Venture capitalists today look far and wide for start-ups

By Edward Iwata

While others toiled in the technology mecca of Silicon Valley, Trevor Loy — a former Intel manager and Stanford University-trained engineer — pursued the digital road not taken.

Nearly a decade ago, he moved to the New Mexico desert to co-found a small venture-capital firm called Flywheel Ventures. His aim: to find the next generation of start-ups where few others were looking.

Tapping into the wealth of technology talent and research in the region surrounding the Sandia and Los Alamos federal research labs, Flywheel Ventures has invested $34 million in 19 companies in solar, biofuel and other sectors. Most of the start-ups were "born global," Loy says, with U.S. and overseas offices, employees and customers.

One promising find off the beaten tech track: Miox, an Albuquerque firm that makes water-disinfectant generators that use salt and electricity, not potentially dangerous chlorine gas. Miox — which just received $19 million in funding from DCM, Sierra Ventures and Flywheel Ventures — has water-treatment installations in 30 countries.

"This is the natural evolution of our industry," the 37-year-old Loy says. "Venture capital has matured and reached critical mass in some markets, and now we're seeing explosive growth and opportunities elsewhere."

The nearly half-century-old U.S. venture industry appears to be entering a new era — what some call Venture Capital 2.0. Powerful forces, from economic globalization to weak markets for initial public offerings and acquisitions, are sweeping the industry and causing much soul-searching. To grow and survive, venture firms large and small are hunting for new global entrepreneurs and markets, and for fresh investment sectors such as clean technology and alternative energy.

Some venture capitalists believe that their traditional industry model needs shaking up. Over the decades, U.S. venture firms have poured hundreds of billions of dollars into thousands of young tech firms. Most died or failed to grow, while others — Intel, Apple, Amazon.com, Google — grew into business giants.

Since the dot-com boom and its 2001 bust, venture investment returns in the USA have dwindled. Too many venture firms and too much capital are chasing too few prized start-ups, many say.

Dileep Rao, a University of Minnesota entrepreneurship professor, contends that venture investing is mostly "a lottery system" won by a lucky few. He says that elite venture firms — about 4% of all firms — haul in most of the profits with big IPOs and acquisitions, while returns for others pale by comparison.

Venture capitalists, he says, "need home runs such as Google and eBay to reach their financial goals, but there are not enough high-potential ventures to satisfy the large numbers of VC funds."

Venture investors focus narrowly on short-term investments and what they believe to be the Next Big Thing, contends Tom Simpson, founder of Northwest Venture Associates in Seattle.

Instead, they should seek steady, long-run growth in young companies. Starbucks is a prime example of a former start-up that resisted the early temptation to sell its stock until the company enjoyed steady profits and growth, says Simpson, whose firm manages $170 million in venture investments.

The debate comes at a tough time for venture firms, as the usual "exit strategies" for venture-backed young companies have dried up in the USA.

Mergers and acquisitions in the second quarter of 2008 fell 59% from the same time last year, says Dow Jones VentureSource.

And there were no venture-backed initial public offerings — when private companies "go public" and sell stock — in the second quarter, reports the National Venture Capital Association. That's the first time that has happened in 30 years.

With no way to cash out of their start-up investments, venture capitalists say they must continue raising millions of dollars to sustain the young companies in their portfolios.

"It is like having a family of children that are still living at home in their 30s," Simpson says. "The traditional VC model and mentality does not effectively accommodate this new 'buy and hold' reality."

Not surprisingly, venture capitalists are gloomy about the near future. Their confidence last month fell to record low of 3.0 on the 5-point scale of the Silicon Venture Capitalist Confidence Index, a quarterly survey by University of San Francisco entrepreneurship professor Mark Cannice.

Many Internet and software investments — core of the venture-capital industry for years — have hit a point of limited returns, say venture capitalists such as Josh Kopelman, managing partner at First Round Capital in West Conshohocken, Pa.

Take a typical $400 million venture fund, he says. For the fund to enjoy a 20% annual return over six years, it roughly would have to triple in value to $1.2 billion.

"The numbers just don't work," Kopelman says. "You've got a whole generation of venture capitalists who have never made money from their funds."

Over the past 30 years or so, U.S. venture capitalists and investors have enjoyed attractive returns of 17% to 18%, says Josh Lerner, a Harvard Business School professor and co-author with Harvard colleague Paul Gompers of The Money of Invention: How Venture Capital Creates New Wealth. Returns peaked at 190% during the dot-com boom in 1999 and hit 20% last year.

The investments are high-risk, though, and the most lucrative returns are taken by mostly larger venture firms, Lerner says. And returns have slowed in recent years because of the weak financial markets.

Some falling out

A shakeout in the industry already is starting, according to venture capitalists. More than 1,000 venture funds sprouted during the dot-com era, but many of those will shrink or be absorbed by other funds, says Gompers. About 500 or 600 funds — the level of the 1980s — would be healthy for the industry, he says.

At the same time, the venture industry is growing abroad. Venture capitalists in Silicon Valley once joked that they'd never invest in a start-up more than a 15-minute drive away. Not now.

Increasingly, Silicon Valley venture firms such as Draper Fisher Jurvetson and Sequoia Capital are looking beyond U.S. tech hotspots and investing from Dubai to Dublin. Since 2001, U.S. venture firms have raised $230 billion in venture capital worldwide — with $40 billion coming last year, according to Ernst & Young.

Of course, U.S. companies have long dominated IPOs. But in the first half of this year, only one — Visa — made the Top 10 IPOs in the world. The rest are based in China, Brazil, India, Saudi Arabia, the United Kingdom and other countries, according to IPO research firm Renaissance Capital.

"Entrepreneurship and innovative technology has gone global," says DFJ managing director Raj Atluru. "Back in the early 2000s, a software engineer in India was maybe two years behind us. In 2005, he was six months behind us. Now, I don't think there's any difference."

At DFJ, one-fourth of its core venture fund invests in foreign-based start-ups, including thriving search-engine firm Baidu, often called "the Google of China."

DFJ also oversees a widening network of 20 foreign "partner funds" run by venture capitalists and investors from Asia to Europe. Managing director Don Wood says the DFJ-branded funds manage $6 billion in investments and are seeing "strong deal flow and a steady flow of exits" via IPOs and acquisitions.

Higher standards

As the economic slump drags on, venture firms are more closely scrutinizing their investments, funding only meaner-and-leaner start-ups.

During the IPO frenzy of the dot-com era, tiny start-ups with barely a few million dollars in sales typically rushed to market to sell their stock. Today, though, young companies must boast seasoned management teams, strong products and tens of millions of dollars in sales. They prudently manage their cash, not recklessly burning through it.

Then, after five to eight years, they're primed to go the IPO route or be acquired by a bigger company. Even the slow economy gives start-ups the chance to streamline their business and toughen themselves.

"The goal is to build real companies," says Matt Trevithick, a partner at Venrock Venture Partners in Menlo Park, Calif. "Successful companies in good or poor markets will remain successful companies."

A new breed of U.S. entrepreneurs — not weaned on short-term IPOs and lucrative stock options — hope to grow their start-ups into larger corporations in the tradition of Dell and Microsoft, says Mark Heesen,president of the National Venture Capital Association. And that's a good sign for the long-run health of the tech industry, he notes.

