VCs & Tech Lawyers: INNOVATE, AUTOMATE, SIMPLIFY

Due Diligence in China: Revealing the Dark Side of the Moon

How To Get Attention From Your VC

by Fred Wilson

I had a funny exchange with Steven Johnson, founder and CEO of our portfolio company outside.in last week. He saw my post about the email address book rankings in Xobni and wanted to know where he ranked. It turned out he was #29 which is pretty high considering that outside.in is the smallest investment we have (by amount invested) in our entire portfolio.

That led me to a simple analysis. I took all of our active portfolio companies (both Flatiron and Union Square Ventures) and I looked at the CEO's Xobni rating and built a simple spreadsheet table comparing that ranking to the amount of capital we had invested in the company. There was no correlation.

Now you can say that is stupid. We should be consciously giving more attention to the companies where we have more financial upside and more capital at risk. I suppose that is true, but in my experience over 20 years doing this business, that's not how it works.

VCs pay attention to companies for several reasons:

1) The company is in trouble. I've heard many investors say "if you don't hear from me, it means you are doing just fine on your own". I understand that approach but I try not to take it myself. But one thing is for sure, when a company is struggling, we certainly do our best to help them get through it.
2) The company is killing it. If I was an investor in Facebook for example, I'd be spending as much time on that company as I could. I am sure that the VCs from Accel, Greylock, and Peter Thiel are doing exactly that.
3) The company is just getting going and needs help figuring out its strategy, building its team, etc. The funny thing is that the ratio between attention and stage/capital invested could actually be reverse correlated, meaning that the VC pays more attention when there is less capital invested.
4) The company is interesting to the VC. You can read this blog and know where my mind is. And as much as I hate to admit it, when my mind is focused on something, that's where my attention goes as well.

There's another factor which I'll call the entrepreneur's ability to engage the VC. There's a reason that Steven is number 29. He has a great way of including me in company conversations via email and face to face. He doesn't look to me to sign off on his decisions, but he does look to get my input. He is roping me into the company. Dick Costolo, who is still in my top 20 email relationships even though FeedBurner is now owned by Google, was also a master at that technique.

Not all entrepreneurs want or need to engage the VC in that way. And that's fine. We have one company in our portfolio that has made most of its decisions without our input and has the best financial profile in our portfolio right now. So there is no rule that says you must engage your VC to be successful.

But if you want to get more attention from your VC than you are currently getting, and you don't want to get that way by struggling, then you should find ways to rope them into your internal discussions. I personally think email is the best way to do that even though it's a terrible medium for a thousand reasons.

I was in a board meeting several weeks ago and we were discussing the company's top priorities. The CEO pointed out that the top priorities were on the company wiki, which is fantastic. But unfortunately, not one of the board members had read the company wiki before attending the meeting. Another truth about VCs is that they are attention constrained for the most part. And they will most likely read information that is pushed out to them, and they are less likely to go find it on their own. That's why email is best.

Getting attention from your VC means giving them attention. It's like any relationship. There are no one way streets. And it takes work. But if your VC can help you and you want the help, you have to rope them in. 

No Exit

I think the answer to the question is a bit complicated.  Historically, VCs have certainly invested a majority of their capital into companies in their geographic regions for a number of simple reasons.

Reason # 1: Personal networks tend to be local

Most VCs back entrepreneurs they have a direct, personal relationship with…or folks that they know "once removed" through a close, personal, trusted deal source.  It stands to reason that most of these relationships occur locally either through prior careers (most VCs have had more than one and most were significantly relevant to being a VC), their alma maters, church, kids' schools, neighborhood, etc.  Similarly, VCs "trusted service providers / deal sources" tend to also be local and, not surprisingly, refer folks to the VCs that they themselves know locally.  There are a number of reasons Silicon Valley is Silicon Valley and one of them is what I'll euphemistically refer to as "the perpetuity of location"— the continued success of its VC ecosystem continuing to support this theory.

 Reason #2: The logic of local logistics

"Return on Time" is a mantra you learn early as a VC as there simply aren't enough hours in any given day to sort through all the myriad of deals that come your way.  Thus, deals tend to get done locally as it is far more efficient and convenient to invest in a company you can simply hop into your car and go visit.  The earlier the stage of investor the VC is, the more time he or she will spend with their portfolio company helping to build it.  There are regular and irregular board meetings, interviewing management candidates, finding suitable and affordable office space, and a whole bunch of other things that need to get done early on in a company's life and it is just easier to help with these matters if the company is local.

