Free Lists of Investors

Or Where Do You Rate on the Entrepreneurial Scale?

by Peter Ireland

Are you looking for lists or directories of investors who will give you money? Are you considering paying for such a list?

One word: Don't!

Raising capital for your new business doesn't work that way. You can't just call up a complete stranger out of the blue and expect them to give you money. Imagine if the situation was reversed and your telephone rang and triggered the following conversation:

Hello?
Yes hello! I got your your name from a list of investors I purchased over the Internet. My startup needs $X to launch and it would just be totally awesome if you could invest your hard-earned money in it. I can send you a copy of our business plan which clearly shows what a great opportunity this is.

What would you be thinking? You'd probably be thinking, "Who the heck are you? Where did you get my name?"

In order to win capital, the provider has to trust you but trust takes time to build. People need to get to know one another over an extended period. The minimum time is in the six to twelve month range. In most cases, the more face time you can get with a potential investor, the shorter the time frame for establishing the minimal level of trust you will need.

During this phase you need to meet with them regularly and demonstrate your competence as an entrepreneur by continuously moving the project along. Polishing your business plan and PowerPoint is not considered tangible progress. What you need to do to win confidence and trust is to find a way to generate some cash flow.

Where are You on the Entrepreneurial Scale?

Imagine a scale of 1 to 10 on which we rate a person's entrepreneurial savvy with 10 being the highest and best.  Writing a business plan and then waiting for some good Samaritan to come along and fund it rates a 1.  Finding ways to create cash flow with a transitional model starts to move you into the 5+ range.  By transitional I mean finding a way to get started with perhaps a piece of the original concept or with a related product or service.  Let me give you an example. Oftentimes individuals or teams seeking funding for a new technology will engage in providing consulting solutions for the same problem that their technology will solve once funded. This approach achieves two key objectives: 1) it demonstrates that the entrepreneur knows how to create cash flow, and 2) the relationship starts to build trust with clients who might be in a position to invest in the project.

Entrepreneurs who can launch a company quickly without waiting for some stranger to give them cash rate a 9 or 10 on the scale. Back in the late 1980s, I was working with a consulting firm providing financial expertise to technology companies from Los Angeles to Vancouver. During that time I was given the opportunity to work with entrepreneurs who rated as 10s on the scale.

So, if you're sitting there waiting for a stranger to fund you so that you can get up and start building the business, understand that you are operating at the 1 level and that's not a good place to be. Moreover, no one with money will take you seriously.

Finally, there's another reason not to pay money for those lists of investors and lenders. It's called the Internet. To find investors, focus on the local because face time is crucial for success. You do this by searching, "your city, venture capital firms" or "your city, angel investor groups." (By the way, this blog lists all the angel investor groups and their contact info by city or state. And it's free.)

So, use the Force, Luke, use the Force.

What should you ask the VC?

by Paul Jozefak

I was thinking about what I'd ask were I raising venture capital. Funny is that I often think about what I should ask entrepreneurs when determining whether to invest. I've often enough told entrepreneurs they should be asking their VC's just as many questions. I never really said though what they should be asking. My bad! Well, in order to be fair, here's what I'd be asking a VC were I interviewing him for the highly coveted position of investing in my business (note the satire!)

1. Who's responsible for your track record?

The boring question would be "what is your track record?" This doesn't answer what you'd like to know plus it's where you'll get the most personal marketing bullshit. Who are the VC's "go-to" people is probably the more important detail. How does he get you in the door where you need to be pitching? Has he been opening doors in the past that led to revenues, partnerships, mergers, acquisitions, exits?  Is he all lip-service about all that he can do for you or does he execute? No one works alone on the VC side. You have to have a strong network of people not only whom you can call but on whom you can depend. I answer this question as honestly as possible when asked. I know where and even better where I can't help you. I'll tell you openly when I can't add value.

2.  How involved do you plan on being in my company?

This is a double-edged sword. The answer can be as little as "I'll be a board member" to as much as "I'll call you every day to see how things are going." Be afraid of both! It sucks if someone only comes to board meetings and is otherwise completely unreachable. At the same time, someone who's on your back each and every day is taking up too much of your time. If you need them there every day, you're not good enough to be running the company anyway.

3.  How much vacation a year do you take (no, seriously, ask this)?

There are hardcore VC's out there who work night and day. At the same time, there are basically "racehorses out to pasture" as well. They've been superstars but they are "doing this for fun" now. If accessible, there's nothing better than these guys. On the other hand, they tend to take month-long "trips" without any interest in business, calls, interruptions or whatever. Ask! It may make the difference between getting the advice you need or trying once again to figure it out on your own.

4.  Will I have access to your partners?

I have really smart guys working with me. I often ask them for their help, advice, insights. Why shouldn't you? Ask the partner you are dealing with if you can also access his partners in times of need and how they can fill in the gaps when it comes to making your business successful.

5.  What is the process for a follow-on investment and how much capital will you reserve for this?

People usually are so focused on getting the first round that they forget the rest. Ask about the process for a follow-on investment. Will there be a whole new due diligence process? Will the VC have to prepare a whole new investment proposal? Who will determine whether additional capital is injected. How long does it take? Most importantly, will there be capital for a follow-on investment? Sure, you're pitching that this round will take you to an exit or break-even. Hey, how about planning for a rainy day? Ask what will happen....just in case!

6.  What stage of the fund's lifecycle are you in?

Remember, as a VC, we're investing other peoples' money (as well as our own). There's a lifecycle for a fund.  If we're towards the end of the investment lifecycle, we're probably looking for a different stage company then were we at the beginning of the fund's lifecycle. Sure, there are exceptions and we make them often but it doesn't hurt to ask.

I'm sure there are more and even better questions but these are the ones initially popping into mind when I think about the process of raising money from VC's. Feel free to add your own in the comments if I missed any.

Start-up Cost Projections For First Time Entrepreneurs

by Brad Feld

Question: At a pub in Los Gatos, CA a casual conversation with some young, first time entrepreneurs lead to an interesting comment:
"...the business plan outlines our estimated (operational) expenses but how do I know an investor is not going to look at these numbers and say...'are you f'ing kidding me' and  right then and there we can loose this guy (his interest)..."How can an entrepreneur build these projections most accurately and in a way that will maintain credibility with potential investors?  What could be defined as the "best practice" for entrepreneurs dealing with this subject?

Answer: As I've said in the past, I've never met a financial plan for an early stage company where the revenue side was correct.  However, I've met plenty where the cost side was correct (or – at least – appropriate).  The key here is simple – you want to have a cost structure that makes sense, covers all the bases, but doesn't assume a big revenue ramp to be supportable.

If you are in the very early stages (e.g. a few people and an idea), recognize that your investor is likely going to be funding you for about 12 months to see how things play out.  The biggest mistake first time entrepreneurs make is that they fall prey to the idea that they need to put together a five year P&L forecast and cash flow projection.  I can guarantee – with 100% certainty – that this model will be wrong.  As an investor, I don't really care about this; rather I want to see how you are thinking about getting to "the next stage" of your business.  You get to define the next stage, what it'll cost you to get there, and what things will look like when you get there.

If you are a first time entrepreneur, go find an experienced entrepreneur to act as a mentor.  She can be a first line of feedback your cost model and likely will know a few "financial people" that can help you put together a simple, yet credible model.  In addition, when you spend time with potential investors, don't try to bluff.  Tell them it's your first time building a model like this and that – while you had help – you know you lack experience and are looking for feedback.  Try to engage the investor in the process. Listen the potential investors feedback and iterate on your model.

Simple message – don't be afraid to ask for help.

What Do VCs Say and Do in Early-Stage Today?

by Bernard Lunn

In the last two months, we have interviewed six VCs. In each case, we asked the same question: "How is early-stage financing doing during this downturn compared to the last one in 2001/2002?"

In this post, we consolidate all the responses, to see if a consensus among VCs emerged. But we also dig a bit deeper. We have been tracking Series A deals since the global financial crisis started. There is some concern that VCs are not walking the walk, that they say all the right things about investing through a downturn, but they may not actually do those things. In this post, we shine a light on that question.

Which VCs Have Been Talking?

Here are the VCs we have interviewed so far, with links to the original posts:

• Brian Jacobs, Emergence Capital (Silicon Valley)
• Phil Black, True Ventures (Silicon Valley)
• Dave McClure, Founders Fund (Silicon Valley)
• Paul Jozefak, NeuHaus Partners (Germany)
• Alok Mittal, Canaan Partners (India)
• Albert Wenger, Union Square Partners (New York)

What VCs Say

According to what they say, all is well. Well, at least better than the last time. Much, much better. But what is good for VCs is not always good for entrepreneurs. When VCs say, "Deal flow is good," that translates for entrepreneurs into, "You have more competition." When VCs say, "Deal terms are looking more reasonable," that translates for entrepreneurs into, "You will have to dilute a bit more in your first round."

Here is our summary of the key points made by VCs:

1. Starting a Web venture has dramatically reduced in cost. Everybody remarked this. Albert Wenger quantified it as 10 times a reduction.
2. Professional angels are still active. They are experienced and, with the dramatically lower cost of starting a Web venture, their fewer dollars stretch further. In the last downturn, their investments were decimated because they were all in the same dot-com bubble stocks. This time around, their risky public market bets on Google and Amazon turned out a lot better than the safe investments in banks and car companies!
3. Entrepreneurs are more experienced. This was the major factor cited by VCs outside the Valley (i.e. this has always been true in the Valley, but it is now true in other centers as well).
4. Everybody knows the history and has seen that the best deals are done during the downturn.
5. The short-term economic issues are irrelevant to a startup that has three to five years before an exit. Paul Jozefak put it nicely, saying this is a nice quiet time to build something: "Going into the office at 7:00 am when nobody is there, you can get a lot of work done."

