Art of the Start 2004: The Art of Raising Capital

This is part of a series of transcripts of the proceedings of the Garage Ventures’ “Art of the Start” conference held in Mountain View. See the complete series of transcripts here.

What we’re talking about now is The Art of Raising Capital. We’re going to assume you’ve gone through all of this hard work that Bill has put you through and now we’re starting to think to ourselves, “Alright – are we ready to go out and pitch to those VCs? Are we ready to go out and raise that venture capital?”

A little about me and in terms of my background in this particular domain: I’ve spent most of my career as a serial entrepreneur. So I’ve done this a lot. I’ve been through this drill a lot. And before Garage I was involved with four different venture-backed startups and raised tens of millions of dollars for those different companies. I had a lot of interesting experiences in that process. Then at Garage, in the early part of our Garage story, we were involved, as I think I said before, at helping companies raise over a third of a billion dollars of venture capital. So, you know, tens of thousands of business plans heard, thousands of pitches went through the process. Now, in our current incarnation as a pure venture capital firm, we’re going through the experience all the time of entrepreneurs who are pitching us for seed stage capital, early stage capital. So, we’ve learned an awful lot – I personally have a lot of scars under these long sleeves from battling with venture capitalists over the years. And so
what I want to share with you right now are a few tips and techniques that you can use to perhaps take a little bit of the F-U out of “funding”.

So now, if you want to go out and raise venture capital, stop first and think. The first question is: is your business venture-fundable? Does it really make sense for you to go out and pound you head against the brick wall of the venture capital industry to try and raise venture capital. Because, the harsh reality is not every brilliant idea is, in fact, venture-fundable. There are a lot of really good ideas – there are even a lot of really good companies – that really should not be going after venture capital, because venture capital is a very special form of capital. It’s not like all other capital. Venture capital firms require that you meet three very distinct criteria in order for you to be justified in receiving their money. The three criteria for raising venture capital are: First of all, you’ve got to have a business that has the potential for rapid sustainable growth. That’s why we’re all here – because we want to start businesses that are going to go, you know, straight to the moon, doubling, tripling every year. That’s great.

There are a number of businesses that can grow rapidly – that’s criteria number one – but you’ve got to be able to get to a significant size and scale in the course of that growth. And you hear this all the time – VCs get on stage and say, “We’re looking for the billion dollar company” – well, of course, they’ve said it so much that all of you believe that every single company that you’re going to start is going to be a billion dollar company. But you got to be honest with yourself – is this really going to get that big over time, and is it going to get to scale? Now, you know, it’s a somewhat more nuanced word, but VCs, venture capital, really needs companies that will scale with growth – in other words, it gets easier as you grow, it doesn’t get harder.

If it gets easier as you grow, then you have the opportunity to meet criteria number three: your business has got to have ongoing disproportionate sustainable profitability. I mean, there are a lot of businesses that can grow rapidly and get to a large size, but they’re not all businesses that have disproportionate profitability. And the only way you can have disproportionate profitability is if you have some very unique sustainable competitive advantage – usually it’s wrapped around some sort of unique technology or know-how you have. And that’s why VCs are so focused on innovative technology, because that tends to be what gives companies the advantages to meet these criteria.

So, first of all, you know, is it venture-fundable? Do you meet these criteria? Let’s assume that you’ve thought about this long and hard, you’ve been honest with yourself, and, you know, you think through the model a little, change your business plan a little bit, and you realize, “OK, this is venture fundable” – now what? Now the question is what is the best way to go out there and raise venture capital? And I want to go through five key components to going out there and being successful raising venture capital.

The first one is: you’ve got to make sure when you start the company, you start smart. There are a lot of very significant details that you’ve got to make sure you get right at the beginning to avoid getting into trouble later on. So you’re going to start smart. And then you’ve got to learn how to tell a good story – you have to understand the fundamentals of your business, you can’t just get pretty slides put together – you really have to understand them, internalize them, and be able to articulate them – that’s a lot of what Bill was just talking about. But on top of that, it’s amazing to me how many entrepreneurs don’t spend the time making sure the numbers add up. There are a lot of economics involved in building a business – and a lot of entrepreneurs just haven’t bothered to get their heads around the economics of their business. I’m going to talk about some of details of that. Once you get all that right, then there’s a very specific process for being successful finding the right investors for you company, and I’ll share with you four techniques are the most appropriate techniques for going after investors. And lastly, throughout the whole process, the key to success in raising venture capital is constantly building your pool of credibility with the people you’re talking to, with the investors certainly, but also with the people who are involved with you in that process – the customers you’re talking with, the gurus you’re talking with, all the people you’re building into your ecosystem – you’ve got to be continuously building your credibility. And we see, all the time, entrepreneurs stumbling in this area and destroying their credibility with very just small, simple mistakes that they don’t have to make.

