The purpose of this post is to help entrepreneurs, advisors and angel investors who are in the process of raising capital, get a better understanding from the inside of what it really takes to get funded at the highest level in Silicon Valley. This post might also be of help in telling your story to VC's and explaining why your startup is the right fit for their portfolio and the most important question, why now? I'm going to include a few links below from other authors that do an incredible job of hitting these points right on the head and from friends whom I work closely with!
Here's what I do:
As an active angel investor, I personally approach the investment decision from multiple perspectives before committing, unlike when I'm running a fund and have a larger pool of capital and longer time horizon. Most importantly, when using my own money, I start with the questions of, the return of capital and return on capital and is this company capable of becoming a billion dollar business and is it going to change the world for the better? Then I ask myself these questions below.
a) What is the probability of getting my money back?
b) When I get my original investment back, what will most likely be the return?
c) Who will be funding the Series A round ( What VC firm's - what partners) and what are the hurdles we will need to clear to get funded? R&D, Tech, Sales, Revenue, DAU, MAU or sequential quarterly growth?
d) Then I begin to inspect what I expect and make the calls to those VC firms first and get an indication of interest and the hurdles needed to not only get the meeting months from now, but also a solid yes they are writing the check if we meet those targets!
e) I stay in touch with the VC's updating them on a regular basis about significant events or traction we receive. I'm also very transparent and share with them the failures and what actions we took to correct the situation. I share everything with my financial partners and take responsibility when we fall short and let them know when we are crushing it.
f) We have a clear use of proceeds for the capital we will be deploying, how it will accelerate the growth and sales of the company and what the ROI looks like, based on past performance numbers. We don't try and guess.
g) When we are finally ready, we schedule the meeting and do a deep dive with the VC partners and are able to make far more progress in a short period of time because we have developed so much rich history. It's almost like old friends catching up, instead of the typical hardcore interview process at some venture firms. We generally bs about what worked, what failed and what it took to get here and where we are going from here. We will usually do between 3-5 meetings that day on Sandhill and I will already have most of the deal syndication work complete, and then dovetail that into closing the round.
h) Pro Tip- I try to start meetings with the VC and venture firm that is the best fit and capable of taking the largest position of the round and then fill in the remaining capital until it is generally oversubscribed. This strategy has worked well about 39 of the 43 times we have done this.
I have a couple of friends who are grandmasters at raising capital, one in particular, Randy Adams. I have backed Randy on a few startups via as a limited partner through Sequoia. (Below is a link to his website)
Randy has extensive experience as a CTO and CEO of eight venture-backed technology companies including three software-publishing companies, two Internet technology companies, an e-commerce company and two celebrity-based digital media companies and published more than 30 consumer software applications that collectively have sold more than 20 million copies worldwide. He has raised more than $250 million in venture capital and returned more than $28 billion to investors. He has held C-Level positions at Adobe, Yahoo and the Home Shopping Network. http://randycadams.com/
Randy is already proven and extremely well connected, although he still uses a simple but very effective style of communicating with investors that I admire and have adopted even if he has never met that investor. Here is his strategy with cold emails and warm introductions, they are both one and the same. Instead of sending a page long email with a pitch deck attached, he instead boils the conversation down to usually a maximum of three sentences. I have seen this work for him hundreds of times. This is an actual email intro below, that I was copied on.
Marc, I am advising a company that has Nanotech that can save 2 million people a year from dying - we should discuss. Would you like an introduction?
That is it, that is all he says, it does not get any more simple than this! He explains his role, what sector the company is in and what solution they provide. He doesn't waste time going into how big a market it is, why they are better, whom they are already speaking with or any financials or any hard data yet. He simply asks the question, would you like an introduction? Randy is sharp, has a hustle and work ethic second to none and I strongly recommend him, if you need an intro just ask?
Here is a recent article I came across the other day that speaks volumes about the one simple equation every VC knows. I do not know Michael Dempsey personally but really like this article. Why your startup idea isn’t big enough for some VCs
"Venture Capital functions with a power law where the majority of a fund’s returns come from a small percentage of investments. Because of this, VCs need to know if a single investment can return the entire fund. As Bill Gurley famously said “Venture capital is not even a home run business. It’s a grand slam business.” This is where the Return The Fund (RTF) analysis comes into play."
Definitely worth the read: https://medium.com/@mhdempsey/why-your-startup-idea-isnt-big-enough-for-some-vcs-2440b61f6d36#.nm260c7ik
Power Laws in Venture
Here is another publication by Jerry Neumann that is a great short read;
At a given alpha, the more investments you make, the better, because your mean return multiple increases with the number of investments, as does the likeliest highest multiple. Dave McClure makes this case:
Most VC funds are far too concentrated in a small number (<20–40) of companies. The industry would be better served by doubling or tripling the average # of investments in a portfolio, particularly for early-stage investors where startup attrition is even greater. If unicorns happen only 1–2% of the time, it logically follows that portfolio size should include a minimum of 50–100+ companies in order to have a reasonable shot at capturing these elusive and mythical creatures.
Peter Thiel flatly contradicts this:
Given a big power law distribution, you want to be fairly concentrated. If you invest in 100 companies to try and cover your bases through volume, there’s probably sloppy thinking somewhere. There just aren’t that many businesses that you can have the requisite high degree of conviction about.
McClure believes he can find hundreds of companies with high enough growth to maintain his requisite alpha. Thiel thinks this is not possible. Venture capitalists have always faced this tension: the average growth rate of all small businesses in the US is closer to 7.5% than 30%. The pool of companies that can grow fast enough is limited. How many companies can you find that will grow fast enough, knowing that when you’re wrong about the growth rate, you’re probably wildly wrong?
All investors want to find the "next big thing, " and we read tons of emails everyday, it would help greatly if you could narrow the facts to 3 sentences or a short paragraph.
There is a tremendous amount of info in the articles above, take advantage of these and use these tools in your next meeting. The final suggestion is to listen to Angel List radio and hear the great interviews of Jason Calacanis, Parker Thompson, Jenny Rooke and Kirill Makharinsky and of course a podcast by Marc Andreessen ( Tim Ferriss did). There is a ton of info here that I find very valuable. Suggestion, start with the Calacanis or Andreessen podcast first!
Good Luck to everyone! It is important to note that I have been or am currently a limited partner in several of the tier #1 VC funds in the valley and some smaller VC funds to show and help support my friends along their Venture Capital journey. I believe that this also demonstrates my commitment to their fund and an understanding of their culture, values and future success. Please make sure you click on the links and open the articles here; they are excellent and worth a read. I do not want my personal story to overshadow any of these other posts. Write me if you need me or need help with anything. I really believe the more people I help, the more it helps me!