What VCs Do

On April 17th, the MoneyTreeâ„¢ Report from PricewaterhouseCoopers (PwC) and the National Venture Capital Association (NVCA), based on data provided by Thomson Reuters, reported numbers for the first quarter, with this headline:

"Venture capital investment plummets in Q1 2009 to 12-year low"

The gloomy macro numbers conflicted with what we were hearing from VCs and entrepreneurs. So, we drilled into the numbers a bit and came to the conclusion that the trend was down (surprise, surprise) but not "falling off a cliff." Fred Wilson at Union Square Ventures also dug in a bit and found some fascinating regional variations.

The NVCA is a rigorously compiled survey. Any VC fund that is a member of the NVCA reports its deals to it. But the NVCA does not publish about individual deals (which VCs invested in which ventures this quarter).

We have been trying to track this in our very specific niche, early-stage for Web technology ventures, and have been reporting on this as the A-Team (Series A financing).

Here is what we found in this quarter. First, a health warning. This has been compiled with limited human resources based on publicly available free sites, but we think we are at least in the same ballpark. MoneyTree reported $134 million, and we found $131 million. Some of that $131 million comes from outside the US, so this is not quite apples to apples.

Who Has Been Walking the Walk?

Almost all of the VCs we interviewed have done a deal this quarter. Emergence did two in the previous quarter but none this quarter.

We count 59 VCs that have done a deal since the market crash; that is, 59 investors that have done a Series A deal with a Web technology venture. That is a lot of investors. And we have surely missed some. But we can see 59 VCs that clearly have been walking the walk since the market crashed in September.

Even more impressive are the 10 VCs that each did two deals. Note that, (1) these VCs may have done more Series A deals in other sectors, and (2) they may have done Series B or later deals in Web technology. We are tracking only the niche of Series A in Web technology.

The 11 Double-Hitters

In alphabetical order, here are the 11 VCs that did two or more Series A deals in the Web technology space since October 2008:

• Atlas Ventures
• Bessemer Ventures
• Draper Fisher Jurvetson
• Emergence Capital
• Maple Investments
• Menlo Ventures
• Opus Capital
• Trinity Ventures
• True Ventures
• Union Square Ventures
• Valhalla Partners

A number of firms, including Union Square Ventures and True Ventures have done more than 2 Series A deals in this period.

Who Has Data on Angel Financing?

The really big gap, which nobody tracks (as far as we know), is angel financing. An angel investor is normally not a member of the NVCA. Tracking these deals would give us the real insight into the top of the innovation funnel. Anybody know of good sources for this?

What Big Trend Jumps Out?

In a word, competition. VCs face more competition. This is specific to Web technology. The fundamental driver for this is the 10-times reduction in cost of starting a Web technology venture. VCs see more competition from:

• Experienced serial entrepreneurs who can use a small amount of the cash they got from selling their last venture. They may want VCs, but they don't need VCs.
• Professional angels who are ex-serial entrepreneurs and can now work either independently or with peers to put together a big enough round to fund a Web technology venture.
• Other VC funds that have tended to focus on later-stage investing because they perceived it as lower-risk. But many of those deals tended to depend on short-term trends in debt financing and IPOs, both of which are moribund right now. So, these VC funds are getting more active in early-stage.

All of this is great news for entrepreneurs!

The VCs we spoke to were comfortable with this increased competition and had all taken specific actions to thrive in this new environment.

It is unclear what this all means for the "Big VC," the top-tier firms that are household names. They have multi-billion-dollar funds to deploy. This new capital-efficient environment is a bit more of a problem for them. Some of them may move to clean tech or bio tech, where big dollars are needed just to get a product to market.

But we're not tracking that. What Web technology entrepreneurs need to know is, "Which ventures similar to mine are doing deals, and what are they thinking?" This is what we're tracking.

What About This Quarter?

What will the headline be when second quarter numbers are reported in early July?

The month-to-month trends from Q1 look good:

• January: $30.3 million,
• February: $45.5 million,
• March: $55.7 million.

If April is better than March, we may be seeing a good trend. Stay tuned...

文: 桂曙光

（此文已刊登在《经理人杂志》“公司金融”专刊 2009年4月）

创业企业在传统VC股权融资时，通常是采取定价融资（Priced Preferred Financing）的方式，这很容易理解，就是VC对被投资企业的股份（股票）进行报价，并根据其投资金额获得企业相应的股份（通常是优先股）。优先股通常拥有优先于普通股的股利、清算、回购、投票等权利，股权投资人是公司的股东，有权投票决定董事会成员，决定公司未来融资或并购交易，等。

如果公司处于早期，融资（30万-100万美元）的种子资金还有一个不错选择——可转债（Convertible Debt），这是一种介于债务融资和股权融资之间的融资方式。顾名思义，它首先是“债”，可转债投资人是以债务协议的方式将钱借给公司，“可转”就是给予投资人可以将“债”转换成公司股份的权利，投资人暂时是公司的债权人而非股东。在特定条件下（通常是下一轮股权融资时），投资人将可转债的本金和利息转换成公司的优先股，所以，可转债通常又被称为是后续股权融资的过桥贷款（Bridge Loan）。

可转债的融资方式比较适合于早期创业企业向天使投资人或VC募集资金。

为什么做可转债融资？

如果可转债能够转换成公司股权，为什么不省略这个过程，直接做VC股权融资呢？可转债融资对于公司和投资人都有一定的好处。

（1）公司的好处

• 可转债避免给公司估值。尤其是对于初创公司，在募集种子期资金时，公司的估值可能很低，而且很难确定。这样，如果直接进行股权形式的融资，对创始人的股份稀释很严重。另外，公司可能会很快完成一个新产品的开发、新业务拓展，或者其他重大里程碑事件，这些都确信会实质性地、有说服力地提高公司的估值。以可转债的方式避免估值问题，将投资人权利谈判推迟，并通过转股折扣或认股权证的方式给予可转债投资人相应的回报；
• 省钱。公司可能没有太多的资金实力，不值得花时间和费用进行股权融资。可转债的文件比A轮股权简单，在律师费上省钱。没有太多条款需要律师讨论，他们只需要修改一下样本文件即可；
• 简便快捷。可转债协议容易理解，Term Sheet通常只有1-2页，最终的交易法律文件也不会超过10页，这相当于A轮融资的Term Sheet长度。因为需要的文件和调查更少，也不需要就估值问题进行谈判，可转债融资通常能够比股权融资快；
• 创始人对公司的控制。在可转债融资之后，创始人控制绝大部分或全部的董事会席位，可转债投资人，尤其是天使，不需要董事会席位。而种子期的股权投资人，尤其是VC，通常需要。另外，如果是可转债，你可以从事有利润但是不需要退出的业务，可转债投资人可能会比较高兴，因为可以从公司获得分红，而VC不在乎分红，VC会影响公司的业务和战略。

可转债是个有用的融资工具，尤其是对于非常早期的创业企业。这种融资方式可以让投资人在不必跟创业者谈判估值的情况下投资进来，而把估值问题留给后续投资人。对于早期公司来说，时机和资金都是非常重要的，尽快获得资金、尽快将精力发展业务发展上，是至关重要的。

（2）投资人的好处

可转债融资对投资人也有吸引力：

• 节省时间、人力成本。可转债融资可以节省投资人大量尽职调查及谈判的时间与成本；
• 资产处置优先权。因为这些投资人在转换前是公司的债权人而非股东，如果公司在后续股权融资之前破产，可转债投资人可以在公司股东之前优先获得公司资产的主张权；
• 规避阶段性法律风险。投资人在投资对象面临一些阶段性的政策、法律风险时(比如，企业在申请某些需特许经营的牌照且还在等待批复时)，采取可转债的方式，可以规避这种风险，当这种风险消除时，他们就可以将债权转化成股权。
• 转股的价格折扣。可转债投资通常包含一个转股时的价格折扣，使投资更有吸引力。

可转债融资的基本条款

不像传统的VC股权融资比较标准的条款，可转债融资的条款根据项目的不同，差别很大。但是，大部分可转债融资中，有些常见的典型条款。

（1）可转债的期限（Term）

可转债的期限通常根据不同情况变化比较大，比如公司预计的下轮融资时间、重要的里程碑时间、产生收入时间等，但大部分可转债的期限是6个月至2年之间，通常，大部分案例是在6-12个月，期限越短对投资人约有利。到期时，如果没有转换成股份，公司必须在投资人的要求下还本付息。

（2）可转债的利率（Interest）

可转债既然是“债”，自然就有利息。利率是某个固定的比例或者是一个参考利率加上一个比例。比如，年利率15%，或银行同期利率上浮5%等，通常可转债的年利率在10%-20%之间。利息在可转债期满时支付，大部分情况下，利息在转换成股份时也计算在内，而不单独支付现金。

国内有相关法律规定约束利率上限，目前是不能高于同期银行利率的4倍，否则双方的投资协议无法受到法律保护。

（3）激发自动转换的事件

通常，可转债在公司的“合格融资（Qualified Financing）”时自动转换成股份，而通常投资人对“合格融资”的定义是公司募集到一定数量的资金（包括或不包括可转债的本金），并且可以约束是向VC募集的。

