1. Mastering the VC Game:
How to Raise Your First Round of Capital
Jeffrey Bussgang
Flybridge Capital Partners, General Partner
Harvard Business School, Senior Lecturer
April 3, 2012

2. Context For My Perspective
 General Partner at Flybridge Capital Partners, early-
stage VC firm based in Boston and NYC
40+ active portfolio companies, Fund III: $280M, 5 GPs
 Senior Lecturer at HBS – Launching Tech Ventures
 Former entrepreneur
Cofounder Upromise (acq‟d by SallieMae),
VP at Open Market (IPO „96)
 Author: Mastering the VC Game
 Blog: SeeingBothSides.com
 HBS ‟95, Harvard „91

3. Goals For Today‟s Session
 As an entrepreneur, I
found venture capital to
be a black box
 As a VC, I now see the
other side and wanted to
help entrepreneurs
understand how to
finance and build great
companies
 Today‟s mission: to
demystify the VC/angel
world for entrepreneurs
3

4. Why Raise Money from VC?
Experience Matters:
Deep Pockets: VCs have “seen the
High risk tolerance movie” over and over
and additional again and can help
funding for follow- avoid pitfalls to find
on rounds the path to success
Value-Add: Swing Big:
VCs provide domain VCs don’t invest in
experience, industry niches, they invest in
contacts, and transformative ideas
strategic planning that can build large
companies
8

5. VCs vs. Angels
 Will want some control (voting,  Will want no control (“send me
board, veto) an annual email”)
 Will want to own 20-30%  Will want to own 1-10%
 Very actively engaged (they  Maybe engaged or not (often a
get paid to do this!) hobby, sometimes a personal
 Can add tremendous value mission)
and be great business partners  Can add tremendous value and
 Can be total disasters be great business partners
 Typically rational actors,  Can be total disasters
commercially-driven, but if
inexperienced…  Typically rational, but if
unsophisticated: naïve
irrational, emotional

6. Raising $ from VCs: Find the Sweet Spot
 Scope out the firm –
size matters, as does
the individual
 Arrange for a warm
introduction
 Prepare, be brief
(VCs Blink)
 Don‟t downplay risk
 Mutual due diligence
is fair play
04/09/10 9 9

7. Context About VCs and Angels
 Most VCs and Angels have ADD – operate on
“BLINK” instincts
 Want to SEE everything, but DO very, very few
deals
 Make their decision within the first 10-15 minutes
 Typical VC and angel will invest in one out of every
300-500 deals they see
 Long odds – you need to really stand out
 Like college applicants – triage quickly

8. The Right People: an Unfair Advantage
 Ideas are a dime a dozen
 Having a world-class team is golden
 Laser focus of the young entrepreneur is very
powerful
 E.g., Bill Gates, Michael Dell, and Mark
Zuckerberg
04/09/10 10
10

9. Investor‟s Decision Tree
Worth 3 minutes
(email, phone)?
No
Ignore Worth 30 minutes
(phone, in person)?
No
Pass
gracefully Worth 60-90 minutes
(in person)?
No
Pass but stay
In touch Worth 2nd mtg
(in person)?
No
Pass but be helpful Serious due diligence

10. Top 3 Things To Do
 Be gracious and personable
 Say something that makes you smile…authentically
 Tell your personal history, tell a story
 Be crisp and on point
 Personal intro should take < 5 minutes
 Team introduction 10 minutes
 Make it relevant – don‟t go off on tangents
 If you can‟t show good summarization skills,
how will you handle a board room?
 Know your stuff
 They will push you to test you
 John Doerr/Upromise case study

11. Top 3 Things To Avoid
 Do not exaggerate
 Assume everything you say will be verified in due diligence
 Assume the listener is a cynic and a professional BS detector
 There‟s no “I” in team
 If you are self-aggrandizing, investors will assume you can‟t build
teams
 Do not name drop
 No one is going to be impressed
with who you know unless
the relationships are both real
and relevant.

12. Typical Investment Criteria
 Tangible things investors like to see:
 Very big market (> $500m)
 Unfair advantage (why you? why now?)
 Attractive business model (recurring, high gross margin)
 Unique technology or business model approach
 Intangible things investors like to see:
 “Pied Piper” – an ability to recruit and retain a great team,
partners
 Interpersonal chemistry
 Movie, not a snapshot

13. So You‟ve Had a Good Meeting…
Then What?
 Treat fundraising like a sales process – build a pipeline,
work people through the pipeline, build up to crescendo
 VCs get distracted – typically only pursue 2-3 high
priority new investment opportunities at any given time
 Stay connected, top of mind, build a sense of momentum
 Need to sell the individual “champion”, then the help
them sell the partnership
 Address objections with specific data
 Make the investment case for them
 Give them tools/materials to share with their partners
13

14. Then, Expect More Due Diligence
 Customers / partners
 Team
 Technology
 Business model
 Market size / analysts
As with sales, package up the information, make it easy
on the VC – provide reference list, financial models,
detailed market size analysis – all in readable form
14

15. Term Sheet Time
Frequently Asked Questions…
 Should I include VCs in my first round or just angels?
 How big should the option pool be?
 How should I think about valuation?
 “Promote” definition - http://bit.ly/8NpdM
 Should I do a convertible note with a cap, no cap or a
priced round?
 How should I think about control?
15

16. Expectations and Milestones
 Have well-documented milestones that represent what
you expect to achieve during the initial funding period
 Team building
 Technical progress/product development
 Customers, revenue
 Budget
 Talk to the investor about the next round before you
close this round
 Expectations, amount, price
16

17. What Is Market?
Rough Numbers (vary slightly by coast and sector):
 Seed: $500k-$2m raise on $3-5m pre-money (or cap)
 Series A: $3-6m raise on $6-10m pre-money
 Series B: $8-12m raise on $15-20m pre-money
Option pool: 10-20%
 The smaller the pool, the more confidence in the
founding team
 Do an “option pool budget” to determine the right pool
17

18. LATER STAGE VALUATIONS ARE
INCREASING, WHILE EARLY STAGE REMAINS
CONSISTENT
$70
$60
Median Premoney Valuation ($M)
$50
$40
$30
$20
$10
$-
2002 2003 2004 2005 2006 2007 2008 2009 2010 1H11
Later Stage Second Round First Round Seed Round
Source: Dow Jones VentureSource

19. Who‟s Ready to Raise Money?

20. Mastering the VC Game:
How to Raise Your First Round of Capital
Jeffrey Bussgang
Flybridge Capital Partners, General Partner
Harvard Business School, Senior Lecturer
April 3, 2012
Jeff@flybridge.com @bussgang