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More advice on raising money, for first-time entrepreneurs

Posted by Scott Kirsner  October 10, 2010 07:27 AM

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Today's Globe column collects advice from local investors and entrepreneurs about raising money — specifically for first-time founders.

People shared far more insight with me than could fit into the printed column, so I'm posting some "bonus material" here.

- David Beisel, Founder, Web Innovators Group; partner, NextView Ventures

The one piece of advice I most often share with entrepreneurs fundraising is: tell a story. Even the most analytically-driven investor will ultimately base his decision on an emotional connection to the vision of the company. Fundraising shouldn't be just telling the what and how of the endeavor, but also the why. Of course all of the fundamentals must be in place for the company to succeed; but the deeper a narrative is intertwined in the pitch, the more likely an investor will become excited about the human element which is inherent in every startup.

- Laura Rippy, board member and advisor to start-ups; former CEO, Handango; former GM, Microsoft

...One [piece of advice] is to take a page from investment bankers' playbook and "make a market". Prepare your pitch, your network, your targets beforehand. Reach out simultaneously to multiple investors. Then, create a sense of urgency so that multiple offers line up at the same time. It makes you look like a hot property and is the best strategy for a good valuation, best ancillary terms, and full syndicate. I have seen a few entrepreneurs take a slower serial approach instead, and backfire, as the first investors get tired of waiting.

- Angel investor Joe Caruso of Bantam Group

Entrepreneurs too often think their first task is to raise money......and waste a lot of time during the early months of their venture pitching an incomplete idea to people who need a lot of convincing....

Instead, much of that time is better spent convincing customers.... or at least talking with prospective customers. The feedback from them... the questions and suggestions.... will be somewhat similar to the kinds of conversations they have with prospective investors, but will be FAR more productive.

1. The feedback will be knowledgeable
2. You will learn a lot if spend more time asking questions than "pitching" your product/service
3. As your offering morphs, and you get a few people interested, you might get some early revenue (or at least early commitments for revenue)..... which will make money raising MUCH easier....

While not an accurate algorithm, I suspect what initially might be a 6-9 month money-raising effort, if preceded by 6 months of customer activity, will become a 90 day money-raising effort..... making overall time to raising money about the same, but you'll have a company with a vetted product, and maybe even some market traction....

...Entrepreneurs waste too much time pitching something unproven to the unreceptive....

- Christopher Mirabile, managing director, Race Point Capital Group

(1) DO: Research and network your way to potential investors. DON'T: Contact investors cold.

(2) DO: When pitching, set the table before jumping in - tell a story about who your customer is, and why your product helps them in a compelling way. DON'T: Jump into the middle of a detailed discussion of product features

(3) DO: Have some skin in the game, a rough prototype, and some solid market data. DON'T: Shop a PowerPoint business plan from the cubicle of your full time job.

- Jeffrey Bussgang, partner, Flybridge Capital Partners; author of "Mastering the VC Game"

A “do” would be establish both credibility and a relationship – investing is a game of trust and investors want to know that you know what you are doing, can trust you to do the right thing, and will enjoy sitting beside you during the wild roller coaster ride.

A “don’t” would be to oversell. There is a tendency for entrepreneurs to exaggerate or spin in order to sell prospective investors. There’s almost never a happy ending in those situations – either before or after due diligence is completed.

One story that sticks out in my mind – after signing a term sheet and before closing, one entrepreneur called me to tell me that his technical co-founder was moving out of the country for personal reasons. He was understandably nervous to tell me about it, but by proactively letting me know the news and his adjusted plan going forward, he earned my respect and, eventually, the investment.

- Dharmesh Shah, angel investor and co-founder, HubSpot

1. DO Be honest with yourself and talk to someone that's done it. Very few ideas and very few entrepreneurs are venture-fundable. If you don't fit the profile, you are going to experience unnecessary pain and frustration and most importantly take time away from actually building the business.

2. DON'T raise venture capital as a response to a competitor raising a large amount of funding. Although it's scary when that happens, in practice, their odds of beating you don't dramatically change as a result of the additional capital. Focus on your strength (which may just be that you're scrappier, hungrier and care about customers more). Remember, raising money does not create value -- it simply provides the opportunity to create value. For example, for my first startup, we had 3 competitors that all raised over $25 million in funding. We were terrified. We hadn't raised a penny. Two of the companies cratered and the third we acquired for less money than I had spent on my car (granted, it was a nice car -- an Acura NSX).

