Ben Elowitz has graciously agreed to a guest post. The timing is apropos since Ben just raised $25 million in the largest technology financing in Washington state this year. Wetpaint is the leader in social publishing with nearly one million hosted user-powered sites. They have recently made a very smart move by enabling their platform to be distributed (they call it ‘injected’) inside of any Web site.
Since there is so much discussion around raising money (by entrepreneurs) combined with the lack of information available, we thought Ben’s insight would be pertinent and helpful to the startup community. Enjoy.
For whatever cosmic reason, I cross paths with lots of early-stage entrepreneurs who are trying to figure out how to fund their startup. We end up talking about bootstrapping, angel money, and venture funding. Most of these entrepreneurs are surprised (to say the least) when I share my experiences in raising venture capital. Based on Matt’s survey results, I now have a better understanding why. My experiences with fund raising are not typical. So take the information I present with a grain of salt. As Matt would say, I’m an outlier… but it works for me.
So what is my approach to getting the term sheet I want to sign? I invest way more time on the process, so that I waste as little of my own time and others’ in the process. The following are the six principles that have helped me minimize effort and maximize reward.
1) Keep it exclusive.
If you meet with too many firms you look desperate (trust me…word gets around); and as we all know, many of the very hottest companies meet with just a couple firms. That’s why I start by talking to just a few select investors on a very short list.
The hard part is figuring out whom to put on that list: who is most likely to clear the bar? I spend a lot of time researching a firm’s investment history, profile and strategy before even making or returning contact. I spend a lot of time to cross-reference investors; and the extra research saves me a lot of travel and meeting time.
The best way to run the process is in waves. Start with 4-6 investors in the mix. Each week, as firms drop out, add more back in. Be sure to carefully track time between meetings. Three business days with no response generally means ‘no’. If they want to schedule more meetings, you’ve got yourself to ‘maybe.’
When things heat up, I communicate the key milestones openly and honestly. Don’t overhype as you might find yourself backtracking. Never, ever put yourself in a position that compromises your credibility.
2) Get a coach. Or a few.
I have a bunch of them. VC’s like my existing investors are themselves great coaches. I learn something every time I check in with them. They know the system, the sensitivities, and the game. They’re on my team; they are supportive and helpful.
My amazing attorney Buddy sees more deals in a year than I will ever live through. He knows the market and has the aggregated experience of 100 companies. Don’t settle for a lawyer when you hire an attorney; make sure the person is truly your wise counsel.
For the scoop on a prospective investor, I check with these advisors and the entrepreneurs I respect. I do my best to uncover the reputation, investing strategy, hot buttons, and other data I need to see whether I should meet with them. And in the process I learn a whole lot more: in fact, every tip and insight in this post can be sourced to one of my great coaches.
3) Don’t sell. Let them buy.
The process of raising money is exhausting. On the other hand, having great conversations with potential investors is something I truly enjoy. So, keep the right ones updated about your business all along the way and they’ll indicate when the time is right. Let them pull their way in instead of pushing it on them. When you have inbound interest, fundraising takes weeks, not months.
When I first met Len Jordan at Frazier Technology Ventures, I shared the gist of Wetpaint asked him for input. Questions like, “What do you think are the tough spots?” and “How does it compare to the winners and losers you’ve seen?” gave me a sense of the success factors he was looking for and where my concept hit and missed. I asked questions like “what are the themes you are working on” and “what’s caught your interest lately?” He let me know what peeks his interest; it helped me get to know him long before pitching. Ultimately, Len became one of my best advisors. And a natural investor.
4) Give ‘em goose bumps.
What is it that any investor wants even more than financial returns? Bragging rights. “I seeded Google.” “This investment is the next Cisco.”
But how on earth do you make them get that goose-bumpy feeling that this is ‘the one’?
· Show ‘em the momentum. Charts that go up and to the right like this: Download hockey_stick.bmp .
· Inspire confidence. They are investing in you. Brand yourself as success, professional, reliable. Deliver what you say you will. Be the train that potential investors can’t wait to get on board.
· Tell stories worth repeating. Highlight your own ability to manage and lead by answering questions with stories from your team. I answer questions about how we will improve CPM’s by highlighting a member of our team who used to optimize revenue per pixel on Amazon’s home page. Tell great stories and anecdotes – these are what investors remember and share with each other. (A favorite example from one company’s prospective investor: “To answer calls from developers, they hired women with Australian accents – and the conversion rates doubled. These guys optimize everything!”)
· Huge markets and disruptive economics. You don’t have to say these two key phrases out loud, but hopefully your discussion triggers these brain centers which are directly connected to every VC’s goose bump neurons.
5) Make really gorgeous PowerPoint slides.
When the other partners in the firm meet you, it’s by way of an email saying, “Take a look at this company,” with your PowerPoint attached. You can’t control what else is in the email; but you have pixel-perfect control of your slides. Every advisor who’s seen my slides has had the same reaction: “WOW”. Don’t go on the road until you get that reaction.
In each meeting, listen for what worked and what didn’t. Take notes. I make three columns on my notepad and write what resonated; what fell flat; and what to hit in the next conversation. And I make changes to my slides for every single meeting. On my Series C roadshow, I called back to my partner after every meeting and discussed how it went and what changes to make. 30 minutes later, an updated PowerPoint arrived via my cellular modem. With continuous improvement, each meeting was even better than the last, and I had new material to review at successive meetings with the same firms.
6) Don’t negotiate the last dollar.
Goodwill at the tenth board meeting is much more valuable to me than reducing dilution by 2%. Long before you have your first formal pitch meeting, you should have already made the decision that you’re going with venture funding to maximize the outcome, not to maximize your percent ownership. Remember that. The goal is to negotiate to a reasonable point within the fair range. I’ve heard stories of deals that fell apart because of that last dollar. I say forget about it.
Get to the fair range, shake hands, smile, and celebrate. Then let’s all get back to building our companies. Now that’s where the money gets made.