Venture Capital

How to get a meeting with a VC

sand-hill-roadThere are a million reasons why you might not be getting meetings with venture capitalists on Sand Hill Road. The most common reason is that you’re simply not trying hard enough. It turns out that it is REALLY easy to get a meeting with a VC – it is his job to meet with you. Referrals are the BEST way to get a meeting, but if you don’t have a referral you can make your own.  The following is my sure-fire method for getting a meeting every single time:

  • Step One: Identify the VC and partner you want to meet with (make sure the partner you choose funds startups in your space).
  • Step Two: Identify the CEO of each company where the partner is a member of the board of directors.
  • Step Three: Call the CEO and let him know you are considering working with [partner name from VC] and you wanted a reference. 100% of the time I have left a voicemail after dropping the name of the VC I have received a return call. The CEO will be happy to give you a reference and you’ll be surprised how candid many CEOs are.
  • Step Four: Call the VC and let him know you talked to his CEO and that he received a glowing reference. Ask for the meeting. 100% of the time the VC will return your call and as long as your company is in the right space and at the right stage you’ll almost always get the meeting.

Despite the fact that I’ve shared my ‘sure-fire’ method each week I get a message from an entrepreneur asking for help finding an investor for his or her startup. The message goes something like this, “Working on the next big thing, can you refer me to a few local investors?” In variably I will put this request in my ‘to-do’ mailbox and forget to respond. Sorry? Not sorry? Here is what you CAN do:

Remember that scene from Jerry Maguire where he tells his client, “HELP ME HELP YOU!”

Here are 9 things I need so that I can you can help me help you:

  1. Explain the stage of the product/service: idea, prototype, mvp, revenue, growth, exit…
  2. Tell me about the team: how many people, functional skills, full-time/part-time…
  3. Explain the funding you seek: seed, angel, series a, series b
  4. Tell me how much you are going to raise: $100, $250, $500, $1M (whatever)
  5. Tell me the form of the investment: common stock sale, preferred stock stale, note…
  6. Tell me who you’ve talked to previously and their thoughts
  7. Tell me how you plan to spend the money – i.e. what are the use of funds?
  8. Tell me your future fund raising plans after this raise.
  9. Send me your fund raising docs (if available) and your deck (a must).

You may not have all of this information, but send as much as possible. Save me time. If I can help I will. If you make me send you an email asking for this information – well I’m not going to. I might send you this post and ask you to try again. But no hard feelings right?

Update on ‘TEN’ my Mentoring Program

Ten-Logo-2Back in April I announced my mentorship experiment I called ‘TEN’. The plan was simple, find ten entrepreneurs and spend a year working with them on their businesses. The idea was that by spending MORE time with FEWER entrepreneurs I could make a more significant impact AND have more time to work on my own startup. Time for an update.

After announcing the program I had more than 40+ applications and quickly selected the first ten with plans to bring them on over three months. To date I have ‘turned up’ five entrepreneurs, had three drop out before starting and had one fire me. The companies include:

  • 3 Tech Startups (two seed funded)
  • 1 Medical Startup (seed funded)
  • 1 Real Estate Business (going concern)

I’m charging $1,000 a month (12 month commitment) and ask for a modest ‘advisor’ stock option. Next week I bring on the final entrepreneur from the original ten and I’m not sure if I will try to replace the four open slots. If someone REALLY wants to get in I will consider opening one of the slots, but its definitely going to be on a case-by-case basis.

As for the entrepreneur who ‘fired’ me? As Kevin O’ Leary would say, “You’re dead to me!”

d38m5pp

In all seriousness, I only spent an hour or two talking to the entrepreneur and we discussed the various options. He was convinced he wanted to raise more capital and ‘run’ his company. When I found out he had an offer to buy the company for a REAL number I made the case that he could do BOTH – i.e. take his money off of the table and run the company. He thought about it for a week or two and decided to take my advice. He then informed me that he didn’t really need anymore help. My only thought? KARMA IS A BITCH. Seriously, if you’re about to negotiate a seven to eight figure deal isn’t that the moment when you’d actually want some advice – especially advice that only costs you $12,000! I have attempted to buy and sell several companies – sometimes I was successful and sometimes I wasn’t – but in each case I came away with useful experience. Anyway, I got my ego bruised a little bit on this one, but life goes on.

