Articles by David S. Rose

Should I give my seed investors anti-dilution protection?

What this investor is seeking is called “permanent, full-ratchet, anti-dilution protection”, and that is neither (a) in line with the market, nor (b) practical. Even if you were willing to give it to him, it is highly, highly unlikely to stand up beyond the next financing round, because there’s no way your next investor is going to take a dilution hit for this first one.  That’s why anti-dilution provisions are typically only applicable to the next financing.

So, no, you simply can’t give him what he wants. (Assuming that the next investor wouldn’t stomach it, there are only two possible outcomes: A: the new investor forces the original one to waive it, or B: the new investor walks away from the deal.)

Instead, let me suggest that you offer “weighted average anti-dilution protection” to the next equity round. That is fair and reasonable, and should provide an appropriate level of comfort to this investor.

*original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *

Crowdfunding: KickStarter, Indiegogo, AngelList, Gust: How to choose?

First, it’s important to understand that the four platforms you list fall into two very distinct groups.

Kickstarter and IndieGoGo are project-based crowdfunding platforms through which anyone can contribute money, either as a donation or with the promise that they will receive a tangible ‘reward’ of some kind if the project is successful.

Gust and AngelList are equity-based platforms, used by Accredited Investors  to facilitate the investment of money for an ownership interest in a company.

As such, depending on what you are trying to do (fund a project or get permanent investors into your company), you would select one group or the other.

Once you’ve done that, for the first group it doesn’t make sense to participate on more than one platform. That’s because in the vast majority of cases, most of your contributions will be coming from your own network, and you don’t want to divide them up (since you will need to hit your ‘target’ minimum raise.)

For the equity group, however, it is not uncommon (and there is no downside) to listing on both Gust and AngelList. Neither has any cost to establish a profile, and both provide visibility to active angel investors and others in the startup ecosystem (Gust primarily to organized investors and funds, AngelList primarily to independent investors).

*original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *

Is making Equity Crowdfunding available to all a good thing?

Part of the challenge is the enormous amount of ignorance surrounding this suddenly hot topic. There are thousands of companies that “the crowd” can fund without restriction, including Apple, Google and Facebook. These are “publicly tradable companies”, and what makes them so are the extensive rules surrounding disclosure, transparency, trading and other aspects of their corporate existence.

But since there are millions of other companies that do not fall into this category, the U.S. Securities and Exchange Commission provides certain limited exceptions to allow individuals to invest in non-public companies.

Chief among the [highly imperfect] criteria used to determine whether companies can solicit and accept investments from specific individuals without providing those investors the protections required of public companies are income and/or asset tests. While by no means ideal, these rules are there for very good reason.

Perhaps the single biggest challenge faced by equity crowdfunding is the fundamental difference betwee “investing” and “supporting”. A quick, impassioned discussion of this can be heard in my recent keynote at CROWDFUNDx:

http://socialmediaweek.org/blog/…

*original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *

How do I get in touch with investors/funds with just an idea and no product?

There are many wonderful ideas, and they are not necessarily easy to come up with. So congratulations on having thought of one!

However…

“Having value” and “Being fundable” are two completely different things. What the more experienced responders here are saying is completely accurate: while a good idea is usually a necessary ingredient for the formation of a good company, it is not sufficient by itself for any serious investor to fund.

Why? Because there are also other good ideas out there, some of which have already been developed, tested and put into practice, thus decreasing the amount of risk an investor will be taking. The bottom line is that ideas by themselves are simply not fundable by professional investors (although, as a couple of other answers have suggested, you may be able to raise some initial money from your friends or family members.)

Here, in a great post by Derek Sivers, is a graphic (and accurate) explanation of why investors place greater value on execution than they do on ideas:

*original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *

Is there an incubator for aspiring Angel Investors or VCs?

No, but there are several sets of courses on angel investing that can provide a good base from which to start. The most comprehensive and best known is the Power of Angel Investing seminar series developed by the Angel Resource Institute (formerly known as the Angel Capital Education Foundation, and prior to that part of the Angel Capital Association). It was co-funded by the Kauffman Foundation, and primarily written by Bill Payne and John May.

Another course (that is getting a bit long in the tooth now) is Angel Investing as a Team Sport, developed by the National Association of Seed and Venture Funds (now part of SSTI).