Moreover, as the U.S. economy and industries mature, Venrock and other venture-capital firms are stepping up the search for new investments in faster-growing sectors.

For decades, U.S. software and the Internet have been by far the largest sectors for venture investments. Now, though, venture firms also are investing more in energy, the life sciences and clean technology, which includes start-ups developing new environmentally friendly technology.

Energy use globally is rising, and more companies and consumers are looking at alternative fuels and greener cars and products, says Joseph Muscat, Ernst & Young's Americas director of venture capital and clean tech.

Last year, VCs poured a record $3 billion into more than 200 clean-tech deals in the USA, China and Europe, says Dow Jones VentureOne. "This is very much the beginning of a long-term trend," Muscat says.

In Seattle, venture capitalist Simpson believes that the standard venture investment fund should be what he calls an "evergreen fund" that invests patiently in young companies with strong cash flow, rather than cashing out quickly in three or four years.

Evergreen funds would offer investments in start-ups from a much wider range of sectors and geographies than traditional venture funds. Investors also would enjoy financial gains earlier by receiving dividends, rather than waiting many years for an IPO.

Natural evolution

Whatever the new era may bring, venture capitalists say, their industry model isn't dying, merely evolving.

Business innovation still thrives during downturns. First-rate entrepreneurs are emerging in many countries. Investment capital keeps flowing across borders. Their industry, they believe, will spring back strongly once financial markets rebound.

"The VC model is always going through transformation," Muscat says. "That's the very nature of venture investors … and it is fundamental to the industry."

Venrock illustrates VC's shifting focus. Founded as the venture arm of the Rockefeller family to invest in aviation before World War II, the Palo Alto, Calif.-based firm has since poured $2.2 billion into 400 companies.

Now Venrock is prowling overseas for clean-energy, technology and health care companies. Venrock and a syndicate of venture firms recently invested $24 million in British start-up Orecon, which makes a buoy-like wave-energy device that generates electricity for 1,000 homes.

"We spend an awful lot of time in airplanes," Trevithick says.

Raising Venture Capital: How Much Money Matters

by David Hornik

After watching a bazillion venture pitches, I've come to the conclusion that every VC Pitch should end the same way -- with the ask. If you want to crescendo into it, feel free to summarize why it is your technology is life changing, but finish with the ask -- "we are looking to raise six million dollars." Don't beat around the bush. Come right out and ask for the money. After all, that's what you're there for.

There are a number of reasons VCs want to hear what you're raising. And it isn't just the obvious one. Yes, it is helpful to know how much money a company is hoping you will invest. But there are other more valuable pieces of information that come out of the ask.

First of all, the amount of money you are raising is a good general indicator of how much you think the company is worth. I was in a pitch once learning about pretty interesting but pretty early stage technology. From where I sat, it seemed to me that the company could use single digit millions to take the technology to the next step. Yet, when we got to the slide that stated how much the company was raising, I learned that they were hoping to raise more than $50M. By my assessment, $50M would buy the vast majority of the company. Clearly the company felt differently -- they were hoping to sell closer to 20% of the company. It certainly refocused the conversation on what the company felt was the justification for such a high valuation and led to a very interesting discussion of the underlying economics of the company's business.

The thing I find most interesting about how much money a company is raising is not the actual number itself, but rather the conversation about how the company arrived at that number. What is interesting to me is what the company plans on doing with that money? What are the milestones the company can reach with that much money? Could they do it for less? What would they do if they had more money?

For me, the right question isn't "how much money do you want to raise?" The right question is "how much money should you raise?" Ask some entrepreneurs and they will tell you, the right amount of money to raise is as much as they possibly can (some recent monster financings suggest that strategy). That makes no sense to me. The right amount of money to bring into the company is enough to reach sufficient milestones to raise more money at a higher price at a future date (or, in some rare cases, enough to get to cash flow positive). If all goes well, the money I invest will be used to drive all sorts of risk out of the business, enabling the Company to raise the next round at a much higher valuation.

Figuring out the right amount to raise is more art than science but can have a big impact on the Company. If you raise too little money, you may run out before you have proven the business sufficiently to raise additional capital. In other words, raising too little money can be fatal. On the other hand, if you raise too much money early on, you could well be selling off too much of the company for too little capital. Companies should leverage early stage venture money to drive up the value of the company (by proving out as much of the business as quickly as possible), so that the next time the company fundraises, they will be able to bring in larger amounts of money while suffering smaller amounts of dilution.

Unfortunately, the perfect amount of money to raise is not always obvious. So the question isn't whether a company is raising the "right" amount of money. The question is, "why is the company raising the amount of money it is raising?" A great deal can be learned about a company from their answer to that question. So when you go out to raise money, be prepared to not only answer how much you are hoping to raise, but also why?

Going Without Revenue

by Tom Evslin

Starting a business with no plan for revenue is always a risky approach; it's especially so these days with no quick exits through either going public or being acquired and not much VC money available – especially for businesses with no revenue in the P&L.

Some people would argue that a "business without a revenue plan" is an oxymoron. That's NOT true; you can build spec houses for a business and know you won't get a cent back until you sell them; that's a business. In the Internet world you can build a service on spec hoping that it will be purchased and become a feature of another business (which probably does have revenue); nothing wrong with that except the risk. You can also speculate that, if you can only attract enough users, many revenue models will be possible; you may be right; Google was.

More on reasons why starting without revenue may be a good idea here. If you're convinced that's what you want to do, here's what you need to have any chance of success (and even with the items below, you will probably fail; but so will most new businesses WITH a revenue model):

Hugely deep pockets of your own. If you've got that, you've got lots of runway – but no verification that anyone besides you believes in your idea.

OR

Enough starting capital to survive at least twice as long as you think you're going to need to survive before you either sell out or raise more capital.

AND

A very low burn rate for personnel costs. If anyone you depend on (especially you) is taking out what they could earn in a "regular" job, you run a good chance of having to fold because they or you have to quit and earn a living.

AND

A business which can grow to scale without consuming large amounts of capital either for equipment or for hosting costs. This requirement can be met by offloading most of the cost of growth to your users' machines and Internet connections (as in a P2P service) or by frugal use of cheap hosting from the likes of Amazon.

AND

A source of follow on funding willing to raise the ante purely because you have met internal goals even if you haven't achieved the growth you hoped for and are still far from revenue. See Fred Wilson's post on why VCs DO like to do follow on funding; but remember that VCs also can and often will pull the plug (Fred again here).

The point is that many things will go wrong and, without revenue, you are walking a tightrope without a net. Revenue gets you both additional runway – infinite if you're breakeven and patient; revenue opens doors to new funding and/or acquisition from many more sources that will look at a non-revenue operation. That's why you need either a huge fortune of your own or an excellent combination of funding and low cost growth before swinging for the no-revenue fence.