- Paul Maeder, Managing Partner, Highland Capital Partners

1. Create scarcity. The best way to raise $15m is to ask for $7m. The
best way to raise $0m is to ask for $15m.

2. Say you are only looking for ONE new investor. They will think it's
a race and work hard. If you say you are looking for 2, they will wait
until someone else commits, which will never happen.

3. You need to have 3 purportedly independent, trusted people tell the
VC it's a hot deal before you ever call him. You need to "Pre Buzz"
your deal.

4. Presentation: If you can't manage a meeting, I expect you won't be
able to manage a company. Right number of slides, topics are Mgt.,
Mkt., Product, Deal in that order. 1.5 hours in total. End on time
having covered all your key points, including banter about sports with
the partners.

5. The best meetings never get to the slides.

6. Remember, you are selling your company, not your product.

7. Objective of the first meeting: a second meeting, and nothing more.
Stop selling once you achieve that. The happiest dinner guests are
those that leave the table a little hungry for more.

- Bob Metcalfe, general partner, Polaris Venture Partners

My fundraising for 3Com in 1980 turned more productive in 1981 when I finally got that VCs wanted me to tell them how they were going to get their money BACK. I had focused on what I would do in the unlikely event that they gave it to me.

Do not run on about what [jerks] you think all those other VCs are.

Do not ask a VC to sign an NDA because your idea is way too easy to steal.

Do not explain how you plan to be capital efficient by having your Dad rent you the space and your wife be CFO.

Do start the meeting by thanking your VC for inventing Ethernet, even if it was before you were born.

- Brian Shin, CEO, Visible Measures

You need to decide on a funding route: 1) bank loans/credit cards 2) friends and family 3) angels 4) angel groups / super angels 5) venture capital - it largely depends on how much money you (and your team/advisors) think you need to raise based on your vision and your plan.

It also depends on your risk tolerance & your tolerance for pain. Simple rule for me is this: If you want to go big, and go fast, and you know you're going home if it doesn't work, then try to raise Venture Capital. If you are going to most "formal angel groups" then imho you might as well go for venture capital since it's practically the same level of diligence for less money. If you have an in with some so-called super angel or micro-vc (in boston that'd likely be Founder Collective or NextView Ventures) then I'd take that route over an angel group (easier diligence, faster process). If you can get a check from a legit angel (someone who has done an angel investment before in a true tech startup), I would almost always take it b/c it validates, takes a little pressure off of you, and the first money in is always the hardest money to get.

No matter the route, these tips apply:

A) Think about "building the onion" - adding layers to your pitch such that you are constantly improving and building momentum. Have a hole in experience? Recruit a partner or an advisor. Not sure about the market need? Talk to prospects. Want to validate the solution? Get a customer. Bottom line is that you want to the building blocks (big market, big idea, strong team, aided by a convergence of market trends making it seem like you MUST start this company now), combined with a perceived trajectory.

B) Don't be unrealistic or greedy - pushing valuations up or trying to solve for retaining a certain amount of equity should not be key goals. Your goals should be to get the best partner and get the best funding terms possible (liquidation pref, participation, drag along, board, etc).

C) Create competition. Investors see a lot of deals and are looking at a lot of stuff or working on other stuff all the time. There needs to be a sense of urgency. Competition for a deal creates urgency. Part of the supposed "AngelGate" situation was folks talking about how competitive deals have gotten. A good deal should have multiple suitors. That is the best possible situation for a startup. But again, don't focus too much on getting a sky-high valuation. The higher the valuation, the harder your job is going to be and the higher the expectations. I'd rather set the expectations low and go from there :)

D) Solve for the best long-term partner for the business: you really do have to pick the person (angel, vc or otherwise). Do your homework. It's OK to ask for references from a VC.

E) Have a coach - an advisor or a friend who can be your Yoda...investors look at a lot more deals than you have ever pitched, so you need a little guidance to off-set.

F) Negotiate everything before signing a term sheet. if you have competition for a deal, you can ask for stuff before you sign. Once you sign, you are sort of locked up with that investor for a while...all the leverage shifts away from you. So ask early and often. But see point B above :)

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Scott Kirsner was part of the team that launched Boston.com in 1995, and has been writing a column for the Globe since 2000. His work has also appeared in Wired, Fast Company, The New York Times, BusinessWeek, Newsweek, and Variety. Scott is also the author of the books "Fans, Friends & Followers" and "Inventing the Movies," was the editor of "The Convergence Guide: Life Sciences in New England," and was a contributor to "The Good City: Writers Explore 21st Century Boston." Scott also helps organize several local events on entrepreneurship, including the Nantucket Conference and Future Forward. Here's some background on how Scott decides what to cover, and how to pitch him a story idea.

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