren’t good at tracking down relationships in social networks.  LinkedIn is the obvious starting point not only because it maps out so many relationships but also because you can tell a lot about work history, references, etc.  Obviously Facebook has much info.  Looking at whom I follow in Twitter can give you some indication of my likely network (although Twitter is more difficult because some people follow too many people and some people follow people they’re interesting in rather than people they know).

But the more powerful and seldom used research in Twitter is that you can go to a person’s’ entire Twitter history and see what they’ve Tweeted.  Based on the text this is a good indicator of who they really know.  Sound creepy?  Maybe a little, actually.  But this is all public information that has been Tweeted by people who KNOW this is public information.  I think it is a legitimate research tool; however, I would never considering bringing up something you read in a person’s Tweet stream with them when you see them.  It creeps people out.

There are more sales oriented tools like JigSaw that tech savvy people hate but sales savvy people love.  Basic search engine research can give many clues and if people do keep a blog and you want to meet the person then many clues are obviously there.

My Summary on getting access will be to tell you what most people don’t want to hear.  Most people are lazy.  When you want to find out information about who knows whom it is really not difficult.  The information is publicly available.  You need to make it an effort by researching on the web and going and doing 50 coffee meetings with people.  Most people are not action oriented.  Most people are not obsessive.  Most people don’t love networking.  Most people are not entrepreneurs.

How much to raise?

money stackImpossible to define an actual number.  My experience tells me that most individual angels like to write $25-50k checks for companies they really don’t know well.  More professional angels seem to like to do $75-100k.  Somewhat the amount you raise will depend on your needs, how much you’ve raised in the past and how much you think you can raise quickly enough.  If it’s your first ever raise, many people try to go for $100-$250k because there are less people to ask for money.  You can use this to get more product out the door, pay some staff and get your customer traction.  Most larger angel rounds are in the $500-$750k range.  Obviously harder because you either need a large anchor ($250k) or you’re talking about 10 x $50k people / 5 x $100k.  If you’re less experienced I’d probably set a max of $250k on your first raise – but I want to emphasize that every situation is unique.  I just wanted to provide some guidelines.

At what value?

Again, every situation is different.  If you’re three s***-hot kids from Stanford, Caltech or MIT you might be able to push valuation higher.  If you’re like most people and you’re a hard-working individual but not with the 0.1% credentials you may need to be more humble.  The hyper connected people in Silicon Valley or big cities might push for convertible debt (see my post here if you haven’t).

I am always an advocate of setting a price.  Why?  Because I believe that getting the best possible angels around the table is far more important than ultimate valuation.  The majority of really good angels want to see the round priced and it also make a decision easier to know what your money buys rather than some vague notion of a discount to a VC round.  The post I mentioned covers all of this.

Most Venture Capital “A” rounds (as of 2009) seem to start around $3 million pre-money and may go as high as $5-6 million pre-money if you’ve made a lot more progress or for some other reason the deal is “hot”.  But A rounds also get done at $2 million pre-money.   Not everybody will want to raise VC money (in fact, see here that I think most should not).  This makes your angel pricing slightly less relevant but my guidelines still largely hold.

If you do plan to raise VC you want to be sure of 2 things in your angel round:

1. Your angels are happy when you do the VC round because it is a “step up” in valuation if possible

2. You don’t make it harder to raise a VC round because  your angel round was priced too high.

You might feel proud that you talked angels into a $9 million pre-money, raised $1 million and therefore only gave away 10% of your company.  But … if you then can’t raise your VC round then how clever was it?  When VC’s see over priced angel rounds they often don’t even want to spend the time with the company.  They see it as a hassle because nobody wants to have to go back to your cousins, brothers or your hairy dentist and tell them that the mean VC is pricing your company lower since they over paid.

Angel rounds tend to get done in the $750k – $1.5 million range in my experience.  If you raise $500k at $1.5 million pre-money then you’ve given away 25% of your company, which is about the norm.  If you raise $250k at a $750k valuation the same goes.

If you finished, bravo.  I probably wouldn’t have.  You probably really do want to raise angel money.  Sorry it was so long.  I wish you good luck in your fund raising endeavors.

