The Venture Capital Math Problem

by Fred Wilson

Yesterday Albert and I visited one of the investors in our fund. The good news is they are happy with the job we are doing. The bad news is they are frustrated with the venture capital asset class.

We got to talking about the venture capital asset class and it wasn't long before we got to the "math problem". The venture capital math problem is pretty basic, maybe something you'd do in high school calculus or even pre-calculus. Here's how it works.

The venture industry has been raising between $20bn and $30bn per year for the past few years. Here's recent data from the NVCA's web site.

Let's be generous and say that the average is $25bn per year (it's actually more). The math problem is to figure out how much in proceeds every year need to be generated to deliver a reasonable return to the investors.

Here's how I go about solving it. My math is not perfect and I'd like to hear from all of you how you'd solve it in the comments.

First, the money needs to generate 2.5x net of fees and carry to the investors to deliver a decent return. Fees and carry bump that number to 3x gross returns. So $25bn needs to turn into $75bn per year in proceeds to the venture funds.

Then you need to figure out how much of the companies the VCs normally own. The number bandied about by most VCs is 20%. That means that each VC investor owns, on average 20% of each portfolio company. We'll use that number but to be honest I think it's lower, like 15% which makes the math even tougher.

Using the 20% number, that $75bn per year must come from exits producing $375bn in total value.

But it is also true that many of these exits have multiple VC investors in them, sometimes three or four. So you really need to look at the percent ownership by VC funds in the average deal at the time of exit. That number is likely to be over 50% and maybe as high as 60%. If we use 50%, then to get $75bn per year in distributions, we need to get $150bn per year in exits.

Here's where my math starts to get a little fuzzy and where I'd love some other approaches. I assume that the distributions of exits each year is distributed on a power law curve like this one:

I've heard from investors in venture funds, including the one we visited with yesterday, that about 200 exits per year produce all the returns in the business. I think that number is too low because that is about the number of venture funds raised each year. That would suggest each fund has only one meaningful exit and that's just not right. I think each fund has at least five or six meaningful exits. So I would use a number like 1000 exits per year.

And I assume that the biggest exit each year is $5bn. Yes, it is true that some venture investments turn into businesses like Apple, Google, Microsoft that are worth $100bn and more. But it is also true that most VCs are long gone from those deals before the valuations get to that level. So for the sake of solving this problem, I'd assume the largest exit each year is $5bn and then you have a power law distribution of another 999 deals.

These assumptions are important to the results you get from this math problem and I'd love to hear everyone's thoughts on them in the comments.

I tweeted this power law math problem yesterday hoping to get some answers. Most of the replies said that I need a "scaling exponent" or a "power number" to get the answer I wanted. So my attempt to use twitter as a math crutch didn't work out very well.

So in order to finish this post and get to a discussion, I'll assume that the biggest deal, $5bn, represents 5% of the total value of all 1000 exits and that the total value of all exits is $100bn per year. If others come up with different numbers I will update this post with them here.

So here's the venture capital math problem. We need $150bn per year in exits and we are getting about $100bn. That $100bn produces roughly $50bn in proceeds for venture firms per year. After fees and carry, that $50bn is around $40bn. Which is only 1.6x on the investor's capital if $25bn per year is going into venture funds. If you assume the investors capital is tied up for an average of 5 years (venture funds call capital over a five year period and distribute it back over a five year period, on average), then the annual return is around 10%.

Here are the most recent NVCA numbers which I got from Anthony Ha's Venturebeat piece a few days ago:

I tend to look at 5 year and 10 year numbers since 20 year numbers include a period when there was a lot less money in the venture business. Those numbers suggest that the 10% per year returns are about right, or are at least in the ballpark.

So here's my conclusions from all of this math (some good, some not so good). The venture capital asset class does not scale. You cannot invest $25bn per year and generate the kinds of returns investors seek from the asset class. If $100bn per year in exits is a steady state number, then we need to work back from that and determine how much the asset class can manage.

If you use my 3x gross and on average 50% ownership by VCs, then the number that the asset class can take on each year is around $15bn to $17bn. It's interesting to note that the industry raised $4.3bn in the first quarter of 2009. That's a good thing. If we can keep it to that level, or less for a while, then we may be able to downsize and get returns back on track.

I'm optimistic that it will happen. In an open and free market, capital will flow to the places where it can earn an appropriate return. I suspect we'll see some of the large public pension funds who have been drawn to venture capital over the past decade decide to leave the asset class because it does not scale to the levels they need to efficiently invest capital. That will leave the asset class to family offices, endowments, and other smaller institutions who made up the largest part of the asset class in the 1980s and early 1990s.

I think "back to the future" is the answer to most of the venture capital asset class problems. Less capital in the asset class, smaller fund sizes, smaller partnerships, smaller deals, and smaller exits. The math works as long as you don't put too many zeros on the end of the numbers you are working with.

How to close a term sheet quickly

by NIVI, Venture Hacks

How do you quickly turn a signed term sheet into cash in the bank? I've seen entrepreneurs do it in one week and I've seen them do it in four weeks.

How do you do it as quickly as possible?

1. Complete all business diligence before you sign a term sheet.
2. Set a firm closing date for your lawyers and justify it with something like, "I'm leaving the country on that date."
3. Have a strong BATNA that keeps the other side moving quickly.

Listen to our podcast below for the details.

Audio: How to close a term sheet quickly (mp3)

Transcript

Nivi: I was talking to a couple of entrepreneurs today about how to expedite the closing process. Closing is when you go from a signed term sheet to money in the bank.

You are taking the signed term sheet, which is really just a letter of intent; it is for the most part non-binding, except for some confidentiality and no shop clauses, and turning it into a set of closing documents and money in the bank.

Closing can take anywhere from one week, to four weeks, to six weeks, depending on the complexity of the closing. There are some things that you just can't speed up. There may be legal diligence that needs to be done that just can't be expedited. It takes time to get it done.

Other than those issues that you can't really speed up any faster than they are going, it is really up to the entrepreneur to set the timetable for closing. You can set things up so it gets done in a week and you can set things so it gets done in four weeks.

My preference is to get it done quickly for a few reasons. One: It just reduces the risk of not closing. Two: The faster you get it done the quicker you can get back to building your business. Three: It is just good experience and practice to move things forward during negotiations with your lawyers, with the other side's lawyers, and with the other side.

There are three parts to closing quickly. One: What you do before you sign the term sheet. Two: After you sign a term sheet, what you do on your end to make sure things are moving quickly. Three: After you sign a term sheet what you do to make sure the other side is moving quickly. Lets cover each of those parts.

Before you sign the term sheet

First lets talk about what you do before you sign a term sheet. Number one, most term sheets have a clause or term in there that indicates what the expected closing date is so your lawyers, the other side's lawyers, and the other side can all work together towards that date.

My next suggestion is to conduct all your business diligence before you sign the term sheet so there is no business diligence left to do once you have signed the term sheet, during the closing process.

A lot of startups, I think, make the mistake of signing a term sheet too quickly before the investors have made the decision to really invest in the company. And they are just locking the company up with the term sheet, taking the company off the market so they can do their real diligence.

I would prefer to get all the business diligence done before I sign the term sheet. And we have a blog post on this, look it up. It is called, Complete business diligence before you sign a term sheet. We have also got another blog post called, Discuss your plans before signing a term sheet.

You also want to complete as much legal diligence as makes sense and is possible before you sign a term sheet as well. Why leave some legal risks? Why take yourself off the market and expose yourself to the risks that there is some legal issue that is going to trip up the financing. You want to get as much of that done before you sign the term sheet as well. You can find more info on that in the blog post. For most seed stage investment there is not a lot of complexity in your legal documents, whether it is IP or existing contracts, or what have you.

And top tier investors aren't going to try to push business diligence to after a signed term sheet, in general. And if they do they are pretty up front about it and there is usually a good reason why. If you are working with a good firm you will get the business diligence done before you sign a term sheet anyway. And if you are a seed stage startup without a lot of complexity the legal work is pretty turnkey, which means that you can get it done quickly. And it is really up to you to determine how long it is going to take. These financing closings take as long as you let them take.

How do you expedite the closing process? There are two parts to this. The first part is making sure your lawyers move quickly. The second part is making sure the other side moves quickly. The other side consists of the fund and their lawyers.

Moving quickly on your end

First lets talk about making sure your side moves quickly. You should understand that you are in a very high leverage position with respect to your lawyers. Your lawyers have taken the risk of working with you while you were an unfunded, seed state startup with a lot of risk that you would go out of business.

They perhaps deferred fees, or gave you reduced rates. And they took on the risks of working with you with the hopes that you would be come a venture backed startup and grow on to great success and do a lot of business with them. Which is exactly what is starting to happen to you at this point in time, you are getting venture backed. You have a signed term sheet.

