Insiders Guide On How To Raise Venture Capital

An Insiders View:
How to Raise Money
from VCs
Bob Dahlberg
Partner
Horizon Ventures
Los Altos, CA
Bob at horizonvc com

Agenda
VC financing +’s and –’s
How VCs decide
The VC dating game

April, 2009 Copyright 2007, 2008, 2009 Robert W. Dahlberg 2

Venture Capital Isn’t Required
To Build a Great Business …
Broadcom
No VC money
Cisco
$5M in revenue, profitable before Sequoia invested
Dell
Raised money at $60M in revenue
eBay
$4.5M in revenue and profitable before Benchmark
invested
Microsoft
VC funded after being profitable
The MathWorks
>$300M in revenue, no VC money
Oracle
Government contract funded first product
SAS Institute
> $1.9B in revenue, the largest private software
company, no VC money
Siebel
Customers funded first product

VC Financing Comes with Costs…†
Fund raising takes time away from serving
customers
False sense of security: it masks viability
Money enables costly mistakes
Money removes spending discipline
Adds additional master(s)
You give up a lot of ownership
Sets the exit strategy and timing
† Source: Greg Gianforte, CEO RightNow, http://cet.berkeley.edu/Resources/CETLectures.html

… But it Sure Can Help

1. Cash to fuel growth
2. Strategy / business advice
3. Introductions: investors, customers and partners
4. Recruiting


Agenda
How VCs Decide
The VC dating game


We Live in Unprecedented Times
Facing the worst economy since the ’30s
No IPO market
Average time to M&A is 6 years,
IPO is 8 years,
Deal Status
Most deals in the last 6 months were follow on with
existing investors.
New investors are asking for 30 – 40% down
rounds, or are waiting for prices to fall.


Against that backdrop .....


How do Most VCs Decide?

You’ll first have to understand VC
care abouts ....


VCs Want to do Deals
Deliver Big Returns to their LPs
VC Exit Value vs. Money Raised
$45,000
$40,000
$35,000
$30,000
$25,000 VC Exits
$20,000 VC Fundraising
$15,000
$10,000
$5,000
$0
2003 2004 2005 2006 2007 1H
2008
SOURCE: TheFunded.com, NVCA / Thompson Reuters Exit Poll and VC Fundraising Q3


Good Deals are Hard to Find
“We kiss a lot of frogs to
find the prince”
-- Venture capital industry cliché


Venture Grade Deals are 1/200
% 2003 Corporate Tax Returns by
Revenue
100%
81.8%
80%
5.4M Returns
Percent of

60%
Life Style Companies VC
40%
AKA “Walking Dead” Grade

13.6%
20%
2.2% 1.9% 0.5%
0%
< $1M < $5M < $10M < $50M >$50M
Revenue

Source: IRS.gov

It’s Hard to Spot Winners
Every deal has “hair on it”
It’s easy to find many, many problems
EBAY: “On-line flea market? Come on!”
Google: 5 CEO candidates passed before Eric S.
“Search is done”

It is not easy to discern a winner:
Portfolio returns: 1 @ 10X; 2 @ 1X; 7@0X


VC’s Personal Bias is a Factor
Will be working together for 6+ years
The project must be interesting
Team compatibility is critical

The unexpected is going to happen
Got to get through the hard times


So How do Most VCs Decide?
VCs “fall in love with the deal”


Your Start-Up Must Be Attractive


Attractive is....
Big Market
Open to disruption
Customers in pain and who buy
Growing order trend
Strong product offering / technology
Differentiated, protected
Successful Team
“A Players”
Successful Investors / Advisors / Board Members


Agenda
How VCs Decide
The VC dating game


VC Dating is a Grueling Process

1. Requires mental toughness
2. You may have to talk to 10 – 40 firms to find
the match
3. Success demands careful planning and
execution


Time Scales

1 2 3
Introduction First Date Dating

1 to 6 weeks
Per VC

2 to 12 weeks
Per VC

2 to 26 weeks
Per Funding


It Will Be the Best
Business Advice You’ll ever Get

1. Listen
2. Learn
3. Accept it
4. Bake learnings into your business plan


Step 1: Introduction

Goal: Get the first date

Strategy: Approach the right VC, right

Due
Introduction “The Pitch”
Diligence


The Right VC, Right

1. Right VCs,

2. The Right Way


The Right VC
has Greener Money
VC money is not a bank loan
Do your homework!
Talk to start-up CEOs
Actively investing
Right sector (life sciences vs. semiconductor)
Relevant portfolio, expertise, and synergies
Early vs. late stage