A third is the in-house course developed for its members by the Golden Seeds angel network.

For individual angels not affiliated with a group, rumor has it that a definitive introductory book on angel investing is on the way early next year from a major publisher.

*original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *

What are the most valuable recommendations in order to raise money from VCs connected via Gust?

To begin with, it is important to understand some basic facts about the world of entrepreneurial finance:

  • There are many more entrepreneurs than there are investors, with the result that only one company out of every 400 that seeks venture funding actually receives it.
  • As such, the competition from an entrepreneur’s standpoint is very, very tough. In order to be competitive, a company needs to have just about everything in place, from its product to its team to market traction, before it is ready to seek funding.
  • Given this imbalance, the fact is that most VCs are reactive rather than proactive. That means they spend a lot less time actively seeking out new deals than they do responding to inbound deal flow. A typical VC might see 500 opportunities cross his or her desk every year; for larger, more prominent ones it could be 2,000.
  • VCs therefore use whatever heuristics they can in order to triage the deal flow. One of the primary ones is the referral source. This means that by far the most effective way to reach a VC is to be introduced by someone who knows both of you and thinks it would be a good match.

The answer to the original question, therefore, is that an entrepreneur should use Gust as a set of powerful tools to organize, support and smooth the fundraising process, rather than expecting it to be a magic bullet. No matter what you may have heard or read in the blogosphere, there is simply no platform in the world where you can post a profile and expect money to start flowing.

With that background, here are 30 tips to help you make the most of Gust:

