Yet Another (ex-)VC Blog

I just read the Techcrunch report on Facebook‘s latest fundraising activities( Decision Time For Facebook: Term Sheets Received At $2 Billion Valuation).    The report talks about the potential heavy dilution that common stockholders might suffer because of 1) a fairly significant down round (taking pre-money valuation down from $15B to $2B) and 2)anti-dilution protection clauses that would apply to the previous investors’ ownership stakes (which means common would bear the brunt of the dilution).

From the article:

The cost of taking money at such a low valuation is higher than it appears. In addition to the direct dilution to stockholders from the new money, old investors at the $15 billion valuation may need to be made whole. Venture rounds traditionally include anti-dilution provisions that give investors more stock if the company raises new money at a lower valuation. Those anti-dilution provisions are heavily negotiated and can end up anywhere from full protection (which is very rare) to no protection at all (which is also very rare). It’s likely that there will be some form of additional dilution, possibly a lot of it, from the $375 million Facebook has raised at that valuation.

Although the current investors will certainly want to preserve their ownership stake as much as possible in any new deal, new investors are not going to do a deal that they think will drive out key employees and founders in droves.

There are a couple of ways to get around this issue.  The new investors could require the old investors to waive their anti-dilution protection as a condition of investment.  Or, the new investors could require that more common stock options get issued prior to closing.  These options could be use to refresh employees and founders who experienced heavy dilution due to the down round financing.  My guess is that both of these mechanisms will be a part of any new Facebook deal.

Related articles by Zemanta

• Polaris Surveys Founders on Dilution (xconomy.com)

Social connections trump business plans by a long shot, says Goldfarb Thus it is that people who already know VCs and angels have an easier time raising money. The irony, says Goldfarb, is that people who don’t have connections need to go out and make them, which may require that they have a business plan to discuss. But the plan is sort of like a business card, he says – just something that business protocol dictates you carry around.

via peHUB » Study Finds Business Plans a Waste of Time.

I wasn’t surprised by the results from this study, although the study only looked at plans from the dot-bomb era.  I’d be interested to see how the conclusions would have been affected had they also looked at a less frothy period.

On a related note, here’s what I like to see when being pitched, in lieu of a full business plan:

• 3 year financial model
• 10 slide pitch deck (I like the guidelines they’ve got on www.garage.com for early stage company pitches)
• 20+ slide supplementary deck that reads more like a document, filling in details from the pitch deck

With these three items, you’ll have the meat of a business plan, without the less nutritional filler.

Related articles by Zemanta

• Top 5 business plan (content) mistakes (myventurepad.com)
• Share Information Or Don’t Bother Calling (markpeterdavis.com)
• Should A Blogger Have A Business Plan? (streamxy.com)

I’ve been toying with the idea of writing a short (< 50 page) e-Book about how to get a job in venture capital.  All proceeds from the eBook would go to charity.  To gauge interest, I’ve created a couple of polls.  I would appreciate your input if you’re someone who has interest in venture capital careers.  I’ll share the results in a couple of weeks once there are a good number of responses.

Thanks for your help!

The most dynamic entrepreneurs don’t have a pitch – they tell you a story.

Everyone loves a good story, and I think that story can really help connect you with potential investors.

For example, I recently spoke to an entrepreneur who started a company based on his experiences from being hospitalized for a severe illness.  You could sense that he was intrinsically motivated by his experience and was leveraging that motivation to bring that day in, day out intensity that leading a startup requires.

Not all pitches are going to have elements of life-threatening illnesses or transformative experiences.

However, it can be just as compelling to share detailed anecdotes from your previous work or less intense parts of your life and use that to paint a picture about why you’re the right person to have started your company.  And why you are intrinsically motivated to succeed, no matter the odds.

So, the next time you meet an investor, think about telling them a story.

Recently I have been approached by people looking for an internship or job with our firm. We’re not hiring or looking for interns right now but a few things jumped out at me about the methods that were used to reach me.

Most people who contacted me sent a blind email having found my email address on our firm website. Also, almost everyone sent a generic cover letter that was not customized.

Now, I did read and reply to each of these inquiries, but my guess is that many VCs (and I’m speaking from experience when I was looking for a job in VC over the last year) would not answer this ‘cold call’ email.