So, let’s go through each of these one by one.

Starting smart – what do I mean by “starting smart”? Well, when you start your company it’s important that you put together a simple clean company. Back to Guy’s original presentation – all the tasks of starting up – there are a lot of things you have to do when you start up a company. As Guy said, you’ve got to rent office space, you’ve got to buy office furniture, there are a lot of things – but there are some things that are really important that you get right because if you don’t, you’ll be in trouble later on. The first thing is, from the very beginning when you set up the company, incorporating the company, creating the founder stock, distributing the founder stock. Now some of this is technical stuff, and this involves making sure you have the right law firm as your partner in the process. But when you set up a company, you got to make sure you get this right and you don’t waste a lot of cycles fiddling with this because you’ve done it the wrong way. It used to be, here in Silicon Valley in the good old days way back in the nineties, when companies would start up the lawyers would incorporate the company in California because, you know, we had a lot of time and if, in the unlikely small percentage chance that you were going to go public, they’d flip it over to a Delaware corporation at that point and then you’d go public. And that was fine. What was interesting was that during the bubble, the investors and the law firms realized, “Well, we’ve only got nine months between incorporation and going public so we might as well start in Delaware!” So, increasingly what you’ll see is the venture law firms are starting companies out in Delaware – but you don’t want to start out as an S corporation or an LLC and start approaching venture capitalists saying, “Don’t worry – when the time comes, we’ll create the right corporate structure.” Just do it right the first time, set up the right corporation – probably it’s Delaware, maybe it’s California, I don’t know where you’re from – if you’re not from California, probably it’s California, probably it’s not Florida with all due respect to our friend from Florida.

Then you have the process of distributing founder stock. It’s amazing how many people get into trouble here – so you need someone who’s done this before and who understands technically what this all means. And I’m not going to go into all of the technical details here, I’ll just make one comment about one key mistake we see people making. You see a lot of entrepreneurs very early on in the process making promises to their co-founders about how much of the company they’re going to get. And you have this discussion about, “Okay – we’ll each take thirty-three percent of the company!” Well, you know, thirty-three percent of the company when, and on what basis? It’s a very ambiguous kind of phrase – don’t ever get into that discussion with your founders. The next thing you know is you bring on another guy and they get another ten percent, then you bring on advisors and they get two percent, and then there’s this great board member and they got another four percent. Whatever the numbers are – you get into trouble if you start promising percentages of the company. At the very beginning, put together a plan for capitalizing the company over the long term, and make sure you understand how each of the founders are going to fit in to that. Distribute the founder stock very carefully and precisely with real documentation. And then the other piece of it is you’ve got to sign buyback agreements as founders. And every entrepreneur when they here this for the first time, usually they walk into a VC, they’re in multiple layers of discussions – the VC says, “Now, you guys have all signed buyback agreements, right?” and the entrepreneurs look at each other and say, “Well no – we’ve been working on this for five years. We’ve worked long and hard on this in our garage, and we own that stock!” And the VC says, “Well, you know, you don’t really.” And then you have this discussion, and it’s usually bloody and it’s messy. Get into your head that it’s the right thing to do, to have a buyback agreement among the partners who start the company. I can’t tell you how many times we’ve seen companies that have blown up after six months or nine months – one of the partners leaves, one of the founders leaves, you know the founder’s wife ends up having half the stock, whatever it is. Put together buyback agreements so you don’t get all messed up as things evolve over time with the company.

And then – as you start bringing employees into the company, and you bring in consultants, and you bring in advisors – do it clean, do it right, do it with documentation. Get your law firm to give you standard employee agreements, standard consulting agreements, standard advisor agreements, don’t promise percentages of companies. If you’re going to distribute stock, do it very carefully and precisely. Be sure that everybody that is working for you is developing intellectual property that the company owns.

