How to Raise Your First Round of Capital

Jeffrey Bussgang

Flybridge Capital Partners, General Partner

Harvard Business School, Senior Lecturer

January 2018

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, Codecademy, Splice,

RemoteYear, LovePop)

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

Author: Entering StartUpLand

Blog: SeeingBothSides.com

Context For My Perspective

3

Fundraising Patterns and Players

• $250-500k pre-seed

• Convertible note / SAFE @ $2-4m cap

• If your friends, family and ex-colleagues

won’t back you – why should I?

• $1-3m seed @ $4-8m pre-money

• Either note, SAFE/SAFT or priced round

• Micro-seed funds, seed funds, super angels

• $5-10m Series A @ $10-20m pre-money

• Priced round, board, control structure

• Seed funds, Series A funds, Series B funds

• $20-40m Series B @ $40-100m pre-money

• Priced round, board, control structure

• Series B funds, growth funds, crossover PE

VCs vs. Angels

Will want some control (voting, board, veto)

Will want to own 10-20%

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 For Decision Making

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

10

Investor’s Decision Tree

Case Study: Analytical Space

11

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?

12

Top 3 Things To Do

Set context

Tell your narrative to prove founder-market fit – i.e., why you?

Tell industry context to prove why now?

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

Know competition, show domain expertise

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.

Assume everyone does their

due diligence

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

What is your X-Factor / Super power?

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)

16

Then, Expect More Due Diligence

Customers / partners

Team

Technology

Business model

Market size / analysts

Treat fundraising like 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, shareable form17

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

18

Ask your champion where they’re at (strong positive? slight

positive? still questioning?)

The Vote

19

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 much do I set aside for team, advisors, board?

How should I think about valuation?

“Promote” definition

How should I think about control?

20

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?

21

Who’s Ready to Raise Money?

Mastering the VC Game:

How to Raise Your First Round of Capital

Jeffrey Bussgang

Flybridge Capital Partners, General Partner

Harvard Business School, Senior Lecturer

jeff@flybridge.com @bussgang

January 2018