Think Like a VC, Act Like An Entrepreneur

Getting employees to adopt both an entrepeneur's bias for action and a venture capitalist's talent for hard-nosed analysis is a challenge. But no one said excellence was easy

By Jeffrey Bussgang

All corporations have the challenge of trying to infuse an entrepreneurial spirit into their workforce. As the theory goes, when employees act like entrepreneurs, they put themselves in the mind-set of business owners with a bias for action, which results in good decisions and good outcomes.

To get employees to act like entrepreneurs, then, companies have often taken a structural approach. For example, Google and Microsoft organize into small units of 50 to 100 employees to maintain a sense of entrepreneurial spirit and eliminate bureaucracy. The trade-off is that small groups can create silos across units, leading to duplication of efforts and squelching synergy. But if a company chooses to organize to achieve maxim efficiency and scale, it risks creating behemoth departments that crush the natural entrepreneurial spirit that lies within its employees.

After a career as both an entrepreneur and a venture capitalist, I have come to conclude that creating an entrepreneurial spirit within the corporation is only half the battle. I have seen too many situations where acting like an entrepreneur was not a business panacea: Unbridled, unfocused entrepreneurial energy can easily be squandered and misdirected. In my last six years as a VC, I developed an appreciation for the attitude and vantage point that VCs have when sifting through business proposals and allocating scarce capital to the best opportunities.

Through these two career experiences, I have come to realize that the true question corporations need to ask is: "How do I get my employees to think like VCs but act like entrepreneurs?" In other words: What's the best way to impose the challenge of complex, competing priorities on employees who must, in effect, be adroit at living with split personalities? This new frame of mind requires the corporate manager to extract the best from both worlds—entrepreneurs with a bias for action, and VCs with a bias for analysis. Elements of both are required.

The VC industry is a small, arcane field that isn't well known to many outside of the mere hundreds of professionals who practice it every day. So let me explain a bit more what I mean when I promote this way of thinking for the corporate manager.

In short, VCs are trained to:

• Survey and network with smart people to find the best ideas out there (what's known in industry parlance as deal flow).

Corporate managers, in turn, should be encouraged to spend time networking with outside experts who can expose them to a broader range of ideas than what might emerge from within the walls of their corporation.

• Be notorious cynics who swiftly reject hundreds of these ideas, setting a high bar before something is deemed worthy of their attention.

Once they've attracted numerous wacky and credible ideas to transform their business, managers need to follow the VC model of being a pessimistic cynic, challenging every assumption and having a sensitive "BS" detector that allows them to dismiss the majority of suggestions as unworthy of further consideration.

It is tricky to encourage a lot of new ideas without pandering to the sources of the ideas. If the ideas are not worth pursuing, managers need to feel comfortable (and supported by their chain of command) to not waste time on them, even if the most senior executives or most important customers provide ideas.

• Assess risk and rewards and apply ruthless judgment to select the handful of big ideas that they want to put their time, energy, and resources into every day.

Look for situations where the team or company has a distinct advantage against competitors; where you can leverage your resources, expertise, and relationships to create value.

Once the big ideas are chosen, there needs to be a shift in emphasis. The key to successful implementation is to act like an entrepreneur. Specifically:

• Attract world-class talent.

Great entrepreneurs don't settle for working with whoever is available. Instead, they take the attitude that their mission is to be inspiring enough to attract the best and brightest, and they don't waste time with B teams.

• Attack the opportunities as if the structural barriers in front of you don't exist.

There's a pattern of young entrepreneurs achieving greatness in areas where their older, wiser colleagues were scared away because they "knew better." At a time when IBM (IBM) and Compaq Computer (HPQ) were dominating the emerging PC market, who would have thought to challenge them with a new direct-to-consumer business model but a young kid named Michael Dell selling computers out of his dorm room at the University of Texas? Corporations need to allow their managers to be naive enough to not "know better."

• Don't be afraid to be wrong—just don't stand still.

For managers to truly foster innovation within the corporation, they can take the best of both of these perspectives—the VC and the entrepreneur—and apply them in their own environment.

Jack Welch had a similar mind-set when it came to balancing competing priorities. "You can't grow long-term if you can't eat short-term," he states flatly. "Anybody can manage short. Anybody can manage long. Balancing those two things is what management is."

I might argue the same is true for instilling a similar entrepreneurial/analytical approach in the minds of corporate managers there are those that are able to sit back and analyze what idea is the best one, while others who are good at acting with the raw, unbridled enthusiasm of an entrepreneur. The best managers will do both. And the best corporations will help them figure out how.

Venture Fund Economics: Allocating Follow-On Capital

By Fred Wilson

It's time for another entry in my Venture Fund Economics series. This time I'd like to talk about the importance of allocating follow-on capital.

One of the great things about early stage venture capital, as compared to many other investment disciplines, is that you get to build your position in the company over time, sometimes over a very long (5-7 year) period.

So this allows the venture investor to allocate capital to the investments in his/her portfolio based on the performance of those investments. I've likened each investment to a hand of poker and it's certainly a lot like that.

Let's start with my 1/3, 1/3, 1/3 assumption that regular readers will be familiar with. This says that 1/3 of an early stage venture portfolio will be losers, 1/3 will get your money back or make a little money, and only 1/3 will deliver the kind of performance you expect when you make an investment (5-10x).

If each investment was allocated the exact same amount in a theoretical portfolio, this is how the 1/3, 1/3, 1/3 scenario would play out.

You'd get 2.2x your total invested capital on a gross basis (before fees and carry) and as we discussed in prior posts on this topic, that's not good enough.

So let's say you did a $1mm round in your losers, two $1mm rounds in your break evens, and three $1mm rounds in your winners. That would look like this.

You'd get 3x your total invested capital on a gross basis and that is not so great either although it gets closer to acceptable performance.

But fortunately, most companies need more capital as they grow. So let's assume the one, two, three rounds is right, but that the first round is $500k, the second round is $1.5mm, and the third round is $3mm. Then the numbers play out like this.

This results in 3.7x on a gross basis which is about where you'd need to end up to generate a good return to your investors after fees and carry.

So it's pretty clear that allocating capital is a key aspect, possibly the most important aspect, of generating good returns in a venture fund.

What should legal fees in a Series A financing be?

by Yoichiro Taku

Company counsel legal fees in venture financings have increased since the 1990s. Legal fees in Series A venture financings routinely exceed $50K, and fees easily exceed $100K in complicated and later stage financings. In my experience, many companies also need to complete some corporate cleanup in connection with venture financings, especially with regard to capitalization matters, which leads to increased costs. Generally, working with competent counsel will be less expensive than fixing problems later or dealing with deferred housekeeping at the time of a venture financing.

Please keep in mind that the company also needs to pay legal fees for investor counsel. This is because venture funds receive a management fee of 2% to 2.5% for managing the money, which pays for day to day operating expenses of the fund, such as salaries, office space and other costs. Venture funds do not want legal fees to be paid from management fees and instead want them paid from the fund itself, via the portfolio company. Sometimes investor counsel legal fees are deducted from the wire transfer that the company receives upon the closing of the financing. Occasionally, venture funds will try to have the company pay legal fees even if the financing does not close.