WTF is Traction? A 6-Step Relationship Guide to VC

August 8, 2009

iStock_000009170146XSmallThis is part of my ongoing series “Pitching a VC” – the outline is here.

You’ve pitched several angels and VC’s.  Everybody seems to like you but nobody seems to be getting out their checkbooks.  Most of them are telling you that they just need to see a bit of traction before they’d be prepared to invest.

Your friends and advisers tell you that this means you need revenue because in this economy VC’s will only fund businesses with revenue.  Unfortunately your advisers are wrong.

The “more traction” feedback is a very typical scenario is a down market economy like the one we’re in.  Investors are giving you a version of the “soft no,” which basically means that they’re not prepared to invest now.

So if it’s not necessarily revenue that’s preventing an investment, then WTF is traction?  Unfortunately there is no real objective measure.  Traction can simply mean showing that you’re making progress with customers, product development, channel partners, initial revenue as a proof point, attracting well-known angel investors, winning industry awards / recognition.  It is code word for “I’m not ready to invest for whatever reason … I need more proof.”

Now there are some firms that have strict rules about not funding pre-revenue companies – that’s different.  But many Series A firms tell people they have a “revenue rule” and then you look at their portfolio and see many exceptions.

Traction really is about building a relationship with a VC over time and showing them that you can move the ball forward.  Many entrepreneurs make the mistake of thinking that funding is something you do in “funding season,” some mythical  2-month period when you’re ready with a great Powerpoint deck and you hit up all of the VC’s at the same time so that you can quickly raise money and get back to the job of building a business.

Fund raising is an ongoing process and not an event on a workplan.  You need to build a relationship with investors over a long period of time.  That is how you convince VC’s that you’re gaining “traction.”

6 Steps to Building a Relationship with VC’s and Solving the Traction Problem:

alec baldwin1. Always be Pitching (line stolen from my favorite scene in one of my all-time favorite movies. At 3:15 here if you’re interested).  Go see a few select VCs before you’re even ready for institutional money.  Tell them about what you’re up to in your business, show them your product or prototype, tell them your strategy, talk about the deals you’re working on and seek feedback.

If you wait until you’re “ready” to fund you’re too late.  Funding is about developing a relationship over time.  Most of us wouldn’t get married on the first weekend we met someone in Vegas.  And most VC’s wouldn’t fund the first time we meet you.  Given that many VC’s base their decision on the team, the longer they have to get to know you the better.

2. Over deliver – The people who get funded are the people who actually get things done.  They tell you that they’re working on biz dev deals with distribution partners and they get the deals signed.  They tell you they’re going to ship product and they do.  They get their widgets embedded or their products piloted.  They hire key staff.  They get positive product reviews on TechCrunch, GigaOm or  They make progress.  You need to over deliver and communicate back with VC’s showing the progress you’ve made.

radarScreen-7194853. Keep on the radar screen – I know the VC’s seemed to love you when they met you.  The problem is that they see hundreds of pitches and they often don’t proactively step back and think about the companies that seemed promising but they weren’t ready to pull the trigger.

You should send “update emails” that are very short but highlight some of the achievements you made with the intro saying, “since you showed interest in my company I just wanted to provide you a brief update on our progress.” This is important because it keeps you at the top of the stack in their memory.  It’s marketing 101 for tech companies in terms of how you market to customers.  You have buyers who are ready now and those that aren’t.  Sales owns the former, the latter get marketing emails so you’ll be top of your prospects’ minds.  VC’s are the same.

4. Find ways of helping the VC – If as an entrepreneur you get to know other interesting entrepreneurs / companies it is a good technique to send intro’s the the VC and ask if they’re interested in meeting the company.  I usually recommend that you send the companies Powerpoint deck and ask the VC if they’re interested but don’t necessarily copy the company on the email until the VC says he/she is interested.  If they’re not at a minimum you’ve shown that you’re thinking of them and you’ve stayed on their radar screen.  It’s not required but I have seen this technique be used effectively by entrepreneurs.

