Right Entrepreneurs In The Right Place Get Funded

Image via Flickr by Jeff Belmonte

Image via Flickr by Jeff Belmonte

I’m a strong believer that investors invest in people, before they invest in a business plan, or an idea. But I continue to learn that there are a host of other factors, maybe not even related to you or your business, that could keep you from getting the funding that you need. You may not have control over many of these, but it helps to know, for planning purposes, what is really happening.

Obviously, a key factor is always the state of the economy and the mood of the venture capital community. The good news is that both of these are looking up these days. According to the Silicon Valley Venture Capitalist Confidence Index® for the First Quarter 2014, the Q1 increase marks seven consecutive quarters of positive sentiment among Silicon Valley venture capitalists. Read more

Martin Zwilling , Founder and CEO, Startup Professionals
October 12th, 2014

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 *

6 Steps to Raising Venture Capital in 6 Months

run (1)

A woman you don’t know tells you that she’s going to run a marathon of 7-minute miles. She’s never run a long distance race before. Would you bet on her completing it in record time? Probably not, right?

“Watch me,” she tells you. And so you do. You’re impressed when she clocks her first mile at 7 minutes. A single mile does not a marathon make, but still, it’s a major milestone. Then she runs a second mile at the same 7-minute pace. And a third mile in another 7 minutes. Your confidence in her is rising. She’s still 23 miles away from accomplishing what she predicted, but she’s already at a place where you might just bet on her being successful.

Most VCs will not bet on your company after a first meeting. But when you use the right plan and the right approach, you can convert a “no” into a “yes.” Here’s the right way to get VCs to watch you long enough to bet on your success.

  1. Describe A Grand Vision. Financeable businesses require investors to believe that: 1) you will win at what you’re doing; and 2) the market in which you’re operating is worth winning. The latter requires that you articulate an amazing opportunity, largely defined by the projected size of the market you are pursuing. A founder with a startup focused on selling groceries online should begin their pitch by describing the total money projected to be spent on groceries online over the coming years.
  2. Predict The Trajectory. Success takes years, not months. To raise capital as a very early-stage business, you have to convince investors that your current size isn’t indicative of where you will be in the future. The best way to do this is to define a trajectory towards success and then set milestones that demonstrate you’re moving in the right direction. Recently, I met with an entrepreneur to discuss her financing strategy. She designed a software solution that she was planning on selling to enterprises for $100,000 a year.  We agreed that there were two significant proof points that she needed to achieve in order to demonstrate a high likelihood of success: price point and sales traction. We came up with a 6-month plan that would illustrate her successfully navigating towards these proof points:
    • In the first three-month period, she would sign on a single beta client at a $20,000 annualized fee; and
    • In the second three-month period, she would sign on two additional beta clients each at a $30,000 annualized fee.
  3. Build the Plans; Share the Plans. To achieve your milestones (and inspire others to believe that you will achieve your milestones), you’ll first need written plans that your team can execute against. In the case of the woman building the SAAS business, this would include:
    • A product plan demonstrating which features would be necessary for enterprise clients to pay higher fees;
    • A marketing plan illustrating how the company would develop awareness for its product;
    • A sales plan showing the output of the sales funnel;
    • A hiring plan mapping new hires required to execute on the product, marketing, and sales plans;
    • Cash flow projections detailing what the money raised would be used for.
  4. Execute. Once you’ve completed all the planning, you’ll need to execute on the 3-to-6-month plan, albeit with limited resources. Your goal is not to demonstrate that you have all the answers or that your success is a certainty, but rather that your business is indisputably moving forward.
  5. Stay In Touch. When I set about to raise money for my first startup, sixdegrees, I spoke with over 200 high-net-worth individuals– all of whom rejected me. But I was clear with them about what I intended to accomplish, and most of them agreed to receive updates from me on my progress.
  6. Have Patience. Because I left each investor meeting with a plan for my company’s growth, investors were able to measure my actual metrics developed over time against my initial projections. I predicted that we would build an MVP. And we did. I predicted that we would get 1,000 members within the first month after launch and then 10,000 members a few months later. And then we did. Some of the original people who rejected me ended up financing me later on. The ability to create momentum is what separates the people who start businesses from the people who don’t. It’s also the trait that outside investors will find the most impressive and confidence-inspiring. Make sure to have the right perspective when you start meeting with potential investors. Don’t expect them to give you a check before you leave the meeting. Your goal is to get your audience excited to track your progress, not to hand you a check after a presentation.

First-time entrepreneurs frequently ask my advice about when they should start meeting with prospective financiers. My answer is almost always the same. You are ready to start when you can: 1) identify a grand and worthy vision; 2) predict a trajectory for your growth; and 3) share marketing/sales, product, and financing plans that will enable you to get there.

When you embark on the financing process, you should expect it to take at least 6 months. If you can build an audience to watch you rack up those 7-minute miles, you’ve got a good chance that somewhere along your run, some of them will be willing to bet on an amazing finish time for your marathon.

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Andrew Weinreich is a serial entrepreneur based in NYC. He has founded 7 startups to date, including sixdegrees, the first social network, and he advises many others. He teaches Roadmap to Entrepreneurship, an intimate 2-day crash course that teaches entrepreneurs of all levels how to build digital startups.

Reblogged via http://coursehorse.com/blog/6-months-and-6-steps-to-raising-venture-capital/

What is the Definition of a Seed Round or an A Round?

Marc Andreessen kicked off another great debate on Twitter last night, one that I’ve been talking about incessantly in private circles for the past 2-3 years – what actually IS the definition of a seed vs. A-round.