Your lawyers are in a pretty precarious position. They have taken a lot of risks and that risk is starting to bear fruit. But they are in a position where they are not locked-in in any way. You are not locked-in with them so you can terminate them at any point in time still. If you terminate them they have taken a bunch of risks, worked for reduced rates, deferred fees, and they weren't interested in working with you while you were a seed stage company. They just did that to build the relationship so that you could work with them when you were a venture back startup spending lots of money on legal fees. If you terminate them, they won't be able to reap what they sowed. So they're in a precarious position. You have a lot of leverage over them.

The first thing to do to expedite the closing process is talk to my lawyers and tell them — if you haven't already, which hopefully you've done — is tell them you're going to measure them in four ways. High quality advice, one. Two, the speed at which they get things done for you. Three, the number of errors in the work product. Four, cost.

Next, you tell your lawyers that you want to have an extremely firm date for the closing process. You can take the Steve Blank approach there, if you like, and tell them that prior to that date, if they need help you are available to help them out, but when that date comes you don't want any excuses. Right? If they come at you with excuses by that date, it's really a fireable offense.

The best way to justify an extremely firm date is with a justification. People like to have reasons for why you want them to do things. So come up with a reason why the closing needs to happen by such and such date. For example, "I'm going on vacation on that date, I'm having a baby, I'm leaving to go to a business meeting in a foreign country, we need the money to make a payment, we need the money to hire somebody." Just get with your team, brainstorm a solid reason why it absolutely has to be closed by that date.

That's the end of the story of making your side move quickly. Ultimately, it's really in the interests of your lawyers to actually get it done quickly. We've seen too many law firms get fired after a closing because the closing wasn't done quickly enough, there were too many errors and the entrepreneurs were not happy with it. I think it's important and good for the law firm for you to communicate what your metrics for success are. Finally, your lawyers are not computers, right? They're humans. So don't take the tone of the discussion here too literally. You want to treat them with grace and humility and make them excited to work with you.

Making the other side move quickly

The other piece of the puzzle is getting the other side to move quickly on the closing and getting the other side's lawyers to move quickly on the closing. In general, if you're closing with a good firm, a good fund, they also want to close quickly. They don't have any interest in a slow closing process. It's just a question of getting their lawyer's bandwidth.

The best advice I have to get the venture fund, or investors and their lawyers to move quickly, is to have a great BATNA. That's really the only advice I have for you there. Preferably you're in a situation where your BATNA has said something like, "If the other side blinks during the closing process, call me." You want to have a BATNA that’s still chomping at the bit to invest in your company.

I'm not suggesting that you break any no shop clauses or anything like that, or confidentiality agreements that you have in your term sheet. What I am suggesting is prior to signing a term sheet, you want to have a BATNA that is chomping at the bit and will be interested in investing in your company even if the term sheet blows up after it's signed. They're chomping at the bit, like I said, they've said something like, "If the other side blinks during closing, call me."

If they haven't said something like that, you can say something like that. When you call the investors that you're not going to take money from and tell them that you're going to sign a term sheet with someone else, you can tell them, "If there's any problem during the closing process you are going to be my first call. I'm not expecting any problems during the closing process, but in the odd case that there is a problem during closing and we decide to pull the plug, you are going to be my first call."

So you're setting things up to have a great alternative if things blow up during closing, and you're providing yourself with an excuse. You're saying, if things do blow up it's not going to be them pulling the plug, it's going to be me pulling the plug.

6 Business Plan Fundamentals

BY TIM BERRY

I've always liked the idea of turning back to fundamentals when you need a special boost--like when times get tough. A downturn is a good time to review fundamentals, keeping in mind that your business plan isn't good or bad because it helps or doesn't help your business grow and prosper.

A better way to gauge the value of your business plan is in the growth it encourages and the decisions it spurs. When writing or revising your business plan, make sure you've got the following six business planning tips covered:

1. Start with a good look at your planning needs in your business. Do you need a printed document to show outsiders? 

If you do, then develop the document to serve its readers and meet its purpose. Spelling, editing and page layout matter because they represent you and your company to readers. For example, a plan for investors should show a solid exit strategy and good discussions of defensibility, potential market growth and your management team. Likewise, a plan to support a bank loan should contain financial history and owners' financial information.

If you're just planning your own business and not showing a document to outsiders, simplify it to serve your internal planning process. Don't include business descriptions and supporting information that only outsiders will read. For example, why deal with professional backgrounds of the managers, if outsiders won't be reading it? Why bother with a flowery advertising-oriented product or service description?

2. Cut your outline down to what you'll use. Start with a standard outline, and then delete unnecessary sections. Don't include what doesn't help you and your management team work better. For example:

• The spit and polish. Why sweat over the editing, the wording, or the page formatting when a plan isn't going to be read by outsiders?
• Exit strategy. Vital for investors, but awkwardly out of place for a small bootstrapping startup.
• Backgrounds of managers. Why would you describe yourselves to yourselves? This is only needed when a plan is for outsiders.

3. Write simply and practically. Use simple bullet points to record key concepts so you can refer back to them to track results.

4. Emphasize the kind of metrics--sales, costs of sales, expenses, leads, presentations, calls, units, prospects, whatever--that will lead to useful plan reviews each month. Strive for visibility of performance, so you get accountability and management as a result. Metrics like these--concrete and measurable--help you track progress against the plan later. They also help guard against "blue sky" planning, which is purely conceptual, and lacks specifics to make it real. Ask yourself, point by point in the plan, "and how will we know, later, how we're doing on this?"

5. Keep the plan alive with regular revisions, but keep it short and manageable. It isn't a market research paper or a graduate thesis, it's a plan.

Don't measure it in pages, but in readability. Just to cite a specific example, a 30-page plan with readable fonts and a lot of useful bar charts and tables might be much more readable than a 15-page plan of dense text only. Don't skimp on charts: pies and bars and line charts make numbers easier to understand. And don't skimp on tables: monthly projections of any and all important metrics are very good for following up later.

How big is a good plan? Does it describe strategy well enough to lead to good business decisions? Does it describe the market well enough to generate effective marketing strategies? Then it's big enough. It might not even be a single document; maybe it's a combination of some spreadsheets, some slides, and some bullet point texts.

Remember, things will change. Your real plan belongs on a computer, not on paper. Market assumptions, strategies and metrics have to change. Plan to review them each month, and change them as necessary.

6. Store a business plan on your computer as a starting point for the occasional elevator speech or business pitch. Standardize your talking points and make them serve your long-term strategy. 

I hope you see how both fundamentals apply to business planning more than ever. Don't create a business plan that's longer than absolutely necessary. At the same time, don't  start, run or grow a business without a plan you can review and revise to keep you on track.

How To Form a Venture Capital Fund

by Scott Scheper

There are seven main steps you must undergo if you want to form a venture capital fund:

1. Create an LLC entity that will manage the fund (Example: Kleiner Perkins, LLC)
2. Create a Limited Partnership for the fund (Example: Kleiner Seed Fund I, L.P.)
3. Create a Private Placement Memorandum: Have either yourself, or an attorney, draft a private placement memorandum. With attorneys, these can be priced well over $3,000. Some attorneys even charge $20,000. However, you can also have one done for yourself, using this template for much less: here
4. Have your potential investors complete The Investor Questionnaire
5. Have your potential investors read and sign the subscription agreement
6. Have your potential investors sign a Letter of Intent
7. Have your potential investors return the letter of intent and subscription agreement

You must also have a compelling presentation, a set of vetting protocol in place and a unique story.

Offering Venture Capitalists a Third Way

by Andrew Ross Sorkin

Founders of start-ups and the venture capitalists who finance them have two ways to get their money out of the company: sell it to another company or sell shares to the public.

The market for initial public offerings has dried up and companies are not being very acquisitive these days. In the first three months of 2009, only 56 companies were sold, half the number of a year ago, and none went public.

What if they had another option? SecondMarket, which operates markets for trading illiquid assets online, is creating a marketplace for trading shares of private companies, The New York Times's Claire Cain Miller reports. It puts investors together with shareholders and collects a fee, which will be 2 percent from each side for the private company market.

Typically, venture-backed start-ups are sold or go public within five to seven years, but lately it is taking longer. As the exits are delayed, venture capitalists who are unable to cash out cannot return money to their investors or devote time and money to new companies. Some employees inside the start-ups, being paid low salaries, get impatient for a payday.

The exit drought "is one of the greatest tragedies of our time," David Weild IV, a former vice chairman of Nasdaq and a senior consultant to SecondMarket, told The Times. "The source of U.S. innovation and competitiveness and job creation has been failed by the capital markets."

SecondMarket, originally called Restricted Stock Partners, was founded in 2004 by Barry E. Silbert, 32, a former investment banker who specialized in financial restructurings, including the Enron bankruptcy. He hatched the idea for a marketplace for illiquid assets after creditors awarded shares of debtor companies by bankruptcy courts approached him looking to sell these shares.

The company operates seven other markets for illiquid assets, including ones for restricted public equities and bankruptcy claims. This month it started a market for banks to unload troubled assets, including mortgage-backed securities and collateralized debt obligations.

