VCs Are Generalists, And Other Lies

 Babak Nivi

Ask an entrepreneur what they’re looking for in an investor and they won’t say things like “advice, corporate governance, recruiting.” Entrepreneurs would prefer someone who has specific connections, interest, and knowledge about the market they’re attacking and the technology they’re building.

 



Filed Under:
Collection: Funding
Category: Choosing Investors

Inside Versus Outside Financings: The Nightclub Effect

 Chris Dixon

At some point in the life of a venture-backed startup there typically arises a choice between doing an inside round, where the existing investors lead the new financing, or an outside round, where new investors lead the new financing. At this point interesting game-theoretic dynamics arise among management, existing investors, and prospective new investors.

 



Filed Under:
Collection: Funding
Category: Choosing Investors

Should Your Startup Give Performance-Based Warrants?

Mark Suster

Often the reason that startups offer performance-based warrants (PBW) is because they’re asked to.  You should think of PBW’s in the same way as you think about employee options – they are an incentive for an important partner in your business to help you achieve success over time.

 



Filed Under:
Collection: Funding
Category: Choosing Investors

The Importance of Investor Signaling in Venture Pricing

Chris Dixon

Pricing in any market is a function of the information available to investors. In the public stock markets, for example, the primary information inputs are “hard metrics” like company financials, industry dynamics, and general economic conditions. What makes venture pricing special is that there are so few hard metrics to rely on, hence one of the primary valuation inputs is what other investors think about the company. This investor signaling has a huge effect on venture financing dynamics. If Sequoia wants to invest, so will every other investor. If Sequoia gave you seed money before but now doesn’t want to follow on, you’re probably dead. Smart entrepreneurs manage the investor signaling effect by following certain rules.

 



Filed Under:
Collection: Funding
Category: Choosing Investors

How Do You Reference Check a VC?

Mark Suster

I would say that most entrepreneurs do almost no reference checks or at least do them very informally. Don’t let that be you. Most VC’s will happily supply you with a list of CEO contacts of the people who will speak to you about working with them. Don’t be afraid to (politely and respectfully) ask for this. In fact, they will think better of you because you’re demonstrating that you’re the kind of thorough person that they wanted to invest money into in the first place. Don’t stop there. 

 



Filed Under:
Collection: Funding
Category: Choosing Investors

Is Strategic Money an Oxymoron?

Mark Suster

When people refer to a strategic investor they are usually talking about an investor that comes from the industry you serve as opposed to an independent venture capital investor.  I put strategic in quotes because they are often anything but “strategic” and thus the term can be an oxymoron. Many serial entrepreneurs who have been burned would use something less kind than quotes.




Filed Under:
Collection: Funding
Category: Choosing Investors

How to Select Your Angel Investors

Chris Dixon

The most common mistake entrepreneurs make is to base their choice solely on the investors’ “celebrity” value (by “celebrity” I generally mean in the TechCrunch sense, not the People magazine sense). Picking celebrity angels might help you get a little more buzz when you announce the financing and a few SUL tweets, but that’s about it. The second biggest mistake is picking angels that benefit the lead VC. A lot of times when VCs guide entrepreneurs to certain investors what they are really doing is “horse trading” – they want you to let in so and so, because so and so got them into another deal, or will help them get into future deals

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Filed Under:
Collection: Funding
Category: Choosing Investors

Choose Your VC Investor Carefully

Mark Suster

I think the best VCs act as a sounding board for management. We provide a point-of-view that isn’t clouded by living in the details on a daily basis. We provide advice that is pertinent because we are able to see patterns across multiple companies. And hopefully we provide input because we’ve been in your shoes before. We’re there to serve you as the people who do the real work not there to have you serve our egos. VC Seagulls don’t think this way. You know in your gut who they are. If you haven’t read Blink by Malcolm Gladwell then read it. In our core we easily spot people’s inner character.

 



Filed Under:
Collection: Funding
Category: Choosing Investors

VC Seed Funding is Dead, Long Live VC Seed Funding!

Mark Suster

I don’t think it’s a question of To VC Seed or Not to VC Seed, I think it’s the age old question of who you’re working with and how well they reference. I’m surprised at how little referencing some founders do on their VCs. You’re never going to have a guarantee with ANY investor that they’ll commit to the next round. But great companies who choose great investors invariably have an easier time.

