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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 10, 2013
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 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
Why Raise Money from VC? Experience Matters:Deep Pockets: VCs have “seen theHigh risk tolerance movie” over and overand additional again and can helpfunding for follow- avoid pitfalls to findon 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
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
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 play04/09/10 9 9
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
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 Zuckerberg04/09/10 10 10
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)? NoPass but be helpful Serious due diligence
Elements of the Pitch Intro who are you, why are you here and why are you special? Problem what is the customer pain? Solution what‟s your disruptive, breakthrough compelling solution? Is the “Gain vs. Pain” ratio 10x? Opportunity / market size top down and bottoms up Competitive advantage what is your unique differentiation? what‟s your “competitive moat”? Go to market plan how are you going to reach the customer? Business model how are you going to make money? Financials what‟s the bottom line, what are your key assumptions? How are you going to make ME money? The ask how much do you want, how long will it last you and how much will you achieve? 9
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 5-10 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
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.
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
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
Then, Expect More Due Diligence Customers / partners Team Technology Business model Market size / analystsAs 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
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 Should I do a convertible note with a cap, no cap or a priced round? How should I think about control? 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 17
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 10, 2013Jeff@flybridge.com @bussgang