1. We see a lot of ideas, all the time, week in and week out. Most say, if you make an investment in our company, we'll really be able to make progress on all fronts. Some say, we haven't had much money to date, but look at what we have been able to achieve with little money in a small amount of time. People that can make progress without money tend to be the ones who make the most progress when they have money.
2. Our scope and interests are limited. We focus our plans on stage of investment, types of technology and specific geography. We win by staying close to our plans. We won't make an exception for you because any off plan successes are considered luck. Any off plan failures make us look stupid.
3. Market timing can be the most important factor in success. More important than management or product. Again, not all the time is this true. But, if you're late, we are likely to consider it game over.
4. We're in a hurry to produce returns but not necessarily in a hurry to invest as we need to be careful. Careful in a number of ways including your idea, team and timing. Your need for the money right now isn't often a factor in our investment process. Repeating that you need the money now frequently, doesn't change that.
5. Sometimes, you may need to consider that your storyline needs to change. What you focus on in the pitch is important to proper interpretation. Commonly, people emphasize the product over the market and the team over the business. We are investing in the business that will be derived from a market.
LivingSocial announced a B Round financing last week of $25M led by USVP with Grotech Ventures and Steve Case's Revolution participating in the round. This funding will continue to propel LivingSocial's rise as a leading social commerce vendor. We are enthused to welcome USVP as a partner and see tremendous opportunity ahead in Social Commerce for the company.
LivingSocial is the company behind LivingSocial Deals and top Facebook applications, Visual Bookshelf and Pick Your Five. Today the company is launching its affiliate program as well as LivingSocial Deals in Chcago, Denver, Raleigh-Durham and San Diego. Over 1 million people are currently participating in Deals. LivingSocial's 80 million + registered users on Facebook and established social media expertise position it well to bring Deals to an ever increasing audience. Today, Deals is in a 13 cities and will be in dozens of cities by year end.
Notably, LivingSocial allows consumers to buy and redeem Deals from the convenience of their iPhone. After all, what good is a coupon at home?
The affiliate program will enable bloggers and web site owners to participate in LivingSocial's Deals and earn commissions while it increases reach for merchants.
Grotech Ventures is pleased to have backed the founders and team of LivingSocial from its early days and looks forward to the participation of the USVP team in the days ahead.
The cheapest and the best capital to grow a business comes from customers. Some businesses, like consulting businesses and other services businesses, shouldn't often start with any other type of capital.
Here is a short clip from a recent Fox Business Network appearance about starting a consulting business.
I have made them all pitching to VC's so this is a trip down memory lane. To save you some expensive lessons, here's some thoughts.
1.Don't look at website or existing portfolio prior to the pitch
One doesn't need be an expert on our history, track record or portfolio but a little knowledge can go a long way. Just a little awareness on our companies, professional background, and current boards, can drive efficiency for the person pitching an idea. If I've had three companies in Internet Advertising, for example, you can probably skip explaining simple concepts related to it. If one lacks that awareness, it wastes time AND undermines credibility. Plus, you look someone who doesn't do what it takes to succeed because, in this instance, you haven't.....
2. Ask us to sign an N.D.A.
Venture Capitalists don't typically sign non-disclosure agreements. Really, we don't. Best not to ask. Why? We simple cannot sign them as a practical matter. With 3 to 6 new companies a week, we would be unable to look at anything within a month or two.
3. Be late to the meeting
When I've allotted an hour and you're 45 minutes late, it better be a short pitch. Yes, traffic is bad. Sometimes really bad. I feel the negative karma doubles every minute after 10 minutes late. Traffic, your meeting with our wind bag competitor and even your poor planning will give you a pass on being a little late. Don't be a lot late.
4. Try to close it early like a product sale
We're investing into rather than buying your company. The semantics may be confusing but can be distinguished between investing in your future or potential versus buying your present. Additionally, we are not going to be "hustled", "closed" or "convinced" by talk versus diligence and data. Our fiduciary duty of care as well as our considerable need to be thorough simply dictate a process. And it isn't a sales process.
5. Present terms
We know you think well of yourself. And we usually know that you would prefer a higher price than the one we may offer you. Somethings go without saying. Terms are one of them.
