Wednesday, March 27, 2013

10 startup fundraising tips from North Bridge VC Michael Skok

by Kyle Alspach
Boston Business Journal

Michael Skok, partner at North Bridge Venture Partners, on Tuesday evening continued the third edition of his popular "Startup Secrets" workshops with a session on "Raising Money from Seed to Exit."

After introducing the topic by saying that "raising money is like sex" — "everyone wants to know about it, but few people want to talk about it openly" — Skok and several guest speakers offered insights on how to think about raising funding for your startup.

Here are 10 takeaways from the event, held at the Harvard Innovation Lab in Allston:

1. In some cases you should not raise money. Great entrepreneurs, in many cases, don't even think about raising money until they've exhausted all of their own resources.

2. One great time to raise money is when you are brand new and have lots of potential. Startups are attractive at this stage if the opportunity seems exciting enough. Plus, there is nothing that can be disproved at this point. The key here is having the perfect pitch.

3. Another great time for fundraising is when you have proof. When investors do their due diligence on your company, and there is plenty of proof that the business is working, investment will be a no-brainer. Investors will often create their own theory about how your business will evolve at this point.

4. Validate the opportunity before raising seed. The worst thing you can do is spend months building a product, only to find that you haven't validated whether it meets a need or solves a problem — that is not a seed investment that's going to succeed.

5. Time intensity is more important than capital intensity up front. Entrepreneurs must be willing to put in the time early on to build a business before even thinking about raising money.

6. Decide how committed you really are before raising a Series A. Even if someone writes you a Series A check, you may not want to spend years of your life building that business. Typically it takes six to seven years to create real value in a company. Are you ready to go the distance?

7. Before working with a VC, decide what sort of attributes you want in them. Are you looking for somebody who has operating experience, or someone who's a pure investment professional? Do you want someone who is hands-on, or not? Will you be looking to them to help with team building or with removing roadblocks to your business?

8. Don't try to fit too much into the first meeting with an investor. Tell your story, but don't spew out your entire business plan in one mouthful — that can be tough for an investor to digest. Just tell the investor enough to get them interested and get to the next step.

9. Be wary of the term sheet that arrives before due diligence is done. This doesn't represent much of a commitment, because an investor's feelings can change after due diligence. A term sheet that arrives after due diligence, however, strongly suggests a deal is going to close.

10. Do a quick wrap-up with the investor at the end of each meeting. Ask them, was this a good meeting? And do you want to move forward? If you don't get a good sense that the investor wants to continue, it might be time to move on to someone else. Your biggest cost is your opportunity cost.

Read more: North Bridge VC Michael Skok on Boston's startup mentor gap (and how to close it)

Monday, March 25, 2013

Sh*t you should never say to a VC in a pitch

This is a guest post by Mucker Lab’s Will Hsu.

Raising money from venture capitalists can be a lot like dating. Certain topics are simply off-limits — like talking about why your ex left you. Venture capitalists are also expert pattern-matchers. They need to know a little about a lot of things. And because they see so many potential investment opportunities, it’s almost impossible for them to have the time and energy to conduct detailed market and customer due diligence to determine the viability of an idea.

Instead, they rely on how you explain your idea and match that to their past experiences to create a complete picture of the potential investment potential. As a result, an innocent sentence you throw in at the end of your presentation could trigger either great memories of their last successful investment or nightmares of their last $10 million down the drain. So sometimes, it’s the things you don’t say that are the most important.

While you might understand the basic topic points, such as revenue potential, market opportunity, and so on, it’s important to know what not to say on the periphery as well. Here are some of the things you definitely should not mention to a venture capitalist if you don’t want to trigger bad nightmares.

10. “Daily deals”: It may seem unfair given that consumers are still lapping up deals and businesses are issuing coupons like never before. But VCs have all moved on. The reality is that it just takes too much effort, time, and tongue-twisting for a VC to tell his buddies how his latest investment is better than all the other daily deal companies that came before. And it will take too much effort for you too.

9. “Big shots like A,B,C,D,E,F,G are advisers”: Simple rule. Being able to say “adviser and investor” is 10 times better than just having an adviser. It doesn’t mean you don’t want lots of advisers and mentors, because you obviously do. You want lots of helpful and passionate advisers, but just be careful thinking that all VCs will give a damn. As a VC, I care about your ability to convince important and influential people to help you build your business (and invest); I don’t really care who they are and how many there are. It’s not about who, it’s about you.

8. “… Uncapped Note … ”: If you’re a YC company, go for it. For the rest of us mortals, let’s get real and understand the point of investors is to have smart people with money on your side.

7. “I’m pretty sure my product will sell itself, and I’m not worried about customer acquisition”: Saying that you’re not worried about customer acquisition is like saying you’re not worried about driving a thousand miles and not running out of gas. If you are not concerned now, you will be eventually. Either have a really detailed customer acquisition plan or show some metrics that allay the fears that acquisition would be too expensive or will never scale. Even product purists care about acquisition.

6. “… SoLoMo … ”: Pick two out of three. Any two. And if you must, at least jumble up the sequence (“MoLoSo?” or “LoMoSo?”). Just don’t say “SoLoMo.” Every time I hear it, a tingle goes up my spine (not in a good way), and I’m pretty sure I’m not the only one.

5. “I don’t need to do market research because consumers are incapable of envisioning the future, you just have to give it to them”:An experienced VC could only respond, “I served with Steve Jobs. I knew Steve Jobs. Steve Jobs was a friend of mine. You, sir, are no Steve Jobs.”