比如，一个300万的可转债融资，自动转换的前提可以是公司获得了超过1000万的后续股权融资（不包括可转债转换后300万）。在这种合格融资发生时，投资人的本金和应计利息应按照其他投资人同样的价格、转换成与其他投资人同样类型的股份（比如A类优先股）。有些可转债可能要求投资人放弃利息或利息以现金支付。

合格融资的募集额通常定得很高，以保证公司获得了合适的估值。通常的额度是根据可转债帮助公司到达某些里程碑之后，公司持续发展需要合理募集的资金。通常至少是300万美元以上。如果募集额定得太低，公司可以完成一个对公司有利的有问题的股权融资，从而损害可转债投资人利益。通常应该设置一个底限数额，或者是可转债数额的3倍，两者之间的高者，从而避免这个问题。

（4）投资人风险补偿机制

可转债投资人通常除利息之外会要求更多，以补偿在合格融资之前对公司进行投资的风险。通常是获得转股时转换价格的折扣，或者获得认股权证，二者选其一。

• 价格折扣率（Discount Rate）

在转换价格折扣的情况下，可转债投资人的转换价格是合格融资的投资人（VC）价格的一个折扣。折扣率从10%到40%，视合格融资的预期远近，越近折扣越小。比如，如果某可转债投资人的本金和应计利息合计为110,000元，如果在合格融资时没有价格折扣直接转换，那么如果后续融资（假设A轮）时的股价是2.00元/股，此可转债能够转换成55,000 （$110,000 ÷ $2.00）股A类优先股。但是，如果同样数额的可转债，有20%的转换价格折扣，那么就可以转换成68,750（$110,000 ÷ $1.60）股A类优先股。公司和可转债投资人在考虑转换价格折扣的时候应该小心，有些VC不愿意参与投资这样的项目，因为购买A类优先股时，有人的价格比VC更低，他们可能会要求可转债投资人放弃这个权利。

• 认股权证比例（Warrant Coverage）

认股权证的方式可能不会导致后续投资的VC的不满。认股权证允许可转债投资人购买后续合格融资时发行的股份，购买价格通常是与VC相同的价格。认股权证的数量通常是可转债投资人投资额的一定比例，一般是20%，但也会如转换折扣价格一样，根据预期后续融资的远近有所变化。比如，假设某可转债的本金是100,000，利息是10,000，20%的认股权证。后续的A轮合格融资发行股份价格是2.00元/股，投资人将能在A轮融资时转换成55,000股，并在未来一定期限内以2.00元/股的价格购买10,000股（$100,000 x 20% ÷ $2.00）A类优先股的权利。注意两点：第一，利息没有包括在认股权证的计算中；第二，认股权证的有效期至少5年。大部分认股权证在公司被出售时过期，有些在公司IPO时过期。

（5）是否有预定的价值（Assumed value）

要考虑两种情况下的转股价格：

• 第一种情况是，如果公司在可转债到期时没有完成新的VC融资。比如，公司发行6个月到期的可转债，但是6个月内没有新的融资，可转债的转换价格怎么确定？通常，投资人会要求一个在发行可转债时公司的价格，这个价格通常是上一轮融资的价格（如果有的话），或者是双方同意的一个估值方法。
• 第二种情况是，如果公司在下一轮融资之前被并购了。比如，如果公司接受了100万的可转债投资，但是公司在可转债到期之前，以1亿的价格出售了，如果投资协议没有特殊约定，投资人只能拿回自己的本金和利息（100万加上10%的利息）。而创业者能得到9900万。作为投资人，他们当然希望与创业者的利益一致，因此，投资人应该有权在这种情况下获得比利息高一些的回报，比如要求：（1）提高利率或固定回报率（如，3倍利率、3倍的本金、等）；（2）可以将可转债按预先确定的价格转换成普通股或优先股（以获得股份增值），这样投资人可以享受增值潜力的机会。

（6）提前到期

大部分可转债约定在公司破产时自动到期，但是，有些可转债也要求在其他一些情况下提前到期，包括里程碑未达到、丧失重要客户、违背公司对投资人的承诺和保证，等。

没有获得投资人的同意，投资人通常不希望公司在即将获得A轮融资或被出售之际提前偿还债务，这样等于剥夺了他们的获利机会。

（7）到期后的权利

可转债到期后，公司可以：（1）偿还债务（但可能比较困难，因为公司可能没钱）；（2）请求投资人延长期限；（3）如果已经有VC投资过，允许投资人将可转债转换成上轮优先股，按照预先确定的转换价格（比如上轮价格）。

如果公司无法偿还债务，投资人可以强迫公司破产。有时，如果公司无法支付，强势的投资人可能会要求控制董事会或其他事情。

（8）担保

投资人可能会要求公司以部分或全部资产对可转债进行担保，甚至要求创始人个人进行无限责任担保，视投资人的风险偏好程度而定。

（9）对后续融资的权利

可转债投资人在后续VC融资时，除了可以按折扣价格转换成同类股份之外，还有哪些权利。比如，优先认购权、优先出售权、价格优惠、等。

（10）保护性权利

投资人也许会要求某些保护性权利，比如，公司特定事务的否决权。这些权利可以防止公司在没有投资人同意的情况下，做某些事情，比如后续融资、出售公司、借其他债务或实施新的员工期权激励计划，等。

（11）其他要求

投资人可能会要求进入董事会，以正式董事身份或作为观察员。有些投资人会要求在公司达不到关键里程碑的时候，获得额外的权利，比如更高的认股权证比例或转股价格折扣。这些可能不是标准的，但随着资本市场的趋紧，这些苛刻的条款也越来越常见。

两种价格补偿机制的设计

（1）价格折扣

转换价格折扣指可转债投资人支付的每股价格是在后续VC支付价格基础上的折扣价，转换折扣的作用是给投资人在A轮VC之前一个合适的投资回报。

如果公司在A轮VC之前只需要2个月的过桥贷款，那么其折扣率应该比12月的可转债要低一些。可转债投资人除了要获得风险相关的补偿之外，还要获得可转债有效期内，公司价值增长的补偿。所以，折扣率需要考虑公司需要多久才能到达重要里程碑或其他可以保证A轮VC投资的事件。

折扣率随可转债的期限长短而变化，大部分情况下，年折扣率30-50%是比较合理的，但是，如何设计结构也很重要。简单地给出一个固定的折扣率，而不管投资时机是不对的。对公司来说，固定的折扣率没有考虑到给予投资人尽早投资的激励，会让投资人降低投资意愿——聪明的投资人会尽力拖后投资。公司价格折扣可以线性方式给予（比如每月3%）或非线性（累积折扣，第一个月10%，第二个月7%，第三个月5%，以后每月3%）。非线性的方式对投资人尽早投资的激励更大。

如上图，假设公司愿意承担1年期的折扣为40%，那么在固定折扣率情况下，投资人的资金无论何时进入公司，都可以享受40%折扣，那么投资人当然愿意尽量推迟投资；在线性折扣率情况下，投资人享受的折扣率与其资金被公司使用的时间成正比；而在非线性折扣率情况下，投资人的资金被公司使用时间越长，享受的折扣率越高，这就会激励投资人尽早投入。

（2）认股权证

通常，认股权证可以认购下一轮融资时公司发行的股份。如果公司已经发行了A类优先股，可转债是“过桥”到B轮融资，那么认股权证可以在B轮融资完成后认购B类优先股。

可转债附带的认股权证在执行时可以购买的股份数量（认股权证比例）是可转债本金的一个比例。根据认股权证比例计算股份数公式如下：

认股数量=可转债本金*认股权证比例/行权价

假设一个500,000的可转债，20%的认股权证比例，下一轮融资价格为$2.00/股，那么：

50,000股=500,000*20%/$2.00

认股权证比例的范围在20%-40%左右，但是也有不少更高的，这跟投资人愿意承受的风险相关。

认股权证的行权价通常是下一轮融资的每股价格。有时，行权价格被设定为上轮融资的每股价格或某个约定的价格，尤其是如果认股权证是认购上轮发行相同的股份或普通股。大部分认股权证可以在可转债融资生效日起3-7年内行权，5年是比较常见的。在公司被出售或IPO时，认股权证应该终止。但是，认股权证持有人可以在这些事件的前一刻行权。在公司被出售时终止是因为收购方不愿意承认认股权证，要求持有者提前行权。这是因为认股权证持有者通常在并购交易完成后跟公司没有任何关系，而不像公司的员工期权。

确定你是应该股权还是可转债融资？

（1）当前股价及A轮融资股价

如果种子期的可转债投资拥有A轮融资价格的20%折扣，而A轮融资的价格是$1.00/股，投资人将以$0.80/股的价格转换成A类优先股。那假设种子期投资人愿意以$0.90/股的价格购买股份而不是以可转债投资，你如何选择呢？

如果你可以将公司今天的股份价格在A轮融资之前提高超过25%（从$0.80/股提升到$1.00/股），那么就应该接受可转债融资，否则，接受股权融资。

这个例子中，如果你认为A轮融资的价格能超过每股$0.90*125%=$1.125，那么接受可转债是划算的。

假如你决定以可转债的方式进行种子融资，A轮融资的价格是$2.00/股，在享受20%的折扣后，可转债投资人以$1.60/股的价格将投资额转换成A类优先股，相比于$0.90的股价，你当然获得很大的好处。但是，如果A轮融资的每股价格只有$1.00，可转债投资人的转股价格只有$0.80/股，这时你就不划算了。

