A review of the process of raising money from angels and/or venture capitalists for entrepreneurs

1. How to Raise Your First Round of Capital
Jeffrey Bussgang
Flybridge Capital Partners, General Partner
Harvard Business School, Senior Lecturer
January 2019

2.  General Partner at Flybridge Capital Partners, early-
stage VC firm based in Boston and NYC
$700m raised across 5 funds in our 16 year history
100+ portfolio companies (e.g., MongoDB, Codecademy, Splice)
 Senior Lecturer at HBS – Launching Tech Ventures, RVP
 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. 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

4. 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 can do great
harm
 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

5. VC Is Not The Only Option!
5
Source: Founder Collective

6. 6
Ridiculously large returns (> 10x)
are very, very rare (4%) – but are always the goal
A Game of Outliers

7. 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

8.  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
Investor Decision Making

9.  It’s never too early to build a
relationship (and get advice) –
especially when you’re not asking for
money.
 That said, there is no such thing as a
casual meeting – every meeting with
an investor is a pitch / presentation
 Leave them with your next
milestones…and achieve them!
 Only when you’ve established a
relationship and some operational
credibility should you ask for money
9
“Ask for money, get advice.
Ask for advice, get money twice.”
When Do You Talk To Investors?

10. 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

11. 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
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12. 12
Investor’s Decision Tree

13. 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?
13

14. Case Study: Analytical Space
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15. Pre-Seed to Seed Process

16. 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

17. 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

18. 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 / Super power

19. 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)
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20. 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
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21. 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
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 Ask your champion where they’re at (strong positive? slight
positive? still questioning?)

22. The Vote
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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

23. Term Sheet Time - FAQs
 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?
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24. 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?
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25. Who’s Ready to Raise Money?

26. 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 2019