The founders of SecondMarket say that in the last several months they have been getting an increasing number of calls from shareholders, including employees, founders and investors, who want to sell their stakes in tech start-ups, including Facebook, Twitter,Glam Media, LinkedIn and Tesla Motors. The company believes there is a demand because it has privately brokered about 50 trades.

The creation of a vibrant market in unregistered securities of private companies that reveal scant financial information has its doubters.

"This will not be a third exit, not in the near term," Roger Ehrenberg, a former investment banker and hedge fund chief executive who now runs IA Capital Partners, his angel investment fund, told The Times. "Just like we've seen a very limited or nonexistent I.P.O. market, it stands to reason that these buyers would be the same kinds of investors, so I'm not at all convinced that the demand side is even there."

For one thing, it could be a thin market, on both sides of the trade. The Securities and Exchange Commission allows the trading of unregistered securities, but only for select investors. The new market will be open only to accredited investors and qualified institutional buyers, which the S.E.C. defines as financially sophisticated enough to invest in high-risk securities about which there is little public information. These include individuals whose net worth exceeds $1 million and institutions that manage at least $100 million in securities.

Even if individual shareholders and venture capitalists do trade on the exchange, it will be hard for it to grow, Mr. Ehrenberg told The Times. There is only a small universe of such wealthy, risk-tolerant investors, he said, and companies are limited to 500 shareholders before they have to file with the S.E.C. as if they were public.

"For this market to really develop real liquidity, that rule needs to be changed, but right now, the government needs to do the exact opposite," Mr. Ehrenberg told The Times. "They don't want more people to buy illiquid, unregistered investments — they want maximum transparency."

As in the public markets, investors will determine how much a company is worth, but with much less information than they have for public companies. SecondMarket will gather public data for buyers and sellers, and companies can choose to submit detailed information that buyers can see. But it is unlikely that many private companies will reveal much data.

Although the securities are unregistered, fraud may not be a big worry. SecondMarket says it verifies with the company and its lawyers before any shares change hands.

"There is no risk that investors wire money and don't own the stock or the company doesn't exist," Mr. Silbert told The Times. The public nature of the market may also serve to discourage swindlers.

There have been other efforts to create exchanges in which investors can trade shares of private companies, including Nasdaq Portal Alliance and smaller efforts like XChangeand Nyppex.

SecondMarket thinks it has an advantage because it has successfully created markets in other illiquid asset classes — it says it has 3,000 investors and has completed $1.5 billion in transactions — and because it has a staff of 100 that handles research and legal issues.

Because of the exit drought, the need has become more acute, they say, and many venture capitalists agree.

"Entrepreneurs won't start companies and investors won't invest in them if there is no path to liquidity on the company stock," Fred Wilson, a partner at Union Square Ventures, which has invested in Twitter and Boxee, told The Times. "A secondary market for private company stock can fill the gap that the lack of an I.P.O. market has created."

Still, some venture capitalists question whether there is a need for such a market. "As an exit option for V.C.'s, I have some very healthy skepticism on it," Theresia Gouw Ranzetta, a partner at Accel, which has invested in Facebook and Glam Media, told The Times. "Quality companies are already going to perceive that they have opportunities for more traditional exits and more traditional I.P.O.'s."

What's the deal with NDA's?

by Andy Sack

I've had three entrepreneurs ask me to sign NDA's recently. As an entrepreneur, everyone knows that NDAs really aren't worth the paper they're printed on.  I occasionally used them with big companies, as a means of communicating to the big company that I cared about the value of our intellectual property. But, they generally just slowed things down and became an item that future acquirers asked about why I was inconsistent in the use of them. So, I stopped using them. Now, as an investor, entrepreneurs should know that most knowledgeable investors won't sign NDAs. As an investor, I see lots of deals -- some of which are similar to others and I don't want to have an entrepreneur :

1. Feel like they gave me an idea that is theirs and to have a piece of paper that leads to some legal letter. That's lots of unnecesary brain damage for me.
2. Angst about their intellectual property so much that they won't talk about it without legal paperwork.
3. Believe their intellectual property is so unique that they're afraid to talk about it. I think ideas are only good when feedback is provided and the whole NDA process seems to limit the entrepreneur's ability to get lots of feedback.

It's getting harder to raise venture funding

by Healy Jones

There have been a ton of reports on the massive drop in venture capital funding deployed in Q1 2009, so there is no need for me to rehash the facts and figures in my blog. I did spend a bit of time cutting up the numbers, hopeful that the drop was concentrated in only one area. When I downloaded the funding report from the NVCA I was expecting later-stage cleantech deals to have been the hardest hit. My thesis was that tourist hedge funds were leaving the cleantech project finance world. I may have been sort of right; late stage and expansion stage deals dropped by almost $4 billion in volume vs the previous year and cleantech was off by almost $1 billion - but that still left a huge % decrease for all other sorts of early stage technology and non cleantech startups. So, it's pretty grim across the board.

Below are a few observations for the startup founder trying to raise their first venture round in this climate.

1. Fund raising is taking longer than ever. VCs are more cautious than a few years ago. Partners at venture funds are also more distracted than usual managing their current portfolio. Can your startup survive for six months while you try to raise capital?
2. Many venture funds are slowing their deal making pace. This means that they are making fewer new investments this year as part of a plan to increase the longevity of their current fund, among other reasons. It doesn't hurt to make sure you are including the most active funds in your process.
3. The bar has been raised. It's just harder to be one of the few companies that are able to be funded. You will likely have to speak with a ton of funds to find the one(s) that understand your business plan well enough to want to actually fund it. You should listen very carefully during meetings with VCs to see what the common objections are to your startup. Perhaps you can better address these issues before you meet with the next VC…
4. Every dollar needs to go further. Venture capitalists are more focused than ever on capital efficiency in their investments. Make sure your spending plan is not too aggressive for the current zietgeist. 
5. Some funds may have money left to invest, but aren't actually making new investments right now. Only talk to funds with still have dry powder to invest. I'd suggest speaking with venture funds that have raised their most recent fund in the past 30 months or who have committed capital to a NEW investment in the past 4-6 months. You don't want to waste your time with a fund that has only one shot left in their fund if they haven't raised a new fund. If there is no new fund to invest from after that final investment is made… well, that final investment decision could be a long one.

I realize that the above observations aren't positive, and suggestions on how you can cope with them are pretty light-weight. It's a nasty environment for the company looking for venture financing and there aren't any easy answers.

15 Quick Pitch Tips for Kick Ass Presentations

by Ben Yoskovitz

The pitch isn't the only thing that will make your business successful; far from it. But it sure does matter when you have an opportunity to get on stage and present. Those opportunities may be few and far between, but you don't want to blow them. And opportunities to pitch your businessshould happen all the time- because ultimately we're always pitching, whether it's investors, customers, business partners, candidates, spouses, or random people we catch on the street. Pitching and presenting are critical skills for startup owners.

After attending the YES Entrepreneurship Conference and watching a handful of young startups do their 5-minute pitches, and jotting down some notes, here are 15 quick pitch tips. First, let me say that I was impressed with all the presentations. For very early stage startups, with minimal (if any) pitch / presentation training, they did a good job. Pitching isn't easy. And it takes a long time to learn how to do well. And it takes continual effort. So kudos to everyone that had the guts and willingness to get on stage in front of the audience and share their dreams.

1. Pitch Solo. Most of the companies that pitched at the YES Conference did so with 2 (or 3) people. If I remember correctly, there was only 1 solo pitch. The problem with having two (or more) people pitch is that it's distracting. The audience can't follow as easily. It's made worse when transitions between presenters are clunky, or seemingly at random. Or when presenters interrupt or talk over one another (say, during a Q&A session.) Having one presenter allows you to pick the strongest person for the job, and lets that person get into their own rhythm. You might have someone else controlling your PowerPoint slides (for example) but stick to one person who does the talking.

   This doesn't mean you don't reference your other team members and highlight their skills and the value they bring to the company. Just don't have everyone presenting.

2. Tell a Story. Even in a short presentation you have time to tell the audience a story and improve your chances of creating meaningful context. Yes, we need to understand things like market opportunity, competitive advantages, business models, etc. but it's the story and relevancy it creates in our lives (or the lives of other people we think about at that moment) that make the presentation worthwhile and memorable. Stories can be extremely varied, but your best chance of creating a story is near the beginning, as you're describing the problem that you solve. Make that problem relevant to me and I'll pay much more attention.
3. No Wimpy Words Allowed. Wimpy words diminish credibility and the power of a presentation. "I think…" is wimpy. We know you think it, because you're saying it - so just get to the point. "We believe…" is wimpy too. It's OK to state assumptions (and it's even OK during a Q&A session, for example, to admit you don't know the answers to certain questions), but cut the wimpy words. Another classic, "What we're trying to do…" You're not trying, you are. Simple as that. Even if you haven't even started your business, you're already doing it, not just trying to do it. Yoda was right about that one.