Maybe your capital needs are expanding beyond the ability of your existing capital sources. Or maybe you see a special opportunity that can only be pursued with an influx of cash. Maybe you're ready to take your business to the next level. No matter the circumstances that have brought you to this post, you're wondering -- Am I ready to do a financing?
The decision to pursue a financing for your small business brings on a process which at times can be daunting, exhausting, tumultous and potentially -- uplifting. The process itself can seem a little unnatural and it always prompts questions. So if you're expecting some financing, here's some questions about what you can expect....:
What are the steps in the process?
Step one: Conceptualize your pitch and refine your investment thesis. Step two: Carefully research potential partners and approach them via introduction by a third party. (Hint:The third party must be known and trusted by the target investor partner. ) Step three: Close the deal by generating multiple interested parties and negotiating the best combination of terms AND partner.
My friends who have had a financing warn me about S.C.D.C fatigue; what is this?
Yes, of course, Same Circus Different Clowns fatigue is quite common during the financing process. This syndrome arises when you pitch many different investment groups with the similar investment thesis in quick succession. The investment groups begin to blend together in your mind. They may, and often do, raise many of the same issues related to your financing. Each potential partner will also likely offer a unique piece of advice that is contradictary to what the others raised. And while it might be easy to zero in on the unique, contradicatory advice --This is the curse of SCDC fatigue. It is better to act on the common advice that you're hearing through this process. While the fatigue will fade, the experience will remain with you for a long time.
I feel so warm most of the time, and I sweat a lot. Is this normal?
The sale of part of your business and the involvement of outsiders is sure to prompt some uneasiness. It is normal to be uncomfortable. It may pass with time. However, with the wrong investor partners or barely passable results, it may not.
How will this affect my business?
Well, while youre' expecting a financing you'll lose some focus on your core business tasks and revenue slippage is common. Soon after you start the financing process, your business problems will become larger or more numerous, but this is a natural result as your focus is distracted away from daily business operations and becomes fixated on the financing. Amongst previously funded CEO's this is jokingly referred to as the "problem fairy". Not to worry, however, as your problems will go back to normal after the financing.
Are there any other physical changes?
Some CEO's who raise funds experience "Balance Sheet Hearing Loss" which is an inability to hear your investors' concerns when the balance sheet is flush with cash after the funding. This will likely be only temporary as cash will reasonably drop over time and then your hearing returns. Many report that a bad quarter or two restores full hearing almost immediately. Your CFO will not likely suffer from Balance Sheet Hearing Loss and should be relied upon to help you here. Remember you guys are a team.
I have heard that you can lose a deal after signing a term sheet, is that likely?
Unfortunately you can lose a deal at any point in the process and many firms will sign a term sheet with you when they haven't completed appreciable diligence. You need to stay focused and keep driving your company and deal forward. It can be compared to landing a jet on an aircraft carrier -- don't let off the throttle until after the tailhook has caught the cable. No deal is done until its done.
I am worried that my new investor directors will want to meddle in my business after the financing, how do I keep them from undermining me?
Well, like so many other things, this is about communication and boundaries. Be sure to communicate a lot and be clear about what assistance you would welcome on a regular basis. Best to be understanding of first time investors or those with few other investments, as they'll be hyper-focused on your progress and seek as much involvement as possible.
My friends who've financed have told me about post deal depression? I think the acronym was P.P.D?
Yes, Partcipating Preferred Depression isn't uncommon after the close of a financing deal. Because Participating Preferred stock is common in most small company financing deals, this condition is also fairly common after a financing.
Participating Preferred stock means that investors receive their investment back prior to any other proceed distribution and then -- additonally -- the investors participate in the distribution of remaining proceeds at their ownership level (i.e. 20%) . You may struggle with a perceived inequity here or wonder if you'll get your fair share of a company sale. Talk to your lawyer along the way and especially if you're struggling with P.P.D., as he or she will remind you of supporting market conditions and the necessity of honoring signed agreements.
Conservative. Conservative like an American Flag tattoo? Or another kind of conservative? That's what one wonders when they hear forecasts described as conservative which are based upon multiple assumptions including many outside the speaker's control.
