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Apparently this service now aggregates reports from 50+ services (like Thomson's old VentureXpert). Previously data like valuation and money raised was only available via subscription services (which meant that it was realistically available to only venture investors). But now with this a la carte service, anyone can get it. Pretty cool.
A couple of weeks ago I "upgraded" my blog comments to Disqus from those native to Typepad. Disqus is part of a crop of new startups that are trying to create businesses out of what previously were "features" for larger companies (I posted on this earlier).
And I have to confess, the new Disqus comments are definitely better than my old ones, as evidenced by more/better comments. That said, there is one major issue that I'm struggling with. Disqus apparently doesn't support migration of historical comments from Typepad (but apparently they do for Wordpress).
This is actually pretty disappointing. I've now got comments on my blog on both platforms and am stuck. Should I stay or switch back? Will they support it in the future? I should have known this before installing (and I'm sure it was in the fine print somewhere), but the instructions were misleading. And getting help from Disqus is tough. [A funny story: the best support I've had is when I posted a gripe comment on venture capitalist Fred Wilson's blog (he posted about his investment in Disqus) and the company CEO replied several times. LOL.]
To be successful these features-that-want-to-be-businesses need to over deliver on the customer experience. It just has to be way too good and way too easy to get enough people to switch that there is value for the company. The jury is still out on Disqus...
UPDATE: I'm not sure where I came up with the association between Disqus and Discus (as in the picture and the post title). But I now know that it's pronounced "discuss" just spelled cool (I'm a fan of Qs).
UPDATE 2: Over the past week I've been very impressed with Disqus' customer support. As I mentioned, there isn't a standard tool to migrate old Typepad comments to Disqus but the good folks at Disqus took a custom export I did and wrote a script to import them. So now I've got all of my comments on Discus and am lovin' it! Thanks Andrew!
About 10 VCs are now posting random "VC tips" over on Twitter. They just started yesterday. It's kind of the antithesis of my blog with long posts. I'll be curious how much useful advice these folks can dole out 140 characters at a time. Then again, it sure would be easier if I imposed the 140 cap here... [that was 310 not including the URLs...]
I've always found it annoying that the company has to pay for investors' legal fees and I also assumed that it was a trick GPs at a fund pull on LPs. But then I confess I never thought much about the incentives at play. I recently saw this post on Venture Hacks which makes a fairly compelling case why this has advantages for LPs, namely, a company paying all the legal bills:
It doesn't make it any easier to write that $75K check to the lawyers, but at least now you know who to blame [hint: it's not the VCs, it's *their* investors].
...he'd be Yokum Taku.
Anyone who's spent any time with me knows that I'm quite fond of analogies and metaphors, so why not annoy the rest of my readers with with this wonderful habit of mine?
Yokum Taku is a partner at Wilson Sonsini Goodrich and Rosati...basically the Goldman Sachs of startup law firms. It's been a while since I've used WSGR as counsel (read: 10-ish years) but I'm pretty sure they haven't started handing out partnerships to any bum who walks in the door (i.e. Yokum passes my "he's ridiculously smart and works his butt off" test even though I've never met or spoken to him).
What sets him apart from any law firm partner I've come across is that he runs a blog (Startup Company Lawyer) where he publishes an amazing amount of document templates and advice. If you read Yokum's posts, you'll see he is not just using his blog as "brochureware" he is actively responding to his readers in the blog comments. Heck, he even takes time to comment on other blogs (like that of yours truly). This is a guy who probably bills out at a rate of $500+ per hour and he's giving away free advice! I've heard a lot of entrepreneurs that are WSGR clients complain that they can't get partner time and can only talk to associates but here's a partner doling out free advice!
Who knows, maybe Yokum has a startup of his own up his sleeve and he's going to launch the Lawyerpedia or something. In any event, hats off to one of the best "open source" lawyers out there.
