Angels vs VCs on business pitches
– Tim Berry is the president and founder of Palo Alto Software. This post originally appeared on his blog, “Planning, Startups, Stories“. The views expressed are his own. –
Recently I caught Business Insider’s “Five VCs Explain What They REALLY Think About Your Pitches“. It’s a great post, gathering points together from discussions with several high-end venture capitalists. If you’re looking at venture capital, read it.
Part of what they said reminded me that angel investors and VCs have a lot in common. For example, these important points:
- Keep it short
- Avoid buzzwords
- Answer questions quickly without getting defensive
- Be a good storyteller
- Know the people you’re pitching
- Don’t forget the financial info
I’m pretty sure all of the investors in my local angel investor group would agree with every one of those. I particularly like the three about answering questions, telling stories, and not to forget the financial info. Those three are critical.
Some of the other points, however, remind me of the differences between VCs and angels. For example, the VCs say introductions matter:
The person introducing the entrepreneur is a big deal — if (the VC quoted) doesn’t trust the referral, he won’t even take the meeting.
Best practices for raising a VC round
– Chris Dixon is co-founder of Hunch and founder of Founder Collective, and an investor in many early-stage companies like Skype and Foursquare. Previously he co-founded Siteadvisor, which was acquired by McAfee. This blog originally appeared on cdixon.org. The views expressed are his own. –
Having raised a number of VC rounds personally and observed many more as an investor or friend, I’ve come to think there are a set of dominant best practices that entrepreneurs should follow.
1. Valuation: Come up with what minimum valuation you’d be happy with, but never share that number with any investor. If the number is too low, you’ve set a low ceiling. If your number is too high, you scare people off. Just like on eBay, you only get to your desired price by starting lower and getting a competitive process going. When people ask about price, simply tell them your last round post-money valuation and talk about the progress you’ve made since then.
2. Never tell VCs the names of other VCs that are interested. Reasons: 1) if you are overplaying your hand that could send a negative signal. Most VCs know each other and talk all the time. 2) it’s possible they’ll get together and offer a two-handed deal in which case you have less competition.
3. I think the optimal number of VCs to talk to seriously is about 5. That is usually enough to get a sense of market, but not so much that you get overwhelmed. You should pick these VCs carefully – this is where trusted, experienced advisors are critical.
4. If there is a VC you really like, have a “buy it now price” and if they hit that valuation (and other terms are clean) do the deal. Otherwise, say you’d like to “run a process” and include them in it.
5. Try to set timelines that are definite enough that investors feel some pressure to move, but not so definite that you look dumb if you don’t have a term sheet by then. (Investors have an incentive to wait – “to flip another card over” as they say – whereas entrepreneurs want to get the financing over with asap). Depending on where you are in the process, say things like “we’d like to wrap this up in the next few weeks.”
Grow revenues before seeking VC funding
– Russell Rothstein is the founder and CEO of business social networking site SalesSpider. The views expressed are his own. –
Small businesses owners want to grow their companies, but their ability to expand operations is limited by their own profitability or otherwise lack of capital.
Faced with this dilemma, many turn to venture capital firms (VCs), which embrace high-risk, high-growth startups and offer the money and management they desperately need to meet the growing demand for their product.
Money may not make the world go ‘round, but it certainly helps when financing a high-growth new business venture. And there are no shortage of VCs to turn to. But while many small businesses rely on VC funding, few CEOs really think about the strings attached to all that cash, and what it means to their company and customers.
VC funding may appear less desirable in comparison with revenue-based funding, for example. Consider the differences between the two:
1. VCs dilute the startup’s equity every time they invest and want board representation. Clients, aka revenue, don’t want equity; they want results.
2. VCs want a certain level of control over a startup’s financing. Clients want control over their financing.
Great article; VC or PE-based funding – at least these days – is indeed rather costly (the conditions have tightened up so badly that it has become nigh impossible).
Fortunately, reprieve is in sight – if one is willing to look beyond the pale. When my company was in need of funding (still early-stage) we found a facilitator (eSolve Capital; http://esocap.com) that were able to provide us with excellent conditions
Alignment between entrepreneurs and VCs
–- Jeff Bussgang is a general partner at Flybridge Capital Partners, an early-stage venture capital firm in Boston, and author of the book “Mastering the VC Game”. This post originally appeared on Bussgang’s blog www.seeingbothsides.com. The views expressed are his own. –-
Alignment.