总之，是否接受可转债方式投资，在于你是否能够将现在的股份价格提高到：当前股份价格/(1-折扣率)。

（2）当前估值及A轮估值

如果你在进行典型的种子期融资，你可能希望以可转债的方式而不是股权方式。如果种子期的可转债能够维持公司6-12个月的经营，有就有足够的时间将公司估值提高25%-100%，这样可以抵消掉可转债投资人通常要求的20%-50%的转股价格折扣。

比如，如果你种子期以股权方式融资$250,000，出让15%股权，公司投资前估值是$1.42M（250,000/15%-250,000=1.417M）。如果你确信公司A轮融资前估值能够做到下述额度，那么可转债融资是划算的：

1.42/(1-20%)=1.77（如果可转债的折扣率是20%）或者

1.42/(1-50%)=2.83（如果可转债的折扣率是50%）

通常说来，如果创业者没有信心将公司的估值从A轮融资之后，每一轮提升2-3倍的话，他最好不要去找VC，也不会有VC有兴趣。而且实际上，公司估值增长最大的阶段就是从种子期至A轮融资之间，这个时期公司从一无所有发展到有产品、用户和收入、利润。

什么情况下，我会认可可转债的方式呢：

（3）投资人最喜欢的投资时机

有时候，创业公司正在跟一些VC融资，但是在融资完成前仍需要资金支持，这些资金可以让他们招募关键人员、购买必要的设备、获得有潜力的业务等，以便在跟VC谈判时有更好的地位。在这种情况下，接受可转债方式投资是很好的选择。

或者，有些潜在并购方开始跟公司接触，创业者也有兴趣，但是需要资金支持现在的发展。这个时候可转债就很好，因为如果公司完成并购，偿还可转债的成本也不高，如果不接受并购，公司得到支持，有利于获得后续VC融资，并且在并购谈判时仍保持公司的成长。

可转债融资的弊端

弊端之一：不能统一创业者和投资人的利益。

由于可转债通常拥有合格融资价格20%-40%的价格折扣，可转债的投资额能够转换成多少公司股份，决定于A轮融资的价格：价格越高，转换的股份越少；价格越低，转换的股份越多。为了获得更多的股份，可转债投资人有动机与A轮投资人一起打压公司A轮融资的估值。如果公司是给可转债认股权证，结果也是一样。但创业者当然是愿意公司A轮融资的估值越高越好，这样对原始股东的稀释会越少。当然，可转债投资人并不愿意有人质疑他们的动机与创业者不一致。

弊端之二：可转债投资人在VC投资时不转换的影响。

可转债投资协议中可以设置在VC融资时偿还或转换，但是如果投资人不愿意转换，创业者有多大把握顶级VC愿意投资呢？VC会想：他们为什么不转换呢？是不是有些公司内幕我们不知道呢？可转债投资人放弃转换对公司发展没有信心的表现，是个很坏的信号。

弊端之三：到期偿还问题。

如果公司发展遇到问题，可转债带给创业者的后果可能比较严重，如果无法按时偿还债务，可能会导致公司被投资人接盘、或者破产，甚至有可能让创业者个人承担连带的债务责任。

结论

可转债融资是一个有吸引力和越来越流行的投资方式，无论是对公司而言还是对投资人而言。考虑到涉及的高风险和越来越多的复杂条款，公司及股东应该仔细考虑和权衡可转债与传统股权融资的利弊，并能完全了解其中的利害关系。

简而言之，当创业者使用可转债方式向天使投资人或VC进行融资时，可以跟他们说：“我需要资金支持，但现在我不知道公司究竟值多少钱，我只能给你一个与风险匹配的回报补偿，让我们一起做大公司，并等后续专业投资人来对公司价值做出判断”。（ReachVC 桂曙光）

Early stage venture capital valuations

by Healy Jones

Since this is my first post as a former venture capitalist I thought it might be interesting to answer a one of the more… opaque issues in venture financing. Two of the most frequent questions I got as a VC from entrepreneurs were "how much is my company worth" and "how do venture capitalists value my company?" The truth is that the answer has nothing to do with DCF's or other business school theories, but instead is based around what the VC thinks/needs to return to their fund from that particular investment. The following is a bit of an over simplification, but is as close to a "rule" as I could gleam from my time in venture capital.

Series A valuations 

Series A* valuations are usually based on percentages - as in, how much of the company does the venture capital fund want to own. Most established venture funds have an established strategy of owning a particular percentage of a company after a Series A investment. A typical, good fund will look to own 20% to 33% of a company after the initial investment. I'll ignore the rational behind this for a moment and cut to the chase: this means that during a normal two-VC, syndicated Series A investment your startup sells around half the company to the VCs. Raising $4 million? Pre-money of $4 million. Raising $6 million? Pre-money of $6 million. 

Getting a higher valuation

Strange as it sounds, this does imply that the more you raise the higher the valuation. I'll get into the rational behind this "math" later in the post, but first I'll mention a few things that you can do to try to command a higher valuation.

1. Have a name-brand management team. CEOs/CTOs and founders who have been previously successful and previously venture backed command higher valuations for their companies. Recruiting the right one of these executives to your team will increase your valuation. It may very-well be worth the percent ownership in the company that you will have to give them to get them on-board. (Who knows, they may actually be able to help grow the business too…)
2. Get multiple firms interested in your startup. VCs can get competitive. If they fear losing the deal to another venture firm they can become more aggressive around the valuation.
3. Have real customer traction. It is honestly impossible to do real financial analysis on companies without historical financial statements, particularly income statements. This is why early stage valuations are so nebulous. However, if your startup is experiencing paying customer growth then you may be able to justify using real metrics to concoct a valuation. (As an aside, I find it really funny how much time business schools spend going over valuations in venture capital courses. This is a minor part of how VCs create value and a very small part of how VCs spend their time.)

The rational

So why are valuations dependant mainly on percentage of the startup owned? When making an investment, venture capitalists are already thinking of the exit. They want to know how much they will return to the fund if the company is sold for $50 million, $100 million, half a billion or more. (Don't try to present the results of this calculation to them; they can do the math on their own. You can do this calculation for your own edification, but you'll come across as a naive management team if you try to tell the VC how much money they are going to make.) This return is very much dependent on how much of the company they own at the exit. Keep in mind that an early stage investor is likely to experience some dilution if the company will need to raise more funding later down the road, and that the first round VCs will also have to invest some money in these rounds to defend their ownership as new investors come into the company.  

The VCs are also thinking about how much of the company is owned by the management team. A good management team has many, many employment opportunities. The VC wants to make sure that the team is properly motivated to help grow the startup. Basically, an important founding team member need to own enough of the startup at an exit to make more (hopefully a lot more) then they would have if they were getting a good salary for five+ years at a big company. The VC can't let the management team get so diluted that they lose motivation. A venture capital firm needs to think ahead to the likely future financing needs of the business and estimate how much of the business the management team will own at the exit. In truth, the VC will probably only run this exercise for the CEO and the most important technical founder (if they are not the same person.)  

There are logical limits to the "raise more money/get a higher valuation" theory I'm proposing. There is likely a narrow band of capital that most VCs will be willing to invest in certain type of companies at the Series A round. For most software and online businesses, this is likely $2 to $6 million, perhaps a bit more on the high end if you have a great team and some traction. So, venture capitalists are unlikely to let you raise $20 million of venture funding at a $20 million pre-money valuation for your online dog food distribution company. They are usually smart enough to not want to over-capitalize a business unless the plan justifies it and the risk/return ratio is correct. If multiple VCs are telling you that they don't think you can/should raise more than $4 million for your particular startup then you've probably found the market clearing round size, and by extension, narrowed the band of the likely pre-money valuation.

Does this make sense? Probably not. But it is the best theory I can fit to the evidence that I've seen during my brief time as a venture capitalist. I'd love to hear your theories and experiences.

*I am speaking to the usual "Series A" startup, which usually does not have much in the way of revenues and is often pre-product.

What Is Dumb Money?

by Mark Peter Davis

In my post, Should You Tranche Your Fundraising?, I described the potential challenges associated with trying to raise a large sum of money from VCs in one round.  In sum, if the capital raise is too large you will most likely give away too much ownership in your company, or scare off the VCs because they can't meet their ownership requirements.  There's not enough of the company to go around.

There is another way.  You could raise "dumb money". 

I generally hate the name "dumb money" - it is a bit insulting after all.  As my mom would say, "It just isn't nice."  There are, however, two reasons why it has that name.  First, the phrase "dumb money" is first-and-foremost used to imply that the investors will not be able to add any value to the business beyond providing capital.  They can't offer relevant advice or connections.

Second, dumb money is often invested in atypical structures that can both 1) reduce the odds of the investor generating a risk-adjusted return and 2) mitigate the entrepreneur's ability to raise subsequent capital.  Put another way dumb money can leave your company overvalued, scaring away future investors.

A bit of irony:  dumb money rarely comes from dumb people.  More often than not the investors who fall into this category are very successful business people who simply made their money outside of the venture community (they aren't entrepreneurs, venture lawyers or early-stage investors).  As a result, they're not as connected to the venture community and don't understand how to structure early stage investments so that the entrepreneurs are poised to "stay in the system", meaning raise capital from investors that participate at various stages in the startup life-cycle.