I stumbled across this academic paper on the psychology of waiting in lines. It's an updated version of a 1985 study and is apparently a chapter excerpted out of an upcoming book. You can read more about it here, but the Cliffsnotes version of line design principals are:
The paper is a study of physical lines (coffee shop, hospital, DMV, etc.) but I think the principals and conclusions apply equally well to virtual queues. here's the paper:
Someone asked a question about this on TheFunded and here's (my expanded) response. First, let me say that the reason VCs come across as entirely pessimistic is because most companies that come in to pitch in reality don't measure up to their claims. Their objections are an imperfect process for testing the claims. It's tough on both sides. So anyway, here is my list of the top 10 VC objections and some tips on how to overcome them:
10. We think your market is too small (or will take forever to mature). Dealing with this feedback from a VC has mostly to do with understanding the constraints of venture capital. You can either broaden what you consider your target market, explain why you see the market as bigger than they do or go talk to a VC with a smaller fund.
9. You are too early stage. This could be real feedback or it could be a platitude. VCs usually develop a comfort zone with a particular stage of company, but all but the most adventurous shy away from companies where the product is not yet in the market. Most VCs like to see some revenue and depending upon the industry they maybe want to see close to $1MM in revenue for early stage deals. Respond to this one is tough, because you are where you are. Best thing to do if confronted with this is find out where their comfort zone is and potentially come back when you reach that (I've actually seen that result in funding).
8. The valuation is too high. This usually means the VC thinks your company is okay and they might consider investing if you were giving it away at a couple million pre. It also can be used as a platitude. Sometimes it's a reference to companies that have raised a lot of money and have to do a flat or down round because they're running behind plan/expectations.
7. You are too late stage. This is really a variant of #8. Any early stage VC would love to own 20% of your late-stage business. This typically happens in Series B rounds or Series A rounds where the CEO/founders have an existing track record of success.
6. Google/Microsoft/Yahoo/AOL is already (or about to or could) do this. This is a push back on competitive landscape and your relative positioning. The key to thwarting this objection is to have more market knowledge than the VC you're talking to (which is an uphill battle given the information flow they get). You have to do your homework.
5. We think your projections are unrealistic (or alternatively: you have no business model). If you haven't spent enough time preparing your financial model, you can get caught flat-footed. Best thing to do on a financial model is to be very conservative. You want the VC commenting, "Oh, I think you'll get customers faster than that." There are also a lot of comparables out there so no need to reinvent the wheel.
4. We'd like to see more market traction before moving forward. This is typically a blow-off or a legitimate variant of #9. A close cousin of this one is when the VC says, "we're interested, but we need to know who else is interested to know if we're really interested." If you get that response, you're wasting your time...just get up a leave.
3. Company is a "feature" or "product" but not a business. This is really a variant of #10. Best thing to do is to try and step back and take a broader view of the opportunity and what it could be.
2. You have to ask yourself...what about India and China? I've only gotten this objection once. It's a dumb question so it's hard to give advice on how to respond. Maybe just make a reference to snoman.
1. B- or C-level team. Actually, Most VCs won't tell you this and instead you get one of the other platitudes. That makes it one of the hardest objections to respond to. I think the best way to overcome this is not to say that you have an A-level team (if in fact you don't) but rather to say something along the lines of, "here's our staffing plan for success..."
Overall, the best policy is honesty and candor. In fact, your best bet is to address these objections before they come up. And if, for example, a VC asks if the market may be too small you can respond, "you are probably right, but here's what would have to be true if that were not the case..." You want to turn it away from a "in-order-for-me-to-be-right-you-have-to-be-wrong" conversation.
No, I'm not talking about Barack Obama...I'm talking about the next hottest startup. Read about Breadless.com and weep!
Breadless Pitch: User Generated Sandwiches from David Kadavy on Vimeo.
Over the weekend, McCain and Obama each had a chat with Rick Warren of Purpose Driven Life fame. It was an hour of Obama followed by an hour of McCain. I saw the middle hour (so a bit of both) including this line of questioning:
Warren: ... which existing Supreme Court justices would you not have nominated? [emphasis mine]
McCain: With all due respect, Justice Ginsburg, Justice Breyer, Justice Souter and Justice Stevens.
Warren: Why? Tell me why?
McCain: Well, I think that the president of the United States has incredible responsibility in nominating people to the United States Supreme Court. They are lifetime positions as well as the federal bench. There will be two maybe three vacancies. This nomination should be based on the criteria of proven record of strictly adhering to the Constitution of the United States and not legislating from the bench. Some of the worst damage has been done by legislating from the bench.