Legal fees for investor counsel may be capped in routine financings, although some venture funds will not cap legal expenses and will expect payment of “reasonable” expenses. These caps may be as low as $20K or range as high as $100K or more in complicated financings. If investors need to conduct specialized IP or regulatory due diligence, fee caps or expectations may be higher, as the investors may engage separate patent or regulatory counsel to conduct due diligence.

Fees for company counsel are typically 2X investor counsel fees because company counsel (at least on the west coast) typically drafts financing documents, coordinates due diligence and delivers a legal opinion, which requires more work than investor’s counsel. In my experience, it is difficult to adequately represent an investor in a venture financing without incurring less than $25K to $35K in legal fees, simply due to the time necessary to review documents and conduct due diligence.

If investors are not represented by counsel, such as in some angel financings, then company counsel legal fees can be significantly lower. This is partially due to the lack of back and forth negotiations among the attorneys and also due to the fact that these companies may be fairly early stage with few due diligence issues. In my experience, I believe that it would be difficult to complete a simple angel Series A financing for less than $20K to $25K on the company side.

Please also see the post by Jason Mendelson on Ask the VC answering the question: “How Much Should I Pay Lawyers to Complete My Financing?”  Dick Costolo has a humorous (and fairly insightful) post about legal fees entitled “Legal Fees: Start Swearing Now.”

In any event, actual mileage may vary.

VC Pre-MBA Hiring... 

作者：桂曙光

（本文删减版已在《经理人》杂志“公司金融”专刊2008年7月15日 发表）

VC的退出渠道之一是投资的企业被并购（M&A），通过将企业出售给第三方，VC可以将自己的股份变现。但是，VC通过自己所谓的增值服务，千方百计找到一个合适的并购方之后，创始人或管理团队可能并不认同并购方、并购方的报价、并购条款、等，导致并购交易难以进行，这个时候，VC可能会搬出一个杀手锏——领售权（Drag-Along Right），强迫创始人接受交易。

什么是领售权条款

领售权，就是指VC强制公司原有股东参与投资者发起的公司出售行为的权利，VC有权强制公司的原有股东（主要是指创始人和管理团队）和自己一起向第三方转让股份，原有股东必须依VC与第三方达成的转让价格和条件，参与到VC与第三方的股权交易中来。通常是在有人愿意收购，而某些原有股东不愿意出售时运用，这个条款使得VC可以强制出售。如下图所示：

VC投资协议中，典型的领售权条款如下：

Drag-Along Right: Prior to a Qualified Public Offering, if a majority of the holders of Series A Preferred Shares agree to sale or liquidation of the Company, the holders of the remaining Series A Preferred Share and Common Share shall, if applicable, be required to approve such transactions and, if applicable, to sell their shares at the same price and upon the same terms and conditions.

领售权：在合格IPO之前，如果多数A类优先股股东同意出售或清算公司，剩余的A类优先股股东和普通股股东应该同意此交易，并以同样的价格和条件出售他们的股份。

领售权条款的设计有这样几个目的：

首先，如果一个公司的绝大多数股东决定出售公司，几个小股东不应该阻止这桩交易，也不应该有办法阻止。有些公司初创时有很多创始人、天使投资人，过了几年在公司可以被出售的时候，要想把所有的这些原始股东聚集在一起不是意见容易的事，当然也可能有些公司经营过程中产生矛盾的小股东故意不出席，阻挠和要挟公司，这个时候，领售权就可以起作用了。只要大多数股东同意将公司出售，这些小股东是不可以、也没有办法阻止这个交易的。

其次，通常在收购企业时，收购方会购买目标公司全部或大多数的股权，如果股权比例太低，就失去收购的价值了。所以，如果有合适的并购方出现，VC这样的小股东手中持有的股份比例是不够的。当然可以由董事会来通过出售公司的决议，但这是没有保障的，董事会上VC的投票权往往没有决定性。

第三，依据“清算优先权（Liquidation Preference）”条款，公司如果出现出售或清算等事件，VC要按照设定方式获得优先分配资金（优先分配额）。如果VC发起的公司出售交易金额低于投资者的优先分配额，创始人和管理团队一定会反对的，因为他们什么也得不到。即使是交易金额超出优先分配额，创始人和管理团队也可能会不满意分配的资金，从而反对此交易。

以上几点决定了，如果想VC通过出售公司实现退出，领售权就是很好的底牌。

但是，领售权如果被VC设计得对他们有利，则会给VC小股东一个极大的权力，把创始人（通常是大股东）拖进一个可能不利的交易中。如上所示的条款，“多数A类优先股股东同意”就可以剩余的其他所有股东同意这个出售交易，A类优先股通常是公司的少数股权，其中的多数更是少数，但领售权给投资者在出售公司时，有绝对的控制权，即使投资者的股份只占公司的极小部分。

领售权的谈判

创始人和天使投资人可能会对领售权有很多意见，首先就觉得“不公平”——我要按我自己的意志、为自己的利益投票，为什么要受VC强迫？但是记住这个条款是融资谈判中众多条款之一，自然有谈判的空间，没有什么标准条款。如果VC不接受，就放弃。

领售权通常的谈判要点如下：

第一、受领售权制约的股东。通常，VC希望持有公司大部分股份的普通股股东签领售权，领投的VC通常也希望其他跟投的VC也签署，这样保证VC不会遇到原始股东和投资人内部对交易产生障碍。其实，对于创始人和管理团队等普通股股东而言，有时候也需要领售权条款！。尽管公司出售不需要全体股东一致同意（通常是完全稀释条件下，每类股份的多数或全部股份的多数），但大多数收购方还是希望看到80%、90%的股东同意。因此，如果公司有很多持股比例很少的普通股股东（创始人、天使、团队等），跟所有股东签署领售权协议，其实也是有必要的。

第二、领售权激发的条件。通常VC要求的激发条件是由某个特定比例的股东要求（比如50%或2/3的A类优先股，或某特定类别优先股）。

对创始人而言就不公平了，因为优先股的多数对公司整体而言，还是少数，所以，创始人可也要求在领售权激发还需要满足另外一个条件，就是董事会通过，这样对公司所有股东而言就公平了。当然，对于优先股要求通过的比例越高越好，这样优先股股东的多数意见得到考虑。比如上文所示的条款可以改为：

领售权：在合格IPO之前，如果超过2/3的A类优先股股东及董事会同意出售或清算公司，剩余的A类优先股股东和普通股股东应该同意此交易，并以同样的价格和条件出售他们的股份。

第三、出售的最低价格。根据清算优先权，有些股东（尤其是普通股和低级优先股）在公司被收购的时候什么也拿不到。强迫这些股东投票同意这种交易是会面临他们的反对的。所以，有些股东就需要在谈判时要求一个最低的价格之上适用领售权。比如，如果VC在“清算优先权”条款中要求的是“参与清算优先权，2倍回报、3倍上限”时，那普通股股东会认为：

（1）只有出售时公司估值高于VC投资额的2倍时，普通股股东才有剩余；

（2）只有每股价格达到VC投资价格的3倍时，VC就会转换成普通股，大家按股份比例分配，股东间的利益才能保持相对一致。

第四、支付手段。当然现金是最好的，另外，上市公司的可自由交易的股票也可以接受。如果并购方是非上市公司，以自己的股份或其他非上市公司股份作为支付手段，那就需要创始人好好斟酌了。

第五、收购方的确认。为了防止利益冲突，创始人最好能够预先确定哪些方面的收购方不在领售权的有效范围之内，比如竞争对手、本轮VC投资过的其他公司、VC的关联公司、等等。

第六、股东购买。如果有创始人不愿意出售公司，而VC一定要出售的话，那么还有一条解决办法就是由创始人以同样的价格和条件将VC的股份买下。如下图所示：

第七、时间。最好能要求给予公司足够的成长时间，通常4、5年之后，如果VC仍然看不到IPO退出的机会，才允许激发领售权，通过出售公司退出。

第八、如果创始人同意VC出售公司，创始人可以要求不必为交易承担并购方要求的在业务、财务等方面的陈述、保证等义务。

综上所述，对于前文所示的条款，比较合理的谈判结果如下：

领售权：在本轮融资交割结束4年后，如果超过2/3的A类优先股股东和董事会同意出售全部或部分股份给一个真实的第三方，并且每股收购价格不低于本轮融资股价的3倍，则此优先股股东有权要求其他股东，其他股东也有义务按照相同的条款和条件出售他们的股份（全部或按相同比例），如果有股东不愿意出售，那么这些股东应该已不低于第三方的价格和条款购买其他股东的股份。

领售权的一个真实案例

美国有一家名叫FilmLoop的互联网公司，2005年1月向Garage Technology Ventures和Globespan Capital Partners融资550万美元，2006年5月，又向ComVentures融资700万美元。2006年10月，公司推出新的FilmLoop 2.0平台，公司和投资人都对前景乐观。可是2006年11月，由于出资人（LP）要求清理非盈利的投资项目，ComVentures让FilmLoop公司在年底之前找到买家。尽管创始人不愿意出售公司，但是ComVentures的股份比例较高，另外还握有领售权，可以强制其他投资人和创始人出售。2006年12月，由于公司在年底前找不到买家，ComVentures让自己投资的另外一个公司Fabrik收购了FilmLoop，收购价格仅仅只比公司在银行的存款（300万美元）略高。根据清算优先权条款，创始人和管理团队一无所获。

ComVentures让创始人在圣诞节假期的时候，在极短的时间内寻找合适买家的做法，显然是有意的。这样他们就可以让自己的关联利益方廉价收购FilmLoop。FilmLoop公司的创始人和员工在头一天还拥有一家公司，并且还有300万美元的银行存款，而第二天，他们发现自己失去了股票、失去工作、失去公司！

这种做法让创始人始料不及，但是如果诉诸法律，以后再创业的话，可能不会有VC敢投资他了。另外，为了自己的名声，创始人只能简单地认栽，并期望哪天能东山再起，遇到有“道德”的投资人，他们可以跟企业患难与共，不会强制出售一个正常运营的公司去解救另外一个公司。

这个案例告诉我们，VC的条款可以有些不太“道德”的用法，所以，融资的时候，要小心给钱的到底是谁。

总论

对VC来说，将领售权条款写入投资协议已经越来越重要了，如果正确设计和执行，领售权可以为VC提供重要的保护，使之在合适的时机可以实现投资退出。企业的创始人理应保障VC合理的退出要求，但也要通过精心的条款细节设计，控制自身可能面临的风险。

Should you pay your VC to ______ ?

by Alexander Muse

Fill in the blank with anything including: conduct diligence, provide consulting or sit on the board.  Jason Mendelson from 'Ask the VC' was asked the following question last week:

My company is backed by VC firm to whom we also pay a $2k/month "consulting fee." We have raised approximately $2MM from them in a Series A. Is that type of consulting payment typical in an early stage venture?

Jason's answer was an unequivicol, NO! explaining, "I've never worked with a reputable VC firm that charges their companies to help them succeed."  Several months ago I heard a rumor about a local venture capital 'fund' that was charging companies they were interested in funding a fee to conduct due diligence.  More recently I learned that an acquaintence of mine went to work for the 'fund' so I had a chance to ask, "Do you really charge for due diligence?" The immediate answer was, "Yes, but if we decide not to do the investment the startup gets to keep the diligence."  The acquaintence, who I really like, was dead serious and didn't see the problem the practice.  I didn't press too hard because the person just finished their MBA and this is their first job in venture capital (I hope they don't read this post).

My stomach churned as I could imagine budding writers paying someone to 'publish' their book, or aspiring musicians paying someone to 'produce their record', or an inventor paying someone 'evaluate' their invention.  Of course, there are legitimate people in these businesses (and I suspect my acquaintance is legitimate), but I think it is a big mistake to do business this way.

Anyway, these sort of venture capitalists are taking two bites at the apple.  Venture capitalists shouldn't take a fee from their investors AND a fee from entrepreneurs, ever.  Jason explains, "As a venture capitalist, we are paid a management fee by our investors that is our "salary" and we receive a percentage of the profits (called "carry") on our fund.  We don't get paid to sit on boards and certainly it is not appropriate for them to "round trip" your investment capital by paying themselves part of it. I would wager to guess if their investors knew they were doing this that the investors would revolt."

What Are the Pros and Cons of Investment From a Strategic Entity?

by Jason Mendelson

Q:  Can you please touch on issues associated with first round financings from corporate or strategic investors. Particularly when the strategic is a competitor. What are some of the pitfalls and opportunities associated with this type of an investor in an early stage company?

A: There are both potential positives and negatives taking money from a strategic investor.  And despite the arguments for and against, there is also are no bright line rules on wether or not you should accept strategic money.

Let us first look to the positives.  Usually the biggest perk is the ability for a strategic investor to be able to accelerate and help your business in ways that a venture capitalist can't.  Strategics can offer access to manufacturing capabilities, technical resources, sales channels, foreign joint ventures, guaranteed retail shelve space, etc.  The strategic can leverage their business to help you.

Also many strategic investors don't consider themselves "financial investors" in the same way that venture capitalists do.  So while a VC might need to realize a return in 5-8 years and be happy with a certain return, many strategics are deriving other benefits besides the ultimate return.  Therefore, they may be a little easier on you if things don't go quite as planned, so long as they are still deriving utility from the other benefits. 

This also can lead to a problem, though.  If you investor isn't ultimately financially motivated to see your company succeed, that can be a conflict between them, you (assuming that you are financially motivated) and any venture investors (who I guarantee are financially motivated).  You may find yourself trying to make decisions that will promote one set of interests over the other.

We've seen this many times.  The questions is "how do I know of my strategic investor is motivated by venture-type returns versus 'something else?'"  Here are some clues:

• If your strategic investor is asking for terms that a venture capitalist would not, such as:
  • A right to buy the company / first look / call agreement (which you should never agree to, as this will kill any other potential suitor from speaking to you);
  • Warrants / other equity kicker for free or based on services provided to the company;
  • Restrictions on who you can sell your product to; or
  • As a condition to financing, entering into some sort of business arrangement.
• If you ask them if they are financially motivated and they say no.  (Don't laugh, many will be completely open about this.

To be clear, even if your strategic is not financially motivated, it still might make a ton of sense to take money from them, you just need to weigh the benefits of the "stuff" they bring to the relationship besides money.  For instance, a performance-based warrant for true performance may be appropriate. 