  1. Subscribe to the Gust Blog, and go back and read the past posts. We have spent a great deal of effort to pull together some of the smartest experts in the money-raising field, and the blog is carefully curated to be useful specifically to entrepreneurs seeking funding. Among the contributors are Quora regulars including Tim BerryAntone JohnsonMartin Zwilling and me.
  2. Browse through the many hundreds of video answers to startup questionsthat we’ve filmed from the world’s leading VCs and angels. They have taken the time to do this so that you can understand exactly how they think about things, and why. Luminaries contributing to the Gust video library includeDave McClureDavid HornikEsther DysonHoward L MorganJosh KopelmanMark Suster and many others.
  3. Take the time to read, cover to cover, The Definitive Guide to Raising Money from Angels, by the legendary Bill Payne. A download link is sent to you automatically by Gust once you create your profile, and the book is exactly what it says. Starting to raise money without understanding the world into which you are stepping is the quickest route to frustration.
  4. A wonderful resource for startups in fundraising mode that most people don’t know about is the Frank Peters Show, the only weekly podcast that is all about (and onlyabout) the world of angel investing. Gust sponsors it because we think it’s an invaluable contribution to the industry, and in fact we require that all members of the Gust team listen to it each week. There are 450+ back episodes online, and it’s safe to say that if you listen to it regularly, within a few months you will know more about what makes angel investors tick than do 98% of the rest of the world…including other angels!
  5. Create your Gust profile to show off your venture in the best possible light. That means it should be complete, thoughtful, accurate and always kept up to date. I am continually surprised at founders who spend ten minutes throwing up a barebones profile and are dismayed that money doesn’t start flowing in. At the very least, answer ALL the profile questions, include your company’s logo, create a two-minute elevator pitch video and upload your presentation deck.
  6. Before you start entering your profile information, decide what language you would like to work in. Gust is fully localized in English, French, Spanish, Portuguese, Russian and Chinese, and will automatically use for its interface the primary language chosen in your browser. Changing languages in your computer’s or browser’s preferences will change the language in which Gust works with you.
  7. Make full use of the fact that there are two parts to your Gust profile: the public site and the private site. The goal of the former is to get you maximum exposure; the latter, to provide all the information that investors need to take a relationship to the next step. As such, your public profile should include everything non-confidential about your business that may attract the interest of potential investors, and your private profile should contain complete, accurate information about all the details of the business that will lead investors to request an in-person meeting with you. Remember that you will have total control over who can see this material.
  8. Make your public profile as sexy, comprehensive and enticing as possible, adding a short, well done, elevator pitch video (think “the kind of video you see on great Kickstarter campaigns”) and listing your full management team. And don’t forget the ability to customize your profile’s background. Choose one from our large library of thematic and designer backgrounds or, even better, upload your own.
  9. Your private profile is where investors will look with a critical eye on everything that makes you a business rather than just a product or a sexy idea. The ten questions that make up the core of the Gust executive summary (and that in turn comprise the bulk of the ‘One Pager’ that investors print out for screening and review sessions) are only the distilled tip of the iceberg. You really should have spent a heck of a lot of time beforehand in thinking through all of the issues surrounding your startup. One excellent way to do this (with a good bit of help from the experts), is to create a draft business plan using LivePlanfrom Palo Alto Software. Based on the seminal work of Tim Berry, it’s the best business planning software available, and they’ve provided Gust users with a 50% discount for your first two months to try it out.
  10. Because Gust is the word’s most comprehensive database of high-growth startup companies (in terms of size, larger than Crunchbase and AngelList combined), it is increasingly used as a source for third party listings and directories. Having a good public profile on Gust means that your company’s public (never private!) information will end up being disseminated broadly into other sites based on geography, industry, etc. This added exposure can result in indications of interest (investment, acquisition, partnership, etc.) from people and organizations that you didn’t even know existed.
  11. Gust allows you to take all the time you want in order to polish up your profile before publishing it. Using the controls on your profile’s home page, you can edit and update your information, preview the way it will appear to investors and the public, and ultimately publish it once it’s ready for primetime.
  12. Because Gust is so universally used, it can be a great source of competitive intelligence for you, during both the planning and execution phases of your business. Make sure to browse through the public pages of other startups on the platform using keywords relative to your venture, in order to see what your colleagues and competitors are up to. Keep in mind that investors will likely be doing the same thing, and knowledge is power.
  13. Use Gust to research funding sources. Investor profiles on the platform are created by the investors themselves, and tell you exactly who the group’s leaders are, and what they are looking for. There’s no use banging your head against a VC’s door with a social network venture if they only invest in biotech companies.
  14. Gust takes advantage of the cloud, and you should, too. Connect your LinkedIn account to your Gust account, and you’ll unlock a nifty feature: whenever you view an investor profile, you will be able to see how you are connected to them, giving you the chance of seeking out a ‘warm’ introduction. This will almost always be the best approach to an investor.
  15. While VCs are the toughest nut to crack, there are many other (often better) sources of seed capital that may be available to you. Gust is used by over 1,000 angel investment groups, accelerators, business plan competitions and support programs to manage their applications. Rather than limiting your search to venture funds, therefore, consider the full range of startup options.
  16. In addition to the fact that it is often easier to get accepted by an accelerator, or to make it to the finals of a business plan competition, or get funded by an angel group, those vehicles frequently serve the role of “curators” for the later stage financing world. That’s why investors attend Demo Days and look for acceptance into such programs as one of several ‘validators’ of a startup. On Gust, these organizations create “Collections” of the companies with which they are working (which are accessible from the main Startup browse page), and companies in these Collections receive, on average, 37 times as many views as other companies.
  17. Once you have your startup profile fully completed and up-to-date, and have carefully identified logical potential investors, it’s time to reach out to them. In the case of the 1,000+ organized or institutional investors using Gust, simplyfind them on Gust, and click “Share your Venture”. All of your material will then be automagically entered into their deal flow management system, ready for them to review.