 Rule #3: Tech transfer has been short-distance

Over the past several decades, a significant number of venture backed companies have spun out of universities and research institutes.  The spinning-out of these companies has historically been a "local" endeavor such that the folks involved in such spin-out, whether as founder, investor, attorney, etc., have been geographically near the university.  It's arguably less true these days than it has been historically, but it still remains true enough to mention here.

Reason #4: See reason 1 and 2 above

The fact that most VCs have historically operated while subscribing to the first two reasons I cite tended to perpetuate the cliché as entrepreneurs will typically (if not always) approach their local VCs before seeking capital from a fund in another geographical region.  The first two reasons are also applicable to entrepreneurs as well.

So, does this mean that it is in fact true that VCs only invest in local companies?  No.  While the reasons for doing so remain valid, globalization has changed things significantly and VCs are much more willing and able to invest in companies outside their geographical region.  For example, I spent 10-15 nights a month not only outside the area but outside the country in places like Russia, China, India, Germany, and South America and, while I developed professional and personal relationships in these places, it would be inherently more difficult to do deals in these regions from afar.  In fact, most U.S. based venture funds doing deals in these foreign regions are actually doing so from that region through a parallel fund structure and utilize/employ local people to make such investments. 

In addition to globalization, "nationalization" has also occurred within the past decade or two such that one can now find pockets of VCs and start-ups in most of the major regions within the U.S.  If there is a lesson here in all this, I guess it would be that the "think globally but act locally" adage has a least one more meaning for me these days.  I hope you had a great Labor Day Weekend and look forward to seeing many of you next week when we discuss our own local endeavors.

I get it now: Learnings from being turned down by VCs

by Charlie Odonnell

I had a very interesting experience this morning...  I got turned down by a VC for the Path 101 angel round.

Of course, we're very early and I didn't really expect to get any VC interest to begin with at this stage, but it was just a weird feeling because I'm not used to being on this side of the table.

It was a little bit like that Simpsons episode where Nelson walks by a mirror and does his "Ha ha!" laugh and then realizes, "Oh, that hurts."  (One of my favorite Simpsons moments ever.)

I've turned down tons of companies on behalf of USV even before they got to a funding meeting, but when it's your company, I'll tell you, it really smarts.  I totally get it.

Even more so, I understand the animosity that entrepreneurs seem to have for VCs because of the impression that they only want to take a risk on you after you've already executed.  I'm not saying that's the case, or that VCs aren't well founded to ask to see more traction, but I have to say that's what it honestly feels like.

But, rather than just sit here and complain about it, I'm thinking about what is to be learned from these experiences.  Here's what I have so far:

1. First, if nothing else, practicing your pitch and seeing what resonates with people is enormously helpful.  This is partly why I'm such a big believer in anti-stealth.  You should get in the habit of telling as many as possible about your startup.  Whittle your way down to the elevator pitch.  Alex and I have come a long way with our presentation even just in the last two weeks and these meetings have proven invaluable for that very reason, if nothing else.
2. Product feedback: Instead of thinking that someone else just "doesn't see the vision" or that there's some missing piece of info that you could get someone to make them understand, you have to consider that your product vision sucks, or more likely, its jumbled with a lot of extra crap it doesn't need right now.  In fact, your first response should be to look at what you're not getting, not what they're not getting.   Being pushed on our product thinking will have the long term effect of making Path 101 that much better in the future.
3. Don't burn bridges...hang around the rim.  Go out and get your angels or cobble together what ever you can and just keep everyone posted.  You can't get rebounds if you don't hang around the rim.  Maybe the investor has too many things going on right now or maybe they just took some meetings that scared them off to your space.  If you got in the door once and you weren't laughed out the door, don't waste any social capital you may have gained even by getting turned down.  Sometimes investors come around again and you don't want to lose touch.
4. There's always risk.  Just because someone asks for more traction doesn't mean that you will have taken all the risk off the table by the time you see someone later on, after you've accomplished more.  Companies still go under even after they've generated lots of revenue.  To think that, "Oh, they just want all the risk off the table first", isn't really accurate. 
5. Most of all... it's not personal.  Everyone in this space is trying to run a business.  Shake it off and move forward.  You'll get 'em next time.