Funding to Customer Validation
Customers
Consulting engagements
Non-Recurring Engineering (NRE) engagements
Retainer fees from customers
Government
Small Business Innovation Research Grants (SBIR)
Big Companies
Value-Added Reseller (VAR) agreements
Divestitures – protected supplier contract with parent for a
defined period
Moonlighting
Founders waive compensation
Family, Friends and Fools

Approach the Right VC, Right

1. Right VCs,

2. The Right Way


The Right Way
“We only look at deals that are
introduced to us by people we know”
– Mike Schuh, Foundation Capital


Study Finds Business Plans a Waste

Social connections trump business plans
Social connections trump business plans
by aalong shot, says Goldfarb. Thus it is
by long shot, says Goldfarb. Thus it is
that people who already know VCs and
that people who already know VCs and
angels have an easier time raising money.
angels have an easier time raising money.
The irony, says Goldfarb, is that people
The irony, says Goldfarb, is that people
who don’t have connections need to go
who don’t have connections need to go
out and make them, which may require
out and make them, which may require
that they have aabusiness plan to discuss.
that they have business plan to discuss.
But the plan is sort of like aabusiness
But the plan is sort of like business
card, he says ––just something that
card, he says just something that
business protocol dictates you carry
business protocol dictates you carry
around.
around.

See: http://www.rhsmith.umd.edu/news/releases/2009/040809.aspx

The Right Way:
Introduction by Referral
1. Successful entrepreneurs
2. Lawyers that work with VCs and start-ups
3. Angel investors
4. VCs
5. Other service providers:
bankers, head hunters, …

Avoid Brokers (= Mothers-in-Law)
Create a buffer layer in between you and VCs.


Sales Tool:
The Executive Summary
Tool Objective: To get a meeting
One pager that covers:
Contact information
Customer problem
Your solution (product/technology)
Market size
Competitors
Team
Customer proof points
Funding status


Executive Summary Template
Company Overview: Logo
Tagline

Pain:

Solution:
www.bandangels.com
Technology
Company Information:

Newco, Inc.
Address :
Phone:
Fax:
Website:
Email
Basic Details:

Founded In: Defensibility
# Of Employees: 15 (X US / Y off shore)

Funding History:
Total Amount Raised to Date:
Funding History:

Total Seeking: $Raised to Date:
Total Amount
Participants Amount
Individuals:
Committed Funds (If Any):
VCs:
Others: Competition
Use of funds: E
Valuation Expectations:
Total Seeking:
Committed Funds (If Any):
Use of funds:
Financials:
Cumulative Revenue:
Burn Rate: $
Cash Flow Positive in: Year ?
3-Year Revenue Forecast: Business Model
Year 1: $
Year 2: $
Year 3: $

Team:

Milestones
• Company founded ____
• ___ Patents filed on ___
• Product Introduction ____
• $ in sales in x
• $ in sales in x+1
• $ in sales in x + 2


How VCs Vet
Your Exec Summary
Is the referral source credible?
Is this company in my geography?
< 1 -2 hours travel time
Is this a scalable business?
Is the team credible?
Are the existing investors credible?
Can I possibly fall in love with the:
CEO
Target market
Problem being solved
The technology being developed


Rejection
“We can’t kiss all the pretty girls”
-Bob Kagle, Benchmark


Step 2: The Pitch
Goal: Get the second date

Strategy: Sketch out a compelling,
exciting vision
3
1 2
Due
Introduction “The Pitch”
Diligence


“Pitch” Advice is Abundant
-- and not duplicated here
Guy Kawasaki, Garage Technology Ventures
www.garage.com/resources/building.shtml

Brad Feld, Mobius Venture Capital
www.feld.com/blog/archives/2004/06/the_torturous_w.html
David Cowan, Bessemer Venture Partners
whohastimeforthis.blogspot.com/2005/11/how-to-not-write-business-
plan.html
Sequoia Capital
sequoiacap.com/ideas/

SVASE
www.svase.org/components/uploads/SVASE%2010%20Slide%20Template.
ppt


Tell a Simple, yet Compelling
Story
Your Start-Up is everything to you
But just another pretty face to the VC
VCs easily drown in details
Boredom sets in
Your goal is simple:
Get the next date
VC Start-Up