You hear this word thrown out frequently in business conversations. It’s a wonderful thing to aspire to, but very hard to achieve. Perhaps even harder to achieve in entrepreneurial settings between the venture capitalist and the entrepreneur, where the stakes are so high and the ever-present risk of dysfunctional behavior leading to a “Start-Up Soap Opera”.
Ever since I began the research for my book, I have been spending time thinking about why VC-entrepreneur alignment is so elusive. And so when the Kauffman Foundation asked me to give a presentation to their recent class of young VCs, I decided to take the opportunity to develop a few thoughts that teed up the key issues.
In short, I concluded that despite all the aspirational rhetoric about VCs becoming more “entrepreneur-friendly”, there are structural reasons why VCs and entrepreneurs are not always aligned. In negotiating term sheets, performing the inside-outside financing dance, discussing exit scenarios – and many other elements of the startup journey – misalignment between VCs and entrepreneurs is common, natural and inevitable.
VCs and entrepreneurs have a hard time dealing with these areas of misalignment because they are human beings. And like nearly all human beings, they have a hard time facing conflict dead on. Conflict makes us uncomfortable. No one wants to be the “bad guy/gal” and so try to gloss over real differences or sweep them under the rug.
I argue instead that VCs and entrepreneurs should explicitly acknowledge these areas of misalignment and talk about them openly and directly. Only by naming these points of conflict and appreciating the other side’s point of view, can you really begin to develop the solutions to these points of conflict. As Mark Pincus of Zynga told me when I interviewed him for “Mastering the VC Game”, “Don’t be a victim. Don’t look at the (conflicts and drama) personally, look at them structurally.”
The reason there’s no alignment between VC’s and entrepreneurs is that VC’s have never had real jobs.
VCs, meet the new sheriff
Move over venture capitalists, there’s a new sheriff in town: the angel investor.
As VC and private equity firms pulled back from the number of deals they made with entrepreneurs during the recession, it appears angel investors – wealthy individuals funding startups on a much smaller basis – have moved in to pick up the slack.
Last month Fast Company ran a blog titled, “Angel investors more powerful than VCs“, wherein author Brian Javeline, the founder and CEO of MyOnlineToolbox.com, stated angel investors “who used to promote entrepreneurialism have been acting more like traditional VCs.”
Javeline, who raised nearly $2 million from a group of angels who each contributed “between $100,000 and $350,000,” argues that because most angel investors were formerly entrepreneurs that they “naturally understand how to participate in operational decisions without the desire to micro-analyze a spreadsheet for every decision.”
PEHub.com editor Dan Primack, who spoke recently at the Angel Boot Camp event in his hometown of Boston, told Reuters TV that increasingly entrepreneurs are looking more to angels as a source of funding over VCs.
“If you bring in a really big name in your industry that can actually provide you more credibility to your market than does a traditional venture firm,” said Primack, who felt it was a trend that would continue to grow going forward, especially in the VC stronghold of Silicon Valley. “Angels are indeed the new black. A lot of startups would rather get a couple big-name angels, people like Mike Maples or Chris Sacca, than they would get a traditional venture capital firm.”
Maples and Sacca are part of a new class of angel investors dubbed “super angels,” who have raised their own small investment funds and take a far more hands-on approach with the companies they invest in.
Will VCs really stop funding startups?
If the American Jobs and Closing Tax Loopholes Act is passed there will be a lot of unhappy venture capitalists, who say they may stop investing in startups.
The new legislation, co-drafted by democratic senator Max Baucus and democratic congressman Sander Levin, aims to re-classify the returns fund managers and venture capitalists receive as ordinary income and not capital gains, as it has been for much of the last decade. This amounts to a much larger income-tax hit for VCs, jumping from 15 percent to nearly 40 percent.
Proponents of the bill, such as angel investor and blogger Paul Kedrosky, say that since VCs, like hedge fund managers, don’t invest their own money when funding startups, that they should have to pay the same tax rate as the rest of us.
The closing of the tax loophole would appear the expedient thing to do in a political climate where bankers are being besieged over bonuses and the big hand of government is trying to better control the practices of all types of investors.