Note: Here is a comments from Eric Wiesen

Mark's posts are usually helpful to his entrepreneur readers, but this one is more important than most, especially since this is a very topical issue a lot of companies are facing. Raising money has gotten harder than ever, and professional investors (i.e. VCs) have raised the bar and are generally paying lower prices today than they were during the go-go market. So it's natural that founders will look for sources of capital that are, frankly, less discerning than those investors who invest in startups for a living. There are obvious reasons to do this - you typically get a higher valuation and better terms. But there are some very good reasons not to, some of which Mark touches on.

1. Passive capital is just that, and won't work with you to build the business.
2. It will often over-value the company, which feels really good but hits you hard when you need to do a followup financing.
3. These investors rarely follow on by themselves, so you wind up in front of the institutional investment community having done an overpriced round with non-standard terms. VCs are going to reset the terms at that time, and the dilution is likely to hurt you, the founder, more than your passive capital investor(s).

Entrepreneurs should take money where they can get it, but be aware of the tradeoffs. Good post.

Does a Financial Or Strategic Investor Better Suit Your Purposes?

By Les Nemethy

If your business is one of the many businesses that needs additional equity capital, then you have a basic choice: do you seek the expertise and capital of a financial or strategic investor? The two have very different implications.

Financial investors, broadly defined, include venture capital funds (for start-ups or companies early into their life cycle), angel investors (for small companies) and private equity funds. As the name implies, "financial" investors typically bring equity finance and expertise primarily of a financial nature, although many financial investors also pride themselves on bringing value-added knowledge in other areas, such as corporate governance, restructuring or sometimes even expertise in specialized sectors, such as logistics or food and beverages. Each financial investor will have criteria for eligible investments that are clearly set, such as geographic scope, minimum and maximum investment size or sectors of preference.

Strategic investors have an industry specialization and would include multinational corporations or mittelstand companies seeking to go international. Locally, there are an increasing number of CEE companies developing a strategy to acquire and grow throughout the region, which seem to an account for an ever-increasing proportion of overall CEE investment activity.

Whether you target a financial or strategic investor depends on your objectives. For example, my company has a client who insisted on a strategic investor, because he wanted to exit his business as soon as possible and didn't want to stay on for the several years, as a financial investor would generally require. A different client insisted on a strategic investor because he had a very successful concept locally and wanted the cross-selling synergies of services that a strategic investor would bring. Another insisted on a financial investor because he had intellectual property to which he did not want a potential competitor to have access. Many clients will solicit interest from both strategic and financial investors.

Offering your business to a financial investor will typically take a higher degree of preparation. You will need to have an extremely thorough business plan with cash flows that may be relatively accurately forecast over at least a five-year horizon, including revenues, expenses and capital expenditures (capex).

Despite difficult financial market conditions, it is possible to find both financial and strategic investors, provided your business is sufficiently attractive and valuation expectations are realistic.

Preparing For A First Meeting With Me

by Brad Feld

I have lots of short meetings.  I'll try to meet with anyone that I can that is referred to me or seems to be doing something relevant to my world.  I'll also meet with people I think are interesting or, in some cases, just to be polite.

Some of the most interesting things I'm involved in have come out of random meetings.  One of my favorite examples is TechStars.  David Cohen somehow ended up on my "random day" meeting schedule.  We had never met before and I had no idea who he was.  He came in, sat down, and handed me a first draft of a brochure he had created.  I asked him to tell me about himself and "TechStars."  He did.  Five minutes later I looked at him and said "I'm in – let's figure this out."

I had two random meetings today (and I've got two more).  Each ended after 15 minutes.  I tried to be polite in both, but the people were woefully unprepared.  This makes me a little impatient as it's so easy to do a little work in advance of our meeting to figure out what I'm going to be interested or not interested in. 

At the risk of sounding obnoxious and arrogant, following are some suggestions of things to do to prepare for a first meeting with me.  By the way, I think this applies to any first meeting, but I'll personalize it since I know it works with me.

Search the web for me.  Google, LinkedIn, my blog, Foundry Group blog, Askthevc blog.  A little bit of research will save us both a lot of time.  I won't have to tell you my story (which I won't do anyway in a random meeting.)  You will know in advance what I do (and don't) invest in.  You can also tune your presentation / our discussion to me.

Figure out the one thing you want to communicate with me.  I'm meeting with you to talk about you and what you are up to.  I can probably handle one – maybe two – things during our meeting.  So, get right to it and lead off with the one thing you want to accomplish with our meeting.  If we are two minutes into our meeting and I still have no clue why we are meeting, I'll ask you "what do you want to get out of this meeting?"  That's a hint to cut the chit chat and focus.  I'm not trying to be rude – just efficient – so we can make our time together useful to you.

Don't make our meeting an endless stream of Planet Feld references: I want to talk to you about what you are up to.  Don't try to connect with me by talking about my running, or my reading, or my house in Alaska unless it's relevant to what you are talking to me about.  I can focus 100% of my energy on you for 15 minutes – help me make it count.

Have one thing in your head that you think I can learn from you: Regardless of the outcome of a meeting, I view it as a success if I learn one thing.  If our meeting isn't going anywhere after ten minutes, you'll notice a not so subtle shift as I move into "shit, I've got five more minutes left – I better get something out of this meeting."  It helps, of course, if you know what you want me to learn from you, and it relates to what I care about.

Following are two other hints for during the meeting.

Don't ask me to sign an NDA.  Please read this blog post titled Why Most VC's Don't Sign NDAs.  If you insist on having an NDA signed, don't have a meeting with me. 

Pay attention to time. Our random meeting is likely scheduled for 30 minutes.  However, most of them only take around 15 minutes.  Don't view this as a bad thing – if you are focused and get to the point, we can usually accomplish more in a 15 minute meeting than most humans accomplish in an hour long meeting.  If I'm really into what you are doing I'll probably get it in 5 minutes and immediately shift into "let's figure out what to do next" mode.  Sometimes it takes me longer and the aha moment hits me at minute 13, at which point we'll go longer.  Please don't feel the need to fill up 30 minutes or stretch things out, especially if you know I'm either into what you are up to – or that I'm not.  I'll appreciate the extra 15 minutes you gave me back (to write blog posts like this) and remember our meeting more fondly!

Stop Pitching

by Charlie O'Donnell

Recently, Alex and I had one of the best conversations about Path 101 that we've had with an investor so far.  We talked about what we've learned, the space, our approach, etc.  They were extremely thoughtful in terms of where the market is going and how to best take advantage of the opportunity.  We riffed for nearly two hours.

A day or two later, I was talking with a successful startup guy who was going to make a key introduction for us.  I had been nearly tripping over myself in terms of all the potential for value creation we had and the opportunities missed by others.  (I get pretty passionate about this stuff.)  I then asked him about how "pitchy" I should be when talking to this potential new investor.

"The last ten minutes of our conversation--that's what you need to have with him," he said.

That's when I realized how inauthentic and contrived the whole pitch process was.  You'd never find your soulmate, make a friend, or hire someone based on a Powerpoint--so why find someone to invest in your company that way?  Either show your product or just talk to the person--with the latter probably being much more effective in presenting a vision and as a way to get to know you as a person. 

The other thing about a "pitch" is that the tone of the conversation is negative.  Investors are looking for holes--reasons not to invest, because the default is a no.  Conversations don't have a default answer that you have to hurdle over, they're just an exchange.

I don't think enough entrepreneurs get out from behind their desks to talk to the market--to business development partners, to investors, to prospective employees...  to anyone who could give useful product feedback.  I can't tell you how many times I've talked to startups and said, "Oh, you know so and so, right?"  They rarely do... even when it's a no-brainer that they should be talking to a completely obvious partner or investor.

Reasonable valuations are good for entrepreneurs

by GREG FOSTER

In this climate, one of the more talked about issues in the venture community surrounds the way in which investors determine pre-money valuations for early stage businesses. With little or no revenue traction, an incomplete management team, and immature technology, most early stage companies have to sell the promise of growth and market opportunity in order to justify a decent valuation. It's a tough sell in good times. In times like these, it's darn near impossible. With fewer exits of significance and public markets still closed, VCs are increasingly back-solving from a reasonable exit value to get a pre-money valuation that makes sense. If 90% of exits are sub-$100 mm acquisitions, and the goal of any early stage investment is to get a 5-10x return, post-money valuations on most Series A investments need to be less than $10 mm. This is a reality that still hasn't caught up with a lot of entrepreneurs.

So this is bad news for entrepreneurs, right? I'm not so certain… one of the most important outcomes of these more reasonable valuations is that VCs get larger ownership in companies. Once most VCs have characterized the risk in a deal and the money has been wired to the company, they turn their attention to the opportunity – how big could this company get? What kind of return could we see here? With larger ownership stakes, the VC has more confidence in the potential return they may see. That triggers a natural tendency to work harder for and on behalf of that business. A 5% ownership stake in a company makes it hard for the VC to really visualize a great cash-on-cash return. But make that stake 30%, and you can visualize that return – you think about it when you come in every morning, you spend that extra hour helping out where you can, you engage at a higher level. So while it might seem painful to accept a smaller than expected valuation, smart entrepreneurs use this to their advantage – it helps them engage with their investors at a deeper level, they can expect more from those investors and they can expect a stronger follow on commitment from those investors. Short term dilution can sometime translate into more stability in the investor base, a greater likelihood of success, and a happy investor base willing to invest in the entrepreneur's next great idea.

