A week ago, I took Caltrain south to San Jose and attended Red Herring North America 2008 as a media guest. The conference featured two days of keynote presentations, roundtable panels and corporate presentations from approximately 100 companies in the region selected by Red Herring as the top 100 private companies in North America. One of my favorite panels was “When and how should a company raise money?“
Moderated by Alex Vieux, Red Herring’s CEO, the panel had three VCs in the valley, Rich Wong (Accel Partners) Saad Khan (CMEA Ventures), Vispi Daver (Sierra Ventures) and angel investor Aydin Senkut (Felicis Ventures), and also Google’s first product manager. Alex Vieux has a very particular style of interviewing – you will often hear him say “stop bullshitting me” or “you are giving me the corporate answer”, which made the panel more fun and dynamic.
Here ismy ten-point summary of the do’s and don’ts of startup fund raising:
1. Don’t raise money when you don’t have alternatives and when you need it most.
2. Avoid truisms such as: the internet is going to be big, search is huge on the web, social and mobile are meant to be, etc
3. Don’t put closes that will come to bite you back. When you have strategic investors they might hurt your value.
4. Don’t over negotiate the terms – in the valley, most of the deals have similar terms and conditions and don’t need to be negotiated too much. Outside the valley, terms may vary, and international investors will be opening a can of worms.
5. Don’t take NO for an answer. Try to do your homework before talking to the VC and understand how you fit in the the fund’s portfolio.
6. When you find yourself with VCs wanting to put too much money, they might be fees oriented. Beware.
1. When should you raise money? Find the right window of time: technology, team and market need to click. Momentum that leads to progress could determine if you get funded.
2. Find the VC through connections – It’s important to have a connection and make sure you’ve done your homework. It will increase your value in the eyes of the VC. Find the right person in your network to reach the right person.
3. Show people the unique competitive advantage. What makes you special?
4. Make sure you go for smart money – some funds and in some cases specific partners, can bring you more than just money: connections, mentorship, sales, head hunting, etc
5. Take as little as possible but enough to reach the next milestone. You don’t want to go back to Sand Hill Road before you accomplished something major with your previous round.
6. Be sure you have a good lawyer. Ask him to brief you on basic terms in advance.
The VC funding process is a sales job – but getting the money is just the beginning. VC investment is a relationship, and it’s polygamist – which makes it more complicated. Like in marriage, make sure you pick the right partner (within the fund) and get to meet the family (fund) before making a long term commitment.