Story Telling is a Skill
Jerry Weissman Coach
to CEOs on an IPO
Road Show


The Story VCs Want to Hear
Big Market
Open to disruption
Customers in pain and who buy
Growing order trend
Strong product offering / technology
Differentiated, protected
Successful Team
“A Players”
Successful Investors / Advisors / Board Members


Four Pillars to any VC Pitch

Market

+
Team Technology Financials
Product


Market Size is
Market
Every VC’s Concern
100% % 2003 Corporate Tax Returns by Revenue

81.8%
80%
5.4M Returns
Percent of

60%

VC
40%
Grade
13.6% 1:200
20%
2.2% 1.9% 0.5%
0%
< $1M < $5M < $10M < $50M >$50M
Revenue

Source: IRS.gov

Market
1. Market Vetting

Competition
VC cliché’: “No competition = No Market”
Is there room for this start-up?
Is there any potential to grow fast?
Is the market big enough to maneuver
if the first niche doesn’t work out?


Example: Competition / Ecosystem
Size of oval does not represent size of company but rather functional coverage in segment
Over The Road Middleware/
Trailer/Tractor Tracking Fusion Oracle
WMS TMS ERP
Players
OAT
QualComm SkyBitz Trimble I2
BEA

Newco YMS
Yardview SAP Microsoft
Impinj Asset Control
Asset Location Asset Management
Zebra C3
ThingMagic HP
Retalix Red
Prairie Manhattan

Motorola SystemId
Ekahau
Oracle IBM
Others…
WMS

Alien
Fluensee
Aeorscout

Laudis
RTLS/RFID Custom Asset Mgmt
Copyright 2007, 2008, 2009 Robert W.
April, 2009 Dahlberg 43

Market
#1 Cause of Failure is
the Lack of Customers
Demonstrate you know your customer cold
There’s a logical reason behind the
customer list
Articulated customer segmentation
Strategic approach
List your marquee customers
Show that customers are helping


Example: Customers
Manufacturing Retail

Logistics

Transportation

45

2. Team Team

Show off your leadership aptitude
Personal results, personal success
Start-up mentality vs. Big company mentality
Company pedigree – worked at market leaders
Backed by blue ribbon advisors
Key: people investors trust
Expect your backgrounds to be rigorously
checked.


Example: Corporate Organization

Bob CEO Disclose:
Experience &
Mark Holes
CFO

Joe David Doug TBH
CTO Engineering Sales Marketing

Cory
2 Application 2 Salespeople 1 Marketing
Engineers

Rob

11 Engineers

3. Product Test:
Technology
Product Aspirin or Vitamin??

The product has to be compelling
Customer inertia is huge
Customers change only when they have to
“Don’t fix what isn’t broke.”


Feature or
Technology
Product a Company?
A Feature?
Can the incumbent add this feature to an
existing product easily?
A Product?
Part of a full-product portfolio?
A Company?
Can the value prop create a substantial
business?

Financials
4. Financials


Cash is King Financials

Revenue forecast will likely not materialize, So
Is this plan realistic?
Revenue must not be too big, but not too small

Spending plan will be scrutinized.
Cash is King
Successful CEOs are frugal


Sequoia Capital’s Directive to CEOs 10/2008


Example: HOW WE MAKE MONEY
Newco Newco 1.0
SAME PRODUCT DELPLOYED IN A
PUBLIC CLOUD
APPLICATION
DELPLOYED IN A
3 REVENUE STREAMS PUBLIC CLOUD

Newco X
ON-DEMAND

$ ECU/hours
Newco X APPLICATION
DELPLOYED IN A
$ Additional ECU’s PRIVATE or PUBLIC
CLOUD

Newco 2.0 On-Premise Q4 2008
$ DELPLOYED AT
CUSTOMER SITE

Licensed Server Newco X
ENTERPRISE

April, 2009
PRODUCT Dahlberg 53

Example: BUILD + SELL
On-demand V2.0 Release OLAP/DW 3-6 New 3-6 New 3-6 New 3-6 New
MySQL
LAMP On-premise Bundle Components Components Components Components

Postgres
PRODUCT EDB Private Glassfish License 2-3 Core 2-3 Core 2-3 Core 2-3 Core
Branding Server Enhancement Enhancement Enhancement Enhancement
EDB
JBoss s s s s
Amazon VMWare VMWare Xen? MSFT?
Platform Beta Tomcat Production