Startups and Venture Capitalists Beware

by Matt Eventoff

There are two communication "killer apps" that I witness plague startups with frightening frequency. These danger zones are lethal to a startup, especially one seeking funding.

If you are pursuing venture capital funding, read this prior to presenting. You will be glad that you did.

Killer App # 1 – No Central Message

I have witnessed this over and over and over again. Brilliant entrepreneur(s), fantastic concept or prototype, great ideas, detailed business plan…and no central message. You can have every fact, figure, and statistic on your side, but without a central message, it all doesn't mean much.

This is crucial for a startup seeking funding. We are in extremely difficult economic times, venture capital is much more competitive and difficult to come by, and every entrepreneur believes thattheir concept is different, special and deserving – every entrepreneur.

There are countless books advising on how to stand out, what to say in a presentation, how to put together a funding request, etc., but very few, if any, on putting together a message.

If you are the entrepreneur you must be able to communicate your message in a manner that anyone and everyone can understand.

What are you trying to accomplish with your concept? If you are pursuing funding, you must be able to identify how you will deliver a return on that investment, profits, and you must be able to do this in a manner that is clear, consistent, and easy to comprehend – remember, you are asking people to invest at a time when investing, no matter the size of the VC firm, is a scary thing to do.

President Obama had a solid message as to why voters should support him and what he would deliver to them - Change. His message – clear, consistent, and easy to comprehend, and he won.

Killer App # 2 – No Practice. No Preparation. No Funding!

This can, and often does, occur whether an entrepreneur has a central message or not. The entrepreneur begins his or her funding presentation. The slides come out. There are lots of numbers, lots of writing, lots of information and not a lot of time to present it all.

The entrepreneur is nervous because this is THE meeting with THE potential future of the company – the funders. He begins to read the slides, all the while moving awkwardly around, or maybe standing still, resembling a statue. "Well, umm, XYZ has, umm, developed what we, uhh, believe is, ahhh, a revolutionary way to, umm…" and the presentation continues on in this painful manner until mercifully, it is over.

Your product or idea might be THE biggest and best idea the VC has ever seen or heard. The VC just doesn't know it because he or she has been so focused and distracted by the verbal noise – umm, uhh, ahhhs, the body language, the speed and the lack of clarity that he or she has not been able to focus on the quality of your concept or product.

In this case you are better off simply dropping the presentation off for the VC to review at his or her leisure but for one problem. Once you have received the funding you are going to have to sell the concept to other investors and to the marketplace. Think that first VC is going to be confident in your ability to do that?

Some people are better presenters than others. Some people are more naturally charismatic than others. Some people are better storytellers than others. Having the benefit of a communications trainer is priceless, but often not in a startups budget. Practice does not cost anything other than time. Every person benefits from practicing before presenting.

You will identify verbal noise, tendencies toward awkward movements or word placement, pitch, tone, mannerisms, etc., you will identify places in your presentation or pitch where there is duplicative information (happens constantly), you will identify when you are providing TMI (too much information). If you practice, review, practice more, review again, and continue practicing - you will improve and you will give a better presentation, guaranteed.

I encourage practicing in front of people who are not on your presenting team or even in your industry – chances are that if they don't "get" what you are delivering or are bored or distracted by your delivery, there is a decent chance the potential funder won't either "get" it either.

Start-Up Finds Benefit In Sifting Its VC Firm's Connections

By Ty McMahan

Beyond the money they provide, one of the benefits of venture investors is the network of connections they can offer an entrepreneur.

In an example of those connections leading to a fruitful deal, two General Catalyst Partners portfolio companies recently found a way to work together. ShortTail Media Inc. has developed a new video ad platform that leverages Visible Measures Inc.'s patented video measurement technologies.

ShortTail's team actually discovered Visible Measures when its recent funding was in the news. General Catalyst helped connect the two companies and they found a way to work together. Payne then started looking within the General Catalyst portfolio to see if other relationships could be formed.

"There are other cases we're talking to other portfolio companies on how we can work together," ShortTail Chief Executive David Payne said. "That's going to be a common theme."

ShortTail received an undisclosed Series A round from General Catalyst last May. Visible Measures recently raised a $10 million Series C and has raised more than $29 million from General Catalyst, Mohr Davidow Ventures and Northgate Capital.

ShortTail Media has teamed up with Schematic, a WPP Digital company, and Visible Measures to develop an ad unit that launches a video when a user clicks on a site to read a story or view pictures. Known as the Digital 30 - or D30 - ShortTail’s platform provides a way for advertisers to distribute their existing 15- or 30-second spots across a network of Web sites. The D30 platform serves video ads as users navigate to sites from search or headline links, creating ad inventory that does not compete or interfere with existing pre-roll video or display ads on partner Web sites.

By leveraging Visible Measures' analytics, the D30 platform will show advertisers how long users actually engaged with their advertising. The D30 will launch its beta program this summer with select publishers and advertisers.

Based in New York with an office in Atlanta, ShortTail works with more than 50 online publishers whose offline media properties include broadcast TV, cable TV, newspaper and magazines. The company was founded last year by Payne, the former general manager of CNN.com, and Jason Krebs, former vice president of Conde Nast Media Group-Interactive.

Insider Rounds Rule As VCs Tend Portfolios

By Russell Garland

More evidence that venture capitalists were preoccupied with their portfolio companies in the first three months of 2009: The rate of insider rounds jumped to 57% in the first quarter.

That was the same period during which venture investment fell to its lowest point in 11 years, a drop of 50% from the first quarter of 2008. VCs said they were being cautious about making new investments in an uncertain economy while ensuring that companies they financed earlier had adequate capital to weather the recession.

Insider rounds - financings done entirely by prior investors - are a quick way to shore up a start-up. Such deals also avoid having a new investor come in and question whether the company's valuation is too high. In good times, venture-backed companies like to bring aboard new investors to set the valuation, provide fresh capital and, perhaps, add expertise on the board of directors.

Insider rounds climbed in the fourth quarter of 2008 as the financial crisis worsened, involving 54% of all deals versus 41% in the third period, according to industry tracker VentureSource, which is owned by Dow Jones & Co., publisher of this blog. By way of comparison, the frequency of insider rounds for the boom year of 2000 was 23%.

The rate of insider rounds in the first quarter 2009 was 58% for both health care and information technology, the mainstays of the venture industry. Second rounds, which can be tough for a company missing its milestones, had an insider-round rate of 54%. Interestingly, later-stage rounds, which included many companies that would be eyeing the public markets in better times, had insiders doing the whole deal 60% of the time.

Venture capital investment memo

by Healy Jones

A friend from business school recently asked me to help him understand what goes into a venture capitalist's investment memo. He is thinking of joining a startup and may ask some friends and family for seed financing, and so wants to be discuss the idea with them in the same way that a VC would. After this discussion I realized that most startup entrepreneurs probably don't understand the inner workings of a venture firm or sophisticated angel group. In an attempt to help demystify a part of the venture fund raising process I'll explain the typical VC investment memo. Understanding the documents that a VC uses to discuss a startup internally to get approval for (or socialize the idea of) an investment may be helpful to your startup as you seek funding. After all, knowing how a venture capitalist is likely to internally publicize, share and memorialize the investment in your company can help you anticipate where some of their questions are coming from.

I've worked for/interned for a few of funds, so feel like I have a pretty good idea of what is standard investment memo material. I am not going to talk about any "special" or unique things I've seen in any particular venture firm's investment memos, only the sections and themes that are recurring across all the funds I've spent time with.

Keep in mind that the purpose of these memos really vary by firm. Some firms use the memo to educate the investment committee on the startup and the memo is an important part of the deal approval process. Other firms circulate memos as more of a heads up to the other partners, alerting them to the deal and seeking advice and introductions that can help with due diligence. Regardless, someone at the VC is consolidating the learnings on your company, market, technology and team and putting that information into a format that helps the the investment team efficiently reach a funding decision on your startup.

Typical contents of a venture capital investment memo

A. Intro/executive summary - This part is usually only a page long; it needs to very concisely summarize the opportunity; depth and discussion of diligence findings will be found later in the document in the respective sub-sections  

1. Business Summary - Couple of paragraphs to set the stage on the opportunity
2. Proposed Financing - $ invested; size of round/sources of capital; (go into more dept in the Deal Description/Details section) 
3. Pros of the Investment/Reasons to Invest - Bullets on why the investment is exciting. Usually mention management, market and technology differentiation. (If you don't have these, why are you investing?)
4. Cons/Key risks - Highlight the key issues that could derail/destroy the company/the investment’s return potential. Holes in mgmt team, competition with deep pockets/stated interest in the space, etc.
5. Deal goals - Use of proceeds; milestones to be hit with the funds from this funding; alignment with management and other investors on goals and direction of company (if a complicated investment or many other investors may require its own section later.)

B. Market opportunity - After the introduction comes the meat of the investment memo. Each section is as long or short as required for the particular investment opportunity. The market section tried to explain how big the potential market is and how/where the startup fits into that market. 

1. Market - Size of market; discussion of analysts' opinion on market; summaries of customer and ecosystem reference calls
2. Problem to be addressed - Does management's description of the problem match up with the VC's diligence findings?
3. Pain point/value proposition - Not a description of the product, but a description of the "relief" that is felt by customers; what customers/potential customers has the VC talked to and what have they said?
4. Competition - Very important section. Articulate what the competitive landscape is NOW and in the FUTURE. How does the company fit into the ecosystem.