4. “My product is naturally viral”: Every entrepreneur claims to have a “naturally viral” product. It’s like everyone believing they are an above-average driver. The fact remains that average CTR on Facebook news feed links are around 0.2 percent, which are about the same as banner ads, and certainly no one has ever claimed that banner ads are viral. Until a product has gone viral, it’s not viral.

3. “I’m Pinterest for X”: I cannot figure this one out. Apparently it is perfectly fine to be “AirBnB for X,” “ShoeDazzle for Z,” and “Dropbox for Y” … but the moment someone utters the word “Pinterest for … ,” everyone’s eyes just glaze over.

2. “I want to build a great user experience, I don’t care about monetization and revenue”: Only a handful of guys can say this: Zuckerberg, Dorsey, Page, Brin. The only reason they can say it is because they have proven abilities to build a large audience and eventually figure out a way to make lots of money. Unless your last name happens to be one of those, you need a plausible business model.

1. “My addressable market is $XXX billion”: Any market sizing higher than $100 billion (actually, I would really be careful starting around $50 billion) is simply not credible. It either means the entrepreneur has no idea how to analyze the market to find the initial target customer segment (and thus a smaller addressable market), or the entrepreneur has no idea how to tie his business model to a market-sizing calculation. For instance, if you are selling food trucks, you can’t say your addressable market is the total dollars for food sold by food trucks. Neither one builds confidence.

Will Hsu is a cofounder and managing partner of MuckerLab, a mentorship-driven startup accelerator focused on serving Internet software, services and media entrepreneurs in Los Angeles and broader Southern California.

Sunday, March 3, 2013

The Silicon Valley Survival School

By Ari Levy

Even by Silicon Valley standards, venture capitalist Tim Draper is an oddball. He co-owns a luxury resort in Tanzania, helped produce a Nickelodeon mockumentary series about his sister’s kids, and ends speeches by singing a five-minute ode to entrepreneurs called The Riskmaster. His latest passion is Draper University of Heroes, where students aged 18 to 26 discuss the future instead of history, play volleyball with two balls, and learn survival skills that include suturing and weapons training. Set to open in April, the program is a $7,500, eight-week crash course in entrepreneurship. “Other schools out there are focused on getting an A, which means don’t make any mistakes,” Draper says. “Our school was created to fail and fail big and succeed and succeed big.”

A typical University of Heroes morning will begin with a lecture from a well-known speaker. Zappos (AMZN) Chief Executive Officer Tony Hsieh and Elon Musk, co-founder of Tesla Motors and CEO of SpaceX, spoke during a pilot class Draper ran last year. The rest of the day will mix courses on urban survival training, finance, and sales as well as viral marketing and idea generation. There will be yoga, go-karting, and riflery. The Heroes version of baseball more closely resembles Calvinball from Calvin and Hobbes—players may run the wrong way around the bases or change positions after every pitch. And, yes, there will be karaoke.
Draper, 54, whose father and grandfather were also venture capitalists, has spent the past 28 years backing startups as founder and managing director of Draper Fisher Jurvetson, whose funds have raised more than $7 billion since 1985. He bet early on Hotmail, Skype (MSFT), Tesla, and Baidu (BIDU), but his once top-echelon firm has missed many of the big social media winners in recent years.

Now he’s bet $20 million of his personal wealth on his school. Some of that went toward acquiring a campus—the vacant 90-room Benjamin Franklin Hotel in downtown San Mateo, Calif., and a former antiques store across the street. Draper plans to host quarterly sessions with up to 180 attendees each. He’s working with universities to help students get class credit, similar to a study-abroad program.

Students who can’t afford the $7,500 tuition can promise Draper 2 percent of their income over the next 10 years, or they can propose another arrangement. For the term starting in April, he’s accepted two such proposals: A race-car driver will put the school’s logo, a shield, on her car during competitions, and two Egyptian students say they’ll write a book about the school in Arabic. “We’ve had some other offers that weren’t quite as good,” says Draper.

Christine Guibara, 27, a jewelry designer in Burlingame, Calif., took part in Draper’s 40-student pilot program last June. She says that though her business was already doing well, Heroes made her think bigger. She says she was inspired by a lecture by Ron Johnson, the J.C. Penney (JCP) CEO who previously led Apple’s retail operation, and has begun talking to possible partners about starting what she calls a retail incubator, a common sales space for up-and-coming jewelry designers. Like every Heroes student, she finished her program with a two-minute pitch to a panel of real investors. By that time, she says, she’d overcome her fear of public speaking through extensive pitch practice and other work. Camaraderie with her classmates also helped, she says: “Being uncomfortable almost every day and still looking forward to it makes you comfortable with the unknown.”

Draper expects Heroes to at least break even, and hopes alumni give Draper Fisher Jurvetson an early chance to invest in their projects. Draper says he expects to invest between $300,000 and $500,000 of his own money into a $4 million round of financing for nVision Medical, a devices company founded by Surbhi Sarna, 27, who attended the Heroes pilot program last year. Sarna says Heroes inspired her to broaden the company’s focus from female infertility to early detection of ovarian cancer as well.

Within about two years, she hopes to have an early detection device on the path to approval from the Food and Drug Administration. That’s the kind of risk Draper sings about on stage. As he says in his song: The riskmaster “skates on the edge of disaster.”
The bottom line: Third-generation VC Tim Draper has invested $20 million of his own money in a $7,500-a-pop boot camp for young entrepreneurs.