Tag: financing
Don’t Be Gunshy Because You Dealt With Bucketheads The Last Time Around
For all of you out there who are wondering, Amy is doing fine. We’re in Boulder, she’s happy, in some pain, but enjoying the delightful impact of Percocet, and making her way through MI-5 Season 8. Thanks for all of the support, emails, and kind words.
I’m about to head out for a five hour run (broken into three separate segments) in preparation for the 50 miler I’m doing in April after I help her take a shower (which ordinarily I would be excited about), but first I thought I’d write some thoughts about a call I had with an entrepreneur yesterday.
The call was about a potential financing he is considering. I’ve gotten to know him some from a distance over the past year and am impressed with what he’s created. He originally just called me for advice on his financing strategy but I started the call by telling him I was interested in exploring leading a round, would be willing to give him advice also, and would quickly tell him if I was dropping out so he could flip me into “advice only mode” if we weren’t going to end up being a potential investor.
We had a wide ranging conversation over an hour about the current state of the business and how he’s thinking about the financing. Several times over the course of the hour he sounded defensive about a particular issue – well – not defensive, but uncertain. He’d frame what he thought was a negative in the context of the way he’d heard it from a previous potential investor (let’s call them BucketHead Ventures) who hadn’t gotten to a deal with the company in the past.
One of these was around churn – he asserted that one of the clear weaknesses of the business was the high churn rate. I pressed him on what he meant and we went through some numbers. He didn’t have a high churn rate at all – in fact, his churn rate after a customer was paying for three months was minimal. The problem – described by BucketHead Ventures as “high churn” – was a combination of what happened in the first three months and BucketHead’s inability to do cohort analysis, so BucketHead looked at absolute churn on a monthly basis rather than on a cohort basis.
In my head, I thought to myself “bucketheads – they pretend to understand businesses like this but have a total miss at a basic level.” The entrepreneur understood the miss, but had internalized BucketHead Ventures feedback and was letting it color his view of his business. And, more importantly, it was making him gunshy. Instead of articulating a powerful story about low customer acquisition costs with minimal downstream churn, he lead with “the worst problem with the business is our high churn rate.”
I see this all the time. While some entrepreneurs think all VCs are bucketheads (they aren’t), other entrepreneurs think all VCs understand this stuff (they don’t). Even ones who seem to be experts, or should be experts, or claim to be experts. Especially the ones who claim to be experts. Often, they are just bucketheads. Listen to their feedback, but don’t let it make you gunshy if you think they are wrong.
I’ve always had mixed feelings about the importance of a company announcing a financing in the absence of any other activity. “Dear World: We Just Raised $X From Investors A, B, and C.” Ok, but so what?
In my book, there is only one real reason for this – to attract new potential employees: “We’ve just raised $X and are hiring 20 people including types A through types Q – see our jobs page at jobs.companyname.com and apply now.”
Unfortunately, very few funding announcements are focused on this for two reasons. The first is the stupid one – many entrepreneurs get tangled up in the ego dynamics of a financing (“look ma – we raised money’) and lose sight of the notion that raising money is just one tiny step on the path to success. In my book, once you’ve completed a financing, take a deep breath, tell everyone in the company so they know how much money is in the bank, and then get back to work creating amazing things for your customers.
The second is less stupid, but is something I see over and over again, even with companies we are investors in (and we know better). When you do a financing, you file something called a Form D with the SEC. This process is fully automated which means it is easy for our friends like Dan Primack at Fortune to see any new filings that are made. Dan was one of the first people I knew who regularly published Form D info – it’s now spread widely across most of the VC-based publications, but I’ve give Dan credit for being the most diligent with this (and with many other things he reports on.)
Once you’ve filed your Form D, the data is available on Edgar with a simple search. There are other ways to get it as well since there are plenty of services that republish Edgar data with a better UI for searching. Regardless, the info on Form D is out there on the web.
Some VCs I know claim that you don’t have to file a Form D. Having researched this, I think it’s a dumb move. Most credible attorneys that work with corporate securities, especially those in the VC industry, will insist that you file a Form D if you have more than one investor, or if you have investors in more than one state. In our world, we just tell companies we invest in to file it and not worry about it.
