Ask a VC

September 14, 2015

Here’s a rough transcript of a call in show I did.  Not just rough, but also long.  If you are a Twitter addict, just read the first 140 characters of each paragraph….


VC Fundraising: Real Advice From A Real VC

If you could have a VC’s undivided attention for fifteen minutes, what would you ask? Our Ask The VC webinar was an open forum with Sean Foote, Founder of Co=Creation=Capital. If you missed it, in addition to reading this rundown of the highlights, you can view the presentation deck on SlideShare.

Understanding what VCs are looking for is top of mind for many founders seeking funding. The more you know about their investing mindset, the greater your chances of insuring you’re a match.

How VCs Invest

The central tension between buyers (VCs) and sellers (founders) is this: buyers believe their company’s value exceeds its price. Sellers meanwhile believe the converse.

VCs are rational. They need to generate annual 30% gross returns just to be an average fund. That’s 5x in 5 years. The economics of investing: out of 10 portfolio companies, half will go bankrupt; four will break even. VCs get it wrong a lot. That means VCs need always try for winners that can return 46x — just to be average. With the stakes so high, they look for extraordinarily high growth companies that will make them the most money for the least amount of risk. They also want to invest in “intriguing companies” that have positive momentum, and make for good cocktail party chat. But their bottom-line goal is to make money for their current fund so they can raise another one.

Because of those parameters, VCs don’t want to invest in revolutionary things. They want to invest in companies that generate revolutionary returns. So your job in a pitch is to convince them that you are innovative and doing great things, but that you are not risky. When you’re making your pitch, do whatever’s necessary to reduce your perception of risk. That includes staying away from words like: novel and revolutionary. It also means knowing what your greatest risks are and finding ways to reduce them. This is key to getting funded.

2 thing you don’t know about venture capitalists

VCs are not risk capital. Opportunities that deliver good returns for a low investment is the single most important factor in getting them to invest.

Nothing gets VCs to fund a term sheet faster than knowing that there’s interest from other investors that might shut them out of a deal. Sound analogous to other situations in life?

On seed funding:

It’s a sellers’ (entrepreneur’s) market. There were 20,000+ angel investments in 2014. Seed money is raised on a concept and based on an investor believing in you. Once you get past this “concept play” stage, your revenue and business model should be vetted and investors shift to measuring you on the strength of your execution. You need to be able demonstrate what you will accomplish with investor’s money. This is an important step in the mindset of entrepreneurs.

While Sean and Co=Creation “love single founder teams” and engineering oriented founders,
once you get to the stage where you’re ready to raise VC capital, it’s great to have “at least one person on top of tech and one on top of business” operations.

On meeting startup investors:

VC see anywhere from 1,000 to 2,000 companies a year — and invest in 2-3 of them. In order to break through the noise, find a way to get introduced. LinkedIn is one source. For seed investors, try AngelList and incubators.

And do your due diligence. The relationship between VCs and their portfolio companies is similar to marriage, with at least one big difference: the lifespan of an average VC deal is nine to ten years. That’s versus seven years for the average U.S. marriage.

On pitching:

Think of the vetting process during your pitch as similar to being out on a first date. VCs will be scrutinizing your composure and assessing how well you think on your feet. Expect some give and take: for Sean, “intentional interruption is a good test to see how people react.”

Be personable.

Be yourself.

Don’t jump the gun on valuation — “We’ll let the market set the price” is a good answer to give if you’re asked.

Don’t expect feedback at the end of the meeting, but do ask for it.

Don’t join the “race to the bottom” by skipping financials in your pitch deck. Particularly after Seed stage

As we’ve covered in earlier posts, creating a financial model with at least three years of financial projections shows that you’ve thought through your financials and understand your business model. For Sean, five years is the right time horizon. Models that show only one year of projections just don’t fly. That doesn’t mean that investors will believe your projections; “we know it’s not a real number” but your longer-term forecasts (3-5 years out) allow you to “sell some sizzle.” Just make sure your near and intermediate term ones (years 1-2) also have “some steak.” The whole process says you’ve thought about the business model.

Reading the (VC) tea leaves

Anything besides a signed (and ultimately funded) term sheet is a “no.” That’s not to say you should expect to clinch a deal on the basis of one meeting. But at some point, if you find yourself getting requests for more information or being told “let us know when you find a lead investor,” the answer is “no.” On the other hand, if the VCs you’re meeting with are discussing valuation, that is a good signal.

Finally, manage the relationship. Follow up and make sure you stay on investors’ radar. Also keep in mind that a first pitch meeting is a lot like being on an interview or a first date. Don’t burn your bridges. Even a “no” from the person you’re sitting in front of might lead to introductions to other potential investors who are a better fit. Or even a “yes” eventually. Sean’s fund invested in Pandora’s Series A after saying “no” 3 times.