But VCs are crying foul over a bill that lumps them in with all fund managers and takes away the one incentive they say rewards them for their long-term and high-risk investments in startups.
“If you talk to congressman Levin, who has been the architect of this, he’ll even tell you that what we do is different,” said Mark Heesen, president of the National Venture Capital Association (NVCA). “Does he want to see a distinction? Probably not, because he just wants the revenue, but he does see that what we do, from a job-creation standpoint and just from how we operate, is very different than what these other folks do at the end of the day.”
Heesen’s NVCA colleague Kate Mitchell, who is also a managing partner at Scale Venture Partners, said what she does as a VC is more a labor of love and is not as financially rewarding as many outside the industry may think.
VCs invest in fewer startups
So far this year both the number and size of deals by venture capitalists are down over the final quarter of 2009.
A total of 681 deals for $4.7 billion were completed by VCs in the first quarter of 2010, according to a MoneyTree Report released by the National Venture Capital Association and PricewaterhouseCoopers. That dollar amount is down about 10 percent over Q4 2009, but up nearly 40 percent over the same period last year.
Dan Primack, the editor of PE Hub – a Thomson Reuters publication – told Reuters TV the decline from Q4 ’09 was mostly “seasonal” and he expected the numbers to increase over the next quarter, as VC firms secure funding from investors and more term sheets are signed.
Some potentially troubling news for entrepreneurs trying to raise money for startups, was that VC investment in early-stage companies was down nearly 35 percent, while so-called expansion-type deals were up nearly 15 percent over Q4 2009.
Primack said the decline may just be a reflection of more angel investors funding startups, leading to a decrease in VCs participating, but not an actual overall decrease in the number of seed or early stage deals being done.
“I think you’re seeing a sea change in who’s making the deals,” Primack told Reuters TV, adding that the MoneyTree report only tracked deals by institutional investors and not individuals such as angels. “What we’re starting to see a lot in seed and early stage deals is a lot of angel activity; rich individuals who are making these transactions and priming the pump for the Series A or Series B round. We’ve seen a huge influx in those sorts of investments and I think in many cases these angels, and some of these so-called super angels on the West Coast, are supplanting some of the traditional venture capital firms at the early stage.”
Watch Reuters TV’s full interview with Dan Primack:
Some entrepreneurial advice from U2
Mark Solon, the managing partner and co-founder of Boise, Idaho-based Highway 12 Ventures, wrote a blog post – “Don’t Let the Bastards Grind You Down” – offering some entrepreneurial advice he gleaned from one of U2′s more underrated tunes. Now we highly doubt Bono had entrepreneurs or venture capitalists in mind when he penned the lyrics to “Acrobat,” but let’s roll with it.
Solon thought of the song after he recently rejected a funding request by a young entrepreneur, who he said “took it fairly hard” and Solon spent the next 20 minutes attempting to explain himself. When he sensed it wasn’t helping to soften the rejection, Solon piped up “Who the hell do you think I am to tell you that your business won’t be successful?” Solon then recounted his own ordeal in moving from Boston to Boise to start his VC firm and the ensuing 18-month span where he was rejected over and over, before launching Highway 12.
Nearly a decade later, Solon said he still remembers “almost everyone who said ‘no’ to me and proving them wrong still motivates me to this very day.”
For entrepreneurs rejection is part of the deal and Solon’s point is that just because you get turned down, does not mean your idea is bad, because as he added: “anyone who regularly invests in startups has said no to many entrepreneurs who went on to build wildly successful businesses.”
Solon’s more self-reflective treatment here is in stark contrast to a generally negative perception of the VC community that has recently sparked some excellent debate. Bijan Sabet, general partner at Spark Capital, has written a great blog on the prevailing anti-VC sentiment that tackles the issue from all sides. It sources Union Square Venture partner Fred Wilson’s post “The ‘we need to own’ baloney”, in which a reader posted a comment that Wilson couldn’t be a real VC, “since you don’t seem greedy, a jerk, don’t appear to know it all and actually seem human and actually appear to show some empathy – all of which are anathema and not typical VC decorum.”
It appears VCs are undergoing an internal reality check in regard to their standard operating procedures and the message from card-carrying members like Solon, Sabet and Wilson is borrowed from U2: don’t let the bastards grind you down.
The VC gender gap: are VCs sexist?