ENGINEERING 1 2 3 3 5 5 6 6

TEAMS
COST($M): $0.3 $0.6 $1.2 $1.2 $1.5 $1.5 $1.8 $1.8

1 2 3
SALES 4
TEAMS
REVENUE ($M): $0.75 $0.75 $0.75 $1.5 $2.25 $2.25 $3.0

79 79
68 68
TOTAL
36 45
TEAM 25
EMPLOYEES 09

Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
April, 2009
PRODUCT Dahlberg 54

The Morning After …


What Can You Do?
React to the business advice you received
Adjust as necessary, your business strategy
Polish your pitch for the next VC
Incorporate learning from each interaction
Simplify, Simplify
Clarify confusing points
Address objection items
Rearrange the slide order


What Will Most VCs Do?
Best case: “Fast no, slow yes”
Typical: Innocuous turn down, if at all
They don’t want to burn any bridges
Typical: No urgency
Risk reduces as time passes
Wait for a milestone
quarter results
prototype works


Rejection
Accept rejection gracefully
There is no rationale argument to bring the
VC back


What Might Happen?
When a VC senses love, you’ll hear back
Be responsive!
VC’s like working with responsive people
You’re building a relationship
Respond to requests < 24 hours


Step 3: Due Diligence
Goal: Receive a term sheet
Strategy: Two way test drive

Due
Approach “The Pitch”
Diligence


Prepare in Advance
Executive resumes & references
Line up references in advance,
Contact people VCs will find
Financial Quarterlies
Capitalization table
Customer / technology references
Keep them updated on your progress,
Use them judiciously


Typical Due Diligence Process
1. More information (Exec. resumes, financials, cap
table, personal references, etc.)
2. Meet with VC’s “expert(s)”
Portfolio companies, friends, paid experts
3. Follow up meeting(s) at your office
4. Calls to customers and personal references
5. Calls to back-channel references


Remember VCs come with Costs…†
Fund raising takes time away from serving customers
False sense of security: it masks viability
Money enables costly mistakes
Money removes spending discipline

Adds additional master(s)
You give up a lot of ownership
Sets the exit strategy and timing

† Source: Greg Gianforte, CEO RightNow, http://cet.berkeley.edu/Resources/CETLectures.html

So Use Due Diligence as a
Two Way Test Drive
Can I work with this team / VC for the next
6 years?
Is this a quality team / VC?
Do team / VC listen?
Is the team/VC honest, ethical, reliable?
dependable?
How do they react being under fire?


Syndication:
Two Parents are Better than One
For the entrepreneur
More strategic minds around the table
Hedge against one VC walking out

For the VC
Validates that the start up has legs
More powder available


Getting “Married”
Locate a Syndicate
Partner
Term Sheet
Legal due diligence
Cash in the bank


And Remember…
Venture Capital Isn’t Required
Broadcom
No VC money
Cisco
$5M in revenue, profitable before Sequoia
invested
Dell
Raised money at $60M in revenue
eBay
$4.5M in revenue and profitable before
Benchmark invested
Microsoft
VC funded after being profitable
The MathWorks
>$300M in revenue, no VC money
Oracle
Government contract funded first product
SAS Institute
> $1.9B in revenue, the largest private software
company, no VC money
Siebel
Customers funded first product

Entrepreneur Resources
Law firm outreach
DLA Piper Venture Pipeline
www.venturepipeline.com
Fenwick & West LLP
“Darrell Kong” <dkong@fenwick.com>
Orrick, Herrington & Sutcliffe LLP’s “Total Access”
"Chad Lynch" <clynch@orrick.com>
Pillsbury Winthrop Shaw Pittman LLP’s “Back Stage Pass”
kiran.kamboj@pillsburylaw.com
Wilson, Sonsini, Goodrich, and Rosati
wsgr.com/WSGR/Display.aspx?SectionName=practice/venturecapital.htm
wsgr.com/WSGR/Display.aspx?SectionName=practice/venturecapital.htm

SDForum
www.sdforum.org
Silicon Valley Bank’s Venture Exchange
Shai Goldman, Director, sgoldman@svb.com
SVASE, Silicon Valley Association of Startup Entrepreneurs.
www.svase.org
The Enterprise Network of Silicon Valley
Tensv.org
Women’s Technology Cluster
www.wtc-sf.org


To Your New Venture
Success!


Insiders Guide On How To Raise Venture Capital

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