Look at Me! Wait, Don’t Look at Me!

August 24, 2015

I was embarrassed by the outpouring of support for my “impossible” seven day bicycle stage race through the Pyrenees. I’m back, I did finish, and I wasn’t last. I’m declaring victory over my old illness.

The embarrassment comes because I didn’t intend to spotlight me, particularly in this current social world where everyone is their own reality TV star. Exercise-based challenges are fun, but they have far less meaning than the really hard struggles that many of us go through or may even avoid. That’s why people raise money with their exercise — to give it more than simply selfish meaning.

So, I hope we all engage in the process of breaking down our own barriers, and thus help make the world a better place.


Now, having said that, you may still be curious about how this Haute Route thing went. They do great videos on their Youtube channel.  Just click through.  Super inspirational and artistic.

And here is the first thing I wrote on the plane on the way back.  Not so much a race report as what was going through my mind on the first day I didn’t wake up and get on the bike.

As I reread it now, it seems so self-indulgent, so read ahead at your own risk.


I remember the pain.  More than I can endure.  Surely.  Pain that makes me want to stop, that whispers that you can make it stop.  And then keeping on.  I remember the world narrowing down to me, the pain, and the few feet of road ahead of me.  And then the next few feet.  And the next few feet.  With groans leaving me against my will.

I remember finishing.  The sweet release. Joy of accomplishing what seemed impossible.  And then the immediate realization that it’s not done.  Now, immediately, my thoughts go to what comes between now and tomorrow.  Preparation, food, water, rest.   Laying out my clothes for tomorrow, my food.   Unpacking and repacking my kit.  Giving a personal pep talk. A few delightful retellings of joy and sorrow and cringing anticipation for tomorrow.   New found friends connected by a bond of experience and hurt.   A tiny, safer echo of war veterans swapping tales.

Waking up is the hardest part.   Surely this can’t happen again. Surely my body can’t feel this badly and still be asked to bicycle up two Mount Everests of altitude this week.   But that’s what we ask.   Put on clothes, leave the hotel forever, and head to a cold starting line.  More logistics, and far too soon I’m straddling my bike, listening to the countdown of minutes.   I place my hands on the hoods, and there’s a physical reminder.  This is the position of past days.  And the position of today.   The pain position.  I realize I’m trapped in a cycle.  I chose it.   And then with the start, so many things fall away.   No fear, no logistics, just the blessed simplicity of a hard task ahead, and the gift of the tools in my possession to do it.   As the pedals turn, I’m suddenly, fundamentally, happy.

Google reorganization is the beginning of the Google breakup

August 11, 2015

Google announced yesterday a new corporate structure, which allows for more transparency into the parts of the business that aren’t Google search. That includes self-driving cars, a pill that attempts to cure cancer, google glass. Basically, all the things that Google does that lose money. And let’s be clear, basically everything loses money except for the Adwords mothership. The mothership, though, makes more than $1B in spare cash every month.

I’m terrible with predictions, but here is my prediction. This is the beginning of the breakup of Google. First comes transparency, and then there will be a clear push to get rid of all those bits that are fun and edgy but are nothing but cost centers.

There, I said it. It’s published. Put this one right next to my iphone flop prediction.

Do something you think impossible

August 10, 2015

I’m about to do something I think is impossible, or at least improbable, and I think you should, too.

The backstory: While I was recovering from nasty Bangladeshi intestinal parasites, and also recovering from being hit by a car, I was riding my indoor bike trainer. I could barely bend my leg, I couldn’t put weight on my broken arm, but I wanted to ride.

On TV, my recorder had recorded various inspirational bicycling shows. One of them was the Haute Route ( 7 days of Tour de France hill stages, 80-100 miles a day, 10,000 feet of climbing every day. I said to myself “If only I can get healthy, someday I’ll do that, and that will be the day I declare I’m cured.”

Now if you don’t bike ride, let me put this in perspective. The hardest races or rides I ever do, maybe once a year, are just one day of these 7 days. I looked at this Haute Route thing as nearly impossible, exactly as I did the Ironman years ago.

One shouldn’t attempt the impossible without preparation, so I’ve been training up for this. My wife says she’s a “bicycling widow” as I spend 6 hours a day on our anniversary weekend trip riding up hills and down hills, then turn around and do it again. She deserves credit for her patience and support.

Now, I’m doing it. I’m heading out on Wednesday to France to do this ride, which starts Saturday.

I’m scared, and looking at the speeds of my training, compared to last year’s participants, I most likely will be the absolute slowest rider. It turns out this isn’t a tour, it’s a race! I believe they do automatic Facebook updates, so when you see me in last place, please help my ego to remember I’m not racing the front riders, I’m racing failure. I’m racing illness.