– Jeff Bussgang is a General Partner at Flybridge Capital Partners, an early-stage venture capital firm in Boston. This post originally appeared on Bussgang’s blog www.seeingbothsides.com. The views expressed are his own. –
I find the preponderance of males in VC an annoying and stubborn phenomenon. When I first entered the start-up game as an entrepreneur in the mid 1990s, I didn’t think much of the “VC gender gap” as there were plenty of women executives around. In fact, between one third and one half of the executive teams at my two start-ups (Open Market and Upromise) were women.
As the father of a capable, ambitious daughter, perhaps I’m over-sensitive to the issue, but since becoming a VC seven years ago, I find it amazing that only 5-10 percent of the VC industry is made up of women. Only 25 percent of all VC partnerships have a single women partner and only 7-8 percent has more than one women partner. Anecdotally, even fewer women are “management company GPs” as opposed to “employee GPs” – in other words, true owners of VC funds as opposed to deal partners. What other major industry remains 90-95 percent male-dominated? What’s the deal?
An outstanding Kauffman Institute study, “Gateways of Venture Growth,” analyzes this issue and comes up with some thoughtful but unsurprising conclusions. They point out that the industry remains very clubby, and the lack of female role models creates a self-perpetuating cycle. Professor Myra Hart of Harvard Business School writes, “Women trying to launch or further careers as VCs have fewer first-degree connections with those (men) in positions to hire or promote them.”
Another issue that holds women VCs back is the fact that the academic backgrounds of VCs tend to be in technical areas, such as computer science, engineering and biotechnology where, again, females are in the minority.
In talking to my women VC friends, they reinforced these two major issues, but held out some cause for optimism going forward. Irena Goldenberg of Highland Capital in Europe (and formerly an associate with us at Flybridge Capital before she went to HBS and then Geneva), believes there are more female VCs in life sciences as the medical field has a higher ratio of women to men then, say, engineering. Our senior associate, Robin Lockwood, told me she thinks VC profiles simply lags entrepreneur’s profiles. As more women entrepreneurs emerge, more women will become VCs.
Here’s a thought-provoking observation that an anonymous woman pointed out to me (and please do not accuse me of channeling Larry Summers on this – I’m just passing along what I heard): she believes the VC industry is male-dominated because men are more wired to take risks than women. Gambling, she points out, is more popular amongst men than women. Thus, risk-taking with capital is more likely to be comfortable for men than women.
The issue of female entry and success in a male dominated industry is not new. I agree that piercing a male social network and lack of female role models are road blocks but I disagree that men are “wired” for risk taking. This sounds like “risk taking” is genetic. I think a factor to recognize is that men and women learn who they are and how to act through role modeling and the expectations of others at an early age. This identity then becomes reinforced as their lives proceed.
It seems the barriers that exist for women leaders in VC firms may be parallel to that in law firms. The demands placed on rising through the ranks for women in these types of firms conflicts with their family role. The expectation of long hours and to be available 24/7 can serve as barrier to women because of the incongruity with their family life.
I applaud Jeff Bussgang for tapping into all available talent without regard to gender. I’m curious if the females in the VC industry have the same kind of exposure to high risk – high reward business opportunities as men?
Competing for buzz and cash: Startup 2009 conference
It’s too late to get tickets for today’s Startup 2009 conference in NYC, but you almost don’t even need to be there. Event co-host Silicon Alley Insider, a NYC tech blog, is streaming the entire conference via live video now (watch below) and attendees inside are busy giving a blow-by-blow on Twitter.
The one-day conference features interviews with seasoned entrepreneurs and presentations by 10 emerging online companies carefully chosen by a panel of venture capital judges to compete for “bragging rights, buzz, and a $50,000 prize.” Here are the companies in the running: Advanced Marketing and Media Group, Adzoomi, Article One Partners, BeliefNetworks, Expensify, GlobeFunder Ventures, Good Health Advertising, Micronotes, Path 101, and Portfolio Monkey.
Update: Article One Partners, a startup that helps company’s establish patents or fight already existing ones, took the prize at Startup 2009. Watch an interview with the company’s founder Cheryl Milone moments after the win (via The Deal).
Adzoomi is part of the top ten, those guys are not going anywhere, their CTO is clueless about technology, its like handing your keys to your ferrarri to a blind man, disaster.