So if I were looking for a VC job, what could I do to improve my chances of getting a meeting with the VC about potential internships or jobs? Some thoughts…

• Use LinkedIn to find someone in your network who may know the VC you’d like to reach.
• If you have no other way to reach the VC except through a blind email, take time to customize your cover letter pitch to the firm (or the person at the firm) you’re targeting.
• Talk to me about some interesting companies in spaces our firm might be interested in and offer to connect me with them.
• Don’t ask for a job or an internship – ask for advice. If you ask me if I am hiring and I’m not, I will probably say “we’re not hiring” versus if you ask me “can you talk to me about careers in VC, I want to learn” I’m more apt to engage in a dialog (and I don’t think I’m unique in that respect amongst VCs).

If you’ve had some success reaching VCs to discuss jobs or internships, what has worked for you?

If you liked this post, and are interested in careers in venture capital, think about subscribing to my mailing list. I promise not to spam you and will only send information related to venture capital jobs and careers. Please input your email address in the field (and click ‘Submit’) below if you would like to subscribe.

Related articles by Zemanta

• A Cover Letter Is Not Expendable (nytimes.com)
• Landing interviews in a tough market (infoworld.com)
• How To Use Linkedin To Get The Job You Want (thecustomercollective.com)

Truer words could not have been spoken about pitching:

1. Don’t use PowerPoint, use Apple’s Keynote 09 ($79) even if it means you have to go out and buy a Macbook ($1000) only for making presentations. Even when I worked at a big company who dictated I use a PC, I brought my own Mac for presos. Like a carpenter, I am happy to bring my own tools if needed. Others agree with me.
2. Deliver your presentation standing up. Don’t stand behind a podium. Don’t sit down. Even if there are just one or two people in the room.
3. Demo your product/service first. Before you do almost anything else…demo.
4. Buy a professional font family ($100-$900). My two favorites are Helvetica Neue and Gotham (Obama and Yahoo! both use Gotham).
5. Don’t use defaults (particularly for PPT). No default templates. No default clipart. No default formatting for charts or tables. No default fonts. No defaults.
6. Learn how to do bulleted lists correctly (note: the default formatting for bulleted text, even in Keynote, is completely incorrect).
7. Don’t use slide titles. If you do, they should say something
8. Use lots of screenshots or images of your product or service (or team)
9. Reisist slide animations. Use the “dissolve” transition between slides.
10. Shorter presos are better. 5-8 slides is ideal. 10-20 for longer or more detailed presos.
11. Limit or eliminate text. You are there to speak. They are there to interact and listen, not read.
12. Send PDFs of your presentation, not PPTs as followup.
13. Tell a story. Every presentation needs a plot (1-3 underlying points). For Al Gore, it was “The planet is in trouble, and it’s worse than you thought” and “We are to blame, but if we now we can also be the solution.” The rest of his amazing presentation were just supporting elements to that plot line of his story.
14. Reduce the size of everything. As a default PowerPoint (and Keynote even) make everything too big. White space is your friend.
15. Don’t pass out your slides (unless they are for a board meeting). Don’t send your presentation in advance (there are exceptions to this rule).
16. Make your own color palette and stick with it for the entire presentation. Generally, you should only use 1-2 colors (plus black and grays).
17. White backgrounds are best. Don’t use backgrounds other than solid colors of very subtle gradients.
18. Charts: Reduce categories. Don’t use legends. Reduce font sizes. Reduce guide lines. Use one color with multiple shades. Eliminate or reduce line weights.
19. Images: Clean up your images and graphics with alpha channel. Mask or crop your images.
20. Use reasonable examples or comparisons. Don’t compare yourself to Yahoo!, ebay, Google, Microsoft, Apple, Facebook or MySpace unless they are your competitor.

Kalani, Jeff “the Blog” Bonforte, Feb 2009

Take a look at the whole article if you have a moment.  Thanks for sharing, Jeff!

Related articles by Zemanta

• Why Keynote is better than PowerPoint (en.onsoftware.com)

Founders spend lots of time, money, blood, sweat, and tears in creating a new business, and they obviously want to maximize the financial return on their investment.  Thus it is important to understand how to value either a) new strategic hires or b) investment capital, as both will reduce the founders equity stake and controlling interest in their business.

I think the question to ask when valuing new hires and investors is “How does this new hire/investor make the pie bigger?“

For example, if you are a technical founder but don’t have the key contacts within your target industry that will get you in the door with potential customers, how much is it worth (in equity terms) to get someone with those contacts on board?  This person will probably demand a significant chunk of equity but if you are confident that they can get you in the door with potential partners and get deals closed, maybe they are worth the dilution you’ll experience as a founder.

Now let’s turn to the investor case.  If you have bootstrapped your company and are able to become cash flow positive without raising outside funds, then you have a business that self-financed and quite possibly sustainable.  However, if your company is burning cash or has ambitious growth targets that can only be met by significant investment in product, sales, or marketing (beyond what you can finance through cash flows or your own wallet), then you will need to think about outside funding.  Taking on outside funding is going to dilute your ownership stake but may also allow you to make the pie (the size of your company in revenues, valuation, etc) bigger.

If taking in $X million in investment will allow you to hire 3 sales people to sell into target accounts and create a channel sales program but will reduce your ownership stake by Y%, is it worth it?  Do you believe that the $X million investment (and the hiring capability, etc that it affords you) will help you build a $50 million dollar company instead of a $5 million company?  Taking said investment may reduce your ownership stake to 50% from 100%, but my guess is that most entrepreneurs want to own 50% of a $50 million company versus 100% of a $5 million company.

Obviously you will never be able to accurately compute that adding $X of investment or giving up some % of equity to a key employee will grow the overall pie by a specific amount.  However, you should think about (in orders of magnitude) how these decisions will help you grow the overall pie (your company’s value) as well as the absolute size of your piece of the pie (the value of your share of the company at exit).

Related articles by Zemanta

• Self-sufficient is the New Sexy

If you have even a minimal interest in biz dev, please spend the 20+ minutes it will take to watch this video.
It’s a panel discussion hosted by the nextNY crew that has some high level business development folks from area startups as panelists.

I also think it has some great lessons for venture capitalists, as a big part of one’s job as a VC is business development (either developing business for portfolio companies or developing relationships with entrepreneurs).

Great tips, check it out…

One of the experts in the VC business, Alan Patricof, is urging restraint and reason in the light of all the turmoil in the markets.  I’ll leave you this weekend with his words of wisdom (via The Deal).

Related articles by Zemanta

• Video Interviews From FOBM Conference: Alan Patricof; Alan Meckler; Susan Clark; Rob Norman
• New Media Investor Alan Patricof: “This old guy can pick ‘em,” Fortune

Yesterday I was at the Bootstrapper Venture Summit and spent the day networking with local investors, service providers, and early stage companies.

There were a bunch of familiar faces (including a bunch of my Columbia compadres who are now in the VC business) and of course a bunch of new ones.  Here are some of the companies that made an impression on me:

Kidos – These guys make a kid-friendly computing environment (written in Adobe AIR) that lets your kid have a safe Internet experience AND prevents them from breaking your computer :)  My kids are still too young for the Internet but I can see why both the former and the latter would be useful.

MediaMorph – This company makes a system to better track and monetize Internet video assets.

CarZen – This site is meant to help car buyers directly communicate with car dealers.  Ultimately the company hopes to build a reputational engine which would help drive business to the dealers who were viewed as the most helpful.  I think this would be great for the used car market in particular, as there is a great deal of seller mistrust and information asymmetry in that market.

Safeguard Guaranty – Divorce insurance.  Seriously.  I thought this was a great idea, and it means you can avoid that awkward pre-nup conversation with your spouse-to-be. ;)

RmbrMe – This startup is trying to address the waste and inconvenience associated with transfer of business cards.  I’ll probably sign up and try this service out since I’m generally swimming in business cards after networking events and would appreciate an elegant solution.

Zen Burger – Not a tech startup, but a purveyor of veggie burgers and other healthy fast food.  They catered the lunch and I must say that I greatly enjoyed my popcorn “shrimp” and “chicken” wrap.  Not a traditional venture capital type of company, but one that has a big vision and could do really well if they can find an investor that’s a good fit.

Allen Stern has some coverage of the event on his blog CenterNetworks which you should check out as well.