This takes us back to the beginning of the post. For some reason, some companies want to keep their financings quiet. That’s fine – just file your Form D and say nothing about it. It’ll get picked up in the daily VC publications, like Term Sheet and VentureWire. Maybe it’ll end up on TechCrunch if you’ve got some famous investors that they like to write about. And, if your local paper is on the ball, it’ll show up there also. But it’s meaningless – “Joe’s Company Raised $X From Investors A, B, and C according to a filing with the SEC.” Next.
But if you are going to announce your financing, do it right – in conjunction with your Form D filing. Have your jobs page up. Make it clear that you are hiring. If you have substantive stuff to announce around the financing, say an acquisition, a major strategic partnership, or a new product release, announce it at the same time. Substance matters here – the more the better.
Make your noise for a day – and then get back to work creating amazing things for your customers.
My friend Paul Kedrosky – who spends some of his time as a Senior Fellow at the Kauffman Foundation – has a thoughtful short video (as part of the Kauffman Sketchbook series) on where entrepreneurs get their money. While it’s easy to get confused and think that VCs are the center of the financing universe, Paul reminds us that most entrepreneurial companies are funded by the entrepreneur’s savings, cash flow, credit cards, friends, and family.
It’s a creative three minute video with plenty of meat to it.
I recently spent some time with a long time friend and entrepreneur who I’ve funded in the past. He’s working on a new company which I think is really neat and I’m already a user of. He called me for feedback on his fundraising strategy as well as to see if it’s something that we’d be interested in investing in.
It’s outside our themes and different than the type of business we invest in. Given our long relationship and the fact that he’s an awesome entrepreneur, I squinted hard at one of our themes, turned my head sideways, and decided to take a look. We spent a few days applying our process to it (each partner touches it and we give each other real time qualitative reactions) and quickly realized that it really wasn’t something for us as it was far outside anything that we felt like we could help much with beyond money and moral support (which my friend is going to get from me anyway.)
So – I sent my friend a note with my explanation for why we are passing. I offered to help with introductions because (a) he’s an awesome entrepreneur, (b) it’s a very fundable business – just not by us, and (c) I have a lot of confidence that he’ll build a successful business and there are several VCs who I know that I think would like what he’s working on.
His response was dynamite. It was
“No sweat. I knew it was a longshot, so I appreciate you even considering it. I know how many deals you have to pick from.
I’d like to take you up on your offer to help us get funded, but I have a better idea … help us avoid the need for funding (700 clients gets us to profitability).”
He then went on to detail a handful of things he’d like me to do assuming that I’m a happy user of his product. All of them are easy, low maintenance for me, and in several cases actually benefit me.
I love that my friend is much more focused on ramping up his customers than raising money. It’s easy to get lost in the soup of “X company raised $Y” and forget that it’s not about fundraising, but building a business. When I think of some of my favorite TechStars companies, such as Occipital, they bootstrapped for several years before raising any money (well documented in the book Do More Faster) and even then could have easily built their business without raising any money.
Don’t forget to bootstrap.
Last night I gave a talk hosted by SVB at their Palo Alto office. It was part of the “Never Ending All Old Is New Again Venture Deals Book Tour.” I had a ton of fun talking to and answering questions from about 75 entrepreneurs who – at the minimum – enjoyed eating the great food and wine that SVB provided on a luscious evening in Palo Alto. Oh – and I signed a bunch of copies of Venture Deals.
Several questions came up about Convertible Debt. We touch on it in Venture Deals but realized that we didn’t cover it in enough depth so Jason recently wrote a Convertible Debt series on Ask the VC. The series is now complete – here are the links to the posts in order.
- Convertible Debt Series
- Convertible Debt – The Discount
- Convertible Debt – Valuation Caps
- Convertible Debt – Conversion Mechanics
- Convertible Debt – Conversion In A Sale Of The Company
- Convertible Debt – Other Terms
- Convertible Debt – Warrants
- Convertible Debt – Early Versus Late Stage Dynamics
- Convertible Debt – Wrap Up
If you feel like we missed anything, or got anything wrong, or were confusing in our explanation, please chime in on the comments on the post. If you want to see an actual convertible debt term sheet or the actual legal documents, take a look at the TechStars Open Sourced Model Seed Financing Documents.