Venture capitalists can generally bring you one or more of the following things: 1) strategic understanding of the market, 2) technical knowledge of the market and how to build a better product, and 3) relationships/Rolodex, and 4) venture capital wisdom (this is the catchall category that represents the wisdom many venture capitalists have after having played the game a hundred times before your company).

• VC的钱成本最高；
• 你的公司不会长得足够大。

• 需要投资人的品牌、网络、建议、等；
• 市场机会很大；
• 借不到债。

Why you probably don't need venture capital

"Things are worth what people pay for them."

– Head of M&A at a Fortune 500 Company

Summary: You need strong alternatives to hack a term sheet. Create alternatives with focus: pitch and negotiate with all your prospective investors at once. Focus compounds scarcity and social proof, which closes deals. Focus also yields a quick yes or no from investors—either way, you will soon get back to building your business.

You can't hack a term sheet without leverage. Term sheets are negotiated on the basis of leverage, not merit. And whoever needs the deal least has the most leverage in a negotiation.

The simplest type of leverage is a great BATNA. A great BATNA might be a term sheet from another investor, an offer to buy your company, or an investment from angels instead of VCs.

Hostage negotiators learn how to negotiate with awful BATNAs where people die in a hail of bullets. If you're not in the mood for a hostage negotiation, get a great BATNA by creating a market for your shares.

The market determines your company's valuation.

Many entrepreneurs wonder what their company is worth. The incredible answer is: companies are worth what people pay for them.

There is no right or wrong price. The market clearing price is determined by supply and demand: how many shares you're selling, your team, your product, your revenue, your salesmanship, et cetera.

The market determines your value, but there is no market for your shares—you must create it. How? At a minimum, get two independent, competing offers from investors who make it a habit to invest in startups at your stage.

You must focus on fund-raising to create a market.

Pitch all your prospective investors at the same time. Negotiate with all interested investors at the same time. You can't clear the market in series, you can only clear it in parallel. Learn from Adam Smith at Xobni:

"Our series A didn't happen quickly. We excited the people we met with, but we were timid about getting started having recently closed a $100k angel round. One firm had interest, so we thought "We better talk to someone else to make sure we're getting a good deal." That incremental approach went on for a few months. We were always in late stages with one investor but just beginning the dialogue with another. Deciding to raise money should be an atomic decision; don't try to just dip your toe in."

Jump on your desk, kick something, and declare a start to your fund-raising. Don't negotiate consecutively, negotiate concurrently—you can't create a market by meeting investors one-at-a-time. The only way to clear the market is to focus on fund-raising and talk to a lot of investors at once.

On eBay, everybody bids at the same time, over a short and arbitrary period of time. That drives the price up. They don't bid one-at-a-time over a timespan of 'whenever'.

Five fund-raising milestones.

The next few hacks will cover the five major milestones of fund raising:

1. Get first meetings.
2. Get partners meetings.
3. Get the first term sheet.
4. Sign a term sheet.
5. Close the deal.

Your leverage goes up at each milestone—that is, your interest in new prospective investors goes down at each step.

Focus compounds scarcity and social proof.

Investors move in herds that are steered by scarcity and social proof. Scarcity is "hurry up or the deal is going to disappear." It engenders urgency. Social proof is "everyone else wants to invest, don't you?" It engenders validity.

Scarcity and social proof make people crazy. Scarcity and social proof close deals. Focusing on fund-raising creates a positive feedback loop of scarcity and social proof:

If one investor wants to invest, you get a little bit of scarcity and social proof. That raises the interest of a second investor and creates more scarcity and social proof. Which raises the interest of a third investor…

Learn more about the psychology of negotiation in Bargaining for Advantage. It combines the negotiation principles of Getting to Yes with the psychological principles of Influence. Chapter 6 of Bargaining for Advantage, "Leverage", is free money.

Creating a market is (relatively) quick.

Focusing your fund raising on a short period of time (about 4-8 weeks) means you will raise money quickly. Or you will fail quickly and start working on getting past no. Either way, you're no longer raising money, you're back to building your company and serving your customers.

这个世界变化快，我原以为VC在募资的时候是求着出资人（所谓的LP）,出资人的强势地位不容怀疑。但最近看到的一篇文章改变了我的“偏见”。

在Wall Street Journal的一篇文章中，讲到有些创业基金(Venture Fund)开始“逼迫”他们的有限合伙人(LP)，或含蓄或直接，他们要求LP要承诺给其它非核心基金出资，才能够把钱投到核心基金中。这个问题早些年是不存在的，因为大部分的VC只有一个核心基金，近年来，一些顶级的VC非常激进，募集了一些晚期/成长基金，或是专注中国/印度的基金。

文章的主角是美国私募股权投资市场的两个大鳄：耶鲁(Yale)和红杉(Sequoia)。官方说法，由于Yale不受红杉胁迫，不愿意投资红杉的成长基金和中国基金，红杉将Yale从其主基金(Main Fund，最顶级的基金，要获得其中一个出资份额非常困难)中踢出局了。

但这个事可能对双方而言，都有好处：

• 对红杉而言，敢把Yale踢出去，就是给LP们一个信号，红杉是VC行业的老大，没有什么其他手段比这个更厉害的了。下次红杉跟LP们打电话为他的某某基金募资的时候，LP们的唯一问题会是：“先生，请问您允许我给多少钱呢？”
• Yale也应该高兴，这个行动也巩固了他们作为行业中最大LP的地位。绝大部分LP拼命都要挤进红杉的基金，但Yale宁愿坚持自己的原则。Yale敢这么做，是因为他们的投资记录是一流的，并且是LP圈公认的趋势引导者。跟红杉分道扬镳让他们更显牛B。

 原文：

Venture Firms vs. Investors

Perhaps it would be useful to spend just a moment explaining what venture capitalists actually do and how the venture business works. I believe it will become clear that we work in many important ways exactly like the founders and entrepreneurs we back and quite differently from financial managers in other asset classes.

Venture funds raise capital from institutional investors like pension funds, endowments, and foundations and to a lesser extent from individual investors. Our charge is to invest these funds in the most promising start-ups, with the understanding that we will work with these companies until they can go public, be acquired by a larger entity or, as is sometimes necessary, shut down.

These start-ups almost all begin the same way, with an entrepreneur and a VC agreeing on an idea. There is no strategic plan, or, at least, not much of one. There is no senior management team; there are no customers. There is just our collective belief that the initial idea can potentially be turned into a viable and profitable business.

When we launch a company, we are investing both time and money, just like the entrepreneur. We generally invest a small amount at first and we expect to continue to finance the company as it grows. We often require the company to meet business-related milestones in order to receive additional rounds of financing. For an early-stage company, five or six rounds of financing is not unusual. Our investment in each company typically lasts 7-10 years, often more and rarely less. We see no cash returns until the company goes public or is acquired. Even at that point in the life cycle, venture capitalists are not paid from company dollars but by outside parties establishing a fair market value.

We also invest our time and lots of it. We take a seat on the board and work with the management team, often on a daily basis, developing strategy, introducing the company to customers and suppliers, identifying and hiring key managers, and leveraging our past experience to address competitive and operating issues.

Let me give you a sense of scale. At Core, over the life of a fund, we expect to make somewhere between 20-25 investments. We have five partners. A fund's initial investment period usually lasts about five years. So, our partners make 1-2 investments a year per partner. We do not have hundreds of positions in the portfolio and we couldn't, because we don't invest in stocks, we start companies.

We are often as actively involved as the founder. Very frequently, the initial idea for a company is developed by a professor or a research scientist who does not want to leave his or her current position. They may be involved a day or two a week, lending technical guidance to the new company. We get involved in building out the company. The combination of their technical knowledge and our business knowledge is equally responsible for the company's success. If we co-founded the company, work equally hard, make intellectual contributions of equal value, why should the founder's share on the sale of the company be treated as a capital gain and ours viewed as performance for service and ordinary income?

I believe it is important to understand that venture capitalists and entrepreneurs are really co-founders, we are not just financiers. Without our active, ongoing involvement, many of these companies fail, or fail to launch, and potentially important innovations remain in the garage, incubator or lab. For their contribution, entrepreneurs receive founders stock, which, if sold, is taxed at the capital gains rate. Venture capitalists, for our contribution, receive carried interest, which is also taxed at the capital gains rate, but only to the extent attributable to the value created by the sales of our companies. This arrangement creates an equilibrium of incentives for all the key players.