This is something I think entrepreneurs don’t totally understand and it’s worthwhile they do. My view:

“Spending any time or energy trying to game the ‘definition’ of your round of fund raising is a total waste. Nobody cares. No VC will be so naive as not to see straight through it. And actually many will probably find the gamesmanship as a bad sign of lack of property priorities or perspective.”

Here’s how all the drama started for me.

When I first became a VC, seed rounds were typically $500k – $1.5 million. There weren’t a lot of seed funds in 2007 so this was often done by angels, funding consortia or sometimes early-stage funds that existed then (First Round Capital, True Ventures, SoftTech VC, etc.). A-rounds back then seemed to be anywhere from $2-3 million (LA or NYC) or up to $5 million in Silicon Valley. $5 million was always the classic definition of an A-round between the late nineties (crazy financings aside) and say 2007.

What changed — and why the definition changed — was it became 90+% cheaper to start companies and thus seed funds appeared en masse as did angels so the size of seed rounds actually INCREASED and the size of A-rounds in many instances decreased. Why the latter? My speculation is that entrepreneurs had more options and wanted to take less dilution so the old $5 million for 33%-40% of your company no longer made sense and on the VC side it made no sense to pay $20 million pre ($25 million post, which implies the VC gets 20% of the company = 5/25). [If you're newer to VC math here's a great primer]. So VCs started writing some smaller A-rounds.

If you want a great primer on how the VC and startup funding scene changed here’s a great primer.

But. [and there's always a but]

Entrepreneurs started demanding that VCs call their first-round financings “seed” rounds even if they were $3 million.

I saw this myself a few times in a row. I had very smart entrepreneurs where I gave the company $2-3 million and we raised anywhere between $3-5 million and when I put A-round in the term sheet they had their lawyers change it back to seed rounds. I found this annoying (I can’t think of a better word for the behavior) because it seemed like entrepreneurs were more concerned about the optics of the financing round than who was participating, would the lead (me) but supportive or simply focusing on building a great product and trusting that the financing nomenclature would work itself out. I think it would have been equally annoying if I had chosen to be dogmatic about it. If I had said, “You MUST call it an a round because be honest – it is an A-round” I think would make me a bit hypocritical. So I did not. I simply said, “Call it whatever you want but frankly I don’t understand why you’re obsessed with this. It seems such a silly thing to focus on.”

But since it was equally silly for me to fight, seed rounds they became. Equally silly were advisors & entrepreneurs insisting that founders use convertible notes but we funded a few of those, too.  I have come to realize that since the great tech boom started in 2009 and given the massive increase in first-time angels, first-time seed funds, first-time accelerators … the market is just filled with well-intentioned, but inexperience advice. Whom you take advice from really matters.

So back to reality. If it looks like an A-round, smells like an A-round & tastes like an A-round … it’s an A-round. My personal definition? It is less about actual money and more about structure of your Cap Table. If you have raised $2-4 million from a bunch of high-net-worth individuals I simply don’t see it as an A-round. If you raised $2 million from two small seed funds I probably don’t either (although in the past I would have). But if you raised $3-5 million from well-known seed funds or from a VC and you’re asking for $8-10 million in your next round … that next round is a B-round no matter what we collectively decide to call it when we VCs fund you.

I think an easier definition is “first institutional capital” which is what most A-round VCs think about what their personal funding strategies are. They want to be early and first.

I haven’t obsessed about what definitions people choose for precisely the reason I would advise entrepreneurs not to. It’s simply not worth the time, effort and drama. But I would say a couple of things:

- I now believe that entrepreneurs who are overly obsessed about the optics of the nomenclature of A-round probably set off some invisible red flag in some VC investors mind even if the VCs don’t internalize it themselves. I know it does in my mind. Obsessing about the wrong things in starting a company says something about one’s priorities even though this is subtle and hard to define. I’m not saying I won’t fund somebody who did a $4 million seed round before I got involved. I will. But if I’m funding their “first institution capital” round and they are obsessed about what we call it that is probably not a great sign for me.

- What Marc said above. Please know that I have never met an experienced VC who can’t pierce through any mechanics in your deal and see your company history in a fairly accurate light. If you raised $1m, then $1m, then $500k over a 2-year period they will most likely assume you had a hard time raising capital. That’s ok. It’s hard building a startup. But no amount of “spin” will change how they view you so it’s best just to be honest. And if you have raised $6 million from non-startup-type investors they will probably see you as an entrepreneur who prefers easy, dumb money over putting in the effort to find the right long-term investors no matter how you try to convince them your hedge-fund buddies really make great funding partners for a startup. If you have raised $6 million in a “seed” round and you’re looking for $10-12 million for your A-round they simply will mentally adjust that they’re funding your B.

In the end, like most things in life, none of it will matter unless you build shit people care about and use en masse and thus you can attract capital even if you call it a Z-round. But my advice to entrepreneurs – stop sweating the silly optics. It’s more likely a negative signal to VCs than a positive one.

 

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Reblogged via http://www.bothsidesofthetable.com/2014/10/07/what-is-the-definition-of-a-seed-round-or-an-a-round/

Public Company Executives Rarely Adapt To A Startup

Corporate boardroom image via Wikipedia

Corporate boardroom image via Wikipedia

Mid-level or even top executives who “grew up” in large companies often look with envy at startups, and dream of how easy it must be running a small organization, where you can see the whole picture and it appears you have total control. In reality, very few executives or professional stars from large corporations survive in the early-stage startup environment.

The job of a big-company executive is very different from the job of a small-company executive. The culture is different, the skills required are different, and the experience from one may be the exact opposite of what you need for the other. I agree with the seven survival challenges from Michael Fertik, in an old Harvard Business Review article, for executives making the transition: Read more

Martin Zwilling , Founder and CEO, Startup Professionals
October 5th, 2014

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 *