I don’t know what scares you, or what you think is impossible. It might be a physical challenge like mine. It might be a struggle with a spouse, or family. It could be addiction to substances or Facebook. It could be something you’ve been meaning to do or to fix but cannot make yourself do it. I highly encourage the effort, because I know one thing:

Once you’ve done the impossible, you can do anything.

The VC guide to bubbles, unicorns and viral cats

August 5, 2015

Yes, in public, I did say “entrepreneurs should do everything they can not to have to raise money from people like me.  But if you need money, and you are offered it, take it!  Nothing prevents bankruptcy better than money.”

Here’s the link to the article covering my speech at the London Business School:


Apple watch underwhelms. Another Hype over Fact example

July 20, 2015

One downside of a swirling, Twitter-fed, Facebook-liked echo chamber is the increased frequency of Hype overwhelming Fact.

Hype is when people collectively believe something yet the underlying Facts belay that belief. A few examples:

  • Justin Bieber is the greatest performer of our era
  • Lance Armstrong is an American hero
  • Uber is worth $40 billion
  • The Apple Watch changes everything.  It’s the next big thing.

Turns out, none of those appear to be true.  Bieber’s 15 minutes is over, Lance is actually complaining that athletes in this year’s tour might be doping, and we’ll see if Uber grows into it’s valuation.  Then, there is the Apple Watch.

Apple has yet to announce sales numbers for their Apple Watch, and rumors of higher returns and falling sales have led the Hyped to simply lower expectations.  There’s a great in depth blog on it here, if you’re curious.

I receive a daily feed of venture-backed companies whose financings are announced that day.  It is breathtaking the amount of money that is going into business whose potential for exit are modest.  Or, I guess I should say, the investment thesis is predicated on virtually everything going right.  Everything never goes exactly right.

Edward Chancellor, in his excellent book “Devil Take the Hindmost” describes the psychology of market bubbles, from the Dutch Tulip bubble to the internet crash.  Hype has ever been with us, including the 1830’s railroad bubble, when the cumulative valuation of all railroad startups exceeded the size of US GDP.

So, let’s not give in to the mass hysteria, folks.  For me, there is one clear takeaway from Chancellor’s book:

If you hear “this changes everything”, it’s time to head for the exits.

Reddit’s easy fix

July 17, 2015

Are you following the hand wringing over Reddit? If not, the problem is that a few people say terrible things there. And then Reddit tries to figure out how to stop it without infringing on the sense of ownership that users have for the content they help create. But deciding where the lines are and what crosses the lines is hard. After all, Google links to ALL SORTS of terrible things (seriously, click on that link at your peril), but since they don’t host all that terribleness, it’s all OK.

The controversial CEO Ellen Pao has left, and people are clamouring for “real leadership”.  This is not a “leadership” problem any more than global warming is a “sunshine” problem.

Rob Labatt and I have been discussing Reddit’s dilemma, mainly because we’ve lived through it.  Rob was CEO of a company called ezBoard, where I invested.  ezBoard grew to be a giant host of discussions of all kinds, circa 2000-2008.  We had the exact same problem as Reddit, and struggled over it in the exact same way (minus blaming the CEO — Rob was great).  The challenge is less about leadership and more about the nature of online communities.  They are, let me not say “unruly”, let me say “heterogenous”.

And, beyond attempts to play moral policeman, it’s also hard to get advertising dollars for a website that has folks saying things with which Safeway or Ford Motor Company would rather not have their names associated.

GOOD NEWS:  There is an easy fix.  The easy fix will temporarily reduce some of Reddit’s traffic but shine a fantastic light on the shady neighborhoods, and it’s this—

Make Reddit users use their real names.

It’s far easier for bad behavior to hide behind anonymity, that’s why mobs can be so destructive.  That’s why the Ku Klux Klan wear hoods.

Facebook, the most successful social network in the world, requires the use of real names.  I have a friend who is working to legally change her name, but until she does, Facebook won’t let her use the name by which everyone knows her.  So it can certainly be done.

Then, the people who need to hide behind anonymity will go to some other site that allows for that sort of thing, and we can campaign to root them out from there as well.  Keep Reddit to its original theme of Democracy Re-envisioned.  Well functioning democracies require ID for voter registration, so Reddit should take a hint.

And it removes much of the problem without Reddit trying to play policeman.  There will still be occasions where Reddit will have to remove content, but I guarantee those occasions will be drastically reduced.  Real names is the single biggest change to allow Reddit to move on from this series of bad PR and destructive moves.

Too many convertible debt rounds

July 17, 2015

This for my venture capital readers: Convertible debt is being used for too many financings.

For non-VC readers, an aside.  Convertible debt is like a loan to a start-up company while they prepare for a traditional “investment round” which is when the investor purchases equity shares in the company.  The convertible debt “converts” into equity when that traditional round comes along.

Got it?  Wait, there’s more!  The convertible debt has a “cap” on what price it will convert to in a financing, and there is sometimes a discount of 15% to 25% as a small financial benefit to the debt holder.  In an “investment round” the equity purchased by investors is “preferred” rather than “common” stock which includes a whole slew of financial advantages (paid first in a sale, can participate in the next financing round), control advantages (board seats and voting rights), and exit freedom (influence on the type and price of exit or financing).

There should be an entire series of posts on those things, so stay tuned for when I get around to that.

OK, I understand the allure of convertible debt for entrepreneurs, they get to do a rolling close (raise money as they go rather than wait for the entire target amount), set their own price (via the cap and discount), and have low legal fees. But as convertible debt rounds increase to be the size of Series A rounds from three years ago, it’s gone too far.

Here is what you, dear investor, are investing in with your millions:

1) No board seat
2) No control provisions
3) No pro-rata in the next round of financing.
4) The 15% discount is not representative of the risk or progress made, particularly when the cash will last the company a year.  To wit:  who believes the company is only worth 15% more after a year?  If you believed that, you should not have made the investment.
5) no start to the timer for tax rollovers for small business investments after 5 years (effectively, a 30% impact on your exit value)

And you, entrepreneur, are missing out on a few things as well:

1) a down round after taking debt is like “full ratchet” anti-dilution, meaning 100% of the down pricing is suffered by entrepreneurs, not investors.  While you believe your success is always up and to the right, that belief might be because you haven’t lived through the last two venture industry downturns.  We have one about every 8 years, which means it’s time for the next one.
2) possibility of friends and family in convertible debt getting screwed by the preferred investors, since the debt has no control over financing.  Then they don’t trust you, and you don’t get to start another company if this one goes bad (which odds are, it will)

These thoughts have been building for a time, but came to a head after reading Brad Feld’s complaints about an investment made by VCs after Brad’s seed investment.  You can glance at that here.

While it might not be the best practice for VCs to step on their fellow VCs toes, Brad’s complaint is, really, that he’s using a tool that doesn’t protect him, and that’s the reason that Series financings have been developed over the last 50 years.  The standard terms in preferred stock investments have been honed over those 50 years, and incorporate all the protections created after bad actors did bad things over 5 decades.

What surprises me, though, is that abuses don’t happen more.  Give enough people $2 million at a time with no constraints, and some portion of them will buy new cars or  throw a party featuring the Dixie Chicks.

The favor economy vs. the show-off economy

June 15, 2015

I received an email from a work acquaintance today. It’s in a stack of about 500 emails, some from people I interact with regularly, some from strangers. This acquaintance was in the middle of the friend vs stranger spectrum, but when performing triage on all those emails, he was among the most important.

The reason? He once did me a favor.

Specifically, he came and spoke in my venture capital class. So now, he moves to the top of the queue when he emails me.

It occurs to me that I do this all the time. The nature of the venture capital business is one of being nice to, and hopefully helpful to, a whole range of people. I try to do favors whenever I can. In the back of my mind, I hope that one day this will work out for me. Someone will send me a great deal, a great connection, an investor in my fund. But I don’t keep track. There is no tally of gives and gets. This isn’t accounting for money. These are favors. And not the mafioso “now you owe me” favors. Just nice things.

In addition to venture capital, it seems that business, politics, entertainment, athletics, basically all fields of human endeavor are fields where relationships can be the difference between success and failure.

As our culture moves more and more towards “look at me” and “I’m great” public projections of our fragile egos, it seems that relationships, and getting ahead, would benefit more from a favor economy than a show-off economy.

Now, if only I could find an app for that.

VCs as TV Stars

December 11, 2014

Dave McClure of 500 Startups, a seed fund in Silicon Valley, has just announced that he’s going to be the star of an Anthony Bourdain style reality show (it is in fact produced by the same company).

This raises an interesting question for venture fund strategy: Does star power improve financial returns?

This is an important question because Limited Partners in venture firms entrust their capital to the firm’s partners (in this case about $50m or so) with hopes of multiplying that capital. The focus is the money, and by extension, the companies the money flows to. If the focus becomes the personalities managing the money, will that lead to distraction? Is the eye still on the financial ball?

Or, craftily, will Limited Partners say “Hey, that guy is interesting and smart and not afraid to use F-bombs on TV, I want to give him millions of dollars to invest for me!” ?

Will the world’s best entrepreneurs say “I like how entertaining he was with that company he invested in. He deserves to invest in my company more than Greylock or Sequoia or NEA!”?

Dave, I count you as a friend. We need to see each other more. Could it really have been as long as the last clove cigarette encounter? Anyway, I’m interested in your thoughts on this one. OK, I’m interested in other readers thoughts as well. What do you think?


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