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How to Raise Your First Round of Capital
Jeffrey Bussgang
Flybridge Capital Partners, General Partner
Harvard Business School, Senior Lecturer
February 22, 2017
General Partner at Flybridge Capital Partners, early-
stage VC firm based in Boston and NYC
$625m raised across 4 funds in our 15 year history
100+ portfolio companies (e.g., MongoDB, DataXu, Codecademy)
Senior Lecturer at HBS – Launching Tech Ventures
Former entrepreneur
Cofounder Upromise (acq’d by SallieMae),
Exec team at Open Market (IPO ‘96)
Author: Mastering the VC Game
Blog: SeeingBothSides.com
Context For My Perspective
8
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
Value Experience: 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 15-25%
Very actively engaged (they get paid to do this), leveraging the power of the firm’s network
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
Most VCs and Angels have ADD – operate on
“BLINK” instincts
Want to SEE everything, but actually INVEST in
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
6
Ridiculously large returns (> 10x)
are very, very rare (4%) – but are always the goal
A Game of Outliers
7
VC Fund Math 101
To achieve target of 3x the fund, need to see
multiple big exits (10x+) after years 9-12
Prototypical, $100M Early Stage Fund
Source: Industry Ventures
9
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
Find the Sweet Spot
VC Introduction Algorithm
1. Entrepreneurs who have made them money
2. Entrepreneurs in their portfolio
3. Entrepreneurs they respect
4. Customers/Partners they respect
5. Service providers they respect
6. Existing investors
…
Cold emails/social networks
…
Investors who are not investing
9
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?
11
Top 3 Things To Do
Be gracious and personable
Say something that makes you smile…authentically
Tell your personal history, your narrative
Demonstrate strong founder-market fit
Be crisp and on point
Personal intro should take < 5 minutes
Team introduction < 5 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, attract great talent
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? $1B? – support $100+M revenue)
Unfair advantage (why you? why now?)
Attractive business model (recurring, high margins, network effects)
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
X-Factor
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
Create a sense of urgency (run a competitive process)
15
Then, Expect More Due Diligence
Customers / partners
Team
Technology
Business model
Market size / analysts
As you would do in a sales process, package up the
information, make it easy on the VC – provide reference
list, financial models, detailed market size analysis – all
in readable, compelling, digestible form
16
Partners Meeting
Ask your champion for the main
objections in advance
Customize your pitch to address
them
Command the room
Be open about risks – and your
plan to mitigate
17
Ask your champion where they’re at (strong positive? slight
positive? still questioning?)
The Vote
18
Partner A Partner B Partner C Partner D Average
Market 4 4 4 4 4.0
Team 4 4 3 5 4.0
Product/Tech 2 4 4 2 3.0
Business Model 5 5 3 3 4.0
Competition 4 3 3 4 3.5
Deal/Cap Markets 4 4 3 3 3.5
Disruption 4 4 4 4 4.0
Network Effects 2 3 4 4 3.3
Total 29 31 28 29 29.3
Two most important
critera
Debate and disparity can be a good thing
Term Sheet Time
Frequently Asked Questions…
Should I include VCs in my first round or just angels?
Should I do a convertible note with a cap, no cap or a
priced round?
How big should the option pool be?
How should I think about valuation?
“Promote” definition
How should I think about control?
19
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
What experiments are you going to run and what results
do you expect from those experiments?
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
[email protected] @bussgang
February 22, 2017