   Removing the wimpy words from your presentation is hard. They're often ingrained in our speech. But that leads me to point #3…

4. Practice. Very few of us are natural presenters. I only know of a couple people who don't get nervous on stage (which I still believe is unnatural and probably some kind of strange condition!) You can conquer fear (to a degree) and certainly power through your fear with practice. Practice in front of a mirror. Practice in front of your team members. Practice in front of other people. I've found the key is to practice so much that it's almost robotic, and then you deconstruct it, loosen up and make sure it comes across naturally. If you come across too robotic, and your presentation appears too memorized it's very difficult to bring out the necessary passion and excitement. It's hard to capture the audience's attention when every word is perfectly spoken, spaced out and said in a monotonous, even tone. So practice. Practice. And practice some more. Then forget everything you've memorized and just do it.
5. Keep Track of Time. If you're given 5 minutes, make sure you say what you need to say in 5 minutes, not 5 minutes and 5 seconds. Just five. If you're given 10 minutes, that's fine, but stick to the time allotted. Oftentimes saying less is better than saying more; so don't try and cram 10 minutes worth of words into 5 minutes of time. It won't work.
6. Keep it Simple Stupid. I'm not an expert in your business. You are. I might not even know a single thing about your specific industry or how it operates. So avoid anything that's overly complicated when explaining your startup. Keep things simple. And be careful about trying to teach, especially in short presentations. There's not a lot of time, and frankly I don't want to be taught (nor do I want to be an expert in what you do) … I want to be convinced that there's a big enough opportunity in what you do that I should be interested in it. And I need to be convinced that you know what you're talking about, without getting lost in jargon, acronyms or in-depth industry details. You can teach me later…
7. Humor is Hard. Cracking jokes in a presentation is risky. If no one laughs you're left on stage looking like a putz. Be very careful with humor. On top of that, humor doesn't necessarily capture people's attention. They might chuckle, but what you really want them doing is paying attention to your kick ass startup idea.
8. Gimmicks are Worse. Gimmicks are even riskier than the use of humor. Props, for example, can very quickly make you look silly. Props and gimmicks might not work on stage, and then you're stuck. In some cases a prop might be great, especially if it's core to your business, but don't distract the audience with it too much; show it, use it, grab people's attention and then get to the meat & potatoes of your presentation.
9. Expect the Obvious Questions. Some issues are universal for businesses. Target markets, for example. Every business has a target market. And it's fairly important to know the size of that target market, especially if someone asks you about it. I did say in a previous point that it's OK to admit when you don't know the answer to a question; let's face it, you can't know everything. But there are some obvious questions you can expect (if you don't address them properly in your presentation), and you need to be ready for those. Incidentally, it's those obvious questions that you need to address during your presentation (so you don't leave it to people to ask you!)

   Other obvious questions will be about your business model (how you make money), your competition (it always exists), and your sales & marketing strategy (often a startup's weakest aspect).

10. When Things Fail (And They Will) Power Through. PowerPoint presentations are notorious for not working just when you need them. Live demonstrations of your product can fail as well. When something goes wrong, you have to power through it. There's no other choice. It's extremely hard to do, although lots of practice will help. When we launched Standout Jobs at DEMO, the conference organizers suggested that we practice contingency presentations, should something go wrong. At the YES Conference, one group's presentation didn't work. They managed to get through very nicely, so kudos to them.
11. Don’t Look Back. When your presentation does work, and they put it on a big screen behind you, don't look at it. This was part of the advice I received from David S. Rose of the New York Angels, and it makes sense. When you look back, you lose eye contact with your audience. You're giving yourself the opportunity to be distracted and it can easily break your rhythm. Incidentally, it's almost impossible to do; we're just naturally inclined to look back at our presentation. But do your best to avoid looking back - and if you can gain some mastery of this, it will mean you can also do much better in emergency situations.
12. Tell Me What I'm About to See. Another difficult thing to do is to talk ahead of the slides that you're showing. Tell me what I'm about to see on the next PowerPoint slide (without saying,“What you're about to see…"). But if you can master this skill it means you've gotten so comfortable giving your presentation that it flows beautifully. One of the presenters at the Conference had a very nice slide with the number "10%". That's all that was on the slide (very nicely done.) With better timing, the presenter would have been speaking about the number before it appeared on the screen, because the minute it did, I started wondering about what it meant. And the number isn't very high after all, it's only 10%, so it seemed a bit weak. It wasn't a weak statistic for them, and it was a fairly strong way for the presenter to end their pitch, but I was already thinking ahead of where he was in the presentation when I first saw it.
13. Tell Us What You Do Upfront. Within the first 30 seconds of your presentation I need to know exactly what you do and why I should care. If you can't get that boiled down into 30 seconds, and you can't start your presentation with that information, you're going to lose me (and most people.)
14. Don't Save the Best for Last. This is a common mistake - people want to end with a punch. But as I just pointed out, the "aha!" moment really belongs at the beginning. The catchphrase, elevator pitch, 30 second story on what you do and why I should care belongs at the beginning, but too often people leave this until the end when most people have stopped paying attention.
15. But Don't End Weakly. No surprise, the ending still has to be strong. But the point of the ending isn't to explain what you do, because if you're using the ending for that you've lost. The end of your presentation is there to hammer home your key messages (of which I would recommend only having 1-3) — the things you absolutely want people to remember when they leave and talk about you (and your presentation) for days thereafter. The ending doesn't have to be flashy, it has to be concise, convincing and concrete.

Pitching is hard, whether it's on stage, in a boardroom, on a conference call or anywhere else for that matter. Most of us are not natural born salespeople. It takes work and practice. But without a doubt you can improve at it; even if you're shy or introverted. Good luck!

A Deeper Dive Into The First Quarter VC Investment Numbers

by Fred Wilson

Claire Cain Miller wrote a story in Friday's New York Times about the "Money Tree Report" that is published every quarter by the National Venture Capital Association and Pricewaterhouse Coopers. The picture in the first quarter is not pretty. As Claire explains:

Venture capital firms invested only $3 billion in 549 young companies in the first quarter, the lowest investment level since 1997, according to the analysis, done by the National Venture Capital Association and PricewaterhouseCoopers.

The amount invested was down 47 percent from the fourth quarter of 2008 and 61 percent from the first quarter last year.

But the numbers don't jive with my own experience and so I took a deep dive into them this morning. There are detailed reports available on the NVCA website that provide a lot of underlying detail.

I decided to look at the numbers by region and focused on the three regions I know best, Silicon Valley, New England, and the NY Metro area. I went back to 2004, when we started Union Square Ventures, and charted total amount raised in each region and total number of deals in each region.

What you see when you do that is that the decline is largely happening in Silicon Valley and it not nearly as pronounced in other regions.

Here's the chart of total amount raised since 2004 by region. The 2009 number is the first quarter annualized.

What you see is that the total amount raised in Silicon Valley which was running between $8bn and $10bn per year dropped to an annualized rate of less than $5bn, a 50% reduction. At the same time, the total amount raised in New England, which was running between $3bn and $4bn, dropped to an annualized rate of below $2bn, a drop of 1/3. And in the NY Metro market, we saw a small decline, but nothing to get excited about.

The same thing is true of total deals, which are shown here:

What I think is happening is certain sectors, particularly capital intensive sectors like clean tech, are seeing very significant declines in investment activity. Claire points out that clean tech saw an 84% decline in investment activity in the first quarter of 2009. On the other hand, Internet which is much more capital efficient, saw a 31% decline.

The NY Metro market has always seen lower investments per deal than Silicon Valley and New England. In 2008, the average amount invested in a Silicon Valley deal was $10mm, the average amount invested in a New England deal was $7mm, and the average amount invested in a NY Metro deal was $6mm. That's largely a reflection of the kinds of deals that get done in each market. When money gets tighter, the sectors that are the most capital intensive take the biggest hit and that is what we are seeing in this data.

We are not seeing a significant decline in investment activity in our portfolio. And we are not cutting back on our investment activity. Since we started investing our new fund, Union Square Ventures 2008, last summer, we have closed six investments and we have one signed term sheet that has not closed. That's seven new investments in the past 10 months, a bit of an increase over our typical investment pace. And the firms that we invest with the most often seem to be equally busy.

So while the data doesn't lie, it also doesn't tell the full story. There is money out there for good ideas, particularly ones that are capital efficient and located somewhere other than Silicon Valley.

Raising money? Get a referral first!

by Alexander Muse

You have prepared your elevator pitch and your 'deck' so you are ready to set appointments with VCs, but no one will return your call. First, DO NOT SEND your business plan. Why not? David Cowan of Bessemer Venture Partners explains, "Nothing slows down a VC as much as a comprehensive business plan."