As a bonus to the evening, I got some direct, constructive feedback from one of the attendees via email later that night. While the “thank you” and “good job” notes are nice, I only learn when someone criticizes me (hopefully constructively, but I can handle it in any form.) The feedback was:
May I make a constructive criticism regarding your talk tonight? Your answers to audience questions tend to be overly long and rambling…..you “overanswer,” to invent a word. You start strong and respond right to the essence, but then your focus blurs and you keep taking verbal baby steps away from the thought stream. If you trim a minute or two off each answer, you can call on more people and hear more questions, which sends more people home happy. I think if you self-critique a video of yourself in a Q&A session, you’ll arrive at the same conclusion.
It’s a good suggestion. I often try to provide additional context to the question, but it sounds like – at least for one person – I went off on a few space jams that weren’t additive. I love the phrase “overanswer” – it’s a lesson from TV interviews 101 (e.g. just answer a question – any question – quickly). Something to ponder as I continue the Never Ending All Old Is New Again Venture Deals Book Tour.
Recently, several entrepreneurs and investors have asserted to me that they don’t think the terms on a convertible debt deal matter much. I was perplexed by the statement and asked each of them to tell me more. In every case, the person hadn’t really thought through the issues. Rather, they were just spouting what they believed was conventional wisdom about terms for seed deals.
In one of the entrepreneur cases, I explained how it was likely that they were going to be on the wrong side of the valuation discussion in the next financing based on one of the terms. In one of the investor cases, I explained the difference between a 2x return and a 15x return – using a real example – based on the way the note was written. And in a third case a separate potential angel investor in the deal brought up a specific term that was important to him that addressed a real concern.
We rarely do convertible debt at Foundry Group – we much prefer to do equity rounds, even at the seed stage. However, many of the seed rounds done in TechStars are done using convertible debt as are many financings of less than $1m. So, if you are an entrepreneur or seed investor, I think it’s important to understand how convertible debt works and what the impact of various terms are.
In Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist, my partner Jason Mendelson and I touched on convertible debt but didn’t go into much detail on the specific terms. A number of people have asked us about them since the book came out so we’ve started a Convertible Debt series on AsktheVC. The first three posts are up:
- Convertible Debt Series
- Convertible Debt – The Discount
- Convertible Debt – Valuation Caps
There are nine posts in the series – coming out every Tuesday and Thursday until we are done. If you notice anything confusing, or incorrect, please comment and/or ask questions so we can clarify and/or fix.
If you can’t wait for the full series, take a look at the annotated term sheet for a convertible note on the TechStars site (also available on the AsktheVC Resources page.)
Vote For My SXSW Panel – An Inside Look at BigDoor’s Venture Funding
I’ve thrown my hat into the SXSW Panel Picker this year – please click here to upvote my panel titled An Inside Look at BigDoor’s Venture Funding.
I’ve never presented at a SXSW panel because I usually like to stay flexible and check out whatever’s interesting, but we came up with an idea that got me excited enough to commit. An Inside Look at BigDoor’s Venture Funding is going to be me, Keith Smith (BigDoor CEO), and Andy Sack (Lighter Capital, Founder’s Co-op, and the TechStars Seattle Managing Director). Both are good friends of mine and have really interesting philosophies about startup funding.
I think Keith was once quoted as saying “I’d rather give up my left nut than give up equity in my company” and having gotten to know him over the past couple years, I don’t think that’s far from the truth. Keith has over a decade of experience running startup companies and is extremely passionate about BigDoor, which made him aggressive in any discussions involving giving up a stake to both Founder’s Co-op and Foundry Group.
Andy’s a serial entrepreneur who has spent the past few years working on ways to make the funding process better for entrepreneurs. He led the first round of funding for BigDoor through Founder’s Co-op, but used a creative structure, partly because Keith is such a stickler on valuation. Andy and Keith will discuss this more on the panel, but they used a RevenueLoan approach to bridge the gap on price.
The RevenueLoan structure is something new Andy’s been working on at Lighter Capital, where instead of making an equity investment, they get a set percent of the company’s revenues over time. It’s a cool idea that worked out well for Andy and Keith, since it got Keith the funding he needed on terms that Andy was comfortable with.
