VC Funding for Geeks; or, How to Get Your Technology to Emerge the VC Way
Marc Hedlund is O’Reilly’s Entrepreneur-in-residence – his session on VC funding used software development, coding and hacking analogies to illustrate the intricacies of securing venture funding for a startup business. Hedlund is a veteran of three startups and around a hundred VC pitches, so he speaks with some authority on the process.
Though the idea is the creative spark for a startup – Hedlund stresses that its is not the most important element – the most important first step is incorporation and that it is a process worth learning, if only to guide others in choosing partners and setting up a new business.
Helund advises thinking about the pitch – ensuring a description of the company if articulated so that the time consuming process of atracting attracting can begin.
VCs will examine others who may be exploring similar opportunities, the backgrounds of individuals involved in a venture and potential customers. Hedlund describes this phase as a tedious merry-go-round where an infinte number of questions can be asked. Gaining progress with one VC is often the breakthrough that enables a startup to attract interest from other VCs and gain investor momentum.
Hedlund notes that it’s important to remember that VCs don’t create companies and are not the first or last step for a company…more close to the beginning of the end, though not even close to the end! It’s down to the startup to create the organisation from nothing (technology, people, equipment, stationary!) in order to attract funding and the sought after ‘term sheet’ – the terms under which a VC will provide funding,
1) Things to do before looking for VC
- You need real customers, even a single customer who believes in your idea.
- Consulting – doing other work to pay costs, whilst developing the product.
- Attract angel investors.
- Secure bank loans.
- Secure government grants – Flickr/Ludicorp first secured grants, followed by angels and then customers.
- Invest yourself (Bloglines & Jotspot were self-funded).
2) Focus on the business, not the funding
- Look for alternatives for funding; dependence on VC is risky, though can enable a faster pace of development.
- Build a product.
- Get users.
- Make money – dont spend it!
The advantages of VC not only cover funding, but also credibility and a degree of guidance and review from VC partners. Also, VCs can make introductions, act as advocates for the company. One thing to baer in mind is they will usually have the power to remove you from the board, unless the board is structured to favour your position. Hedlund identifies the key to successful VC investment ironically as being in the position where VC is not required, the business is self-supporting and simply requires VC to accelerate growth.
There are however exceptions – where millions are required for development costs, when competing with other VC-backed competitors or large partners (such as handset manufacturers) are required.
3) No means maybe, Yes means maybe!
- Mever walk away from a VC who doesn’t accept.
- Keep feeding the VC information – unless you hate them!
- If the reaction is positive (enthusiam is inveserly proporitional to response!)
- The physical performance of a VC in the first meeting can indicate their board management style – nurturing, advisiry, good listener though comments like Super! Great! can be indicative of a lack of substance.
- ‘If the other guys fund you – then I will!’
- Proceed only with those you’re happy doing buisiness and get them all to closure – dont allow feature creep.
4) Funding is more than a fulltime job
- One person needs to do all the communicating with VCs and look for patterns.
- Do the marketing using a strategy like the ones at Victorious, business development and HR yourselves – find the best people and hire them.
- 10 face-to-face meetings = 1 term sheet
- 3 term sheets = 1 financing
- From pitch to term sheet = 2 months (10+ meetings)
- From term sheet to money – 1 month
- 6-12 months overall
- Avoid August and December – people are on vacation 🙂
Hedlund advises startups to follow the blogs of noted VCs (Feld Thoughts, VentureBlog) to better understand the business of being a VC. VCs are also businesses and their goal is to make more money than is invested.
Hedulnd also states that when VC isn’t correctly applied, then an exit strategy (by IPO or otherwise) becomes difficult. Also, it’s worth noting that ‘funders do not equal founders and investors are not inventors’ and most pertinently that VC is a consensus business – many intelligent people agree on a business.
What You Need
- One Powerpoint deck of 10-15 slides
- 2-3 page executive summary
- An introduction to a VC – don’t submit online, but get a personal introduction
- Don’t send web sites or blogs – stick to the conventions of Powerpoint!
Finally…the Technologists Trap
- Don’t focus too much on the product (limit to just one slide).
- Will customers care about this product?
- Are they high margin?
- What has changed to allow a startup to grow?
- Are there enough customers willing to pay?
- Is there a profitable sales channel?
- Do I want to work with these people for five years.
- Are the numbers believable?
- Try the Steven Silbiger’s Ten-Day MBA/
- It’s easier to learn a business, but harder to have an idea and product.
Hedlund’s complete presentation can be downloaded here…