Oh, and DO NOT ASK a VC to sign an NDA. Ryan explains, "Asking a VC to sign a NDA is tantamount to splitting 10's at the blackjack table. You just don't do it. In the least, it will show that you do not understand the mechanics of how VCs operate. At worst, the VC will burn your NDA and dump your submission in the trash."

My Advice? Make your own VC Referrals!

You need a referral to get most VCs to return your call. If you are trying to raise capital from VCs you will need to talk to them over the phone to (a) gauge their interest in your business, (b) see if your business philosophies mesh, and (c) to schedule the ever important face-to-face meeting. When I was in money-raising mode in the late nineties there were over 1,000 venture capital firms across the United States. I must have talked to more than 100 of them, scheduling meetings with perhaps 50 different firms over a six month period. Less than 10% of venture partners I called would return my call without a referral. With a referral, I got a return call around 80% of the time.

Today, lots of people call me and ask, "Do you know such-and-such at such-and-such venture firm? I need a referral.” In some cases, where I know both the entrepreneur and the venture partner, I will make a call to grease the wheels. In other cases, I may just say, “You can use my name and explain that I recommended you call." It all depends on how well I know the entrepreneur or the VC. Bottom line, in my experience, without a referral you aren't very likely to receive a return call. With a referral your success rate will be 50/50 based on the quality and type of referral.

For those of you who don't know me and need a referral to a specific VC, I recommend a simple way to "Make Your Own VC Referral."

• Step One: Determine which firms you want to talk to. Base this decision on which firms have previously funded deals in your space.
• Step Two: Figure out which partner at your target firms you want to work with. Base this decision on which partners managed the deals you used to decide which firm to call.
• Step Three: Contact the CEOs of the companies the VC partner funded. Let the CEO know that you are considering working with one of their VCs and suggest that you plan to talk to the partner they work with. See if he will answer a few questions about his experience with them. Usually, a CEO will return your call very quickly. Ask him real questions that might help you determine if, in fact, you really want to work with the firm and partner you found on the Internet. Hint: not every VC is fun to work with.
• Step Four: Contact the VC partner (i.e., leave him a message) and explain that you had a chance to talk to such-and-such CEO of his portfolio company. Tell him that based on that conversation he sounds like just the sort of investor you are interested in working with. Ask him if he would be interested in getting together for coffee to discuss your business. More often than not you will get a return call.

Get it? By following these simple steps you can create your own referral. Of course, don't be deceptive -- the VC will soon realize that you don't really know his CEO, and that is fine. You are obviously the sort of business person that does his homework. You are just as concerned about him as he should be in you and your business.

One side note, if you ever see that "submit a plan" button on a VCs website, run away. NEVER, EVER submit your business plan blindly to a VC. You don't want to be 'that guy.' Always send your plan to a real person, someone you have actually talked to. It would be like putting a "Submit Termsheet" button on your website. If you actually got one from someone who obviously knows nothing about you, would you take it seriously (assuming you can make payroll next month)? Good Luck!

TITLE INFLATION

by Dr. Larry Marshall

Many early stage VCs let this happen, and as startup CEOs we are often guilty of it too. One large company success is enough to convince you that title inflation is really, really bad. In the early stages titles are cheap and all of us are focued on preserving cash--its oxygen, so we often weaken and hand out titles that are too big to wear. Now a startup is great because it gives people a shot at exceeding their capacity and then growing to fill it--it's an incubator for great C-level people. As a startup CEO you are always in the crosshairs of everyone. The best thing you can do to build success is surround yourself with the strongest executive team you can--especially people who can make up for your blindspots. Now there is a chance that one of this team will be able to replace you as CEO--this is critically important--you can't build an organization without this (see another Blog on the indispensible founder & nutcase ...).

I've known a number of startup CEOs (and come to think of it two or three public company ones as well!) that surrounded themselves with mediocre people that they can control, seemingly thinking that that insured their job. In a VC backed company it will just ensure a new CEO to replace all the dead wood.

One of the single most powerful things you can do to convince your Board that you are the right CEO is demonstrate an ability to attract top quality people. Who cares if the VP marketing runs rings around you in marketing, or if the VP sales is a 10x better closer than you are--this is what you want. For some inexplicable reason, many startup CEOs think this makes them look bad--no, no, no, it's exactly the opposite. Team is everything. You build the team, you raise the money, use it to build a great company.

When companies grow larger, the founders often jealoisuly guard their titles--they were great in building the company--it's "their" company and it owes them a living ... I know one Nasdaq company that recruited a new CEO to replace the old one when the stock ceased to perform, but the old CEO insisted on holding the chairman position, and remaining "actively involved" with the management. The end result, the new CEO had to create two layers of management; they recruited a new executive team who could actually do the jobs, and kept the old founding team in place who tended to get in the way of executing anything, despite their exceptional track record of executing nothing. In the end the new CEO was replaced by the old one, and things reverted more or less back to normal ... ugg.

When you sell a company, there is apt to be a preliminary assumption that, as a startup CEO, you have pretty bad title inflation--if the acquirer quickly notices that, actually your Director of Engineering, would normally be titled VP of Engineering, but really is a solid director level guy on track to VP, then it's likely he'll retain that position post deal, and be well respected in the new organization. This opinion will carry over to the rest of the team in the same way the negative opinion would have. I've had this argument many times with team members who felt I was pushing them down and preventing them having a solid VP slot on their resume, but again, a VP slot that isn't real usually has the reverse effect. You also probably want to do another startup, and having industry colleagues question your personnel judgment or hiring skills wont help that ;-)

What Venture Capital Can Learn from Private Equity

The venture capital game has changed, yet many VCs are still using an old, outdated playbook

By Peter Rip

Baseball and venture capital always seem to make an effective pairing for analogies. As in baseball, much of the cachet of venture capital is inspired by the romance of the metaphoric grand slam. The recipe has been the same since venture capital began: Find a team, give it money, sit back, and wait for the bloom. Most investments fail. But a few could be big winners and make it all turn out just fine. It used to be said in this business: "You can only lose one times your money." The implication is that winners will pay back the risk many times over.

The reality is that this approach works for an ever-winnowing number of companies, and shockingly few since 2000. The median venture capital fund has seriously underperformed the Russell 2000 Index since 2000. This is a stunning reversal over the prior two decades. What happened? There was a structural change in the game, yet most of the incumbents kept executing the same playbook.

Traditionally that has meant funding disruptive change and managing execution risk. For example, the decision byKleiner Perkins Caufield & Byers to recruit Eric Schmidt was a masterful way to take the risk out of business execution at Google (GOOG) early on. Closer to my home, my partner, Jim Feuille, led change in our business model when we invested in Pandora Media, changing from a subscription service to free personalized Internet radio. Today, Pandorais the largest radio site on the Web. Managing execution risk at Pandora meant adding measured risk to capture the return of a bigger opportunity.

The classic VC play has always been to take enough risks and you'll be rewarded with the Great Exit, such as a big IPO or acquisition. VCs learned to excel at team selection and the mitigation of execution risk, often considering other risks inherently uncontrollable. Venture capitalists tended to place less emphasis on issues such as valuation, the timing of exits, and future capital availability precisely because you could only lose one times your money.

THE BULL BENEFIT

Great Exits happened from 1982 to 2000 with a regular cadence. The strategy of going for the grand slam in every deal in every portfolio worked often enough during that bull market. The bull market gave public companies more currency to buy startups and often instilled public investors with confidence in the future of small growth companies. There were some spectacular successes among many long-forgotten failures.

The bull market in technology ended with a bang in 2000. Nevertheless, most of the venture capital industry still executes the same playbook, ignoring the public market, which is why the industry has performed so poorly since 2000.

Author Michael Lewis chronicled the success of baseball teams such as the 2002 Oakland Athletics in his book Moneyball. The A's didn't have the funds to buy top athletes, but instead assembled a winning team through a more analytical approach. Statistical analyses included in the book found that ballclubs that simply tried to get a man on base as many times as possible won more games than teams that focused on hitting home runs.

Most investors in venture capital understand that you cannot generate an acceptable rate of return by hitting singles and doubles. What they don't appreciate is that a strikeout is far more destructive when grand slams are fewer and further between. And with fewer grand slams, time also matters. In a secular bear market, that Great Exit may take so long to occur that the drought destroys your internal rate of return.

MORE RISK TO MANAGE

In short, it has become clear since 2000 that financial risk/return is as important as execution risk in venture capital. Financial risk/return refers to weighing the risk that the financial markets may not be ripe enough soon enough to justify investing this much, at this valuation, now. Today's VCs have to pick great markets, great teams, and manage execution risk, as they always did. But they also have to manage valuation risk, timing risk, and investor syndicate risk.

Venture capitalists can learn a lot about managing this new set of risks from their counterparts in private equity. Whereas the traditional venture capital playbook has been about company-building, the private equity playbook has been about financial engineering. Private equity is focused on metrics, comparables, terms, and cost of capital—more so than innovation, market selection, and team development. Their teams and companies are more mature, reducing the need to be an expert in assessing execution risk.

