Fundraising

What the greatest technology investors say about Fundraising

FUNDRAISING POSTS (51 posts)

The following is a list of the post titles by author under this topic.  Scroll further down this page to find the actual blog post by your selected author.   Author’s posts appear in reverse alphabetical order.  For example, following this list, Fred Wilson’s posts appear towards the beginning of the blog page, and Marc Andreessen’s post appears towards the end of the blog page.   

MARC ANDREESSEN   (1 post)

Marc Andreessen: Do Whatever is Required to get to Product/Market Fit

BOSTON MILLENNIA PARTNERS  (1 post)

Boston Millennia Partners:  Early Stage Investing is Far from an Exact Science

JEFFREY BUSSGANG  (3 posts)

Jeffrey Bussgang:   How to Select a Venture Capitalist

Jeffrey Bussgang:  Be Wary of Term Sheet Tactics    

Jeffrey Bussgang:  Relationship between Option Pool Size & Price

RON CONWAY (1 post)

Ron Conway: What Ron Conway Looks For in a Deal

CHRIS DIXON (9 posts)

Chris Dixon:  How Much Seed Money to Raise

Chris Dixon:  Think of Dilution over the Company’s Life & How Much to Raise

Chris Dixon: Best Thing when Considering Raising Money

Chris Dixon:  Problems Taking Seed Money from Big VCs

Chris Dixon:   Nothing More Dilutive & Morale-Crushing than a Down Round

Chris Dixon: The Company’s Stage: Weighing  Investor Quality vs. Valuation

Chris Dixon:  Tranching Can Create Misalignment of Interests   

Chris Dixon:  Never Share Your Minimum Valuation Number with Investors

Chris Dixon:  How to Understand & Predict New Markets

BRAD FELD  (3 posts)

Brad Feld:  Brad Feld: 3 Types of Angel Investors

Brad Feld:  The Math behind the Valuation Calculations

Brad Feld:   Investors Require Employee Stock Options

BRIAN GARRETT (1 post)

Brian Garrett:  Do More with Less Before Raising Outside Capital

JOSH KOPELMAN  (1 post)

Josh Kopelman:  High Valuations Can Limit Exit Opportunities

JASON MENDELSON  (2 posts)

Jason Mendelson:  Investors Only Care about Two Things

Jason Mendelson:  Investors Only Care About Returns & Control

HOWARD MORGAN  (1 post)

Howard Morgan:  Fail Quick & Cheap

BABAK NIVI   (3 posts)

Babak Nivi:   The Biggest Mistake Entrepreneurs make when Raising Money

Babak Nivi:  Tips When Raising a Seed Round

Babak Nivi:  The Option Pool Lowers your Effective Valuation

BASIL PETERS  (3 posts)

Basil Peters:   Why VC's Block an Exit

Basil Peters:   Angels Need a 20-25%/yr Return

Basil Peters:   How to Ensure There's Alignment on Exit Strategy

NAVAL RAVIKANT  (2 posts)

Naval Ravikant:  5 Main Qualities of an Exceptional Startup

Naval Ravikant: Social Proof is Powerful

MARK SUSTER  (13 posts)

Mark Suster:  Mark Suster's Financing Advice for Entrepreneurs

Mark Suster:  Be Leary of Too High a Price

Mark Suster:  Select the Highest Quality Investor Available

Mark Suster:  Mark Suster:  Angels Need Five Skills to Excel

Mark Suster:  Dilution Benchmarks & Fundraising

Mark Suster:  Fundraising Terms Pile Up with Later Stage Investors

Mark Suster:  VCs Want Big Outcomes & May Block a Sale

Mark Suster:  The VC “Squeeze” and Dilution

Mark Suster:   Early Stage Technology Investments Come Down to 4 'M's'

Mark Suster:  Angels vs. Series A vs. Series B Characteristics

Mark Suster:  The VC Assumes there’s an Option Pool

Mark Suster:  Shoot for 18-24 Months of Runway When Fundraising

Mark Suster: Mark Suster: Valuation-What It Is & Its Ranges

FRED WILSON (7 posts)

Fred Wilson:  Two Rules of Thumb for Early Stage Fundraising

Fred Wilson: Building the Business First

Fred Wilson:  An Option Pool is about Price

Fred Wilson: Fred Wilson's Comfort Zones on Fundraising & Valuation

Fred Wilson: No One Gets More Diluted than the Founders

Fred Wilson: Determine Option Pool Needs ‘Round to Round’

Fred Wilson:  Option Pool Gets Increased for Subsequent Rounds            

Option Pool Gets Increased for Subsequent Rounds

Fred Wilson venture capitalist and Co-Founder Union Square Ventures

When entrepreneurs go to market for subsequent investment rounds, Wilson says that “as part of the transaction the [option] pool will get increased again.   [Wilson likes] to do these refreshes as part of the financing negotiation since it is all about price.”  Fred Wilson, Valuation and Option Pool, Nov. 6, 2009 comments section http://www.avc.com/a_vc/2009/11/valuation-and-option-pool.html#comment-22043449

 

Determine Option Pool Needs ‘Round to Round’

Fred Wilson venture capitalist and Co-Founder Union Square Ventures

Even if one expects multiple investment rounds, Wilson says it’s better to determine option pool needs “round to round [vs. earmarking all expected future option pool needs upfront] because you can never know where this thing is headed and when you'll sell.”  Fred Wilson, Valuation and Option Pool, Nov. 6, 2009 comments section, http://www.avc.com/a_vc/2009/11/valuation-and-option-pool.html#comment-22043449

No One Gets More Diluted than the Founders

Fred Wilson venture capitalist  and Co-Founder Union Square Ventures

 Wilson discusses employee equity and dilution in technology and high growth businesses.   

“If anyone goes to the pay window, everyone goes to the pay window. [from [] Jeff Minch, [] JLM [] an active commenter on the avc blog].”

“[] If you [] sold [your company] for $100 million and you and your co-founders are gonna make a bunch of money [] you really ought to make sure that every single person who was involved in making that success happen makes a bunch of money too.”

“[] nobody will get more diluted than [the co-founders] because [the co-founders] are there at the very beginning and the dilution will happen over time.  And the person or the investor who shows up at the very end of the process might never get diluted.  The person who was there at the very beginning gets diluted the most.” 

“[] The sooner you can stop talking about equity in percentages and start talking about it in dollars is the sooner that you are going to own more of your company than you would otherwise.” Fred Wilson  April 19, 2012  MBA Mondays Live: Employee Equity - Archive and Feedback- video;

http://www.avc.com/a_vc/2012/04/mba-mondays-live-employee-equity-archive-and-feedback.html#disqus_thread

Fred Wilson's Comfort Zones on Fundraising & Valuation

Fred Wilson venture capitalist and Co-Founder Union Square Ventures

“I'm all about “back of the envelope”.  I am old school but these are my comfort zones:

Build product - raise [$] 600k at 3mm post [post-money valuation] 
Build usage - raise [$]1.8mm at 9mm post 
Build company - raise [$] 4mm at 20mm post

I am not in my comfort zone these days.” [Wilson was referring to valuation-wise late 2011 and presumably early 2012 as well.] Fred Wilson Burn rates: How Much?  Comments, Dec. 12,  2011; http://www.avc.com/a_vc/2011/12/burn-rates-how-much.html

An Option Pool is about Price

Fred Wilson venture capitalist and Co-Founder Union Square Ventures

“One [] contentious [] negotiation [point] between an entrepreneur and a VC [], particularly [in] an early stage financing, is the inclusion of an option pool in the pre-money valuation. [] [The] fact [is an option pool] is simply about price.  [Example]:  [] $3.25mm pre-money with no option pool [can be equivalent to] $4mm pre-money with one. [] What an entrepreneur needs to do is find out what the market price for [his] company is with and without an option pool in the number. [Then], the negotiation over this point is [] less contentious.”

“[] [Wilson acknowledges that if] options are counted in the pre-money, entrepreneurs will want commensurately higher valuations to compensate for the additional dilution.”

“[][The] option pool request needs to be reasonable and based on [a] budget.  [Wilson looks for] enough options [in] the "pre-money pool" to fund the hiring and retention needs [] until the next financing.”  Wilson wants an option pool in the pre-money when he invests.  Fred Wilson, Valuation and Option Pool and comments, Nov. 6, 2009;  http://www.avc.com/a_vc/2009/11/valuation-and-option-pool.html#comment-22043449

Building the Business First

Fred Wilson venture capitalist and Co-Founder Union Square Ventures

“[Some] founders [] suggest building the business first (even if it takes longer) and then seeking investment later after it's proven successful and has a strong growth trajectory. [] Examples [][are] StackExchange and DuckDuckGo.” Wilson responds that “[] that's a great model if you can do it.”  Fred Wilson Burn Rates: How Much? Comments section, Dec 12, 2011 ; http://www.avc.com/a_vc/2011/12/burn-rates-how-much.html

 

Two Rules of Thumb for Early Stage Fundraising

Fred Wilson venture capitalist and Co-Founder Union Square Ventures

“[With a fast growing company], doubling employees year over year, adding users and customers [] very rapid[ly] [], [] don’t [] raise too much money.  [] [Otherwise] [the company] will be sitting on cash [] raised [at a lower valuation] [] [which is] too dilutive to [founders] and angels.

[Wilson has] two basic rules of thumb [for the amount to raise in early stages, i.e., seed, Series A and B rounds]. First try to dilute in the 10-20% band whenever you raise money.” 10% is preferable.  More may be necessary, “[] but try [] to keep [] dilution below 20% each round.  If you do two or three rounds [exceeding] 20% each round, you’ll end up with too little [equity].

Second, raise 12-18 months of cash each time you raise money.  Less than a year is too little. [] Longer than 18 months means you may [have cash when the company had at a lower valuation].

[] When [a] company gets above 100 employees and valued at north of $50mm, things change. You may need [] more cash [] for working capital [] and [the company] may not be increasing value [as rapidly as] when [it was] smaller.”  A raise of 24+ months cash may then be appropriate.  Fred Wilson, How Much Money To Raise, Jul 3 2011;  http://www.avc.com/a_vc/2011/07/how-much-money-to-raise.html

Mark Suster: Valuation-What It Is & Its Ranges

Mark Suster Partner Upfront Ventures and former entrepreneur

 “Valuation = whatever an investor is willing to pay. Investors want to own 25-33% so it can be determined by how much you raise. [] early investors know how much they want to invest and what the norms are by stages. There are huge variances (and prices go up and down dependent on market conditions), but general guidelines on valuation:

angel: sub $1m
seed $1-$2.5m pre [pre-money valuation]
A round: $2-5m pre. Up to $7-8m for super experienced entrepreneurs
B round $7-12m pre. Outliers can be $20m pre. EXTREME outliers (see: FourSquare) can fetch crazy prices.
C round: 100% dependent on company performance.”

Mark Suster comments from Want to Know How VC’s Calculate Valuation Differently from Founders?, July 22, 2010;  http://www.bothsidesofthetable.com/2010/07/22/want-to-know-how-vcs-calculate-valuation-differently-from-founders/

The VC Assumes there’s an Option Pool

Mark Suster Partner Upfront Ventures and former entrepreneur

“The VC assumes [there will be] an option pool [] to hire and retain talent to grow [the] company. [] The more senior members [the company has], then the [fewer] options [needed] and vice versa.  Industry standard post [the] first round of funding will be 15-20% [for the option pool].  [Suster] say[s] “post” funding because [one will] need more than this amount pre-funding to get to this number after funding. [] 

[It’s standard] that the VC wants the options includ[ed] before [he] funds [].”  The option pool dilutes the founder’s percent ownership, not the investor’s.  The option pool suffers the same percent dilution the founder suffers when a VC invests his money. 

“Note that the term sheet [says “Pre-Money” valuation and nowhere does] the term sheet [say] “true Pre-Money” or “effective Pre-Money”– that’s for [the founder] to calculate.”   True or effective pre-money is based on a lower price/share due to options increasing the number of shares incorporated in the calculation. The result is a lower true pre-money than pre-money, the latter which is also called “nominal” pre-money valuation.  Mark Suster Want to Know How VC’s Calculate Valuation Differently from Founders, July 22, 2010;    http://www.bothsidesofthetable.com/2010/07/22/want-to-know-how-vcs-calculate-valuation-differently-from-founders/

Angels vs. Series A vs. Series B Characteristics

Mark Suster Partner Upfront Ventures and former entrepreneur

“[] Angel investors [] [invest] at the highest risk because much less is proven in the business.  They expect and need to earn a much higher return for the risk they’re taking. 

[] When a [Series] A investor gets involved, usually product has shipped, usually [there are] the first clients and some proof points, management team is better and solutions are more thought-out.   

[] [In] Series B [investors] are looking at metrics [] like how many clients have [been] signed up, [] costs of acquisition, [] conversion rates, [] LTV (lifetime value of customer), [] churn, and they want to see data, facts and figures.

[] Check sizes grow as the risk is decreased and usually coincides with the founders themselves needing more capital.”   Mark Suster-This Week in Venture Capital #14 with Rick Smith, founder of CrossCut Ventures, Jul 15, 2010  @ 50-52 min into interview;  http://www.bothsidesofthetable.com/2010/07/15/this-week-in-vc-with-rick-smith-of-crosscut-ventures/

Early Stage Technology Investments Come Down to 4 'M's'

Mark Suster Partner Upfront Ventures and former entrepreneur

“[] [Almost] all VC investments in early stage technology & Internet investments come down to just four key factors []: management, market, money [i.e., valuation] and above all else momentum [i.e., mostly product momentum]. 

[] The number one thing that investors get their checkbooks out [for is] momentum.  [Momentum has various definitions]:  user numbers, revenue, channel partners, biz dev deals, [etc.]. 

[] [Suster’s investment decision is based] 70% [on] management, 30% [on] product. 

[] [Almost] all VCs care about investing in big markets with ambitious teams.

[] Most VCs want to own between 20-25% minimum of [a] company. [] [Investors need to] own enough [equity] to make it worth their time – thus “money”. And all of this is wrapped up in forward progress that [entrepreneurs] demonstrate over time.”   Mark Suster, The Four Main Things that Investors Look for in a Startup,  October 6, 2010

http://www.bothsidesofthetable.com/2010/10/06/the-four-main-things-that-investors-look-for-in-a-startup/

The VC “Squeeze” and Dilution

Mark Suster Partner Upfront Ventures and former entrepreneur

“[] most VCs have a 20% minimum [equity threshold] so bringing in multiple VCs can be very expensive in terms of dilution. [] The biggest problem [with 2 VC’s in a deal] is the “squeeze.” All VCs want to own between 25-33% [equity]”, above their internal 20% minimum.  A founder with co-founders can quickly get very diluted once an option pool is included.  “[]There are [] VCs [] who don’t cling to the old “20% or the highway” mentality [] and [Suster] suggest[s] [founders] seek them out.” Mark Suster, How Many Investors are Too Many? February 22, 2011http://www.bothsidesofthetable.com/2011/02/22/how-many-investors-are-too-many/

 

VCs Want Big Outcomes & May Block a Sale

Mark Suster Partner Upfront Ventures and former entrepreneur

“VCs want big outcomes.  [VCs] will demand a veto right over [a company sale].  [A founder] might be very happy selling [his] business for $9 million and owning 50% of the company.  [A] VC is not necessarily going to be happy getting $3 million for his 33% stake for which he invested $1 million.

[While that’s] a 3x return [] it’s still just $3 million and if the VC has a $300 million [fund] it is just 1% of the money [needed] to reach his “hurdle rate” of when he’s entitled to earn carry (e.g. big bucks).  It’s just too much time to spend [] for such a small total return.  Many VC’s would still let [a founder] sell []” but some would block the sale.  Mark Suster  Do You Really Even Need VC? July 22, 2009; http://www.bothsidesofthetable.com/2009/07/22/do-you-really-even-need-vc/

Fundraising Terms Pile Up with Later Stage Investors

Mark Suster Partner Upfront Ventures and former entrepreneur

“[] any [early stage terms] will certainly be asked for by future investors in [] later funding rounds so all of these terms pile up [after] 3-4 rounds of funding over a 5 year time frame. And by the time most companies get to an exit [which realistically is still 8-10 years,] often the founders own very little of the economic upside."  Mark Suster, Want to Know How VC’s Calculate Valuation Differently from Founders?  July 22, 2010

http://www.bothsidesofthetable.com/2010/07/22/want-to-know-how-vcs-calculate-valuation-differently-from-founders/

Dilution Benchmarks & Fundraising

Mark Suster Partner Upfront Ventures and former entrepreneur

Negotiations between entrepreneurs and investors include dilution and other fundraising terms.  “[] the “fairway” of [investor’s equity] is 25-33% per round [i.e., entrepreneurs’ dilution]. [] If [the entrepreneur is] “super hot” or “super experienced”, [he] can end up with much less dilution –in some cases 12-15%.  But this is the exception, not the rule.”