Running an efficient board meeting

by Brad Feld

One of the questions that we get most often is "why are VCs such jerks?" or some sort of derivation thereof. Specifically, people complain about:

- VCs not returning calls / being unresponsive

- VCs not understanding how good of an investment my company is

- VCs stringing along entrepreneurs when they know they aren't going to fund a deal

- VCs being "know it all board members"

- VCs being unapproachable in general  

I won't try to defend all VCs. In fact, I've seen all of this behavior from other VCs and I don't condone it in any way. How does one avoid these behaviors? The key is picking good VCs to work with, but also to be self aware of your particular situation. I'll try to address the particular complaints above by illustrating some situations that I’ve seen and also try to give you some insight into what might be rattling around in your VC's head.  

Issue 1: VCs not returning calls / being unresponsive.

Why is this happening to me? It could be that your VC is just too busy. They may have a prior investment that is suddenly requiring a lot of time, they may be looking at a ton of new deals, they may be fundraising themselves, etc. It's not uncommon for one deal to take 100% of a VCs time if it is going through a merger situation or complicated financing. In this case, don't take it personally.  

I've seen some cases where the entrepreneur's actions have led to perceived unresponsiveness. If an entrepreneur cold-calls a VC looking for funding, I wouldn't expect a call back normally. I answer all of the emails that I get, regardless if I know the person sending it, but 5 minute phone calls that go on forever from someone that I've never heard of usually don't get returned.

I've seen other cases where the entrepreneur sends an email every day to the VC wanting an update. This can get annoying and doesn't lead to someone wanting to respond quickly.  

Also, I hate to say it, but maybe the VC just "isn't into your deal" and it's at the bottom of his or her list. Sometimes unresponsiveness is indicative of interest. We try very hard to let people know quickly whether or not we are interested, so that folks don't end up in this "bucket" but many VCs don't operate this way.

Finally, maybe your VC is just an unresponsive person and you don't want to work with them.  

Knowing which one of these fact patterns that you fall into is easier if you are self aware and also have a transparent line of communication with your VC.  

Issue 2: VCs not understanding how good of an investment my company is

Why is this happening to me? "I have the greatest idea in the world and no VCs see this – are they all idiots?" This is a reoccurring theme. I think the biggest disconnect here between VCs and entrepreneurs are *why* VCs may decline to pursue a deal. It might not have anything to do with your idea at all.  

You *may* have the greatest idea in the world. A VC may still decline if the deal is outside of his / her investment thesis, is located somewhere that they don't want to invest, or if they think the management team is not the correct team for the company.

You also may NOT have the best idea in the world. Perhaps the VC has seen similar ideas fail, or has some knowledge of a better prepared competitor in your space. Maybe your idea is just not that compelling.  

Or perhaps, all the VCs you've met are idiots. It's happened before where good ideas have been turned down by numerous VCs, only to find one later that funds it to great success.  

Issue 3: VCs stringing along entrepreneurs when they know they aren't going to fund a deal

Why is this happening to me? It shouldn't. This is one behavior that I've seen that I personally have no tolerance for. Yes, it isn't fun to tell someone that you aren't going to fund their deal, but the only honorable thing to do is tell an entrepreneur this as soon as you've made up your mind.  

Issue 4: VCs being "know it all board members"

Why is this happening to me? This situation is rarely one-sided – it's usually the fault of both VC and entrepreneur, but it's usually between the following polar extremes:

1. The VC is a complete idiot, doesn't pay attention to the company at all, only shows up for the board meetings and then sits there and espouses "wisdom for all to hear."

2. The Entrepreneur always thinks he/she is correct and that "no one could possibly know more about my company than me" and completely ignores the VC who has experience across many different companies.  

In reality, most times I see this dynamic of "my VC is a jerk on my board" the truth is that it lies somewhere between these two extremes. I've seen situations that were very clearly biased towards each sides of the spectrum, however.

Issue 5: VCs being unapproachable in general

Why is this happening to me? This one is strange to me, because it would seem the whole VC community has become much more open and transparent over the years. From blogs, to speaking panels, VCs are more "out there" than they've ever been. Hopefully from this blog, folks at least think a few VCs out in Boulder, CO are completely approachable.