Ok. Fine. So he doesn't like the 4 liberals on the court.
Only one small problem...he actually *did* vote to confirm three of them (Ginsburg, Breyer and Souter). Believe it or not the 4th, Stevens, was confirmed before McCain joined the senate).
TheFunded released some documents today that were subpoenaed in a case brought by EDF Ventures last week. I'm amazed by this whole thing. The VC firm is suing because someone anonymously said they have, "very harsh deal terms..."? Come on. How has this not been thrown out as a frivolous suit? And why hasn't Adeo counter-sued?
I confess to being an avid TheFunded reader and contributor. Like any group, there are a few crackpots in the lot (heck, I could be one) but there are also some folks who are doing amazing things. As a member I've found that the perception of the site is a place to bash VCs and while that does happen occasionally, the reality has moved on a lot. For example, here are a sampling of recent questions/posts:
In fact, most posts are not about individual VCs and those that are are neutral or positive.
One funny bit in the EDF law suit story is the insinuation that the poster wasn't an entrepreneur who pitched the fund and got shot down, but rather some disgruntled adviser to the fund affiliated with a partner that got pushed out. Which raises an interesting point...everyone knows that VCs pressure some CEOs to make flattering posts on TheFunded, but I wonder if any pressure CEOs to post negative reviews of competitors?
The last thing (and then I'll move on) is that TheFunded is claiming there's no way to track down the poster, but I think they are wrong and this post actually tells how (somewhat inadvertently) it can be done. Apparently TheFunded sends invites to prospective members using a Gmail account that includes a random invite code and the message is deleted immediately (by TheFunded). They admit you could subpoena Google to get the recipients' email addresses, but that you couldn't ID the exact user because how could you tell one of the thousands of TF invitees from the other? Well, the answer is that they store the "member creation date" which for the account in question is February 9, 2008. So to find out who this person is, all you have to do is subpoena Google and look for messages sent from that account in the day or so before February 9th and voila! My guess is that there wouldn't be that many emails to go through.
I still think it's a baseless case, but were it not, I'm pretty sure the "perp" could be found.
This chart is from a "pitch piece" for social media companies. I'm not sure if I agree with everything in it, but it's an interesting framework nonetheless. To entrepreneurs: where is your company on this curve? To investors: where on this curve are you investing?
Check out this blog by "Mac" an incredibly talented and creative graphic/web designer from Tokyo. He imagines a mobile search device that has a transparent heads-up-display-like look and feel. Users would peer through the screen and see layers of additional information. It could be used to answer questions like, "where am I?" and "what am I looking at?" or "what does this say?" An incredibly cool idea.
I've always been fascinated by new UIs and how slowly (if ever) they come to market. A case in point is the Dvorak keyboard. The QWERTY keyboard was *intentionally* designed to be inefficient so as to slow down typists and thus avoid jamming the keys. Fast forward 130 years and we're still using the same thing!
Let's hope it's not another 130 before we can do a "Mac" search...
So you have just finished months of grueling investor presentations and due diligence and finally one (or hopefully more) VCs have signaled their interest in negotiating the terms of an investment in your startup. This interest may be in the form of an actual term sheet that they've sent to you or a call/meeting/email indicating they would like to make an offer but want to talk about terms before shooting something over the transom.
First, congratulations, you are now in a *very* select group of startups. Having been on both sides of the table, here is my list of tips for entrepreneurs negotiating with VCs:
10. Relax. If you've gotten a VC to the table and they are negotiating terms, then the hook is set (they don't [usually] do this lightly). It's possible they could get away, but it's not likely. Now you can focus on reeling them in...that's something that takes time, focus and patience. There is no need to rush and from a negotiation point of view, you don't want to seem too eager. So even if you are a few weeks from missing payroll, you want to come across as casual and as indifferent as your nerves will allow.
9. Start "reverse due diligence" now. I wrote a post on how to do this a while ago. There is real and perceived value in shifting the conversation away from "why should the VC invest in your company?" to "why should you take their money?" If you have more than one option, reverse diligence becomes even more important, but even in the scenario where there is only one offer you still want to make sure you're not walking into an hornet's nest. So if you haven't started this already, get crackin' now.
