Raising Capital: Closing The Deal(slideshare.net)
slideshare.net
Raising Capital: Closing The Deal
http://www.slideshare.net/jbeninato/raising-capital-closing-the-deal
12 comments
Hi Gruseom, I probably won't follow after this post, but you are welcome for the share. You can always email me directly via the address on the first page of the presentation. Board composition really matters, because your board is going to make decisions about the future of the company, and their most important role (some would say only role) is to hire/fire the CEO. Many founders give up 2 board seats for a bag of peanuts, and live to regret it.
The bottom line is board composition should be proportional to ownership. If a VC buys 25% of your company, they should have 1 of 4 board seats. The day investors (or their close friends who are identified as outsiders) have more than 50% of the board seats is the day you as a founder have lost control of your future.
I think most investors are fair about board composition up front. However some bigger VCs rely up on the fact that over time, you'll need to do multiple rounds, and they know that follow-on investors are frequently afraid to go against their decisions, so in effect, they end up with multiple board seats because the other investors don't want to piss them off. I have seen this dynamic firsthand, and it is not good. I hope this helps you!
The bottom line is board composition should be proportional to ownership. If a VC buys 25% of your company, they should have 1 of 4 board seats. The day investors (or their close friends who are identified as outsiders) have more than 50% of the board seats is the day you as a founder have lost control of your future.
I think most investors are fair about board composition up front. However some bigger VCs rely up on the fact that over time, you'll need to do multiple rounds, and they know that follow-on investors are frequently afraid to go against their decisions, so in effect, they end up with multiple board seats because the other investors don't want to piss them off. I have seen this dynamic firsthand, and it is not good. I hope this helps you!
I can personally say that Joe Beninato is a great guy. He personally took time to meet with me at a Starbucks and gave some honest, valuable advice when we were looking for some funding early on with Picwing. Glad to see he's still doing that!
Hi Joe, we really appreciate your time and energy at fbFund REV!
I'm curious about the distribution of meetings/term sheets for the investors you highlighted.
Also interested in the second and third order effects of introductions to investors. Who has the best recommendation/conversion in the valley? *Need to do my HW on papers, dissertations, etc. to formulate better questions but seems like we could run tests to validate some of your points with our teams...
Thank you, Enrique
Sorry would of posted earlier but failing to get my username enriqueallen back :(
I'm curious about the distribution of meetings/term sheets for the investors you highlighted.
Also interested in the second and third order effects of introductions to investors. Who has the best recommendation/conversion in the valley? *Need to do my HW on papers, dissertations, etc. to formulate better questions but seems like we could run tests to validate some of your points with our teams...
Thank you, Enrique
Sorry would of posted earlier but failing to get my username enriqueallen back :(
Thanks, Enrique. Not sure what you mean by distribution of meetings/term sheets. If what you are saying is which VCs or angels are most likely to fund, that is a really hard question to answer. It really depends upon your plan and what you are doing, so I don't think I could say "firm X gives the most term sheets."
In terms of your other question about recommendations, I would guess that if Reid Hoffman or Marc Andreessen recommended an investment to a VC firm saying they were investing, the VCs would take notice. However, getting time from either of them is difficult. I'd recommend getting a strong, well-connected advisor, and a similarly connected lawyer, and work closely with them. I hope this helps.
In terms of your other question about recommendations, I would guess that if Reid Hoffman or Marc Andreessen recommended an investment to a VC firm saying they were investing, the VCs would take notice. However, getting time from either of them is difficult. I'd recommend getting a strong, well-connected advisor, and a similarly connected lawyer, and work closely with them. I hope this helps.
Why is he so adamant about not communicating a valuation? Is it because if you don't give one, there's a chance the VC will value you higher than the valuation you would have communicated?
Hi Jack,
Great question. It's pretty complicated, but I think naming a valuation can only lead to problems. Bottom line: it's not your job as an entrepreneur to value your company. It's up to the investor to "make the offer" in most cases. Angels and VCs are professional negotiators. Most entrepreneurs are not. They see thousands of companies every year and can very quickly assess the value of your company. I have seen situations where an entrepreneur shoots himself in the foot by stating a valuation that is lower than the VC had in mind, as you suggest above. But the reality is that the "market" will value your startup. If 3 VCs want to fund it, it's probably worth more than you thought. If 0 VCs want to fund it, it's probably worth less than you thought :( I think it's best to let the investors compete and the interest level drive the valuation of the company. If asked for a valuation by a potential investor, my suggestion to entrepreneurs is to say "We'd like to raise $X. We're realistic about valuations these days, so you don't need to worry that we want $20 pre. But we're going to let the market decide the valuation." Most investors respect that response from what I have experienced over the years.
Great question. It's pretty complicated, but I think naming a valuation can only lead to problems. Bottom line: it's not your job as an entrepreneur to value your company. It's up to the investor to "make the offer" in most cases. Angels and VCs are professional negotiators. Most entrepreneurs are not. They see thousands of companies every year and can very quickly assess the value of your company. I have seen situations where an entrepreneur shoots himself in the foot by stating a valuation that is lower than the VC had in mind, as you suggest above. But the reality is that the "market" will value your startup. If 3 VCs want to fund it, it's probably worth more than you thought. If 0 VCs want to fund it, it's probably worth less than you thought :( I think it's best to let the investors compete and the interest level drive the valuation of the company. If asked for a valuation by a potential investor, my suggestion to entrepreneurs is to say "We'd like to raise $X. We're realistic about valuations these days, so you don't need to worry that we want $20 pre. But we're going to let the market decide the valuation." Most investors respect that response from what I have experienced over the years.
Generally, a negotiation around a number will go more in your favor if you don't say a number first. Another view is that you should raise a level appropriate for your growth plans, and set the valuation based upon the control demands of the VC. Control is more important than valuation.
He who speaks first, loses.
You see the list of angels, angel groups, and seed firms? They're all in the Valley. You can do your startup elsewhere and succeed, but hey, if it's possible, probably worth moving.
Hi Sachinag, thanks for your comment. The reason most (but not all) of the firms I listed are in the Valley is because this group of startups are all in Palo Alto and meeting with investors here over the next few weeks. Of course there are many great investors outside of the Valley (some like Union Square, Foundry and First Round are all based outside) but I live and work in the Valley, so most of the investors I've worked with are here.
This presentation is really well done and will save you time from having to read 5-10 other smaller posts on the subject.
I still think it's best to raise capital when they come to you. Most don't or won't have the luxury of that though.
I still think it's best to raise capital when they come to you. Most don't or won't have the luxury of that though.
I ask because I have heard many nasty stories of founders thinking that they would stay in control of their company, only to find that, because of the board, this wasn't true at all. I would like to know how to make sure this doesn't happen. It seems like the issues can't all be obvious, or so many smart people wouldn't fall prey to this pattern.