Announcing ‘TEN’

For more than five years I’ve been actively involved in the Dallas startup community. During that time I have advised scores of entrepreneurs; however, I’ve often wondered how valuable my advice really was. For example, in the last thirty days I have ‘touched’ almost 100 different entrepreneurs. Touches include emails, voicemails, texts and face-to-face meetings – 100 unique connections over 30 days. I’m giving advice, making suggestions, referring employees and investors, but there is no way I have enough information about 100 entrepreneurs and startups to give any sort of valuable advice and I wonder how valuable my referrals are? What do I REALLY know about these people/companies? Truthfully, I have no idea. Additionally, I am spending a LOT of time providing this potentially dubious advice – maybe 20 hours a month. I decided that something MUST change so I am starting what I am calling TEN.

Ten-Logo-2My plan is to select 10 entrepreneurs I will spend one year coaching, advising and supporting. These entrepreneurs will be hand selected by me based on just a few factors including: how well I think we will get along, how coach-able they are, how relevant my experience would be for their business and how bullish I am on their endevour. Here is the plan:

  • 1 group meeting per month (2hrs+dinner, think EO, YPO, Vistage)
  • 1 one-on-one meeting per week (1hr)
  • 4 quarterly trips to Silicon Valley, 2-3 day (vc/angel networking)
  • 1 graduation retreat, Fri-Sun (city/venue selected by group)

The focus of these meetings will be on:

  • building teams, advisory boards, and BoDs
  • developing products and services (mobile, web, infrastructure)
  • raising capital
  • selling
  • marketing and pr

Interested? I’m going to charge you, a LOT. I’ve learned that people rarely value anything they get for free. I don’t plan to take on a single company that I don’t think I can add at least a million dollars in value within twelve months so hopefully you will be able to stomach the deal. The monthly fee for the engagement will be $1,000 (compare to a typical board member at $40,000/yr) plus a small equity component (whatever you are giving advisers). The term will be 12 months with a termination clause. If you do not want to continue for any reason you must pay the remaining term at 50% or find someone to replace yourself in the group that a majority of the group will approve. So basically you pay $12,000 for 100 hours of my time – a pretty great deal if you ask me.

I’ll be putting the first TEN class together in the next couple of months. If you are interested let me know by applying here: TEN APPLICATION

 

Investor Referrals – HELP ME HELP YOU!

Remember that scene from Jerry Maguire where he tells his client, “HELP ME HELP YOU!”

Each day I get a message from an entrepreneur asking for help finding an investor for his or her startup. The message goes something like this, “Working on the next big thing, can you refer me to a few local investors?” In variably I will put this request in my ‘to-do’ mailbox and forget to respond. Sorry? Not sorry? Here are 9 things I need so that I can you can help me help you:

  1. Explain the stage of the product/service: idea, prototype, mvp, revenue, growth, exit…
  2. Tell me about the team: how many people, functional skills, full-time/part-time…
  3. Explain the funding you seek: seed, angel, series a, series b
  4. Tell me how much you are going to raise: $100, $250, $500, $1M (whatever)
  5. Tell me the form of the investment: common stock sale, preferred stock stale, note…
  6. Tell me who you’ve talked to previously and their thoughts
  7. Tell me how you plan to spend the money – i.e. what are the use of funds?
  8. Tell me your future fund raising plans after this raise.
  9. Send me your fund raising docs (if available) and your deck (a must).

You may not have all of this information, but send as much as possible. Save me time. If I can help I will. If you make me send you an email asking for this information – well I’m not going to. I might send you this post and ask you to try again. But no hard feelings right?

When should you raise money? NOW! [updated]

Garrett Camp, the co-founder of Stumbleupon, recommends, “Stay self-funded as long as possible.” I think I have been quoted saying the same thing, but over the past few years I have come to realize that you can wait too long to raise outside capital.