One thing to consider is a board / observer seat.  Most strategics don't want a board seat as they don't want the fiduciary duty issues present with their own business and yours.  This is especially true if your strategic is a competitor.  But they many times will ask for an observer seat and you need to carefully consider what type of information will be in their hands at the end of the day. 

A note on competitors investing in your company.  I haven't seen many of these arrangements end well.  Usually, the distrust of sending information back and forth quickly chills the relationship.  Do you really want your competitor getting your financials and board presentations?  Do you want them to know if you are negotiating a deal with one of their other competitors?

In general, we've had both good and bad experiences with strategic investors.  We've had deals that without them, we wouldn't have had nearly the success that we did.  We've had deals where we never saw or heard from them again after the funding.  We've had other cases where the noise in the machine caused by their wake was quite disturbing.  In this particular case, it appeared that the strategic's sole intention was the bankrupt the company and take their technology. 

It's really an individual choice.  I'd recommend getting references from prior investments that they've made to see how helpful they really can be. 

Raising Venture Financing Is A Sales Process

by TheDarkKnight

Some recent posts have generated a lot of interest around the process of raising money.  This post is really around running the fund raising process.  For those of you that have sales as a competency or profession, you'll understand that this spreadsheet is a poor man's sales funnel.  Raising money is a sales process.  Understanding each firm, your pitch, and the details around the process are critical to closing a round of financing.  Don’t' act like a first time startup CEO (even if you are one).  I cringe when I meet a new startup CEO that is running around like a sailor on leave. 

A good tool to have as an entrepreneur to have after you have mapped out your financing strategy, is to map out a plan.  A very specific, project-like tactical plan that you follow religiously is a sure fire way to keep your financing process moving.  It also ensures that you don't forget critical follow-ups.  Here is a simple spreadsheet format that is really helpful (click here: Download sample_venture_tracking.pdf) .

The first column has a list of status codes:

• Hot - good news; you have a VC on the hook.  They are getting back to you quickly and asking for more information in the way of financials, supplementary business plan information, etc.
• New - Very early in the process;  you have either talked to an associate or very early discussions with a partner.
• Lukewarm - the venture firm is still interested but they are not giving you a strong sense of momentum or interest;  lukewarm is the entrepreneurs purgatory.
• Waiting - your business is being presented at the partner meeting;  this happens on Mondays.
• Stale - they are not getting back to your email or vmail after 3-4 days.  This is basically a 'no' but the firm doesn't have enough respect for the entrepreneur to get back to you.
• Passed - remember this is nothing personal;  they passed so move on.  The best firms will actually explain why to you in email and even better a phone conversation.  Please listen to their feedback.  Its usually really darn good.

The firm, contact, and sponsor information is very self explanatory.  However, an important note is that make sure that you key contact in the partnership is someone senior enough to sell through your business.  If not, the Monday partner meeting process will just roll over your idea.  The partner in question can't get enough of the partnership excited about the idea nor pulls enough political weight to get the firm behind the idea.  There is more emotion behind these decisions than you might think and having the right person behind your business is crucial.

Latency and Last Contact Date are important tools for you.  I am very religious about tracking this and flags go up for me personally if I haven't heard from my contact in 4 days.  Venture capitalists hate the idea of losing a deal so if you've run your process correctly there is a healthy bit of tension around how hot your investment is.  so, if you are getting 4 days out email responses then you need to start to pull in (aka expanding your target list) more firms and analyze what you are doing (or not doing correctly).  At this point, if you have several lukewarms right out of the gate then make use of Board members, advisers, and your team.  Ask hard questions about how you are pitching, your presentation, and even deeper ones (say around your business). 

Full history is fun for you anal retentive types.  Its almost at the point where you would want to use a light CRM system.  But, I basically jot down little milestones along the way.  What I look for in this section are things like what information have I sent, people that I have met with in the firm, and any feedback from those encounters.  I also have a column that indicates whether I sent financials.  Its good to know who has them. 

Good luck.  Raising money is tough. Ben Elowitz did a great post on the Startup Whisperer that is helpful and Bill Burnham's post last year was really good to.

The Priorities of a Venture Capitalist

by Brad Feld

I'm baffled whenever I hear from a CEO that he's having trouble getting a response from one of his VC investors.  Unfortunately, this is a very common occurrence in VC-backed company land.

After noticing this during the Internet bubble around the turn of the century (doesn't that make it seem like so very long ago), I'm starting to notice this again more frequently.  As I pondered this the other day, I tried to discern a pattern, but I just think it's just the way the universe works for some people.

I've always thought that my "priority hierarchy" was very straightforward.  In order:

1. Amy (my wife)
2. My extended family
3. My partners
4. Our employees
5. The investors in our funds
6. The CEO's of the companies I've invested in
7. Other board members of the companies I've invested in
8. Employees of the companies I've invested in
9. Everyone else

If you've spent any time with me, you know that I handle #1 pretty easily since I love being with Amy.  #2 is also easy - fortunately - as my family is pretty functional (yeah - we have our issues like every family, but they are more "entertainment" than "problems.") 

Once you get into the work hierarchy, it just seems painfully obvious to me that my partners, our employees, and our investors are the next chunk.  Without them, we don't have a business.

Then comes the CEO's of the companies I've invested in.  Notice that there is no "noise" before them.  No new deals.  No potential investments.  No conferences.  No baseball or golf games.  No boondoggles.  No hanging out with other VCs.  No ... (random other thing goes here.)

All of the CEO's I work with are excellent on email.  As a result, the tempo of our initial communication is immediate.  They send me something; I respond almost immediately (worst case - a typical "catch up on email cycle time" which is rarely more than 12 hours for me.)  If it requires a phone call, that happens "next" (immediately after whatever I'm doing, as long as I don't have 1 ... 5 scheduled "next".  If it requires a face to face interaction, that happens as soon as we can get together.

This seems so simple to me.  Maybe I'm missing something but I'm always kind of amazed to hear CEO's talk about how difficult it is for them to get a response from some of their VC investors. 