The critical C word in a Venture Capital pitch is credibility. Any other words that serve or might undermine credibility are to be avoided strenuously. And almost no word so powerfully undermines credibility like conservative.
No forecast should ever be described proactively as conservative. After the fact, if you want to call it that you could -- but even then -- why would you? Much better to say, "yeah, it was a tall hill to climb, but we really made it happen, this is a strong group." Doesn't that sound better than "it was conservative, don't go thinking we are a great team or anything, we just set low goals".
So how should one cultivate investment interest while building credibility? Speak to a range of outcomes. Talk about what will drive revenue, the associated risks, critical tasks, special skills and execution oriented focus that will allow your team to achieve various revenue outcomes. Given the venue, one might speak to these possibilities, use of funds and how invested capital will be used to drive revenue. For every 20 times, I've heard someone say conservative in a pitch -- I've heard Return on Investment once. Venture Capitalists are an ROI crowd.
You're talking to a room that is determining your credibility and skills at using capital to drive progress. And by progress, we mean revenue. Don't kill belief in both your credibility and skills by unnecessarily characterizing something as conservative.
In the recent piece from Fox Business Channel's "Your Money, Your Questions", I talk about the 4 C's of business lending. One needs to show cash flow, credit worthiness, collateral and character to a potential lender. Character is commitment, integrity and delivering on your promises. A lot easier said than done for most people but probably the fundamental component to accessing O.P.M. (Other People's Money) in the real world. And that one delivers on their promises can be more quickly and clearly demonstrated than one's integrity and commitment (in the short term, at least).
For all the people who come into our offices to tell us what they're going to do, few return to show us that is what they've accomplished in a reasonable period of time. When they do so, we are all ears.
This article and supporting video go a long way to address some fundamental and important questions people have about their VC pitches. Including how proven do I or the product have to be, how direct should I be and what role does passion play in empowering a pitch.
When I first raised venture capital in 1990, the world was a different place but one very similar to today. Our company was a software business, we were growing, losing money, and achieving trailing twelve month revenue of $1.5M. Our burn rate, as I recall it, varied between $25k and $75k monthly. We ended up receiving $1M of vc money at 1x trailing twelve month revenue valuation and we were pleased to get the money we needed to grow the business. So, we sold 40% of the company and with a 1x liquidation preference (meaning the VC's would get their money out first) -- we gave up a lot. And our VC's were well positioned to make money on almost any positive outcome. Which they did.
This thought is prompted by an excellent article by Matt Asay on cnet.com. Matt's article talks about the big changes needed in the VC industry -- back to smaller funds making smaller investments in earlier stage companies. Matt's Article
At Grotech Ventures, we couldn't agree more with this line of thinking. For me personally, this shift to a smaller fund doing earlier investments prompted a move to Grotech two years ago this month. Grotech Ventures made this shift in recognition of opportunity , which was for Grotech, a shift back to its future.
"There is nothing more powerful than an idea whose time has come." -- Victor Hugo
I have wondered about the Hugo quote above from both sides. Is there anything less powerful than an idea whose time hasn't arrived?
As an investor, it can feel that way when you're backing a company that you believe to the core of your being is right about the opportunity/market/product but whose progression is slow. For the entrepreneur, this can all be about the power of perseverance. Which isn't to say that the entrepreneur's persistence is less admirable for its necessity. It can be tough to hang in there as long as it can sometime to take to realize one's moment in the sun.
This highlights an investor internal dialogue that the adept entrepreneur should seek to engage within investment discussion. The investor is pondering both whether something is a good idea AND whether this is the right time for this good idea. Many an entrepreneur can leave a meeting with the correct conviction that the investor believes in their idea but remain confused as why the investor fails to act.
That reluctance to act is often related to doubts about timing. In my case, I recall my entrepreneurial decision to create a site called myroom.com in 1997 aimed at teenagers. The site allowed users to create private webpages online and was equipped with a variety of tools including music and page creation wizards. The thought was this young audience would enjoy the social aspect of their own private space online that intersected with other private spaces. The userbase, though small, loved it. I thought then and now, that it was a good idea. It might have been early. It was certainly beyond the patience and associated financial support of my backers.