When I founded LayerOne I raised money first and then built the company. Since then I have been starting companies using my own money including my last company – ShopSavvy. Our investment strategy was to look at the company each month and determine if it makes sense to keep investing. While we had the resources to grow the business, there was a limit to those resources and I think we should have raised outside capital to increase the pace of growth. Ironically our success in user growth and engagement made it more difficult to raise money from early stage investors. It was not uncommon to hear a VC suggest that he wishes he talked to us earlier.

We grew a lot on a small amount of money, but sometimes I wonder if it would have been smart to raise outside capital earlier. Raising outside capital provides credibility to your business giving you instant access to the blogosphere (TechCrunch, VentureBeat and so on) and access to potential employees who pay attention to what deals investors are betting on. Using your own money doesn’t win you any access, credibility or friends.

The upside to not raising outside money? You don’t have to raise money, period. Tim O’Reilly said, “Money is like gasoline during a road trip. You don’t want to run out of gas on your trip, but you’re not doing a tour of gas stations.” Raising money makes me feel like I am visiting LOTS of gas stations – usually not getting any gas.

Now that I am doing it all over again with my latest startup, HAUL, we have decided to go ahead and raise a small amount of money ($750K) from a few smart angels (Dave McClure, Christine Tsai, Dave Matthews, Joel Fontenot). These early investors are valuable for a few reasons a) potentially ability to refer clients, b) potentially able to refer potential hires, c) potentially able to make referrals to VC firms for the Series A and (perhaps most importantly) d) social proof that the deal is smart. Within a short period of time, perhaps 6 months our plan is to raise a $5M series A investment from one tier one firm (perhaps with a co-investment from a strategic). The idea is to get everyone in the same boat together until it makes sense to raise the huge round or do a strategic deal.

When I was updating this post I realized that I wrote on this topic last year in November in a post titled, “When should you raise money?” (hmmm, I’m not too creative with titles). I suggested that when I started my next deal I’d do a few things…

  • participate in an early stage accelerator
  • raise a small angel round from Dave McClure
  • raise a series A from First Round, Benchmark or Andreessen Horowitz

Turns out we did the first two. After the holidays we will try to do the third. Go back and read that post (it was a lot better).

Mark Cuban’s Sharktank Deals

mark_cuban_sharktankIn 2001 a television program called the Tiger of Money aired on Japanese television that featured entrepreneurs pitching their business ideas to a panel of investors. The format, called SharkTank in the US, has become wildly popular around the world. While I have seen the show a few times my son watches it religiously stoking his interest in entrepreneurial ventures. When Mark Cuban joined Sharktank in season two the rest of my family became avid viewers of the show. I’ve been doing a little research into the companies that Mark has invested in from the show and you might be surprised by some of the numbers*:

  • Number of Investments: 35 (as of 2013)
  • Total Invested Capital: $7.7M
  • Average Invested Capital Per Deal: $219K
  • Average Equity Stake Per Deal: 34.8%

Here is a breakdown of the deals:

*note – in some cases Mark co-invests with another shark and in some cases the deal might have fallen through prior to close.

Is there a Series A Crunch?

There is a LOT of discussion about a so-called “Series A crunch“: startups who receive seed or angel investment not being able to raise their first institutional round of financing. I would argue there really ISN’T a Series A Crunch, but instead a proliferation of seed and angel deals and this is a GOOD thing. First lets look at the numbers (via CNN, CB Insights):

No. of Deals   2009   2010   2011   2012 ytd
Seed/Angel      472     770     1064  1747
Series A             418     515       703    688

From 2009 to present there has been a small increase in Series A deals, but a HUGE increase in seed/angel deals. The advent of the cloud and agile software development techniques mean that a lot of startups can get to their MVP (minimum viable product) without raising a Series A. With a small amount of angel or seed funding a company can build and launch their product AND get user feedback very quickly.

So is the increase in seed and angel investments relative to Series A investments a bad thing? First, I would argue it is great news for entrepreneurs because it gives them the ability fail faster, more frequently with less risk. If you are lucky enough to get a Series A investment it can take you three to four years to fail – this means an entrepreneur is lucky if she gets three or four times at ‘bat’ in her career. The proliferation of seed and angel rounds opens up the possibility of several more times at bat. Second, I would also argue that it is great news for investors because it creates a much larger pool of entrepreneurs with experience – eventually the pool the increased angel and seed rounds are creating will lead to an increase in Series A deals – its just going to take some time.