Top 10 VC Objections (And How To Overcome Them)

by Furqan Nazeeri

Someone asked a question about this on TheFunded and here's (my expanded) response.  First, let me say that the reason VCs come across as entirely pessimistic is because most companies that come in to pitch in reality don't measure up to their claims.  Their objections are an imperfect process for testing the claims.  It's tough on both sides.  So anyway, here is my list of the top 10 VC objections and some tips on how to overcome them:

10. We think your market is too small (or will take forever to mature). Dealing with this feedback from a VC has mostly to do with understanding the constraints of venture capital.  You can either broaden what you consider your target market, explain why you see the market as bigger than they do or go talk to a VC with a smaller fund.
9. You are too early stage. This could be real feedback or it could be a platitude.  VCs usually develop a comfort zone with a particular stage of company, but all but the most adventurous shy away from companies where the product is not yet in the market.  Most VCs like to see some revenue and depending upon the industry they maybe want to see close to $1MM in revenue for early stage deals.  Respond to this one is tough, because you are where you are.  Best thing to do if confronted with this is find out where their comfort zone is and potentially come back when you reach that (I've actually seen that result in funding).
8. The valuation is too high. This usually means the VC thinks your company is okay and they might consider investing if you were giving it away at a couple million pre. It also can be used as a platitude. Sometimes it's a reference to companies that have raised a lot of money and have to do a flat or down round because they're running behind plan/expectations.
7. You are too late stage. This is really a variant of #8.  Any early stage VC would love to own 20% of your late-stage business.  This typically happens in Series B rounds or Series A rounds where the CEO/founders have an existing track record of success.
6. Google/Microsoft/Yahoo/AOL is already (or about to or could) do this. This is a push back on competitive landscape and your relative positioning.  The key to thwarting this objection is to have more market knowledge than the VC you're talking to (which is an uphill battle given the information flow they get).  You have to do your homework.
5. We think your projections are unrealistic (or alternatively: you have no business model).  If you haven't spent enough time preparing your financial model, you can get caught flat-footed.  Best thing to do on a financial model is to be very conservative.  You want the VC commenting, "Oh, I think you'll get customers faster than that."  There are also a lot of comparables out there so no need to reinvent the wheel.
4. We'd like to see more market traction before moving forward. This is typically a blow-off or a legitimate variant of #9.  A close cousin of this one is when the VC says, "we're interested, but we need to know who else is interested to know if we're really interested."  If you get that response, you're wasting your time...just get up a leave.
3. Company is a "feature" or "product" but not a business. This is really a variant of #10.  Best thing to do is to try and step back and take a broader view of the opportunity and what it could be.   
2. You have to ask yourself...what about India and China? I've only gotten this objection once.  It's a dumb question so it's hard to give advice on how to respond.  Maybe just make a reference to snoman.
1. B- or C-level team. Actually, Most VCs won't tell you this and instead you get one of the other platitudes.  That makes it one of the hardest objections to respond to.  I think the best way to overcome this is not to say that you have an A-level team (if in fact you don't) but rather to say something along the lines of, "here's our staffing plan for success..."

Overall, the best policy is honesty and candor. In fact, your best bet is to address these objections before they come up. And if, for example, a VC asks if the market may be too small you can respond, "you are probably right, but here's what would have to be true if that were not the case..."  You want to turn it away from a "in-order-for-me-to-be-right-you-have-to-be-wrong" conversation.

10 Tips On Negotiating With VCs

by Furqan Nazeeri

So you have just finished months of grueling investor presentations and due diligence and finally one (or hopefully more) VCs have signaled their interest in negotiating the terms of an investment in your startup.  This interest may be in the form of an actual term sheet that they've sent to you or a call/meeting/email indicating they would like to make an offer but want to talk about terms before shooting something over the transom. 

First, congratulations, you are now in a *very* select group of startups.  Having been on both sides of the table, here is my list of tips for entrepreneurs negotiating with VCs:

10. Relax.  If you've gotten a VC to the table and they are negotiating terms, then the hook is set (they don't [usually] do this lightly).  It's possible they could get away, but it's not likely.  Now you can focus on reeling them in...that's something that takes time, focus and patience. There is no need to rush and from a negotiation point of view, you don't want to seem too eager.  So even if you are a few weeks from missing payroll, you want to come across as casual and as indifferent as your nerves will allow.

9.  Start "reverse due diligence" now.  I wrote a post on how to do this a while ago.  There is real and perceived value in shifting the conversation away from "why should the VC invest in your company?" to "why should you take their money?"  If you have more than one option, reverse diligence becomes even more important, but even in the scenario where there is only one offer you still want to make sure you're not walking into an hornet's nest. So if you haven't started this already, get crackin' now.

8.  Use your attorney to help with thorny and low-level issues. You should be consulting with your attorney frequently during the process, and on certain issues you'll want to use your attorney as an agent (who will talk to their attorney). This extra channel can be useful for low-level issues that come up in every deal as well as on particularly thorny issues. That said, don't over-rely on this channel because at $800 per hour combined (remember you pay for both sides), legal fees can add up in a hurry.

7. Do your homework.  Particularly if this is your first raise.  Make sure you know as much about the terms you'll be negotiating and their relative importance.  Also, note that there is some subjectivity to this process so it's worth building your own decision matrix.  Read Venture Hacks.  Go on TheFunded and check out all the actual term sheets they have there.  Make sure you understand how the economics of a venture investment work such as liquidation preferences and dividends.

6. Be clear you are not the final authority.  Even if you are, tell the VCs that someone else is the final decider.  This technique is used quite often by car salesmen as well as VCs themselves.  You know how they say, "let me talk to my partners" or "let me see what the boss says."  You can respond with things like, "I really want to work with you...can you give me something to work with on [some particular term] so that I can convince [my partners, board, other investors, etc.] to go with you?"  At certain points in the negotiation (particularly near the end) you will want to avoid this so don't over use it.  As the deal solidifies you can offer (provided it's true) things like, "I have authority to offer X, Y and Z.  Can you accept that?"

Don't over play this card because you also have to be careful to make sure that investors (your existing or the potential new ones) don't go around you.  In so far as possible, you want to keep your existing investors and potential investors from talking directly.  This is sometimes hard to do, but it's worth trying.  It's not just collusion that is a problem, it's also can be confusing and risks blowing up a deal (or getting worse terms) if there are uncontrolled back channels.

5.  Be honest.  And be as forthright as possible.  I know some will tell you that VCs are the "enemy" and they will screw you over at the flip of a hat so you shouldn't have any compunction about returning the favor.  There are some VCs out there like that, but certainly not all.  I've had the pain and pleasure of working with both types and can report that honesty and candor is the way to go.  For example, if this is your first time raising money, you should state up front that.  Tell them that you will negotiate in good faith, but that it is possible (likely?) there are details you are not familiar with which you'll have to come back and renegotiate and that you ask for patience in advance.  I love that Scarface quote where Tony Montana says, "I never fucked anybody over in my life didn't have it coming to them. You got that? All I have in this world is my balls and my word and I don't break them for no one." Not bad words to live by.

4.  Negotiate by email, phone or face-to-face (in that order of preference). I recommend negotiating by phone or ideally via email. In-person negotiations are tough. Remember that VCs negotiate terms on a weekly basis. They know these things inside and out. While you have to go "crank the spreadsheet" they intuitively know the results of a tweak to a term from comparison to other deals they've done or seen their partners do. Often times you won't even know the meaning of a term and it hurts your position if you have to ask for an education. If you negotiate asynchronously you can always Google something or call an adviser.  Also, if you're doing a face-to-face that means you are limiting your negotiating options (hopefully you have multiple interested parties and you want to keep negotiating with them all simultaneously until the very end).

3. Control the documentation process.  If there are multiple investors in the round, ask (demand?) that investors use one counsel.  If they insist on having multiple investor counsels, you should tell them that you're "only paying for one."  Besides the "two- or three-on-one" structure this also runs up the cost and consumes a lot more time.  Most investors will agree to use the lead investor's counsel and do any additional legal review by their own counsel on their own nickel and time.  As a side note, I've noticed that the funds that use SBIC money have special issues that makes them want their own counsel.  Since the SBA terminated this program this should be a less frequent issue, but in case you come across it I'd push back doubly hard (it's not your problem they had to beg for government money!).