5. Schedule a follow up meeting. Contact the VC again when you’ve signed a few more big deals. In your email to the VC tell them about the additional progress you’ve made and ask for a short, 30-minute session to update them on the business.  Don’t take no for an answer.  Show some chutzpah.  But be polite.

You might find that you get a “we’re really not interested” response.  That’s OK – at least you’ll know to cross them off the list.  When you do get a follow up meeting tell them about your new revenue model, ask to show your new demo, talk about the progress you’ve made and what has turned out differently then expected.  Update them on your fund raising progress.  Seek more input from them.

Stick to your 30 minutes so you build the trust that every time you come back you don’t abuse your time commitment.  Leave them wanting more.   Don’t come back with fake progress.  If the businesses isn’t getting “traction” then probably best not to come back with a bad impression.  Your time is better spent actually making progress.

lather6. Rinse and repeat – When you do raise a round, start immediately building the relationship with VC’s who do B rounds.  Some of the masters at this VC relationship business are Jason Nazar  (DocStoc), Jon Bischke (EduFire) and Ophir Tanz / Ari Mir (GumGum).  In the latter case, every time I saw them they had moved the ball forward and evolved their strategy.  After more than a year of updates I pulled the trigger and invested.

We all build relationships over time.  Doing an investment is more permanent then marriage – there are no divorces for irreconcilable differences.  I know that in a booming market people fund quickly.  And I know many stories of Benchmark or similar investors writing term sheets after the first meeting.  But I also read stories about people winning the lottery.  Neither is the norm.

Beware of Gym Salesman VC

July 29, 2009

gym salesmanThe post is part of a series called “Pitching a VC” – the outlines is here.

You’ve been trying to raise VC for months.  You’ve obviously talked with several funds to hedge your bets.  You finally get your first term sheet.  Time to celebrate!

But wait.  What?  They’re giving me 48 hours to sign the term sheet or it expires?  WTF?  What about all the other VC’s I’m talking with?  I can’t get them to close in 48 hours.  But I have a bird in the hand.  Will they really pull the term sheet if I don’t sign?

OK.  First, every term sheet has an expiration date in it.  That’s normal and no reason for alarm.  A VC isn’t going to give you an unlimited offer to stay on the table as you shop the terms around town.  But there is a difference between a term sheet with an expiration date and a VC that puts pressure on you to sign and alludes to pulling if you don’t close by the date.

The various excuses they will give you are:

  • I can’t leave an offer “hanging out there”
  • I don’t want you to shop my deal
  • If I’ve made you an offer and you don’t KNOW you want to work with me maybe there’s a problem here
  • Whatever …

Please read this disclaimer here before following any of my advice.   You need to make your own mind up regarding an offer and I accept no liability for your basing your decision on my point of view.

So here’s my view: it’s total bullshit.  Any VC that would try to turn the screws on you to try and pressure a decision is not the kind of VC you want to work with.  If they use these tactics when they “love you” imagine the tactics when you’re not performing as well as you would have liked.

It’s one thing if this term sheet is the only game in town.  You might NEED to take it.  But I like to say that “VC is more permanent than marriage.  At least in a marriage if you’re unhappy you can get divorced.”  Not so, VC.  So why should you be pressured to make a quick decision.  It’s unlikely that you’ve even had time to do due diligence calls on this VC – you wouldn’t be so presumptuous as to do this pre term sheet.

The only reason some VCs use these tactics is the same reason a gym salesman only offers you a discount if you sign up today.  Once you’re out of the gym they’re afraid someone else will get a hold of you and you won’t sign with them.  And you know damn well that when you come back to the gym tomorrow and ask for the deal that was only valid yesterday they’ll still give it to you.

One more reminder to read my disclaimer ;-) , but I highly doubt that any VC who submits a term sheet to you would really pull it because you politely ask for a reasonable extension to their deadline.  They’ve done all the work.  They’ve had the big debates at the partners’ meeting.  You partner sponsor is excited.  And lose it because you need 2 weeks rather than 1?  Really?