Don’t worry about the Series A crunch, instead celebrate the explosion in early stage deals.

 

Don’t cold call Bill Gurley, ever. . .

Did you just cold call Bill Gurley from Benchmark? Shame on you. NEVER cold call a VC. That is so 1999. It is 2012 – have you heard of Google?

Raising venture capital seems like a black box to most entrepreneurs, but it is actually pretty easy once you understand the rules. First, never cold call a VC – that is the first rule. Get an introduction (more on that in a minute). Second, only call VCs that invest in similar companies. Don’t bother calling a bio-tech VC with your mobile app unless it can cure cancer. Visit their website. Check out the sort of deals each firm does. Then visit the profiles of each partner at the firm. Each partner has a bias and a particular focus. Find the right partner for you and your business. Once you have found the right partner start reading his blog, his Facebook page and his twitter feed. Get to know him. It will take a day or two – but it is vital to understand your prey before stalking him. Lets pretend Bill is our prey, visit the following before reading further:

Crunchbase Profile
Twitter Account
Blog
Facebook Account
LinkedIn Account

You might be surprised to learn Bill is a Longhorn. Yes, he went to the University of Texas for his MBA. He is also a geek – an engineer with Compaq. Oh, and he is a Zac Brown fan – that is key info. Now you know Bill a little better lets take him down!

Lets assume you don’t know anyone who knows Bill. Remember, don’t cold call him – huge mistake. But all hope is not lost. We can still get an intro. Bill is an investor in:

Dog Vacay – CEO: Mike Jones
Ubiguiti Networks – CEO: Robert J. Pera
Uber – CEO: Travis Kalanick
Grubhub – CEO: Matt Maloney
(BTW – there a bunch more)

Now lets call all of them. Let them know you are considering taking an investment from Benchmark and Bill Gurley. At least one of them will call you back. Ask them what it has been like working with Bill. Ask them if they would do another deal with Bill. You might be surprised what you hear. Eventually you will run into a CEO who is not a big fan – listen to them. But at the end of the day if you hear more good than bad it might be time to set the hook. Call Bill and let him know you talked to [insert name of CEO], that he had great things to say about him and that you wanted to talk to him about investing in the next Uber (or whatever).

100% of the time you are going to get a return call. It has NEVER failed for me, ever – if it does, call me and I will get you the meeting myself. Of course, once you get him on the phone it is your job to get the meeting. I’ll save that advice for my next post, “How to get the meeting.” Good Luck!

 

 

 

Why is capitalism maligned by the Left?

Have you followed the latest meme started by Mike Arrington? It began with a post titled, “Startups are hard. So work more, cry less and quit all the whining.” The title seemed innocuous and content to of the post basically explained that startups have always been hard, highlighting a 1994 quote from early Netscape engineer Jamie Zawinski. Mike argues that more and more of the people have been showing up in Silicon Valley are shocked by how hard they have to work and how rare successful startup exits actually are. He predicts that in the near future our fearless leaders on the Left will be talking about ‘maximum working hours, minimum number of engineers assigned to complete a given task and ultimately unionization of startup workers.’  More and more ‘startup workers’ seem to be suggesting they have a ‘right’ to a certain level of wealth without risk and hard work. Mike explains the answer is very simple: if you don’t want to work crazy hours you should find a less demanding job. Of course he is ever the optimist suggesting,

“deep down you know that you’re part of history, that the things you are building will be written about and thought about forever, then maybe after that good cry after a short sleep under your desk you’ll pull yourself together and remember. That you are a person in the Arena. A Pirate. That you are here to make a dent in the universe.”