In summary, I think it's hard to brand all VCs as "jerks." I think some of the "poor" behavior is simply poor behavior, but some of it is perceived through rose-colored glasses of some entrepreneurs.

by Tim Berry

According to Mike Glanz, of www.hireahelper.com, there's a Catch 22 of venture capital financing: you can't get venture capital (VC) money without a track record, but you can't get a track record without getting VC money first.

I don't agree with his underlying point, but I like the way he puts it:

I'm stuck. Not stuck like a truck in the mud, with wheels spinning and no hope of ever going anywhere. But stuck like I would envision being stuck in a pool of pudding. … That's the best way I can describe trying to get VC with no prior experience raising capital. Pudding. I read everything, forums (like startupping), blogs (avc.com, venturehacks.com etc), articles (wikipedia), how-to's (howstuffworks, business2.0, Inc) and write letters and emails to anyone I can think of to help me make a connection, offer advice, or even (dare I say it) make an introduction.

Where am I? Almost the same place I started.

I don't know Mike Glanz, but I'm rooting for him. I like his letter, which he published as an open letter to the community at the Venture Capital review site www.thefunded.com (an excellent resource, by the way).

The open letter goes on to compare his company's frustrating lack of success with VCs, apparently despite a good-looking launch, to another (unnamed) company's deal that got $10 million for 50% equity.

The only difference, he says, is that the other company has an executive from RealMedia, and his doesn't.

So what are your thoughts? Am I stuck? I've spent 4 months trying to get intros to VC's. I've sent off the packet and even got great positive feedback on it, but here's the bottom line. If I don't know someone, then someone better know me. Since neither are the case, we're stuck dealing with apathetic Angels, while Mr. Yahoo gets all the big money for his next big flop.

At this point I say stop. Hold on here. Your point is that it doesn't seem fair? Who said this is about fairness? VCs are not responsible for offering equal opportunity to entrepreneurs. They aren't judging a school venture contest. They are investing other people's money. That's their job, not being fair to newcomers. And they don't do well at their job unless they choose the best possible deals, obviously guessing as they go.

Of course it's a Catch 22, because people who have been there before are a better bet than those who haven't. Mike describes that other team as "Mr. Yahoo" and his team as "2 small business owners and a couple whiz kids with high ambitions."

I'm touchy on this point because through the 26 years I've been watcher of and consultant to venture capitalist, and guidance counselor for entrepeneurs, I've heard way too much "VCs are sharks" and not nearly enough of reality. Most of the big VCs are placing money entrusted to them by larger organizations including insurance companies, college funds, and so forth. Not that the source of the funds makes a difference, but it is a reminder that what they are supposed to do is maximize the return while maintaining a decent relationship between risk and return.

The Catch 22 that Mike notes is quite common, throughout life, not just in venture capital. Try getting a job as a journalist without experience, for example, and you're at a similar dilemma: "How can I get experience if nobody will hire me without experience?"

Futhermore, there are ways around the wall.

• One of my personal favorites is bootstrapping; not always possible, not always a good idea, but when bootstrapping is good, it can be very, very, good. Of course Mike's business plan might make a great case against bootstrapping, and I haven't seen the plan, so this is just as an example. Still, with that as a caveat, he says in the letter that his startup sold $4K, $7K, $14K monthly its first three months, and it has $100K in the bank from friends and family investment. Doesn't that sound like they could just go for it, then, make it $28K next month and $54K the following; does it really need $10 million? What's that for, a SuperBowl ad? Build the sales, make it happen, don't worry so much about what "Mr. Yahoo" got. Go get your own without having to convince venture capitalists. Just convince users. For the record, I've seen this happen before. I've been on the board of directors when it happened. It's not a bad way to go.
• Strengthen your team. Hire somebody who has the experience the VCs want, offer that person equity, listen to his or her views, absorb the know-how and experience that the VCs want.
• Mike's letter is discouraging about angel investors but maybe there's an intermediate option, angel investors who have some future clout and credibility with VCs.

Anyhow, like I said above, I disagree with the sentiment about implied fairness, but I'm also rooting for this to work out because I liked his letter. The best revenge is living well. Forget the VCs, Mike, make a ton of money and then tell stories about how you did it without them. 

Venture Terms - Liquidation Preferences and Participation

Seven steps to achieving M&A success

By Mike Rogers