Mastering the VC Game:How to Raise Your First Round of Capital

Jeffrey BussgangFlybridge Capital Partners, General PartnerHarvard Business School, Senior Lecturer

April 10, 2013

General Partner at Flybridge Capital Partners, early-stage VC firm based in Boston and NYC40+ active portfolio companies, Fund III: $280M

Senior Lecturer at HBS – Launching Tech Ventures

Former entrepreneurCofounder Upromise (acq’d by SallieMae),

VP at Open Market (IPO ‘96)

Author: Mastering the VC Game Blog: SeeingBothSides.com HBS ’95, Harvard ‘91

Context For My Perspective

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Why Raise Money from VC?

Deep Pockets:High risk tolerance and additional funding for follow-on rounds

Swing Big:VCs don’t invest in niches, they invest in transformative ideas that can build large companies

Experience Matters:VCs have “seen the movie” over and over again and can help avoid pitfalls to find the path to success

Value-Add:VCs provide domain experience, industry contacts, and strategic planning

VCs vs. Angels

Will want some control (voting, board, veto)

Will want to own 20-30%

Very actively engaged (they get paid to do this!)

Can add tremendous value and be great business partners

Can be total disasters

Typically rational actors, commercially-driven, but if inexperienced…

Will want no control (“send me an annual email”)

Will want to own 1-10%

Maybe engaged or not (often a hobby, sometimes a personal mission)

Can add tremendous value and be great business partners

Can be total disasters

Typically rational, but if unsophisticated: naïve irrational, emotional

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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

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Raising $ from VCs: Find the Sweet Spot

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

Context About VCs and Angels

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

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The Right People: an Unfair Advantage

Investor’s Decision Tree

Worth 3 minutes(email, phone)?

Worth 30 minutes(phone, in person)?

Worth 60-90 minutes(in person)?

Worth 2nd mtg(in person)?

Ignore

Pass gracefully

Pass but stayIn touch

Serious due diligencePass but be helpful

No

No

No

No

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?

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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

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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

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The Vote

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A B JB D E AverageMarket 4 4 4 4 4 4.0 Team 4 4 4 4 5 4.2 Product/Tech 2 3 4 4 2 3.0 Business Model 5 4 5 3 3 4.0

Competitive Landscape 4 3 3 3 4 3.4 Finance/Cap Markets 4 3 4 3 3 3.4 Disruption 4 4 4 4 4 4.0 Network Effects 2 4 3 4 4 3.4 Total 29 29 31 29 29 29.4

Term Sheet TimeFrequently 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?

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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

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Who’s Ready to Raise Money?

Mastering the VC Game:How to Raise Your First Round of Capital

Jeffrey BussgangFlybridge Capital Partners, General PartnerHarvard Business School, Senior Lecturer

April 10, 2013

Jeff@flybridge.com @bussgang