What Entrepreneurs Should Know Before Approaching Investors

Here is an interview I did back in the spring and it appeared in The Park Guide. I had no idea it was out there until someone pointed it out to me today, but the material is still helpful and relevant for the most part.

I just re-read it. In the interview, I talk about:

• What VCs look for in an investment opportunity
• Common mistakes entrepreneurs make when pitching to a VC
• What entrepreneurs can do to "seal the deal"
• How to decide how much to raise
• State of the VC market nationally and locally

Let me know what you think.

Comments

[Samantha]

Entrepreneurs who want to start new business; it is not easy raising business capital for small business financing needs. Particularly, if you have had bad credit history, business capital is harder to come by.

[Chad]

I have a found a VC to fund my start up company. Upon me forwarding the email can you tell me if its ok etc?

[Igor Jablokov]

Interesting comment above re: expectations; I'm sure leaving founders with 1-2% of equity is a VC's wet dream. That said, only the 2nd tier folks would try to corner you in this extreme fashion. Most others we've socialized with, who have greater than average IQ points, would probably want to keep their investments' senior leaders motivated. This is especially true with the negative impact on dealflow a "nice" writeup in TheFunded.com could have. It's eye opening to see the interesting patterns developing in this symbiotic process...

[Lt.Draper]

>>Typically, companies will raise money in rounds focused around milestone points, which works to the benefit of the investors and the company. If a company raised sufficient funding at the start — when valuation typically is at its lowest — economics will force the company to give up an unusually large share of the equity. By staging it, shareholders will have less dilution.

I think most founders are deluding themselves when they take a smaller first round investment with the idea of preserving equity. The VCs are well aware that anti-dillution is going to kick in during the next rounds. In fact, I contend that many VCs purposefully underfund first and second rounds with an eye towards getting a larger piece over the long term.

The typical $1M first round is really about 10 months of burn rate for a 10-person company. It will take you six months to secure the next round which is going to dillute you further, so you've really only bought 4 months of runway. Many founders find themselves on the VC treadmill -- as soon as one round closes, they have to start working on the next. So you end up with a company based on selling an investment opportunity instead of real products to real customers. From the company's standpoint, they would have been far better off taking an adequate amount of funding and just giving up the equity.

As a founder, before you accept venture capital, you need to ask yourself if 1-2% of the equity in the big payoff is going to be enough to meet your goals. The 80% of the company that you still own after the first round is a mere illusion.