Another point to push for is to have company counsel prepare the first drafts of the documents.  The documents these days are pretty standard, but I still believe that "facts on the ground" play a part in negotiation psychology.  Unless you have particular leverage, you should instruct counsel to draft a "down the middle of the fairway" set of documents and this may help you in the margins.

2. Negotiate "complete" offers. Some people like to negotiate one term at a time and go back and re-open previously agreed terms while negotiating new ones.  I personally find this style distasteful, although I've found it works well in a one-off transaction if you have the stomach for it (which I don't).  So instead of negotiating each term individually, ask for (and give) complete offers on all of the key terms.  It's a much easier and product method.  If someone asks you how you feel about a "valuation of $15MM" the answer could be "great" if the other terms or reasonable or "that sucks" if not. 

1. Get in a legitimate fight.  At some point in the negotiation (ideally toward the end) pick a fight on some topic that you can make a real argument for.  Don't be rude, but be firm.  The reason is two-fold.  First, you want to test how your prospective partner argues; do they fight dirty, aggressive, passive aggressive or something else?  Second, you want to leave them with the impression that you are an aggressive advocate for you, your shareholders and your business.

And since I can't count, here's a "bonus" tip:

0. Don't say "no" say "not now" when turning down alternate investors.  Even when you sign a term sheet (or close on a round for that matter) you still want to keep the alternate investors loosely engaged.  You never know when you might need to re-engage them. 

If you read this far, you must have an opinion...please do share! 

How Much Money Should I Raise?

by Furqan Nazeeri

http://www.altgate.com/blog/

A good rule of thumb is to have a financial plan with 18+ months of runway after you raise a round.  That is long enough that you can avoid worrying about raising money for a year while you just focus on running the business.  Any shorter and you'll find you are back in the market looking for more money after 6 months and are facing a "flat round" in terms of valuation because you really haven't had time to achieve much.  Note, in some industries (mobile is a good example) you want to have 24+ months of runway (because carrier deals take so long).  However if you raise more then 24 months of money in an industry where things move fast and don't cost much, then you're likely just going to watch interest accrue at the stunning rate of 2% in your bank account while kicking yourself in the butt for "giving away" equity at such a low valuation.  That said, raising too little money is a bigger risk for founders because those bridge loans extended by VCs make payday loans and pawn shops look cheap.

Another issue on deciding how much money to raise is related to investor capacity.  Typically angels work for amounts up to about $2MM and then beyond that you need to look for other sources.  Recently I've been seeing a lot of financial plans that call for a total investment of $4-6MM which is an odd-ball number for many VCs. 

Why?

Well, if there are two investors splitting the deal (all VCs like to have at least one other professional investor at the table) then you're talking about $2-3MM each that they'll be able to invest.  If a VC partner can sit on (tops) 8 boards and all the deals were like this, we're talking about less than $20MM invested per partner.  If the fund has 4 partners and is investing out of a $250MM fund (pretty typical), then you can see the issue (either the partner has to sit on 24 boards or doesn't get all the fund invested in the requisite 3-4 years).  Basically they need (on average) to put $8MM in each company.  So if you're pitching a VC a deal that only allows $2MM, it's...well....odd and has a much higher threshold to get done (because you'd be "using" up one of their precious board slots.  Why is a board slot "precious?"  Well, it's really the *only* asset a VC has (and to avoid a rash of comments saying "money" is also an asset, remember, the money in a VC fund is from someone else...the VCs only asset is time).

Now before you head off to change the plan to need $16MM over the life of the company, you have to first make sure that the market opportunity really justifies it.  The conundrum outlined above is one that frustrates a lot of entrepreneurs.  VCs keep rejecting them saying something like, "your business is too small (for me)."  It doesn't mean it's a bad business.  [Note: some VCs are smart about how they respond to this.]  So what's an entrepreneur to do?  Well, one thing to do is to focus on "small" VCs, i.e. firms that are investing out of a $100MM or less fund.  Another is to go for strategic investors or "super angels" or even go the consulting route. 

It is interesting to see how investors are dealing with this "donut hole" between angels and traditional VCs.  It's becoming a more frequent dilemma (as the cost of building things decreases).  A new crop of funds along the lines of Y Combinator, Kleiner's iFund and Bay Partner's AppFactory has cropped up to address this need.  I haven't worked directly with any of these guys, so I don't know if they walk the walk, but they certainly talk the talk.  I think more funds are going to forced to do something similar if they want to stay relevant (or go find some other industry to invest in that is capital intensive). 

How Should I Approach a VC I Don't Know?

Venture capital investors go green, but payoffs elusive

by Mavis Scanlon

http://www.al.com/business/ambizdaily/bizjournals/index.ssf?/base/abd-4/1218436814140050.xml

Venture capital investors are pouring more money than ever into clean technology and renewable energy, but they may wait longer to get a return on their investments.

Chances for initial public offerings or merger and acquisition activity have slowed as a result of a slower economy and uncertainty in the capital markets.

Clean technology investment in the United States grew 41 percent in the second quarter, to a record $961.7 million. That compares with a 12 percent drop in total venture capital investment during the quarter, to $6.6 billion.

But a recent survey of 297 financiers by KPMG LLP underscores how problems that started in the subprime mortgage market are affecting all areas of the economy. Sixty-seven percent of the respondents to the KPMG survey said the economy and an unstable market have increased investment exit timelines by more than 12 months. Seventy-nine percent of respondents do not expect to see a steady stream of IPO activity until 2010.

Clean tech venture investment is a small portion of the total venture capital market, but is seen as a bright spot, as its drivers include high prices for oil and natural gas, state mandates to reduce emissions and increase renewable energy generation and a growing number of corporate commitments to take action on climate change.

Oakland solar firm BrightSource Energy Inc. saw the third-largest deal in the quarter; it was one of three that raised more than $100 million.

Venture capitalists expect the clean technology sector to lead the market out of the IPO doldrums - 44 percent of the KPMG survey respondents said that the clean tech sector will be the first to see a steady stream of IPO activity.

Packy Kelly, a partner in KPMG's Silicon Valley office and leader of the firm's Western Area Venture Capital practice, noted a trend in clean tech investing: big companies partnering with venture capital firms to provide capital to startup firms.

Barack Ravid, national leader for KPMG commercial due diligence, said semiconductor companies "have really become pretty intrigued with solar." Santa Clara chip giant Intel Corp. in June spun off certain assets to form SpectraWatt, a venture-backed company focused on solar cell technology and manufacturing. IBM and Applied Materials have also jumped in, IBM and Japanese chip gear maker Tokyo Ohka Kogyo are making thin-film solar panels and Applied Materials will supply equipment for solar panel factories.

Clean tech will continue to see corporate venturing, said Jeff Grabow, clean tech leader for the Pacific Northwest region at Ernst & Young. Grabow cited the growth of the biotech industry and its relationship with big pharmaceutical companies as a precedent. Big pharma provided needed capital to some early-stage biotech companies, which in turn developed a pipeline of drugs sold by the bigger drug companies.