“[] [These] dilution numbers don't take an option pool into account [].  Options are additional dilution.”

“[] [Valuation can be driven up] ONLY if there’s [] competition [for] a deal.  [Investors stay honest when entrepreneurs] talk with multiple parties.”

Fundraising also requires considering how many future rounds are needed and expected total future dilution.  It’s not an arbitrary spreadsheet-driven exercise reflecting attaining profitability.  It requires “understanding [industry norms necessary] to build a successful Internet business and where [the company falls] on that spectrum given [its business type].”  Mark Suster,  8 Questions to Help Decide if You Should be Raising Money Now, February 17, 2011 and comments;  http://www.bothsidesofthetable.com/2011/02/17/8-questions-to-help-decide-if-you-should-be-raising-money-now/

Mark Suster: Angels Need Five Skills to Excel

Mark Suster Partner Upfront Ventures and former entrepreneur

Suster identified “[] five skills [angel investors need to excel]”:

1.  “Access to the Best Deal Flow” []

2.  “Domain Knowledge

“[]Domain knowledge [] [is] [well-honed industry knowledge].” “[] It requires domain knowledge to know what you’re talking about and success long term as an angel. [] One of the biggest problems is when “you don’t know what you don’t know.””

3.  “Relationships with VCs

“[] Relationships with VCs [] protect [angel] investments” by taking out angels’ positions. 

4.   “Deep Pockets

A company is either acquired or has an IPO in an average 7-10 years.  Suster says that angels’ deep pockets providing follow-on investments minimize these risks:  dilution, inability to protect good investments and a lack of deal diversity.  “[] [Angels] need to be able to do a large enough number of investments to create enough deal diversity.”  The greater the deal diversity, the lower the risk. 

5. “Access to Buyers”

“[] the best investors influence their end-games through well-cultivated relationships with eventual buyers of their portfolio companies.” [] [Helping] companies exit to the right buyer and importantly at the right time” can be crucial.  Mark Suster, Angel Topics Sept. 14, 2010 http://www.bothsidesofthetable.com/angel-topics/

Select the Highest Quality Investor Available

Mark Suster Partner Upfront Ventures and former entrepreneur

 Suster advises entrepreneurs to select the highest quality and most experienced investors available.   It’s generally better for the company long term to have the right investors vs. optimizing every last piece of equity up front.  “Worrying about giving up an extra 10% [equity] at [an early] stage can be meaningless if the ultimate outcome is either success or failure.”  Mark Suster, Raising Angel Money, July 19, 2009; http://www.bothsidesofthetable.com/2009/07/19/raising-angel-money/

Be Leary of Too High a Price

Mark Suster Partner Upfront Ventures and former entrepreneur

 “[] [Suster has] seen a destructive cycle where otherwise interesting companies have been screwed by raising too much money at too high of prices and gotten [] [trapped] when [] markets correct and they got ahead of themselves [on inherent market valuation]. []

[It’s] OK to [] shoot for the “top end of normal” for the market conditions. [] [He] caution[s] entrepreneurs from [] raising money at significantly ABOVE market valuations. []

If [entrepreneurs] haven’t figured out product / market fit and therefore still have a highly risky business [they] run great risks for getting too far ahead [] on valuation. [] [Most] investors won’t want to [][do] a “down round,” which creates tension between them and early investors.

[] [Sophisticated] investors know [a major down round] is fool’s gold.  They get a cheaper price, [] wipe out much founder stock value and [] reissue [founders] new options. [Founders] take the money []” except their incentives get eliminated.

[] He advises “[] us[ing] competition to [][ensure] a fair price [and] rais[ing] a slightly higher round than [] [otherwise for some strategic reserve]. [] [One wants] to show an uptick in valuation [] for new investor confidence and to maintain [early investor relations].”  Mark Suster  Why Startups Should Raise Money at the Top End of Normal,  June 5, 2011;  http://www.bothsidesofthetable.com/2011/06/05/why-startups-should-raise-money-at-the-top-end-of-normal/