So, if you're going to make a case for something being right with investors, you would be served to make your case include support for why it is also "right now".
We recently encountered the phenomena in popular culture of "Too Big to Fail". Start ups can often appear to be - Too Big to Succeed -- when the management team size exceeds the need (and budget) at hand.
Now, let's consider that there are two primary jobs or missions within any start up. They are build/create product and to market/sell product. In truth these two can frequently be summarized as "Sell product". Any person who cannot completely and totally relate their job and everything in it to the two primary missions should change what they're doing so that it is matched to the missions. Otherwise it is time to leave the start up and go to a larger company where more esoteric contributions are valued and rewarded.
We typically see the assembled management team in venture capital pitch. Just as there aren't jobs in a start up unrelated to the product and its sales, there aren't non-speaking roles for company executives at VC pitches. If an executive doesn't contribute in one of these meetings to the discussion, they shouldn't be in the room. It isn't much a spectator sport nor was it designed to be one. It also doesn't convey good prioritization for an organization whose only real asset is the time and effort of its team. Silent Sam or Sara raises more questions in our minds about the team and its focus as well as its efficiency. Questions mean doubts. Doubts mean no deal.
So here's the point, start ups will often bring a full compliment of management team members to a meeting to impress us with breadth and depth. The intention is to strengthen their case but in the process they do the opposite by opening the door to suspicion that they may be too big to succeed -- or at least capital inefficient by using our investment to pay an over sized management team.
Plus, it can create an odd moment in time (read loss of credibility) when the start up CEO says "we are going to be lean and mean as we grow this" when that same CEO is accompanied to the meeting by 5 vice presidents. All for a company with an incomplete product and no sales. When does lean and mean start? Do we really think the addition of millions of investment capital will cause a company to become "leaner and meaner" than it was before the money? Capital comes from investors, capital efficiency comes from management.
When these 5 VP's don't all relate to the primary mission or speak in a pitch meeting or otherwise appear to contribute anything obvious - these team members look like a liability and cash drain for any invested capital. The team looks riskier for its size and less likely to be capital efficient. It looks Too Big to Succeed.
Featuring A Panel of Local VCs who are actively investing
Wednesday, July 1, 2009 The Greater Washington Area Technology Venture Center (TVC) is pleased to invite you to our next program to hear about the current state of the VC market. Despite the lukewarm – yet slowly recovering! – economy, this group of VCs, each from four different local funds, is actively investing and optimistic about the future. We are looking forward to hearing from these four well-known and highly regarded VCs:
John Backus - Founder & Managing Partner, New Atlantic Ventures
Scott Frederick – General Partner, Valhalla Partners
Steve Fredrick – General Partner, Grotech Ventures
Sever Totia – Principal, Edison Ventures
When:Wednesday, July 1, 2009, 7:30 a.m. – 9:00 a.m.
·Registration, networking, and breakfast - 7:30 a.m.
·Program – 8:00 a.m. – 9:00 a.m.
Where: Tech Venture Center 1750 Tysons Boulevard 5th Floor, Room 5052 McLean, VA 22102
If you want to find a match, it is best to understand what you're matching.
All Venture Capitalists can be differentiated on 3 axis; the stage they invest in, the geography they focus upon and their technology opportunity areas. If you're a CEO seeking money and you don't match up with these, you're really wasting your time.
At Grotech Ventures, we describe ourselves as early stage investors in high potential technology companies. Our geographic focus, which is a reflection of our personal networks over the last 25 years in the IT business, includes the Mid Atlantic, Southeast and Mountain West. So if you're outside these areas, because of stage, technology or location, we are not likely to be a good investor to approach with an your idea. Sure, there might be an exception but those exceptions are never going to be the rule.
So, the investment stage of the investor is the right starting point. Seed investors won't want to look at your Series B round, for example, and if you're pitching a Series B -- you really don't have time to waste as you're already running an operating business. As a practical matter, investors will do seed/early, Series A and B rounds, later stage (Series C+) or expansion capital so I don't want to split hairs and advise only approaching those with very specific focus. But one gets the idea, investors don't like leave their comfort zone or neighborhood.
