Babak Nivi AngelList & Venture Hacks

What Babak Nivi, AngelList & Venture Hacks says about topics vital to entrepreneurs

Babak Nivi Posts – Titles

Babak Nivi  Posts  – Titles  (4  posts)

 

The Biggest Mistake Entrepreneurs make when Raising Money

Tips When Raising a Seed Round

The Option Pool Lowers your Effective Valuation

“Good” Social Proof

“Good” Social Proof

Babak Nivi Co-Founder AngelList and Venture Hacks and angel investor

“Social proof is when you do something because other people are doing it. []

In this context, social proof is looking at what other investors, entrepreneurs, and advisors are doing. Customers don't count.

I'll disagree with Naval Ravikant [Co-Founder AngelList and Venture Hacks] on "An investor is choosing not to invest in your company and is making the introduction for you".  I don't think this is as bad as he makes it out to be.

[] [The] logical part of your brain will ask why the investor is passing.  And there's often a good reason: wrong market, wrong stage, wrong geography, bad chemistry with entrepreneur, some known risks that the investor doesn't want to take, etc.

Rejecting a deal just because a peer rejected it is mathematically unsound. Here's the proof. Every deal you ever invested in was probably rejected by a peer at around the same time you made the investment. So, if your criterion is that you will reject deals that peers reject, you will never make any investments.” Babak Nivi, What is good social proof?  Aug. 20, 2010; http://www.quora.com/What-is-good-social-proof

The Option Pool Lowers your Effective Valuation

Babak Nivi Co-Founder AngelList and Venture Hacks and angel investor

“The option pool lowers your effective valuation.  Your investors offered you a[n] $8M pre-money valuation. What they really meant was, “We think your company is worth $6M. But let’s create $2M worth of new options, add that to the value of your company, and call their sum your $8M ‘pre-money valuation’”. [] Slipping the option pool in the pre-money lowers your effective valuation to $6M. The actual value of the company [] is $6M, not $8M. [] The [option ‘shuffle’] puts pre-money [valuation] into your investor’s pocket. [] the option pool only dilutes the common stockholders.  [] [The] investor’s norm is that the option pool goes in the pre-money.”   Nivi recommends using a specific hiring plan to more accurately determine option pool size vs. allocating some arbitrary percentage.  Babak Nivi  The Option Pool Shuffle  April 10, 2007;  http://venturehacks.com/articles/option-pool-shuffle

 

Tips When Raising a Seed Round

Babak Nivi Co-Founder AngelList and Venture Hacks and angel investor

When raising money in a seed round: “[] Take as much money as you can while keeping dilution between 15-30% (10%-20% of the dilution goes to investors and 5%-10% goes to the option pool).

Compare this to a Series A which might have 30%-55% dilution. (20%-40% of the dilution goes to investors and 10%-15% goes to the option pool.)

A seed round can pay for itself  if the quality of your investors and progress brings your eventual Series A dilution down from 55% to 30% (for the same amount of Series A cash).

Don’t over-optimize your dilution.  Raising money is often harder than you expect, especially for first-time entrepreneurs.”  Babak Nivi, Venture Hacks  How do we set the valuation for a seed round?  April 17, 2008;  http://venturehacks.com/topics/dilution

 

The Biggest Mistake Entrepreneurs make when Raising Money

Babak Nivi Co-Founder AngelList and Venture Hacks and angel investor

Nivi says “the biggest mistake entrepreneurs make when [] raising money” is that “[they] focus on valuation when they should be focusing on controlling the company through board control and limited protective provisions.   (Protective provisions let preferred shareholders veto certain actions, such as selling the company or raising capital.)

Valuation is temporary, control is forever.  For example, the valuation of [a] company is irrelevant if the board terminates [the founder] and [he] [loses his] unvested stock.

The easiest way to maintain control of a startup is to create good alternatives while [] raising money. If [the founder is] not willing to walk away from a deal, [he] won’t get a good deal.  Great alternatives make it easy to walk away.

Create alternatives by focusing on fund-raising: pitch and negotiate with all [] prospective investors at once. This may seem obvious but entrepreneurs often meet investors one-after-another, instead of all-at-once.

Focusing on fund-raising creates the scarcity and social proof that close deals.  Focus also yields a quick yes or no from investors so entrepreneurs can avoid perpetually raising capital.”  Babak Nivi, What’s the biggest mistake entrepreneurs make? , October 14th, 2007  http://venturehacks.com/articles/biggest-mistake; Why do investors want protective provisions? August 2nd, 2007;  http://venturehacks.com/articles/understand-protective-provisions