C. Product - What does the product look like; who is buying it; why are they buying it and does this match up with the market opportunity/stated pain point addressed; is the product defensible; can you actually make it and how much R&D is required 

1. Product description - include who the buyer is at the customer
2. IP - if an important part of the investment thesis; did a lawyer conduct an IP review?
3. Product development timeline/roadmap
4. Price points/margins/economies of scale - who is actually "making" it and what is required to get "production" to scale; if a web based business what are the key costs of delivering the product
5. Highlight issues on the product/features to be developed from the reference calls with potential customers/existing customers

D. Sales/marketing strategy

1. Re-define ideal customer - how reach them/where are they
2. How much cost to acquire/what is the sales process timeline - are there different costs by different channels
3. How does this fit with the reference discussions/market analysis conducted
4. If company has current customer then case studies and list of major customers/revenue concentration
5. Are partnerships/business development tactics to be important in the startups marketing/customer acquisition plans

E. Team/advisory board - This is perhaps the most important section. Sometimes it should be put right after the Intro/Summary. There needs to be real detail on each team member and the people to be hired/needs analysis. VCs usually have an honest write up of which team members are scale-able and which will need to augmented

F. Operational plan - The more "grown up" the company is the more detail will be spent on historical financial statements.

1. Quarterly or monthly burn rate
2. Historical financials - only important/included if the company has real historicals; if of a certain size, say over $5 million in revenues, then an accounting review may be required; not usually included in detail if the company is still developmental stage
3. Use of funds – make sure the metrics highlighted in the "Deal Goals" section match the metrics you will be funding towards…
4. Revenue plan/revenue model and build up
5. Margin discussion
6. Staffing plan – looking at the staffing needs from a "how much it will cost" perspective

G. Deal Description/Structure/Details

1. $ invested; size of round/sources of capital; ownership; 
2. Type of security
3. Any other interesting facts such as what management is putting in or is a convert note rolling in at a discount/etc.

H. Long-term financing plans

1. Reserves set aside for the investment in the fund
2. Total amount of capital needed to get the business to self-sustainability
3. Going forward financing plan - milestones that will be hit with the current fund raise & explanition of how those are valid value creation metrics for the industry

I. Exit analysis - Who are the buyers; how big does it need to be if an IPO is a considered outcome; what are comparables worth; return profile

J. Deal history - Source of deal; who has met; what diligence has been done;

Appendix

1. Capitalization Table
2. Other supporting documents
3. Some funds put the references and due diligence findings in the investment memo, others reference them and make them available to the partnership on a server or in a database

I'm not suggesting that you try to manage your venture funding process to the fund's investment memo. However, I strongly believe that if entrepreneurs have a greater understanding of VCs' internal deal procedure then they are more likely to be successful in raising venture capital. I hope this discussion of the venture capital investment memo is helpful, and welcome your comments.

Chasing the Money: Stop Trying to Raise. Start Trying to Sell!

by Steve Barsh

I've spoken with 5 different early stage companies in the last week that all seemed to be making the same mistake IMHO:

1. Trying to raise a serious seed or Series A round from VC's,
2. no customers / users,
3. no revenue,
4. and have not tried to pre-sell to target customers.

The discussion was nearly always the same:

Entrepreneur

1. We have a business plan, and our revenue projections are conservative.
2. We're going to grow like crazy.
3. You won't believe what a great idea this is.
4. We need to raise $200,000, $500,000, $2 million (pick a number) for ______.

Me: How many customers do you have today, how many potential customers have you spoken with, and what's your revenue?

Entrepreneur: Answer 5 out of 5 times: "0, 0 and $0."

 

Hint: Stop chasing VC's, start chasing customers / users!

Let me give you a more specific example from this week.

Entrepreneur: We want to do a small raise.

Me: For what?

Entrepreneur: We basically have the product done and have bootstrapped until now.  We need money for purchasing email lists, going to trade shows, travel, advertising, etc.

Me: How much are you looking to raise?

Entrepreneur: Small amount.  Maybe $100,000 - $200,000.

Me: How many customers do you have today?  How much revenue?

Entrepreneur: 0 and $0

Me: Wow, there must be a lot of unverified assumptions and risks in your financial model.  Have you thought about some "baby steps" first to de-risk your model? If I said you have as a goal over the next 7 days to get 10 LOCAL customers in the Philly area (the company is based in Philly), do you think you could meet that goal without spending any cash on marketing?

Entrepreneur: Yes, I could do that.

Me: And would they all be paying customers? (I've learned to ask that question: people have different definitions of a "customer" which have varying levels of importance based on the revenue model.)

Entrepreneur: We could get 10 customers to sign up (sign up is free); probably 50% would start paying $1,000 each per month. (Note: Company revenue run rate = $5,000 per month.  Also note, multiple assumptions being made here that could be vetted quickly, easily, and cheaply).

Me:  Okay.  I bet you could give those new customers a spiff of $100 if they refer someone else who signs up and starts paying.  So, you'll give them a $100 credit for your service and you would be happy to pay it as I'm guessing that your cost of customer acquisition is probably north of $300 and you would be happy to pay $100 all day long for referrals that turn into paying customers. (I wonder if the company modeled their viral coefficient?)

Entrepreneur: Absolutely we would do that!  And I think we would get referrals. (Assumption, and I bet it's in their financial model).

Me: And if I asked you in 4 weeks from now do you think, just in the Philly area, you could have a total of 50 customers signed up (including a few referrals), and half of those companies would be paying customers?  No email marketing.  No travel. No trade shows.  Just good old fashioned "drag a bag and go make some sales."  (This is not the way to scale a company, but a way to de-risk, learn, and get started.)

Entrepreneur: Yes, I think that's really doable. (Note: Company monthly revenue = 50 x 50% x $1,000 per month average purchase = $25,000 per month).

Me:  I know you'll learn a ton trying to get those customers on board.  You'll also learn a lot about the assumptions you have in your financial model. Now, if in 4 weeks, you can be at a run rate of $25,000 per month, why are you out trying to raise $100,000 - $200,000 now?  How about this: Set measurable stretch goals for the next 1, 2, and 3 months.  Get your revenue up to $50,000 - $100,000 per month (Note: $1.2 million annual revenue run rate), THEN go out and try to raise money.  In 3 months go to investors and say, "I have a problem:  I'm at an annualized run rate of $1.2 million, I just started selling 3 months ago and I have a solid gross margin of x%.  My problem is that my lack of capital is limiting my ability to grab profitable market share and grow my business."

Now when they go to meet with investors, they would end up having an entirely different conversation.  It's still not a slam-dunk that they'll get outside funding, but their chances have gone up dramatically.  Investors will see that they have greatly de-risked their model, have a lot less assumptions, and they're off to the races.

We'll be spending a lot of time this summer working with the DreamIt Summer 2009 portfolio companies to roll out early versions of their products and get feedback as well as meet with customers, potential customers, and potential partners as early as possible.  We'll help them make this happen in an accelerated time frame by leveraging our experience and connections.

The above may not fit your situation, but I urge you to try to think outside the box of how you can get to sales, product/service adoption, or potential customer feedback as quickly as possibly so you can learn the realities of the marketplace, and then look to raise funds.  If you're a Web 2.0 company, maybe you'll do this by getting an early beta out onto the web, and attracting traffic via Google Adwords, Twitter, Facebook ads, blogging, PR, etc.

If you are building a new product or service that will be very capital intensive (e.g., a new hardware device, new type of robotics, new medical device, very large scale software application, etc.), then it will be hard to actually sell something to a customer without having cash up front to develop the product.  If this is the case, meet with companies / potential partners to get their input and reactions to your ideas.  Have meetings with companies that meet your target customer criteria and ask them the right questions to find out if they would buy your product, how much they would be willing to pay, the potential objections, etc.  Check out my BarshBits blog post: When can I start speaking with potential customers?  Take your learnings into your meetings with investors and you'll have a lot more credibility.

Now, not every company I meet with are like the ones described above.  As a matter of fact, quite a few of the companies I know that tried to sell first and build revenue before raising outside cash: nearly 50% of them have gone on to raise outside money or are growing without it. 

Entrepreneurs seem to think that when they have a new idea the first thing they need to do is put together a plan and go out and raise money.  I'm a big believer that you should go out and try to sell, get adoption, or get marketplace feedback first, and then try to raise money.

It's okay to "ask for the money."  Just TRY to start the "old fashioned way" by selling something to a customer or getting user adoption, rather than selling a vision and a set of assumption-riddled numbers to an investor.  I think you'll have more success with the former, and just pound your head against the wall with the latter.

How to find angel investors revisited

by Alexander Muse

Lots of people ask me, "How do I find angel investors?"  I don't have a great answer, but perhaps I can help some of you think about who angels are and as a result perhaps you will be able to find them more easily.  To start, I think it is important to classify angels in a few classes:

1. Type 1: Novice angels with financial objectives
2. Type 2: Experienced angels with financial objectives
3. Type 3: Novice angels with subject matter expertise
4. Type 4: Experienced angels with subject matter expertise
5. Type 5: Family, friends and colleagues

You will find lots of Type 1 and 2 angels at angel investment groups.  The main problem with this group is that they have usually have a very limited understanding of your space and as a result require more information about your startup than you will be able to provide.  They want to be convinced that the IRR is going to be sufficient, but you aren't even sure what the product or service will end up looking like.  Type 1 investors have NEVER made an angel investment and it is unlikely that they will invest in your deal unless they know a Type 2 investor who has already agreed to invest.  As a result, you might consider spending very little time targeting Type 1 guys.  Spending time with Type 2 guys is fine, but only if they have clear and provable access to professional investors.  Their relationship with professional investors (i.e. VCs) needs to be vetted prior to spending a tremendous amount of time with them (i.e. ask them for references to CEOs they funded and ultimately introduced to real VCs).  Talk to CEOs they funded and get an understanding of what it was like working with them.  Make sure there is value beyond the money.