  18. If the fund or group has additional, specific information that they requestwith an application (such as who referred you, or how you qualify as part of a specific demographic), you will be prompted to answer additional questions, which you should do just as carefully and completely as you did for your core profile.
  19. Note that investors have the ability to set ‘filters’using Gust, so that neither they nor the entrepreneur wastes the effort of going through the process for a venture that is outside their own, specific criteria for investment. These can be based on things like location (some only invest in a particular country or state), industry (a Life Science fund is simply not going to invest in a new social network for real estate agents), or valuation (a seed fund will not usually invest in a company that is advanced enough to warrant a $10m pre-money valuation), etc. If you share your material with a VC and get a polite response that you are out of their range, you should double check the investor’s profile page. In the vast majority of cases the fund’s criteria are described explicitly in their profile, so that’s a hint that you should probably spend more time researching and targeting your potential investors.
  20. In addition to sharing your site with institutional/organized investors you find in the Gust database, one of the platform’s most powerful features is that you can use Gust to share your materials with any potential investor, provided you know their email address. Simply enter their name and email, write a good cover letter, and click the share button. The suggested draft cover letter is a good place to start (I wrote it :-), but take the time to personalize it to your specific company, and each specific investor.
  21. Note that because of Gust’s well-known brand, scammers are increasingly trying to take advantage of eager entrepreneurs by claiming some sort of affiliation with the platform. Every investor on Gust is an Accredited Investor that has been provided access to the system by either an official angel group known to Gust, a venture capital fund, or another startup in which they are investing. Any legitimate investor who finds you through Gust will alsocontact you through Gust! If you receive an unsolicited regular email from an “investor” or other party claiming that they saw you on Gust, either ignore it, or ask them to contact you through the platform. If they’re legitimate, they will. Otherwise, you can be 99.9999% sure that they’re just out to scam you.
  22. With your fundraising program underway, you should now be using your Gust Entrepreneur Dashboard on a regular basis for keeping track of how many people are viewing your site, for authorizing new investors to access your materials, and for monitoring your ongoing interactions with all of the investors with whom you’re working (whether institutional, group or individual). There are tabs for each category of investor (ones you’ve invited, are actively engaged with, have withdrawn, been declined, etc.) Within each category, all investors have cards on your dashboard showing their current status, latest activity, and date you first engaged.
  23. For more detailed information on a specific investor, clicking on their relationship card brings up details of their activity, including which of the pages from your site they’ve viewed, which documents they’ve downloaded, and, in the case of angel groups, which of their members have specifically expressed an interest in learning more about your venture.
  24. As you update your presentations, plans, financials, and other aspects of your business, be sure to upload them to your Gust site. One of the reasons that investors use Gust is that they know they can always find the most current information about a company simply by clicking on its Gust document vault. A smart entrepreneur will use this area to share not only the latest versions of his or her pitch and executive summary, but also the current weekly or monthly status reports, major customer lists, and product roadmap. (Remember, access to this area is limited only to investors you specifically authorize, you can see exactly who accessed what document when, and you can remove both documents and access at any time.)
  25. In addition to general company documents that are available for viewing to all authorized investors, you can also use Gust to upload documents to only specific investors or groups. Use this feature to supply documents in response to investor questions, or to provide additional information specific to one group that you might not necessarily want to share with other potential investors.
  26. When you are working with an organized angel group (and Gust is used by more than 80% of angel groups worldwide), there is an additional set of tools that you can use for communication and collaboration with members of the group who are interested in working with you. This includes a private investor message forum for each VC or angel group with which you are engaged, that is devoted just to your company. Although you can’t access it directly (that’s why it’s private), you can answer questions posed by members of the group that will be seen by all of the group’s interested investors.
  27. From the group investor perspective, a very important feature of Gust is that it is used to track the interest level and status of every member who is considering investing in your company. Investors indicate their interest and the amount they are considering funding, and as the negotiations/diligence progress, the platform keeps a running tally of how much has been funded, committed, soft-circled, etc. Again, although this ‘sausage-making’ is internal to the group, you should proactively work with your lead investor/champion to understand where you are in the group’s process.
  28. Once you’ve gotten to the negotiation stage with a VC or an investor group, you and your lead investor should use your Gust data vault to share copies of the relevant term sheets and closing documents with each other and with other investors. Having all the deal documents in one placemakes life infinitely easier for all parties, and avoids the need for mass emailing, external document control, and the other friction-full administrative steps involved in getting a company actually funded.
  29. After you have successfully raised money from one or more investors, Gust then turns into the company’s ongoing investor relations tool. As all of your investors are now corralled in one place (that happens to already be the location—as per #24 above—of all your updated corporate information) this is the way to file your monthly, quarterly and annual reports with your VC and other investors. It makes the information available for everyone in one place, avoids having stray documents floating around by email, and lets you track who reads each report, and when.
  30. Finally, a tip that is overlooked by many entrepreneurs: once you have investors in your corner, pay your good karma forward. As noted above, most investors find most of their best investments through recommendations from people in their network, and that network now includes…you! When you come across another startup that you truly think might be a good match for one of your investors, by all means use the “Forward to a Friend” button on the company’s public Gust page to refer it. Both parties will appreciate the introduction, and good deeds like this will come back to help you in the future. Trust me.
    *original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *