Masterclasses: Behind the Scenes with VCs & Venture Backed Startups

Jan 2012: Behind the Scenes with VCs & Venture Backed Startups

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The decision of taking your startup from early-stage to venture-backed will change the dynamics of pretty much everything in your company. How do you decide when you’re ready to seek investment? How do you make the most of your time with prospective investors? What can you start preparing for the transition? How can you work most effectively with the new board members joining your startup? When is the time to start thinking about an exit?

[/tab] [tab id=”2″] [reveal title=”Alan Wallace, Investment Director, Octopus Ventures” ]

Alan focuses on sourcing deal flow, evaluating and assessing potential investee companies and portfolio management. He has represented Octopus on the boards of True Knowledge, LoveFilm, Zoopla, Steribottle, and PrismaStar. Prior to joining Octopus, he held senior marketing and general management positions at Sara Lee UK Ltd, Rank Hovis McDougall, and Cambridge Nutrition Holdings Ltd.

He was also managing director of Dairy Crest and Premier Brands (Hillsdown) and Market Planning Director for GUS. He has over fifteen years’ general management experience. Alan has a PhD in Management Science from Manchester University and graduated with a BA in Economics from Liverpool University.

[/reveal][reveal title=”Andrey Kessel, Entrepreneur and Investor” ]

Andrey’s experience is a combination of investing into and working in startups. He is currently spending his time working with early stage companies, venture funds, incubators or interesting venture opportunities. Previously, during his time with Amadeus Capital Partners, one of blue-chip venture funds, Andrey has worked as an investor and Board member with a number of investments, mergers, exits, company development, etc.

Prior to Amadeus, Andrey gained substantial operational experience in technology start-ups, which covered most aspects of establishing and running a business, business development, managing offices, teams or projects. Andrey co-founded several startups and is a shareholder and/or advisor of several companies and investment funds.

[/reveal] [reveal title=”Mark Davis, CEO & Co-Founder, Kohort” ]

Mark is the CEO & Co-Founder of Kohort. He is also a Venture Partner at High Peaks Venture Partners. He blogs (mpd.me) about starting companies and financing them & his posts have been syndicated on Inc, WSJ, PEHub, Mashable, Business Insider and more. He has also started numerous communities for entrepreneurs including the Columbia Venture Community & the New York Venture Community.

[/reveal][reveal title=”Ryan Kiskis, VP Product, BaseKit” ]

Ryan joined BaseKit in 2010, where he has helped create the product management team and guide BaseKit through its rapid commercialisation. He has helped BaseKit raise 2 rounds of funding from leading investors Eden Ventures, Nauta Capital, NESTA and Seedcamp. As technology entrepreneur, his career has been focused on helping growing companies with product management, business development, strategy definition and operational management in Silicon Valley. Prior to BaseKit, he was founder and CEO of Martini Media, now the leading network targeting the exclusive audience of affluent enthusiasts online.

He built the team and led the company through Seed and Series A funding from 2007 to 2009. Martini was founded out of his time as an EIR at Venrock Associates while doing research and due diligence in the digital media space. Prior to Venrock, he led product management for Xfire, the largest community of online PC gamers, from shortly after launch through multiple funding rounds and its eventual acquisition by MTV Networks in 2006. Ryan began his career with BearingPoint in product & customer lifecycle consulting. Ryan has an MBA from Stanford University with a focus on Global Management, and a BSE from Princeton University in Mechanical & Aerospace Engineering.

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“Best meetup to date! I can now see my way thru getting funding…”

- Brian Merritt

“Excellent session with a well balanced agenda. Speakers offered great insight, came from a variety of backgrounds and provided well rounded advice from all perspectives. Very informative.”

-Simon

“Exceptional quality of speakers.”

-Steve Price

“Great event. Good speakers. Good venue. Good turnout. Well organized.”

-Adi Ben-Ari

“Great mix of excellent speakers that delivered a insightful and creative discussion on the how entrepreneurs and VCs approach funding. As they all said: it is all about the people and they definitely were the right people.”

-Mauricio Salazar[/tab] [tab id=”4″]

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[accordion collapse=”yes”] [panel title=” Alan Wallace, Investment Director, Octopus Ventures – Winning the Hearts & Minds of Venture Capitalists ” ]

Write-up by Linsey Willaford-West, Founder, eTeamUps

About Octopus
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  • Growth & early stage focus
  • Invests £250K-5M
  • Every Wednesday they run ‘open office’- message Ataylor@octopusventures.com
  • Looks for companies with: product, route to market, team, ability to validate customer acquisition costs with traction

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VC or Angel?
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  • If you have traction and want to fund growth, go for VC funding. Go for angel if you are pre-product or pre-traction.
  • Choose your initial seed investor wisely. 20-25% for £500K-1M is a good rule of thumb. Be careful that they do not give you too high a valuation that will make it unattractive to the VC in the next round.

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Preparing the approach
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  • Ensure you understand the VC that you are going to meet, and ensure your business is a good fit. Find out what the VC is looking for and do your homework on what value they might be able to add to your business
  • Your chances of getting an investment: 12K business plans sent each year, see 200 company meetings per year, then make a single deal every 6-8 weeks
  • Get a referral from someone in their network (one option is through the portfolio companies)

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Meet up with the VC
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  • Send presentation in advance
  • Bring the two execs from your team, but ask first
  • Impress the VC right away with who you are and why you are special/li>
  • Communicate the business plan in simple terms
  • If you don’t know answers to the questions, don’t wing it, just say that you will come back to them with the answer

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It’s all about the team
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  • This is more important than the product or business plan!
  • Be proud to talk about what makes you and your team special
  • Ensure that there is one clear leader
  • Ensure that there is a blend of complementary skills. If there are gaps, say so and ask the VC for help finding that person/li>

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How big can you grow?
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  • At minimum, VCs want a 10x exit
  • Businesses worth £100M is the minimum
  • Under promise your investors in terms of returns
  • Consider getting the money that you need in chunks based on hitting milestones. Milestones could be something like: 1) breakeven 2) get 10% growth per month and 3) get to exit.

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Strike Zone
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  • It takes 8-12 weeks to close a deal including negotiating.
  • Remember that you will sign a warranty that what you told the VC is true about your business

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Get married (make the deal)
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  • Most VCs look for an exit after 3-5 years. A corporate finance advisor will be appointed to help sell the business. Know what valuation you want over what time period. VCs do not want lifestyle businesses (i.e. high salaried staff, ongoing low returns)

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What we say & what we mean
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  • “send us a short message” means “keep your deck or email SHORT.”
  • “we need to see customer validation” means “we’re not sure your solving a market need”
  • “we need help understanding your market” means :we don’t believe you will get the market traction you forecast”
  • “we want to talk about valuation” means “we’re interested but be realistic”
  • “sorry- it’s not for us” means “it’s a no today, but do come back to us in the future…it is never an absolute no forever”
  • “we’re excited by the opportunity” means “you are in the strike zone, and we want to do business with you”

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[/panel] [/accordion][accordion collapse=”yes”] [panel title=” Andrey Kessel, Entrepreneur and Investor – Startuper and Investor Getting to a $ 1B Startup (Case Study) “] Write-up by Linsey Willaford-West, Founder, eTeamUps

Andrey presented a case study of Solexa’s journey from startup to a buy-out by Illumina raising the following points as the key lessons learned.
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  • Remember that funding is just a tool, it is not the end game
  • Building a company is always a rollercoaster – ever the best known ones went through the period that you are going through!
  • Valuation is a function of risk. The more risk that you eliminate (i.e. technical risk, market risk and team risk ), the higher valuation you get. This is linked to the milestones for building a company
  • Get a good team and a set of advisors/people you can draw upon
  • Insisting on NDAs too much is a red flag for investors and tells them that either the entrepreneur is naive or the business is non-defensible

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[/panel] [/accordion][accordion collapse=”yes”] [panel title=” Mark Davis, CEO & Co-Founder, Kohort – 10 Things You Need to Know About Fundraising ” ] Write up by Linsey Willaford-West, Founder, eTeamUps

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  • Is VC a pandora’s box? Align the plans for your company with your fundraising strategy. For example, if you need loads of money to build a big company, go for VC. If you need a small amount for a business with small potential returns, bootstrap and keep as much of your business as possible.