As a side note, Lighter Capital is the leader in a new funding approach called revenue based finance which is an interesting alternative for entrepreneurs to fund growth in their small business. I may write about this more in the future, but in the meantime Lighter Capital is funding an “explosive” company in August (you’ve got two days left to apply), a fun idea to keep small business funding interesting and worth checking out if you need 100K to 500K right now.
During the panel, I plan to bring Keith and Andy water to support them, as is my typical role. I actually didn’t like Keith’s business when I first came across it but as we got to know each other he did an awesome job keeping me in the loop, listening to my feedback, and iterating, so after about six months, I came around especially to Keith but also to BigDoor’s business. I’ll be giving my thoughts on how Keith convinced me to invest by just running his company and interacting with me over an extended period of time rather than by pitching me.
If you are into this, upvote our panel. Either way, I’ll see you at SXSW.
On the heels of all the noise around Groupon’s $100m financing at a $7.5b (billion) post valuation, I thought I’d put out a call for “old VC term sheets – prior to 1990.”
My partner Jason Mendelson and I are working on a book titled Venture Financings: How To Look Smarter Than Your Lawyer and VC. The final draft is due at the end of February (feel free to give us your sympathy if you happen to see us between now an then) and based on my previous experience with our publisher (Wiley) on Do More Faster, I expect it’ll be out by the end of Q211.
The basis for the book comes from the Term Sheet series that Jason and I wrote on this blog in 2005. We’ve updated the series for the current reality of 2010 (of which much is very similar to 2005, with some differences), talk about lots of different twists that have appeared, and tell plenty of stories to illustrate what the implications of various terms and financing configurations are.
As part of this, I’m looking for some early VC term sheets. I started by trying to hunt down the original Digital Equipment Corporation term sheet (or letter describing the investment) from AR&D to Ken Olson but came up dry. Today, as I was working on some stuff, I realized it would be interesting to look at some term sheets from the 1970’s and 1980’s in whatever form they are in.
If you happen to be in possession of an older VC term sheet – either for a company that was successful or one that was a failure – I’d love to see it. You can email it to me if easy, or drop me a note and I’ll tell you where to fax it. I’ll make sure I honor your request to keep it anonymous if you want me to (either you, the company, or both) but of course would love the ability to weave it into the book where appropriate.
My partner Seth Levine has a detailed post up today titled Trada – from the beginning that describes the creation and financing of Trada. Foundry Group is the seed investor in Trada and Seth’s post describes one example of what I think is effective VC seed investing.
The meat of the funding story follows:
“Of course coming up with the idea is the easy part. Executing against that idea is another matter. In this case neither Niel (nor I) had any interest in creating a traditional syndicate to fund the company. Instead we quickly put our heads together about a financing (we like to say it was over beers, but the truth is more mundane – we hammered out the details in a 10 minute conversation in the conference room of the Foundry office). We decided that we wanted to bring in some experts to help us with the business and together flew around pitching the business to a small handful of strategic angel investors to pull together a small syndicate that became the initial Trada investor base. Niel and I hammered out a second financing in similar fashion (again around the Foundry conference table, this time without the need for an angel roadshow). It’s a great example of how we like to work with entrepreneurs – especially those that we have a long history with. We like to be involved early (in this case before an idea for a business even existed) and we think of our angel investments as a down payment on a subsequent investment in the business (we’ realize that we need to give early businesses some time to develop).”
The short version is that the seed round was figured out in ten minutes – this was the “Series A”. A few strategic angels were added to this round. We did a second financing by ourselves at an increased valuation – this was the “Series B”. Recently Google Ventures led the a $5.75m “Series C” round.
The terms on the Series A and B were straightforward as Niel Robertson, the founder/CEO of Trada is a sophisticated entrepreneur (Trada is his third company) so he had no patience (nor did we) for silly, complex early stage terms. More importantly, the two key aspects of any deal – price and control – we able to be negotiated quickly between Seth and Niel, partly because of their long history working together which was built on mutual respect and trust.
When we funded the Series A (the seed round) of Trada, we fully expected we were at the beginning of a multi-round journey. Seth does a great job of explaining how it got started – I encourage you to read his post for an example of one of the financing cases where I think a VC can be an excellent seed investor.