 



Filed Under:
Collection: Funding
Category: Choosing Investors

It’s The Partner, Not The Firm

Chris Dixon

From my experience, picking the right partner is very important.  For example, in two companies I seeded, the same top tier VC firm invested in later rounds.  In one case the partner has been super helpful, and in the other case pretty much absent. The partner’s influence within the firm also matters.  A influential partner can, for example, “pound the table” to do a follow on financing when you need it.  What stage the partner is in his career also matters. Junior partners will typically work harder, but might also have “sharper elbows” when, for example, you are selling the company since he needs to prove himself by making the firm money.

 



Filed Under:
Collection: Funding
Category: Choosing Investors

Angel Funding Advice

Mark Suster

In Silicon Valley there are people like Ron Conway, Jeff Clavier, Mike Maples and many more.  In SoCal we have Crosscut Ventures, Matt Coffin, Mike Jones, Klaus Schauser, etc.  They exist in every town.  They are people who built and sold companies and have a bit of money.  They have advice to share.  They know that the money they invest may be lost.  Their time is too valuable to call you every day wondering if you spent their $20-$100k wisely.  They know all the VCs for intros.  Their name alone is enough to get meetings set up.  They are calling cards.  They are full of wisdom.  Find out how to meet them in the next section.  They are your best bet.  They might be as hard as raising VC.  They are not for everybody.  Don’t be despondent if you can’t get their money.  But if you can, you should.

 



Filed Under:
Collection: Funding
Category: Choosing Investors

The Problem With Taking Seed Money From Big VCs

Chris Dixon

What the entrepreneur didn’t realize is that when you take any money at all from a big VC in a seed round, you are effectively giving them an option on the next round, even though that option isn’t contractual. And, somewhat counterintuitively, the more well respected the VC is, the stronger the negative signal will be when they don’t follow on.

 



Filed Under:
Collection: Funding
Category: Choosing Investors

Do You Really Even Need VC?

Mark Suster

If you’re in the more likely situation that you can see how to get your business from $1 million this year to $3 million within 3 years and maybe $8 million within 5 years then VC may not be for you.  VC’s aren’t looking for companies that are doing $15 million in sales in 8 years from their investment.  In this scenario I advocate a combination of bank debt, venture debt, small equity raise ($1-2 million) from high net-worth individuals.  These people would be thrilled with a company that could potentially double or triple their money.  VC’s would not be happy with this outcome.

 



Filed Under:
Collection: Funding
Category: Choosing Investors

Raising Angel Money

Mark Suster

The conversation about angel money is one I have all the time with entrepreneurs so I thought it would make for a good post on understanding angel investing – how they think, how you should think and how the first round venture capital firm will think by the time the deal gets to them.

 



Filed Under:
Collection: Funding
Category: Choosing Investors

How Well Do Investors Recruit?

 Babak Nivi

Investors refer 18% of hired executives, employees refers 65%, and “other sources” refer the remaining 17%. This data is consistent with our advice: hire investors for their money-add. Investors do add value, but you should assume their primary contribution will be money. Most of your value-add will come from employees, not investors.

 



Filed Under:
Collection: Funding
Category: Choosing Investors

What's the Difference Between Smart Money and Dumb Money?

Babak Nivi

Smart money is money plus the promise of help that’s worth paying for, dumb money is money plus hidden harm, and mostly money is mostly money. Weed out the dumb money with diligence. Evaluate supposedly smart money with the smart money test. Finally, assume your investors are mostly money: unbundle money and value-add to get money on the best terms possible and value-add on the best terms possible.

 



Filed Under:
Collection: Funding
Category: Choosing Investors

Is the VC Industry Doomed?

Babak Nivi

Entrepreneurs shouldn’t select their investors based on how much money they have made for their limited partners. The best VC for an entrepreneur is a partner who doesn’t care what other investors think, doesn’t take up the entrepreneur’s time with a lot of diligence, doesn’t pull out his Blackberry in meetings, and doesn’t ask dumb questions. The right partner makes investment decisions quickly, shows up to meetings on time, pays attention, lets management run companies, treats the entrepreneur like a peer, and conducts himself with humility and trust.

 



Filed Under:
Collection: Funding
Category: Choosing Investors

Keep Your Series A Options Open if You Raise Debt

 Babak Nivi

Raising convertible debt from venture capitalists can restrict your Series A options and lower your Series A valuation—whether or not your investors have a right of first refusal on the Series A. You can keep your options open by raising debt from angels exclusively or raising debt from more than one VC.

 



Filed Under:
Collection: Funding
Category: Choosing Investors