Think about this in terms of an inflection point, or that period when an additional dollar invested yields far greater shareholder value than it would have at an earlier phase. It's the point at which a little gas fuels a huge fire. Finding the best companies and investing in them at inflection points are perhaps their two most important disciplines. Stage is not a consideration. It is all about that inflection point.

Venture capital is at the intersection of innovation and finance. Fortunately for investors, innovation continues without regard for the financial markets. The jet engine, the helicopter, FM broadcasting, fiberglass, nylon, photocopying, radar, sticky tape, and instant film were all invented during the Great Depression. Breakthroughs are everywhere today, in energy technology, biotechnology, and even information technology. These innovations will continue to disrupt incumbents and create new markets—and they will all need early-stage venture capital.

But the absence of buoyancy in capital markets means the early bet is not always the best bet. The new venture capital playbook begins by taking into account the macro drivers of growth. Which sectors are most ripe for disruption through innovation? Add to this the venture practice of building networks of entrepreneurs and partners who can place you in the flow of that innovation.

INFLECTION POINTS

Here's where the private equity model takes hold. Like private equity investors, VCs need to understand the entire sector, at every stage in the spectrum—seedlings through large public companies—to develop a theory of how the industry will evolve. Who will win and who will lose? When will incumbents need to make strategic acquisitions? What events have to transpire to enable big, new markets?

And, like other forms of private equity, the timing and probability of exits are as critical as their magnitude. This necessarily leads to a view toward finding inflection points, regardless of stage. Sometimes the best stage is the napkin sketch in the coffee shop; sometimes it's the phoenix rising from the ashes of $100 milllion of previous investors' capital. Either has the potential for venture capital success. The best performing venture capital investors will be able to find both.

At Crosslink Capital we have been evolving this new venture capital playbook since the late 1990s. We recognized early on that the bull market was over in 2000. We mostly sat on the sidelines for much of 2001 and 2002 with our 2000 venture fund. When we did return to investing, we did many restarts, turnarounds, and private investments in recently public companies, many of which were in Internet and services. This strategy of selectivity, stage independence, and a focus on companies at inflection has served us well.

LETTING GO OF THE IPO WINDOW

By 2006 we began to see two important shifts with our new venture fund. One was the emergence of energy technology as a new and important growth market opportunity. Many energy technologies had reached a point where the scientific risk was being replaced with commercialization risk. This transition is always a tipping point in the emergence of new growth venture markets.

The other shift was a rising inflation in later-stage valuations. It seemed many of our peers anticipated a forthcoming IPO window, whereas we did not. So we tended to find better values in earlier-stage opportunities, where the return multiples would justify the higher financial and execution risk. A few of these companies have had very attractive subsequent financings, suggesting we are off to a very good start. Among the companies funded were Twin Creeks Technologies (energy), Like.com (search), and OpSource (cloud computing).

There are lots of strategies for playing to win in baseball and in venture capital. The best strategies are context-specific. Entrepreneurship and innovation are eternal. A few venture firms will be able to continue to successfully swing for the fences without the bull market tailwind. Most will not. Great returns will continue in venture capital, but only for those who can successfully operate across the spectrum of private companies and find great value regardless of their stage.

A written business plan does not get you venture capital

by Healy Jones

I was recently pointed at an interesting study by several professors at University of Maryland's Robert H. Smith School of Business. These professors' study analyzes the impact of written business plans on a startup's chance of successfully raising venture capital. Their conclusion (as summarized by PEhub): high quality written business plans do NOT increase the odds of raising venture capital.

The professors are correct.

Your written business plan is not the most important thing

Early in the venture funding process you, as a startup founder, have two simple goals:

1. Get a meeting with the VC
2. Convince the VC to begin diligence on your startup

That's it.

Far more important than your written business plan is HOW you are introduced to the VC, because this gets you past the first point above. Your best bet is to have been a successful CEO who was previously backed by that VC (yeah, I realize this is probably not you, but think about how much easier it will be the second time!) Your next best bet is to be introduced to the VC by an entrepreneur with whom they've worked before. Or, try to find someone on a board of directors with them who will introduce you.

I'm not trying to trivialize this. I realize you do not likely have these connections. But they can be made. I see first-time entrepreneurs who have gained the confidence of very successful CEOs/founders all the time. First-time entrepreneurs who pretty much had no business getting the attention of these big time CEO-types! Many of them didn't know these successful CEOs/had no connection to them prior to founding their startup, yet they have been able to convince these CEOs to act as advisers. People who are able to get these well-known entrepreneurs involved are also more likely to be the resourceful-type founders who create legitimate businesses.

Use a short investors' presentation

After you get this introduction you will want an investor's presentation. (Ok, so I maybe trivialized the introduction step a bit.) Your presentation should be short - long presentations do not get read by busy VCs. Sorry, but that is the truth. You will increase your luck with a shorter presentation vs. a 50 page business plan. I often point entrepreneurs to a template investors' presentation on the Common Angel's blog as a good starting template for their presentation. By all means write a great plan, one that will help you run and operate your business. Just don't expect that same plan to get you funding.

Your final business plan may be different than the one you started with

I think the professors' conclusions would be different if they had been able to look at the final presentation (and business plan behind it) given to the venture partnership just before funding was approved. My partners and I spend  lot of time working with entrepreneurs prior to seeking approval from the fund's partnership for an investment. Beyond the traditional due diligence work is time we put in to refine the business plan and the investors' presentation seen by the funding approval group. We do this with both first time CEOs and entrepreneurs who have sold businesses for hundreds of millions. It is an important step, not only in planning for the business, but also in setting expectations on how we as a fund will work with the founders.

And, academically, I'd bet that these final plans are statistically significantly higher quality than the average plan submitted to VC funds.

The venture capital entrepreneur in residence - Part 1

by Healy Jones

As a startup founder trying to raise venture capital you may be introduced to a venture firm's "EIR." Startup founders should welcome these interactions, but should also prepare carefully for meeting with a VC's entrepreneur in residence. An entrepreneur in residence has slightly different motivations than a typical venture capitalist, so an understanding of the role of an EIR and a the right homework can be very beneficial in your quest to raise venture funding. This is the first in a 3 part series on venture funds' entrepreneurs in residence and your startup's fund raising process.

First, a little definition that I'm making up on the fly describing an entrepreneur in residence

Entrepreneur in Residence: ("EIR" or sometimes "venture partner") is a previously successful entrepreneur/manager/CEO/CTO working for a venture capital firm as an advisor to the VC on new investment opportunities and seeking to join a startup as a key member of the management team (usually as CEO) when the venture firm finances it.

The EIR's role

So what is the purpose of an EIR?

1. An EIR is probably looking for a job. While they are usually paid something by the venture firm, their real end goal is to find a cool startup to join… usually as a CEO. Thus, your job as a startup founder looking for capital is to get this EIR so excited about your company that they want to work there. You may not wish to give this person the CEO role, or even let them near your startup. But knowing that the EIR's purpose is to take such a role at a startup can be used to your advantage. Try to get the EIR so pumped up about your business that they want to join it - even if you don't want them to. I'm not saying you pretend to offer them a role and then yank it away, I mean make the company so exciting that they can't stop talking about how great it is to the VC firm's partners. Consider this part of the game of raising venture capital.
2. An EIR provides expertise to the VC firm's diligence process. The entrepreneur in residence came out of a particular industry and is likely to focus in a similar space OR had a special role, such as a channel partner development expert. It is very likely that this person has some real knowledge in one of the areas that you are attacking or in one of your potential execution strategies. The EIR will try to help the VC understand these aspects of your startup's business model. You could potentially learn a lot from this interaction, but should also know that there is a chance an EIR will ask some pretty tough questions… either because they really know their stuff or because they are trying to look good in front of the VC.
3. An EIR can help the VC find new potential deals. Since the EIR likely has good connections in a given industry and a good reputation with executives in the community it is very likely that the EIR can help the VC generate "deal flow." The EIR might also be doing a deep dive into a particular industry. Getting introduced to a venture capital firm through the EIR is a smart way to take advantage of the EIR role. Gaining access to the VC through a trusted entrepreneur is a powerful way to get the VC's attention. You may also get to take advantage of a little bit of human nature, as an EIR who introduces an idea is more likely to subconsciously support it.
4. An EIR might actually put together a new company for the VC. Many early stage venture capital firms may be willing to put capital into an EIR if they can come up with a good idea and find the right co-founders. This is probably the trickiest thing to navigate when interacting with an EIR, as you do not want them to turn around and start your idea with funding from the VC. This is where dealing with only reputable venture firms can be most helpful, and it is also a great idea to ask any venture fund you meet with if they are looking at other ideas in your space. There have definitely been a few times that I have had to say to a startup "hey, we are in deep talks with a company in your space and may be making an investment in them, do you still want to speak with us?" (Most startups still seem to want to take the meeting.) I would hope that other firms' EIRs would disclose the same.
5. An EIR may help the VC with existing portfolio companies. This probably doesn't matter too much for you during your search for venture funding, but can be a bit of a time suck for the EIR.