8. Use your attorney to help with thorny and low-level issues. You should be consulting with your attorney frequently during the process, and on certain issues you'll want to use your attorney as an agent (who will talk to their attorney). This extra channel can be useful for low-level issues that come up in every deal as well as on particularly thorny issues. That said, don't over-rely on this channel because at $800 per hour combined (remember you pay for both sides), legal fees can add up in a hurry.
7. Do your homework. Particularly if this is your first raise. Make sure you know as much about the terms you'll be negotiating and their relative importance. Also, note that there is some subjectivity to this process so it's worth building your own decision matrix. Read Venture Hacks. Go on TheFunded and check out all the actual term sheets they have there. Make sure you understand how the economics of a venture investment work such as liquidation preferences and dividends.
6. Be clear you are not the final authority. Even if you are, tell the VCs that someone else is the final decider. This technique is used quite often by car salesmen as well as VCs themselves. You know how they say, "let me talk to my partners" or "let me see what the boss says." You can respond with things like, "I really want to work with you...can you give me something to work with on [some particular term] so that I can convince [my partners, board, other investors, etc.] to go with you?" At certain points in the negotiation (particularly near the end) you will want to avoid this so don't over use it. As the deal solidifies you can offer (provided it's true) things like, "I have authority to offer X, Y and Z. Can you accept that?"
Don't over play this card because you also have to be careful to make sure that investors (your existing or the potential new ones) don't go around you. In so far as possible, you want to keep your existing investors and potential investors from talking directly. This is sometimes hard to do, but it's worth trying. It's not just collusion that is a problem, it's also can be confusing and risks blowing up a deal (or getting worse terms) if there are uncontrolled back channels.
5. Be honest. And be as forthright as possible. I know some will tell you that VCs are the "enemy" and they will screw you over at the flip of a hat so you shouldn't have any compunction about returning the favor. There are some VCs out there like that, but certainly not all. I've had the pain and pleasure of working with both types and can report that honesty and candor is the way to go. For example, if this is your first time raising money, you should state up front that. Tell them that you will negotiate in good faith, but that it is possible (likely?) there are details you are not familiar with which you'll have to come back and renegotiate and that you ask for patience in advance. I love that Scarface quote where Tony Montana says, "I never fucked anybody over in my life didn't have it coming to them. You got that? All I have in this world is my balls and my word and I don't break them for no one." Not bad words to live by.
4. Negotiate by email, phone or face-to-face (in that order of preference). I recommend negotiating by phone or ideally via email. In-person negotiations are tough. Remember that VCs negotiate terms on a weekly basis. They know these things inside and out. While you have to go "crank the spreadsheet" they intuitively know the results of a tweak to a term from comparison to other deals they've done or seen their partners do. Often times you won't even know the meaning of a term and it hurts your position if you have to ask for an education. If you negotiate asynchronously you can always Google something or call an adviser. Also, if you're doing a face-to-face that means you are limiting your negotiating options (hopefully you have multiple interested parties and you want to keep negotiating with them all simultaneously until the very end).
3. Control the documentation process. If there are multiple investors in the round, ask (demand?) that investors use one counsel. If they insist on having multiple investor counsels, you should tell them that you're "only paying for one." Besides the "two- or three-on-one" structure this also runs up the cost and consumes a lot more time. Most investors will agree to use the lead investor's counsel and do any additional legal review by their own counsel on their own nickel and time. As a side note, I've noticed that the funds that use SBIC money have special issues that makes them want their own counsel. Since the SBA terminated this program this should be a less frequent issue, but in case you come across it I'd push back doubly hard (it's not your problem they had to beg for government money!).
Another point to push for is to have company counsel prepare the first drafts of the documents. The documents these days are pretty standard, but I still believe that "facts on the ground" play a part in negotiation psychology. Unless you have particular leverage, you should instruct counsel to draft a "down the middle of the fairway" set of documents and this may help you in the margins.
