How to raise venture capitalDemystifying the dark arts

Planningness 9/11/14

Who am I?

@jamiedavidsonjdavidson [at] redpoint [dot] comwww.correlatedcausation.com

Background:– redpointvc – consumer tech– hoteltonight - product

• acq primatable – founder

– kpcb – digital investing– google

• youtube – product (search)• adwords – eng / data

– princeton – ORFE

“I’m a great believer in luck, and I find the harder I work, the more I have of it..”

Thomas Jefferson

Raising venture capital

• Who – shared context• What – details • When• Why• How – tactics

Raising venture capital

• Who• What• When• Why• How

Who – the capital

1. Angels2. Venture Capital

“Where you invest your love you invest your life.”Mumford & Sons

Who – angels

• Friends and family• Independently wealthy• AngelList• Accredited investors!

“Prediction is very difficult, especially if it’s about the future.”Niels Bohr

Who – venture capital

• Capital: Institution investors - Limited Partners (LPs)– based on past returns– anti-correlation with other asset classes

• Economics: The typical model is “2 and 20”– 2% annual management fee of the fund– 20% of the gains beyond the investment (carry)

“Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t … pays it.”

Albert Einstein

• Power law of startup returns– 1/3, 1/3, 1/3

• Targeting >3x the fund in 7 -10 years– 20% annual return

1. http://blakemasters.com/post/21869934240/peter-thiels-cs183-startup-class-7-notes-essay

Who - venture math

Who – venture math

1. http://tomtunguz.com/how-to-align-founder-and-vc-incentives-why-fund-size-matters/

Fund Size $50 M $500 MExit Multiple 3 3Implied Portfolio Value $150 M $1500 MAverage Ownership 10% 25%Total Market Cap of Portfolio $1500 M $6000 MAvg Investment Size (inc. reserves) $2.5 M $10 MNumber Investments 20 50Investment Failure Rate 50% 70%Successful Investments 10 15 Avg Market Cap of Exit $150 M $400 M

“You just have to pay attention to what people need and what has not been done.”

Russell Simmons

Who – a startup

“A startup is a company designed to grow fast.”- Paul Graham Y Combinator

1. Targeting a big market2. Reach and serve that market - scalable

• Relatively efficient market implies that a startup needs a novel idea or market change– startups create new ways of doing things– technology facilitates rapid change

Raising venture capital

• Who• What• When• Why• How

“Price is what you pay. Value is what you get.”Warren Buffett

What

1. Convertible Debt– Cap and discount

2. Equity– Amount and valuation– Dilution

Raise enough capital to hit milestones to mitigate risks to growth

3. http://correlatedcausation.com/how-much-to-raise-using-crunchbase-data/

What – an example

At Incorporation OwnershipFounders 100%

Seed TermsPre Money $4 MRaising $1 MOption Pool 20%

Post Seed OwnershipFounders 60%Option Pool 20%Seed Investors 20%

Raising venture capital

• Who• What• When• Why• How

“You've got to know when to hold 'em, know when to fold 'em”Kenny Rogers

When

• Don’t need money!• Materially mitigate risk and can use capital

1. Seed - product market fit2. Series A - build team and business3. Series B - scale the business4. Series C - profitability5. IPO - liquidity

Raising venture capital

• Who• What• When• Why• How

“The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore, all progress depends on the unreasonable man.”

George Bernard Shaw

Why

Recall startups = growth

Implies:1. Targeting a really large market2. Valuable markets will be competitive

Funding is fuel for growth

Raising VC means you target a big outcome

Raising venture capital

• Who• What• When• Why• How

“A-B-C. A-Always, B-Be, C-Closing. Always be closing. ALWAYS BE CLOSING.”

Glengarry Glen Ross

How

• Warm intro• Relationship building• The pitch• Competitive process

How – venture process

1. Screen2. Socialized3. Diligence4. Decision

How – tell a storyAristotle's mode of persuasion • Logos – facts and reason• Ethos – character• Pathos – emotion

Reasoning by analogy vs. reasoning from first principles.• This for that.

Consider Homejoy1. Uber for home services2. Home cleaning is a offline fragment market. We improve rates cleaners

receive by XX% and make it cheaper and easier to customers by YY%. This is a $ZZB market.

“Well done is better than well said.”Benjamin Franklin

How – the pitch[Vision] What is the problem and is it worth solving? Why now?[Team] Does the team have the unique ability to build this company?[Traction] Who is the customer? Which customers have used the product and how have they received it? How much is each customer worth?[Distribution] How does the company acquire customers cost effectively? What are the unit economics (customer acquisition cost, contribution revenue, and churn rates)?[Business model] Does the company have the business model to build a big (>$100M annual revenue) business with good margins (gross ~ 50 to 60% / net ~15 to 25%) under reasonable assumptions?[Market] Can the market enable $100M revenue? Is the company in a quickly growing market or riding a disruptive wave?[Competition] What is the competitive angle (competitive barrier to entry and/or go-to-market) that will enable this company to succeed where others have tried and failed?[Ask] What do you need and how will you use it?

1. http://tomtunguz.com/pitch-deck/

Questions?

“The best way to predict the future is to create it.”Abraham Lincoln

Breakout

• Vision or “the uber” pitch

Pitch either 1. an idea / startup you know2. an existing company

Thanks

@jamiedavidsonjdavidson@redpoint.com

www.correlatedcausation.com