Understanding the EIR role and realizing that the EIR has slightly different goals than the VC can help you highlight your company better. Getting your startup funding is no easy task, but having a venture firm's entrepreneur in residence in your corner can really help move you along in the fund raising process.

Rejected By VCs, Rescued By Angels

By Scott Denne

After spending a year talking to more than 70 venture firms on both coasts, Earl Galleher gave up on raising venture capital and turned to angels to fund his unproven idea - software that automates and analyzes the process of landing meetings with sales leads.

As his company, Basho Technologies Inc., was running put of cash, Galleher was able to score $2 million from two groups of angel investors in Wilmington, N.C., to launch the first product.

What surprised him during the year-long funding process was not that angels were willing to invest when venture firms were not, but the widely divergent attitudes about investing in new businesses.

Even before the Lehman Brothers Holdings Inc. meltdown in September that shocked the financial markets and caused venture firms to further tighten their purse strings, Galleher said it was tough to pitch to venture capitalists. One West Coast VC took a five-minute meeting with Galleher and his team, peppered them with questions about the business and ended with "'You guys really had me there, for a minute,'" Galleher said. "I felt like I was auditioning in front of ["American Idol" judge] Simon Cowell, rather than pitching a business from two people that have start-up experience." (Galleher was a president at Internet services provider Digex Inc., which was sold to Verizon Communications Inc. for $178 million in 1998, and an early employee at Akamai Technologies Inc. His co-founder, Tony Falco, was also an executive at both companies).

After September, things got worse, with presentations at two East Coast venture firms dissolving into discussions about the challenges faced by the venture industry.

Around November, Basho gave up on venture capital and turned to angel investors. Not only was he able to round up $2 million from angel groups, but found them to be much more engaged in meetings.

"There's much more diversity of questions [from angel groups] because they all come from different backgrounds," Galleher said.

He attributes the interest from angels to the fact that they are not dependent on the good will of limited partners to make investments, despite the fact that many have experienced pain in the economic crisis.

Or "it could just be that our business plan stinks," Galleher joked.

Basho's initial angel investors, Harbor Island Equity Partners and Wilmington Investor Network, have used their contacts to help the company secure meetings with other angel groups across the country, and Galleher says they hope to raise more angel money and avoid the need for traditional venture capital.

Angel investors have been showing more of an appetite for seed and start-up stage investing lately. Such investments made up 45% of all angel investments in 2008, up 6% from the previous year, according to the Center for Venture Research at the University of New Hampshire. While the number of venture capital deals fell 10% to 2,550 in 2008, according to VentureSource, the number of angel investments dropped only 2.9% to 55,480 deals. However, the University of New Hampshire survey did point out that angels are becoming more frugal.

by ReachVC 桂曙光

(原文: http://www.reachvc.com/post/243.html )

融资不是一件容易的事！你需要扮演销售员、梦想家、幻想家、技术高手、运营经理、联络员等不同角色，而这些还只不过是刚刚开始。

在向VC融资演示的时候，你还需要成为PPT专家和Excel专家。但这些都不能保证有人会给你支票。而有可能，你只不过是给别人展示了你的PPT和Excel技能。

做演示越多，你会做得越好，因为演示的过程中你会学到很多技巧和诀窍。Venture Hacks里也有很多非常好的资料，创业者可以从中看到很多关于风险投资方面的信息。在过去的几周的融资过程中，我已经看过不少了。下面是我学到的5条向VC融资演示的经验：

1、每家VC都有自己的风格。

在融资演示之前，你应该了解每家VC的喜好，尽量多地收集内部信息。他们有博客吗？他们是关注当前财务状况还是长远发展目标？他们真正关注创业者的什么特质？他们喜欢什么形式的演示？如果你无法事先找到这些背景信息，那么在演示的过程中，要注意观察一些信号，并及时调整。

在融资过程中，你跟不同的VC演示的东西基本相同，但对每家VC也要有一些针对性的修改。

2、提高PPT的效率。

PPT不会说服VC投资你或你的企业。我怀疑不会有VC会私下看了你的PPT，然后告诉你：“我是该给你支票呢还是现在就给你现金？”PPT只不过是你的辅助工具。关键是怎样尽量有效使用它。对于新手来说，一定要做一个有视觉冲击的PPT。

当Fred和我在鼓捣我们的第一份PPT的时候，里面充斥者大量文字和分门别类的内容，有很多有趣的细节，但是没有视觉冲击。一张图片抵得上千言万语，通过运用图片和寻找能够表达你意思的图片，你会更认真地考虑PPT中要表达的意思，并且如何表达。

VC跟所有普通人一样也喜欢炫一点的PPT，加上一些让人眼前一亮的东西会让PPT看起来更专业和认真。

3、保持平常心。

说起来容易做起来难，但是不要感情用事。不要因VC的问题丧气或者生气。不要为那些不理解、不喜欢、不相信你的想法的VC而苦恼。形形色色的VC有很多，每家对你的反馈都会不同。VC也是跟我们一样，没什么特别的，他们中有些人很不错，有些人一般般，有些人很友好，有些人很讨厌。

你事先对他们了解越多（见第1条），你就会越容易达到这种状态。如果你知道某个VC总是跟创业者第一次见面时很粗暴，那就随他去吧。

即便你是两眼一抹黑，也不要担心什么。并不是要每个人都喜欢你，也不是要每个人都理解你。你越不在乎，你会越觉得从容和放松，演示也会越成功。

4、自信并提供假设条件。

宏大的、大胆的介绍是不错的，你需要向VC展示你对自己的创意的信心，并且你也可以给VC介绍一堆你认为真实有用的东西。但是，你需要提供背后的假设条件去支持你的说法。你不需要将每条假设都说透，但基本的要涉及。“这背后有一些重要的假设……”之类的话就管用。而VC要知道你的目标在哪里、你如何处理特定的问题、达到重要的目标、等。

5、先展示你的创业激情和实实在在的想法/做法，然后再要钱。

我的好友Austin Hill称之为“Hearts、Minds、Wallets”方法。你应该对你的创业企业充满热情（如果不是，那就是有其他问题），因此向VC展示激情并不难。你也希望VC跟你一样充满激情，但是你无法平白无故地传达激情，你也无法仅仅凭着一个概念说服VC。你需要给他们实实在在的想法和做法才能让他们兴奋：你卖什么东西？怎么卖？收入模式是怎样的？等等。一旦哪个VC能够把你的激情和想法/做法牢牢地联系在一起（用他们自己的判断），那你离拿到钱就近了一步。

向VC融资是很困难的一件事，需要做大量的准备，还要结合技巧与经验，而我们这些创业者很少具备这些。你需要很好的演讲技巧、厚脸皮、无穷的热情、和一份完美的并且内容充实的推销计划。当然，一点运气也是必须的。(桂曙光)

The Arcane Method Of Valuing Early-Stage Companies

By Mark Peter Davis

I was recently asked by a reader to explain the arcane math used by VCs in valuing early stage companies.

I should begin my response with a caveat – early-stage investment firms likely vary in the process that they use to determine valuations for seed and series A investments. Companies at this stage are often pre-revenue (or even pre-product). That said, the common thread between the various approaches to valuation early-stage companies is that they all ultimately are as much art as science. Judgment and experience are key inputs into the process; a mathematical equation alone rarely yields the appropriate output.

Unfortunately, no single equation is designed to optimize all of the VC's key objectives. In general, VCs need to find a deal structure that balances three key considerations. The terms must be:

• More attractive than the entrepreneur's other options,
• Provide the VC with ownership sufficient to generate an acceptable risk-adjusted return, and
• Designed to provide key managers with enough equity to align incentives.

Because there isn't a single equation that solves for all three of these objectives, valuations are most often determined through a process of scenario analysis. A range of valuations and capital investments are input into a capitalization table model. The output, which illustrates the ownership of all of the involved parties after the investment, is then evaluated to determine if it achieves the three objectives stated above. If it does not, the inputs (valuation and capital invested) are adjusted until a viable scenario is identified.

As part of this math, VC's typically do an additional analysis whereby they project their expected ownership levels after future dilution to understand the likely return on investment in various exit scenarios. This analysis can help them better assess how much of the company they need to own initially in order to generate an acceptable return after dilution.

The fact that the valuation process is based on judgment does not mean that it is invalid. I would argue that all company valuations, whether the company is early or late-stage, are in no small part based on judgment. Regardless of what equation or process is used, some of the inputs ultimately are dependent upon investor experience. For example, in a discounted cash flows model (an approach often used for valuing more mature companies), the process used for selecting a discount rate is often less than scientific (and often arguably arbitrary). Small variances in discount rate can have a large impact on the ultimate valuation. The same holds true for the process of selecting and adjusting comparables used in both early and later stage valuation exercises. Picking one comparable company over another or selecting one arbitrary adjustment over another can substantially impact the valuation.