Don’t mistake eagerness for pressure.  I can understand a VC who tries to close you the way you would try to close a customer deal.  It’s OK for them to push for closure but if you politely request more time they should really be understanding.  And if there are threats, implied consequences for taking time to think about it or do due diligence then I’d give that VC a really hard think.  Caveat Emptor.

Next post I’ll talk about how to handle this awkward period of time when your first term sheet is in and you’re waiting for a few more potential ones.

The Dreaded Question of Valuation

July 28, 2009

coins chartThis is part of my ongoing series, “Pitching a VC” – the entire outline is here

Whenever I sit on panels and discuss the topic of fund raising the topic of how to handle the discussion of valuation (e.g. how much you’re worth) always comes up.

I have very fixed views on this topic although I’ve learned through these discussions that not everybody agrees with me.  Having sat on both sides of the table on many occasions – I’m pretty sure I’m right about this one ;-)  I know that the line of answering below mostly applies to 2009 (e.g. tough fund raising environment) but I think holds more generally.

VC asks the following line of questioning:

Q: What was your last round post-money valuation?

(translation: how expensive was this deal previously?  Do I think they’ll want an up-round, down-round, flat-round?)

Q: When did you raise the money?

(translation: if it was raised in the peak of the market and the price was high then I should be looking for a down round.  If you raised it 1 year ago, what progress have you made that would justify a flat round or an up round)

Q: What are your expectations on valuation? … or … What price are you raising at now?

(translation: based on my views of whether you’re over valued at the last round or not, please help me figure out whether it’s worth spending any more time with you now.  My scarcest resource is my time.  If you or your investors have unrealistic expectations on valuation I don’t want to waste my time trying to talk you down on price.  I’ll just move one.  There’s plenty of other “fairly priced” deals out there.  See here for an article in the NYT on this tension.

So what do you do?  My advice:

1. Be humble. I prefer the following line, “Listen, we know that it is a tough market out there.  We’re realistic about valuations right now.  Obviously we want to get the best valuation we can but we understand the current environment and what the normal valuations are at this time.”

(translation: we want a fair price but we’re not going to be difficult.  Spend more time with us.  Come on, you know you want to!)

2. Don’t name a number. It’s up to a VC to price a deal.  He/She knows that.  They don’t need you to tell them your asking price – they just need to know that you’re not on another planet.  We all had the pre-revenue companies in 2007 trying to get a $40 million pre-money valuation.  It took time for those people to realize that the market had changed so we want to be sure you’re not still one of those.

3. Don’t say, “we’ll let the market determine the price.” That’s everybodies’ favorite line.

(translation to us, “we’re going to run a competition and whoever pays the highest price will get the deal.”  I know that’s not what you mean, it’s just how it sounds in VC speak.

4. Don’t sound desperate. I know it sounds obvious but you’d be surprised that some people really come across this way at times.  I think some people are so beat up and tired of the fund raising process that they already are like dogs with their heads down expecting to be hit.  The number one rule of VC is to make it seem like you have other options and these are likely to yield results.  You’re looking for understated optimism.  Someone else is planning to ask you to the prom.

5. Make it clear that price isn’t the only determinant. My recommended line (and I hope you actually mean it!) is, “We obviously want a fair price but price isn’t the only consideration for us.  We want an investor who does A,B,C.  Ultimately financial success for us isn’t going to come from an additional 5-10% in this round.  It’s going to come from a thoughtful and hard working executive team & board.  We’re looking for somebody that can contribute to this.”

Final note:  Unfortunately many deals from 2005-2008 were overpriced or have investors no longer wishing to invest.  Most teams think the best way to fix all this is by bringing in a new investor.  I know that the easiest way to get concessions out of your existing investors is to have a term sheet so I understand the sentiment.  But I recommend trying your best to clean up your Cap Table before fund raising.  It is hard enough to raise VC in this market with a “clean” deal that is doing reasonably well.  The odds are stacked against you if your deal “has hair on it.”  Go to the barber and clean it up.

On NDAs and Confidentiality

July 26, 2009

confidentialThis is part of my ongoing series Pitching a VC – the outline is here.