Type 3 and 4 angels are the best, but they are hard to find (they rarely join angel investment groups).  They are people who have previously made lots of money in and around your space.  They have subject matter expertise around your idea and can often provide a lot more than money.  In many cases they will know the ultimate customer that will ensure your success and their investment.  Novice angels in this space are almost as good as experienced angels, both groups will be able to understand your idea very quickly and will be able to evaluate your idea without lots of bogus financial models.  Start by talking to your lawyer, your friends, your colleagues, your competitors - anyone who might know people who had prior success in and around your space.  Check out LinkedIn and Facebook, use their advanced search functions.  Type 3 and 4 angels will be able to act on their own, investing without the 'buy-in' a Type 1 or 2 angel might need.

Type 5 angels are good and bad. They are your family, friends and colleagues.  They will invest in YOU, not necessarily your idea.  This is a good thing until and unless your idea fails and YOU fail them.  They won't understand that angel investing is risky and they they are likely to lose 100% of the their money 90% of the time.  No matter whether or not you explain this prior to their investment, they won't understand - EVER.  You may lose relationships with family members, friends and colleagues.

My advice? Focus on Type 3 and 4 angels.  Otherwise use your savings, borrow against your 401K, borrow against your home equity, get an SBA loan until your idea is ready for real investment dollars.

Understanding Venture Capital in China

by Dave Broadwin

One of my ongoing interests has been doing business in China. In that connection, I visited China in February and made some comments about that trip in this blog. Last Sunday, I attended and spoke at a "conference" sponsored by NECINA at which a group of Chinese VCs attended and also spoke. It occurs to me that there is a significant culture clash between U.S venture investing and Chinese venture investing. This clash can be found in the level of specialization of investors, the goals of investing, the sources of investment money for the VC funds, and the regulatory climate in which the investors operate.

One Chinese venture investor's card states that he is interested in making investments in high-tech, real estate and new agriculture. When I ask Chinese VCs what they are interested in investing in, they the answers are so broad (at least in terms of industry) that it is actually hard to imagine who I could introduce them to. Compare this to a more familiar experience in the U.S. Here the VCs are highly specialized. VC funds are often, if not always, specialized in a few industry verticals. Many of their web sites say they invest in IT or clean tech or something else, but few, certainly none that I know of, say they invest is anything. Once you get below the fund level, each individual VC is likely to have an area or two that are of interest and to make investments more or less exclusively in those areas. How often do you hear VCs say that they are interested in small molecules or data storage or solar energy. At some level, this high degree of specialization reflects the fact that the venture industry in the U.S. is more developed and more mature than the venture industry in China, but it also reflects different aims of investing in the two countries.

It goes without saying that the goal of venture investing in the U.S. is to make profits. A secondary goal might be to create enduring companies, but profit is first and foremost. Creating enduring great companies is arguably a by product of the profit motive and, possibly, the best way to make money, but it is not the end. I am not certain of what I am about to write, but I believe that the motive for Chinese venture investment is to create business in China that employ people. The population of China is vast, 1.4 billion. While a portion of the population live in relatively good circumstances (the ones that live and work in Beijing, Shanghai, and a few other industrial centers being perhaps 50 million) the rest live in rural poverty (more like the third world than the first or second world). The government needs to find ways to pull these people forward and good jobs is it. If they government fails, considerable political instability could arise. The government is less concerned with profit than with employment.

Remember China is a communist country. The vast amounts of venture money they have does not come from private investors (although there is some of that); it comes from the government. In addition, it is controlled by the government. The government controls who can own equity in Chinese companies, when and how money can come into the country and, most importantly, when and how money can leave the country. It also controls the exchange rate, which it sets at 7 RMB for one dollar (way too low). All these policies support one goal – employment. By way of an obvious example, by keeping the exchange rate way low, they keep down the cost of labor and make it attractive to locate manufacturing in China. Another example, is keeping money in China. If you can't get investment capital out, then in stays in the Chinese economy. One could argue that this particular policy is counter productive since it discourages investment (if you can't get your capital out why put it in?), but it is hard to argue what policy is being followed.

China is still a great market (eventually it will be the biggest market in the world). It is the current best place to make money – after all in this global recession; they grew at a whopping 6 percent. Somehow, to make cross border investment work, some of these conflicts in style, purpose and regulation will have to be bridged. Ultimatley, I think they can be because their goals and U.S. goals are not mutually exclusive, but adjustments are going to have to be made on both sides. The beginning will be to understand the differences.

9 Rules to Follow When Pitching Investors

By Jeff Ready

Consider this the most basic introduction to how to pitch investors and venture capitalists.  A few people have asked for advice around this, and I should probably put together a whole series of posts (or maybe videos, which I've been thinking about) on this very topic.  Nevertheless, I can give a high level overview here of some of the basics.

For purposes of this post, I'm talking about equity investors.  Pitching a bank for a loan is a similar but different prospect, and if you're hanging around this blog, debt financing is probably not where you need to look. Anyway, here are some high level considerations:

Rule #1: Recognize that you are SELLING part of your company

When you take an investor on in exchange for an equity piece, you are, plain and simple, selling them part of your company.  This is really no different than if someone came up and said they wanted to buy the whole thing from you, except that the investor probably doesn't want the whole thing, and they expect you to use their money to grow the business instead of buying that beach house.

Rule #2: Sell this part of your company just like you would sell anything else

See Rule #1 - as I said, you are selling part of your company, and you need to treat the fund raising process exactly like you would any other sales process.  You need to put together a list of target customers (investors) come up with a short phone pitch (elevator pitch), start making sales calls, and start setting up in person meetings.  You then need to gradually walk the prospective customer (investor) through your product (the company) and build their interest and excitement until the point that they are ready to buy it (invest).

Do not think about this any other way.  I've seen plenty of people that are perfectly capable of selling suddenly fall apart when it comes to managing the investment process, because they somehow thought it was different.  Just as you would not trust that your target customers "already know all about your business" you should not trust that an investor has any such knowledge either, which brings me to point #3...

Rule #3:  Start with broad, exciting overviews, and work your way deeper over several meetings

Again, this is no different than selling anything else, but I've seen things run awry during investor presentations all too many times to not call it out separately.  If you are meeting with someone for the first time, do not launch into the minutia detail of your product, technology or service.  They aren't ready for that yet.  You need to build EXCITEMENT, not bore people to death with the details.  Big strokes of the brush are what you are looking for, not details.  And speaking of broad strokes of the brush...

Rule #4:  You are pitching your BUSINESS, not your product

It must be true that nearly 100% of first time entrepreneurs focus FAR too much time and energy on the product when pitching an investors (yours truly included).  Investors are not there to buy your widgets, they are they to buy your COMPANY.  This may seem obvious when I say it, but I can almost guarantee that when you put together your first investment pitch, you'll end up with twice as many slides on the product as anything else, and if you time yourself you'll spent half the time (or more) talking product.  DON'T.  Product is just one piece of the puzzle, bringing me to...

Rule #5:  Answer the big 3 questions

What is the market, how do you fit in, and why should I care?  Why will your business win (a portion of) that market?  Who in the heck are you, and why should I believe you can even pull this off?  How much money do you need, what will you use it for, and how to I get paid back?

Those are the big ones.  Notice, there's nothing in there about how your widget works.  Such information may come out during the course of answering those questions, but that's not what an investor needs to know, especially in the beginning.  They simply need to know if the market is big, can you pull it off, and if so, how much will they make.  Don't over think it.

Rule #6:  Know what you are going to ask for

Don't go in and not have an answer if someone asks "how much money do you need to raise?"  You can have a range, you can have plans that deal with different amounts raised, but you can't lack an answer entirely.  You'll look like an idiot.

Rule #7:  Just because the first meeting (or two) went well, don't let your guard down.

Venture Capitalists are notorious for making you feel confident during the first meeting or two, and then unloading on you with probing questions during the next meeting.  Don't let your guard down just because things have gone well thus far.  You'll need to be prepared to dig deep into the specifics, once an investor is interested and has had some time to think about and research your business.  And related to that...

Rule #8:  Don't get flustered when the questions get hard

If the questions are getting hard, it's because the investor is legitimately interested in your investment opportunity, and is looking for the gotchas.  Don't clam up when these questions come.  Answer them as best you can, be honest, and if you don't know, say you don't know.  You are a startup after all, and you aren't going to have all the answers all of the time.  I've seen more than a few entrepreneurs take it personally when these questions start coming, and believe me, they can come fast and furiously.  Again, it's really a good sign, so be prepared, and if the questions turn this way, know that you are making progress to getting an investment.

Rule #9:  Don't get fooled by those that "seem interested"

This, again, is SALES.  You do not stop selling product just because you have a few interested prospects -- you keep selling until someone buys all that you have.  You can do yourself a world of good by continuing to reach out to new investors until the time comes than an investor commits to putting money in, or asks you to sign an agreement that stops you from pitching others while they look deeply into the deal.  Until then, sell, sell, sell, and keep selling.