Regardless of the methodology used to arrive at a valuation, investor willingness to pay will determine the range of acceptable outcomes. Simply put, investors won't pay more than their perceived value of the company.

Begging and Choosing

by Glenn Kelman

Fred Wilson talked the other day about the importance of choosing a group of venture capitalists who like working together. It reminded me of how much I like our investors: Paul Goodrich from Madrona Capital, Marc Singer from BEV, Emily Melton from DFJ and Steve Hall from Vulcan.

When I first got involved in raising money for my last employer, Plumtree, I looked at a venture capitalist the way Wiley E. Coyote looked at the Roadrunner, as a mirage of drumsticks and chicken wings, garnished with a sprig of parsley. Assessing an investor for his advisory ability seemed like asking about a heart surgeon's personality before getting a triple bypass; it was hard to think beyond the cash we needed for our survival.

Ten years later, raising money for Redfin has often still been a gambit — our last effort was in 2007, and it wasn't as easy as we thought it would be — but what made it easier was that we had convinced ourselves we really were evaluating each investor too.

Of course, it isn't always possible to choose your investors. Beggars can't be choosers, and all of us unprofitable companies are beggars. But my point is that approaching money-raising as a choice actually makes you a better beggar. Nobody likes being sold to, but everybody likes being chosen.

I still read tweets and blogs about how to make a VC moan with pleasure or lose his mind or do whatever he is supposed to do, but a VC relationship is more of a marriage than a one-night stand. Yes, you need a mission statement that fits on the back of a business card, a snapshot of your financials and the blue-bottle magic of an insanely great demo — which I have to admit should have the intensity, the lack of antecedent, the awkardness and brevity of teenage sex.

But after that it seems obvious that you just want to have a conversation about the business. PowerPoint, an evil system of command and control that turns one person into an unstoppable bore and the rest of us into zombies, is responsible for billions of dollars in lost valuations.

And if you aren't asking as many questions as the investors are, you can fall into becoming a performing monkey, skimpering down Sand Hill Road from one meeting to the next with the same song and dance. Ideally, raising money is more like traveling to alien planets in a densely clustered solar system, where you encounter very smart creatures who have no idea what your world is like, but ask you questions that make you wish it were better.

It has been so long since Redfin has raised money that I worry we've lost touch with an important source of ideas and information. I still remember the questions from last time: why doesn't Redfin charge users for premium access? Have you looked at how Yelp encourages users to compliment one another's reviews? Why aren't you offering mortgages? I try to answer every question with "yes," "no," a number, or "I don't know." For the best questions, the answer is usually "I don't know."

But you also need to have questions of your own. Here are some of my faves:

1. How do you see our market changing over the next few years? Your investor has to develop her own ideas about your business sooner or later. At this early stage, this question is mostly an IQ test.
2. When times have gotten tough for your portfolio companies, how have you helped them out? Anybody can get lucky with an investment that takes off like a rocket; all you have to do is hang on for dear life. A VC's true measure is how she gets all her other companies pointed in the right direction.
3. Who are your favorite entrepreneurs? Some people genuinely like entrepreneurs, notwithstanding their volatility and constant intellectual jousting. Most people fake it. If the investors' fave five is composed of people she hasn't worked with, she's faking it.

It's a fun process. Yes, when really smart people get to know everything about you in a very workmanlike way and then pass by the dozen, it becomes a self-esteem destruction machine. But mostly, it's fun. Every entrepreneur I know secretly loves the WSoP-stakes game of raising money: the marbled lobbies and green courtyards, the bountiful assistants bearing glasses of ice-water are so much nicer than our grubby little offices.

What I don't understand is why entrepreneurs only love venture capitalists until they give us money. As someone who always hated rich people and people in authority, I remember as a younger co-founder being shocked at how the grown-ups at Plumtree spoke respectfully of our board. I kept waiting for them to take off the rubber masks of their own faces and say, "just kidding, we hate them too." So maybe now you're waiting for me take off my rubber mask.

But back then, I just wanted to build good software and market it straight down the world's throat. Now that I feel responsibility for other parts of the business, I need more help. This fall, despondent about our layoff, I really needed help.

Sooner or later, you will too. You'll feel all alone in whatever you're trying to do, and you'll need advice. If you're really in a jam, you won't even be able to ask normal people for advice, because the situation is so bad you don't want anyone to know about it. Your friends will listen to your better-than-it-really-is situation assessment while browsing the web or yelling at their kids, and then tell you what you want to hear: that the situation is better than it really is, that your board is wrong and you are right. If you already know what to do and just haven't done it yet, this feels great. If not, it makes you feel more alone.

This is why it's a good idea to at least try to choose your VCs, instead of just begging to be chosen by them. I almost didn't write anything about recruiting and choosing VCs because I am so bad at talking to them — at a climactic meeting with an entire firm a few years ago, I opened the presentation by asking if the firm had ever made any Seattle investments, whereupon a senior partner gently reminded me that he was the first venture capitalist to invest in Microsoft — but the one real lesson I've been able to glean from the whole experience is that being a better chooser makes you a better beggar.

American Idol meet American VC!

by Alexander Muse

Lots of people will tell you that getting the 'right' venture capital firm to invest in your deal is key.  To be sure I understand the arguments and certainly agree with them, but the reality is most entrepreneurs (myself included) will take money from almost anyone willing to give it to us.  Venture capitalists know this and as a result have significant leverage when negotiating terms - we don't want to risk losing the money to find the 'right' deal.

Last week a relatively new venture capital firm came to talk to me about ShopSavvy.  They wanted to make a small, but meaningful investment in our company.  For us, the amount was small enough that the trouble it would cause us wasn't worth the investment (trouble meaning, we would have to be careful about shareholder rights, inside dealing, corporate opportunity and so on given our various companies).  But for a bigger investment, say $5MM, it would be worth building Chinese walls between our companies and move forward.  The partner didn't want to take no for an answer.  He explained that he had more than just money.  That his experience in the space, contacts with carriers and ability to bring significant capital to the table was worth the trouble.  His offer got me thinking, why not offer him a few options in exchange for not investing?  Let him have a free look and as a result get a semi-free look myself.

Many startups require less and less capital and as a result venture capital firms are having to change their investment models.  My advice for entrepreneurs is to seek out the 'right' venture capital partner and once you have them interested in taking a harder look at your business turn the tables on him and offer him a small stake in exchange for a little bit of his time.  Give him a vested interest to help you before taking his money (oh and to all of you neysayers - yes I get the potential for conflicts - and yes I know you aren't allowed - and yes…, but man give it a try and then complain).  You are basically paying him to conduct diligence on your deal, but he is auditioning for you.  It is a pretty cheap price to pay if you avoid making a serious mistake about the future of your business.  I am going to give it a try - I will let you know how it turns out.

Cover the basics before you raise capital

by Ed Sim

No matter how many times I told my friend that he needed to get a deck together for a potential capital raise and model out some thoughts on market sizing and financials, I ran into resistance.  It was not because he didn't think it was important or that it mattered.  It was because he was understaffed and going 60 miles per hour trying to get a product released.  I can understand that pain but at the same time, if you want to raise capital from anyone, you need to have the basics covered.

Fast forward 6 weeks from that last conversation, and we ended up having a meeting with a "friendly" VC to receive some market feedback on where his company stood and what needed to get done to raise capital.  And sure enough, it didn't take long for my friend to be questioned on the revenue model, potential market size and opportunity, and how long the cash would last.  Of course, he did have some strong answers but they were not what the VC was looking for - it was not quantitative enough.  We all know that coming up with market sizing and revenue forecasts for a startup is as accurate as the weatherman predicting the weather.  That being said, VCs want to understand the logic behind the numbers as much as the numbers themselves. 

Overall the meeting went as I suspected it would - a VC who was very interested in the product but also highlighting the fact that the revenue model was not clear.  The kiss of death for me on the revenue side was when the entrepreneur said that he would monetize the company like Facebook and Twitter.  Hmmm?  We all know that Facebook and Twitter are unbelievable web phenomenons and suck up incredible user attention.  And yes I am sure that Twitter will find a way to monetize the stream of data flowing through the system and I am sure that Facebook has tremendous value.  That being said accumulating users and worrying about revenue years from now is yesterday's news.  Unless you have tremendous scale when you show up at a VC's door, then don't bank on ad revenue as your only revenue source.  We have seen the market numbers-overall online ad revenue declining but search revenue increasing.  In addition we all know that social apps on the consumer side have incredibly low CPMs and that you need massive numbers to turn into a business.  So if you want to get funded, you better have a clear answer on how you will make money and either be implementing that model today or in the short-term.  What VCs are looking for is a revenue model today that makes sense - this can include premium subscription revenue, analytic revenue, and even lead generation revenue, but don't ptich massive scale and advertising as your go-to revenue souce 24 months from funding.  You will be shown the door quite quickly.