One of the most nerve-racking things for entrepreneurs is when they need to “open the kimono” and show their strategies, products, plans and financial projections to VCs.  This is especially true since many entrepreneurs know that the world of VC is very tight-knit and most VC’s know each other.

On NDA’s

Occasionally I’ll get somebody who asks me to sign an NDA (non disclosure agreement) and I have to tell them, “VC’s don’t sign NDAs.”  This topic has been so widely covered that I’ll mostly just link to the best articles I’ve read over the past couple of years on the topic and add my own quick words if you don’t want to link through.

– We don’t sign NDAs because it would be too time consuming to read and process them all, because we could never track all of the ones we’ve signed and because we see so many companies of which many are competitive.  If we signed NDAs we’d constantly be in a litany of accusations every time we funded a company.  It is highly likely that when we fund a company we saw some of the competitors.

– You shouldn’t worry about NDAs because they’re mostly unenforceable or unprovable anyways.  Paraphrasing Fred Wilson, “you’re far better off working with somebody of high ethics with no NDA then somebody of low ethics with a signed NDA.”  Confidentiality is our business.  If we had a reputation for sharing proprietary information we wouldn’t get too many entrepreneurs knocking on our doors.

Here are the links to the NDA articles if you’re interested in more reading: Startup Lawyer on NDAs (here), Brad Feld (here), Jason Mendelson (here) and Guy Kawasaki (here in the first paragraph).

On Confidentiality

secretThe broader issue that I see is one of confidentiality more generally.  Rick Segal does a good piece on Confidentiality here)

While most VC’s that I know wouldn’t forward your information on to competing companies it is true that the best VCs will likely be meeting with some of your competitors.

So if you send your deck to many VCs how do you protect your information from getting to your competitors or other VCs who may fund your competitors?

Here are my thoughts:

  • When you write your Powerpoint deck write it with the assumption that people you don’t want to read it will get a hold of it. It probably won’t get in the wrong hands but keep your information high-level enough that you wouldn’t feel compromised if it did.  The detailed information can be delivered verbally and/or in follow up documents once you know that they VC firm you’re talking with is more serious.
  • You shouldn’t be overly sensitive about your information.  It is surprising how many companies feel that their information is proprietary and that they are truly innovating in ways that others aren’t thinking about.  Almost all of the time there are 5-6 firms simultaneously working on similar problems in the same way.  I’m a big believer that often the winner is chosen by who executes best … not some grand strategy.
  • Most VC’s have very high integrity when it comes to the confidentiality of the materials they possess.  It’s the job of a VC to protect confidential information and the reputation of that particular VC wouldn’t be in tact very long if they were known for shopping information on sending out your Powerpoint deck.  I say most – I have seen some decks float around unethically.  That’s why I refer to point one above.
  • Some entrepreneurs are paranoid that a certain VC is bringing them in to gain competitive knowledge for an existing portfolio company or an investment they’re about to make in a competitor.  I’m sure that this does happen but as with the point above, I think it is the exception rather than the norm.  If you’re going to see a VC that has a competitive investment already then it’s worth being circumspect and perhaps pointing out that competitive positioning and asking why they are interested in meeting with you or skip meeting them altogether.  If a VC has a competitive investment it is highly unlikely they’ll invest in you.  On the other hand, if you think you’re doing better than your competition then meeting the VC really shouldn’t worry you.  If nothing else you’ll probably rattle the cage a bit ;-)
  • With regards to a VC that sees all of the competition, I have found that most VCs are very good at not leaking information across companies.  If they’re not seeing multiple players they probably aren’t a great VC … do you really want to work with them?  It’s their job to scout the industry and pick what they believe is the winner.
  • One side note that I know will sound mischievous.  If you really do shine more than the competition then sometimes seeing the VC’s who are looking at funding them can play in your favor.  We were looking seriously at a company and one of my partners was sponsoring us to potentially fund them.  I got a call from one of the competitors who already had 2 terms sheets but wanted to see us anyways.  We agreed to see this second company and we called the first company to let them know.  The second company was so impressive that we decided not to fund the first (the second company was too highly priced so we skipped both).  It is a bit Machiavellian, but it probably does work.