2. Negotiate "complete" offers. Some people like to negotiate one term at a time and go back and re-open previously agreed terms while negotiating new ones. I personally find this style distasteful, although I've found it works well in a one-off transaction if you have the stomach for it (which I don't). So instead of negotiating each term individually, ask for (and give) complete offers on all of the key terms. It's a much easier and product method. If someone asks you how you feel about a "valuation of $15MM" the answer could be "great" if the other terms or reasonable or "that sucks" if not.
1. Get in a legitimate fight. At some point in the negotiation (ideally toward the end) pick a fight on some topic that you can make a real argument for. Don't be rude, but be firm. The reason is two-fold. First, you want to test how your prospective partner argues; do they fight dirty, aggressive, passive aggressive or something else? Second, you want to leave them with the impression that you are an aggressive advocate for you, your shareholders and your business.
And since I can't count, here's a "bonus" tip:
0. Don't say "no" say "not now" when turning down alternate investors. Even when you sign a term sheet (or close on a round for that matter) you still want to keep the alternate investors loosely engaged. You never know when you might need to re-engage them.
If you read this far, you must have an opinion...please do share!
No one is safe now...I can blog from anywhere. I'll be curious to see how the camera does in the low light. Typepad should also add geocoding.
BTW, that's my 2.5 year old (going on 5) playing on the jungle gym.
[Ok...put your hands up and step away from the "publish" button! That's a silly "feature" that Typepad has where an "edit" shows up as a totally new post.]
A good rule of thumb is to have a financial plan with 18+ months of runway after you raise a round. That is long enough that you can avoid worrying about raising money for a year while you just focus on running the business. Any shorter and you'll find you are back in the market looking for more money after 6 months and are facing a "flat round" in terms of valuation because you really haven't had time to achieve much. Note, in some industries (mobile is a good example) you want to have 24+ months of runway (because carrier deals take so long). However if you raise more then 24 months of money in an industry where things move fast and don't cost much, then you're likely just going to watch interest accrue at the stunning rate of 2% in your bank account while kicking yourself in the butt for "giving away" equity at such a low valuation. That said, raising too little money is a bigger risk for founders because those bridge loans extended by VCs make payday loans and pawn shops look cheap.
Another issue on deciding how much money to raise is related to investor capacity. Typically angels work for amounts up to about $2MM and then beyond that you need to look for other sources. Recently I've been seeing a lot of financial plans that call for a total investment of $4-6MM which is an odd-ball number for many VCs.
Why?
Well, if there are two investors splitting the deal (all VCs like to have at least one other professional investor at the table) then you're talking about $2-3MM each that they'll be able to invest. If a VC partner can sit on (tops) 8 boards and all the deals were like this, we're talking about less than $20MM invested per partner. If the fund has 4 partners and is investing out of a $250MM fund (pretty typical), then you can see the issue (either the partner has to sit on 24 boards or doesn't get all the fund invested in the requisite 3-4 years). Basically they need (on average) to put $8MM in each company. So if you're pitching a VC a deal that only allows $2MM, it's...well....odd and has a much higher threshold to get done (because you'd be "using" up one of their precious board slots). Why is a board slot "precious?" Well, it's really the *only* asset a VC has (and to avoid a rash of comments saying "money" is also an asset, remember, the money in a VC fund is from someone else...the VCs only asset is time).
Now before you head off to change the plan to need $16MM over the life of the company, you have to first make sure that the market opportunity really justifies it. The conundrum outlined above is one that frustrates a lot of entrepreneurs. VCs keep rejecting them saying something like, "your business is too small (for me)." It doesn't mean it's a bad business. [Note: some VCs are smart about how they respond to this.] So what's an entrepreneur to do? Well, one thing to do is to focus on "small" VCs, i.e. firms that are investing out of a $100MM or less fund. Another is to go for strategic investors or "super angels" or even go the consulting route.
It is interesting to see how investors are dealing with this "donut hole" between angels and traditional VCs. It's becoming a more frequent dilemma (as the cost of building things decreases). A new crop of funds along the lines of Y Combinator, Kleiner's iFund and Bay Partner's AppFactory has cropped up to address this need. I haven't worked directly with any of these guys, so I don't know if they walk the walk, but they certainly talk the talk. I think more funds are going to forced to do something similar if they want to stay relevant (or go find some other industry to invest in that is capital intensive).
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