  • Debt vs equity? Benefits of convertible notes: defer valuation, simplify paperwork. Benefits of equity: lock-in valuation, make it easier for future financing. To make the decision, answer the question whether if the market valuations are strong. If so, take VC. If not, take debt and hope for an upturn later.

  • Venture math- investors don’t care about the pre-money valuation. They care about this equation: investment / dilution – post investment = pre money valuation

  • Three documents- you will need these: 1) executive summary 2) 10-20 slide ppt presentation 3) operating model (revenue plan, cash flows, how you plan to build the company)

  • Investment overview slide: the first slide should include the answers to the questions that the investor wants to know in terms of whether you are a fit with their investment thesis (this usually includes Market size, Competitive Position, etc)

  • Culture drives structure: everything in the structure of the deal is negotiable!!
  • Fundraising is like dating- since everyone is different you will be rejected sometimes, no matter how great your company is! Signal how popular you are and that you are speaking to other investors. Tell investors every time you hit a milestone with other investors (i.e. offer, got a term sheet, etc).

  • The three-step: don’t go for fundraising when you are desperate for cash as it will weaken your negotiating leverage. Start by taking a convertible note that will give you 3-6 months of lifeline. Then go to Angels for a commitment of a full round. Then go to the VC s and say “I have a deal on the table, do you want to be a part of it before it closes?”

  • Raise-slow: take your time. If an investor gives you an offer on the spot, you don’t need to take the offer immediately.

  • Get a pile-up: get as much money on the table as possible before finalizing terms
  • Respect- always be respectful and maintain good relationships

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[/panel] [/accordion][accordion collapse=”yes”] [panel title=” Ryan Kiskis, VP Product, BaseKit – You’ve Got Seed… Now What? ” ]

Write-up by Linsey Willaford-West, Founder, eTeamUps

What does a Series A mean? It is your first round with professional investors, with true financial targets and commitments.

How to get from seed to A: deliver an MVP, build out your team and get customer traction
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  • MVP: the core of your business to prove the business
  • Committed team: working together full-time and covering the key bases of the business
  • Product/Market Fit: proving that you have built something that target clients will pay at a commercially viable rate/li>

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When do you need Series A
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  • When you have proved the above
  • 3-6 months before you need the money
  • When you need to get to the next level

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Investors matter
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  • Money isn’t money… remember that you will be in a close relationship with these investors for years! They should be a resource to help grow your business. They should be people that you would really like to work with!

  • They will generally follow-up in subsequent funding rounds and will have influence over your future equity

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Start early- start to casually network and pitch 3-6 months ahead of time. Investors will want loads of data, but try not to let it distract you from running your business (consider doing this ahead of time or appointing someone to focus on this)

Build a relationship- have trust for the road ahead & understand their firm (their investment thesis)

When pitching, be UNIQUE and put the vision in context of your competitors

Agree on milestones with your investors early. This is important to align the vision of success and motivate the team. Less direct milestones might be of equal importance. Examples can include: user conversion/engagement rates, team & product development.

You have series A- now what?
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  • Know your runway- how much time do you have before you need to fundraise?
  • Start investing to grow the business
  • Communicate the milestones that you agreed with your investors with your team
    1. Set a communication schedule and keep to it
    2. Communicate loads!
  • Think about your own role (will you be the person who will lead the company into series B and beyond, or should you start specializing?)
  • In your board meetings, use it as a working session to problem solve and automate your data so that you don’t spend too much time generating data just before the meeting

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After Series A, B/C is for expansion and team building, C/D/later is growth including expanding to new locales, product lines, etc[/panel] [/accordion]