What is the VC's neighborhood? Investment historical data is that 80% of all Venture Capital is invested within 200 miles of the VC's office. It is by and large a regional business. Yes, there are VC's that invest nationally and internationally. But, the bottom line is that VC's want to be close to their investments literally and figuratively. While I don't have data to support it, I would speculate that the earlier stage investors want to be even closer than the 200 mile average.
At Grotech, we talk about staying close to the technology areas and markets we understand and are capable of delivering the best value to our entrepreneurs. And while that varies, to some degree, by individual, we know what we don't know. If you're the latest thing in alternative energy, take it to someone who will "get" your idea and admire your insight. I wrote in an earlier blog about the best way to get a VC firm attention. The jist of which was; the current CEO's are an important conduit and filter. Those current CEO's are also a clear analog about the comfortable technology areas of the VC.
The start up CEO needs one yes answer to the funding quest. The fast way to achieve it is to narrow the search at the beginning by matching the idea, stage and geography to the right candidates.
This article has been updated from the original post with the supporting video from Fox Business Channel.
For a VC to say "yes" to a company in a new market area, they have first believe that there will be a successful company in that market. The second key, that the company pitching will be that successful company only matters if the first point is made to the VC audience.
These two points are best made in this order and are better made separately. For, if you can't convince the investor that there will be a market and successful companies within it -- well then, the second point hardly matters. In my regular experience, the first point is often assumed by the presenter and all the energy goes into making the point about the company becoming the winner.
But, if the investor, doesn't believe in the market -- no amount of story telling is going to get a deal done.
The question often arises, "how do I portray a compelling opportunity in a market that doesn't exist?". The short answer is find the analogs of existing markets, make the connection as to the similiarities and use the parallels to project a reasonable future.
Making the point about the market competently will dramatically increase the chances of a successful pitch.
I coach CEO's who are seeking venture capital to deliver their pitch in the following way.
Tell the complete story in 3 minutes.
Tell it again, with the next layer of detail, in 10 minutes.
Repeat the story a third time, with greater detail, in 35 minutes.
Having told the story three times with increasing levels of detail, stop talking. Ask for questions, comments and insights. This approach provides assurance that the small audience understands the pitch and company story. It also provides an expeditious and efficient starting point for the group to consider and discuss an opportunity.
It shouldn't be surprising to entrepreneurs that the discussions about an opportunity by venture capitalists after a pitch often revolve around what was said and what was meant in the preceeding meeting. "I thought he meant that they would rely more on OEM sales than direct", for example, while someone else argues the opposite impression.
The 3X approach described here eliminates a lot of those misunderstandings. It also provides the CEO with the assurance that a turn down by the VC, if one occurs, is because of a honest disagreement rather than a simple mis-understanding.
The conventional wisdom differentiates a seed or A round based upon the amount of money raised by the startup. The crossover amount is typically around $500k. This is only half the story, however, as the distinction between a Seed Round and a Series A round goes deeper......
I think the better definition would point to how much has been accomplished by the company. For both Seed and A Rounds, the company often may have an unfinished product in an unproven market. But how unfinished is the product? And how unproven is the market? These levels of distinction are far better indicators of the necessary corresponding investment. And almost more importantly, how defined is the entrepreneur vision? The incomplete product is ok, we expect that. Unknowns about the product and market are expected as well.
But that said, it is striking how many entrepreneurs arrive with the conception that a seed round should allow them to receive investment for a unfinished product (it does) for which they don't yet have a clear, crisp vision (it does not). Simply put, a Seed Round investor can be made comfortable with an unfinished product in an unproven market so long as the entrepreneur has the clearest of ideas about product and market. Frequently, people arrive with a request to fund a hunch as this is their perceived view of seed rounds' purpose. And I'm sure there are investors ready to fund hunches, though they are likely the product of pre-existing relationships and previously profitable demonstrations of intuition.
For the entrepreneur that lacks those relationships and intution track record, clarity is key.
Investment Conference (Photo credit: Salmaan Taseer)
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