If you are like me you read the post and thought, ‘meh…no shit‘, and moved on to the next post on Techmeme. Turns out that Netscape engineer that Mike quoted didn’t appreciate the attribution. He responded with a post titled, “Watch a VC use my name to sell a con.” Jeremy suggests that the entire venture capital system is corrupt – they make money off of your hard work and provide no value whatsoever. Mike responds point by point here. I won’t bother to rehash the points here, but I did want to point out that a LOT of people are starting to get the idea that capital formation is bad – that perhaps capitalism is dead.

I think it all began with the bailout of the investment banks (and mainly AIG). The outrage against the bankers and the insurance companies was well earned and appropriate. More recently that outrage has taken shape as the Occupy Wall Street movement. The general feeling seems to be that capital formation is bad – i.e. accumulating wealth is bad as it allows the rich to get richer. The undertone is that our economic system has failed – that capitalism is somehow dead. Jeremy’s post suggests that VCs don’t actually write any code and as a result any money they make from investing in your startup is somehow ill gotten or as he suggests a ‘con’.

The Left is against capitalism because it’s outcome is by definition unequal. The framers of our Constitution sought to provide a nation of equal opportunity – a nation where a child born of an unwed mother, given up for adoption to a working class family could one day build the most valuable corporation on the planet (his name was Steve Jobs). In America anyone can succeed (and fail) regardless of who their parents were. On the other hand the Left seeks equality of outcome – everyone should be rich or no one should be rich. The Left believes, like Jeremy, that anyone with money must have had some sort of unfair advantage. The formation of capital – i.e. in this case by venture capitalists – is vital to create this equality of opportunity. Without capital how could Steve have built Apple?

We just raised $7M, now what?

Back in October I wrote a post titled, “Post Funding, The Real Work Begins…” We had closed on the first million dollars of our eventual $7M round and everyone was spending a lot of time congratulating us. Now that we have closed on the full round (read more about it here) I thought it might be useful to REPEAT that post for a second time.

If you have ever attempted to raise capital for your startup idea you are in pretty good company. Once you have actually raised capital for your startup idea you are part of a relatively exclusive club. Your close friends and family (who know how long you have been working on raising a round) will congratulate you. The other members of your team will want to celebrate. The PR folks will prepare a press release and try to get TechCrunch interested in the funding story. But, if you are like me, you might not feel entirely comfortable accepting congratulations or celebrating or even getting some TechCrunch love.

Raising money is a lot of work. First, you have to come up with a startup idea that resonates with investors – if it doesn’t resonate they won’t meet with you. Of course getting an investor to meet with you based on an elevator pitch is pretty easy once you figure out what sort of investments they are looking for (assuming that is the sort of business you want to start). Once the meetings begin you will experience a roller coaster of excitement, disappointment and despair. Some investors will LOVE your idea, your team and generally be ready to put a term sheet together only to learn their partners aren’t the least bit interested in having your deal on their website. If you are lucky you will hear no a LOT. If you aren’t as lucky you will hear a lot of maybes. But eventually, you might get a term sheet. Of course once you get the term sheet you are on your own 10th yard line. You still must negotiate the terms and agree on a final term sheet. Once you have signed the term sheet you are on the 50th yard line. Of course sometimes closing is harder than you think. Papering disclosures, employment agreements, charters, financial statements – all can throw a wrench into a deal. When you finally get the wire you are likely so exhausted you may feel relieved, but I would argue that you are actually back on your own 10th yard line.

The congratulations, celebrations and press coverage should make you feel uncomfortable. Your team won’t understand at first, but raising outside capital is a HUGE responsibility and you should start feeling the pressure at about the same time the wire hits the bank. Your investor believed in you, your team and your idea – enough to put their hard earned treasure at risk. While your Mom, Dad and close friends were more than happy to cheer you on – how many of them wrote checks to fund your deal? Maybe a few, but generally encouragement is free. Your investor is not looking for a standard return – he is specifically looking for outsized returns 10x is the norm. For every dollar you spend you have to figure out how to make it worth $10. People who can do that are few and far in between. If you think the venture backed entrepreneurs is exclusive – try getting in the ‘provided outsized returns to investors’ club – it is downright lonely there. Outside capital isn’t for every startup or every entrepreneur, but if you decide to accept it be sure you understand the responsibility you have placed firmly on your shoulders.