And that gets to the next point: make sure you manage your intellectual property. People, when you talk about “intellectual property”, they think patents, and they think, “OK, it’s off in this domain of going and filing patents.” But it’s not just about patents. It’s about making sure everybody who works in the company has signed appropriate agreements. It’s about making sure that all the know-how is appropriately protected or licensed, about making sure you’re not stealing something from your prior company, it’s about making sure that the company owns the intellectual property and it’s appropriately protected. And then when it comes time to take some money from some seed investors, make sure you do it, again, the right way – from smart investors who now what they’re getting into. Don’t take money from Aunt Martha if Aunt Martha’s going to give you a lot of trouble – now I used to say “unless your Aunt Martha is Martha Stewart”, now I say especially don’t take money from Aunt Martha.

But there’s a process of taking seed capital using convertible notes, using the right instruments, bringing the right qualified investors into the process – you want to pay good attention to that. And you’ll do that, as I said, in a convertible note or loan rather than trying to sell Series A preferred stock to your Uncle Fred.

And last, earlier today someone said, “Well, you know, startup companies shouldn’t really have to worry about Sarbanes-Oxley and that sort of thing.” But I will tell you, in this environment right now, a lot more attention needs to be spent on proper governance from Day One. And that means things like all the things I’ve talked about before – it means things like thinking through compensation structures, thinking through option policies, thinking through/making sure that you don’t have any funny deals within the founders, and the investors, and the board members, or the customers, or anything like that. At the very beginning, don’t assume that what you’re doing is private – assume the things that you are doing, relationships you’re building, will become public at some level, and you want to make you they can survive the light of day. So pay attention to governance from day one. Be professional about the way you set up your company and you start your company from Day One.

So you put this all together, and what this means, really, is you’ve got to get the right attorney, the right law firm. And, now, I just want to, I should do the disclaimer, I should have done the disclaimer before – I am not an attorney, I just play one on stage. But if you’re going to start your company, you want to make sure you get someone like the Hellerman/Venture Law Group. And there are a number of other attorneys who will, for deferred fees (I’m just now negotiating prices for our friends here), they will defer their fees, they will work with you to make sure you set this up right. It’s doesn’t have to cost a lot of money to set the company up right.

Point two: tell a good story. I’ll tell you, if only every entrepreneur has spent a little bit of time listening to Bill Joos the world would be a much better place. For those of us who are at the other end, you know, receiving it, you know, the sky would be bluer, the birds would sing sweeter, if only entrepreneurs had taken to heart how do you articulate the fundamentals of your business. As Bill was saying, as you approach the venture capital community, you have to understand what’s going on in their heads – inside the heads of an investor there’s generally a scorecard that they’ve developed over the years. They’re scoring you – every communication you’ve got – if it’s an email, if it’s a phone call, if it’s an in-person presentation – they’re scoring you against these different factors and evaluating your business and how well do you understand the fundamentals of your business. Those scorecards vary, you know, from investor to investor – different investors have different biases as to what’s the most important, but it’s usually some combination of these six elements: the team and how good is the team, the problem that you’re going after and how big is the opportunity, the technology and solution you’re putting together, the sustainable advantage that you’ve got, what sort of business model you’ve put together, is it proven, and how do you leverage this business with partnerships. I don’t want to spend a lot of time on these, because I think Bill has already covered a lot of this in great detail, and we’ll talk about some of these elements later on.

The main point here is: it’s not just about getting someone to put together a great pitch for you, it’s about having the whole team understand the fundamentals of the business and being able to articulate any one of these in any given communication you’ve got.

So, you know, too often we see CEOs who will not answer a question and say, “Well, you’re going to have to talk to my CTO about it”. If the CTO is in the room, that’s O. If the CTO is not in the room and you’re the CEO and you can not give an adequate articulation of the value proposition around your technology and what makes it unique, then, you know, you’re not quite fully there. You don’t necessarily have to be able to recapitulate the code that it’s written in, but you’d better be able to articulate each of these elements and the fundamentals of your business in any given context. It’s also important to understand even though we give you kind of a template for how to articulate this, different investors are going to focus on different elements. You’ve got to listen to what they’re worried about and make sure you can address the concerns that they’re most focused on and be articulate about that issue.

Articulate the fundamentals but then, as I said before, make sure the numbers add up. Make sure that you can demonstrate a fundamental understanding of the economics of your business. Now, some entrepreneurs are more analytic financial than others. There are a lot of CEOs that, you know, they position themselves as, “You know, I’m the big picture guy – talk to my CFO when it comes to numbers.” That’s not good enough. If I’m entrusting you with millions of dollars, then I want to know that you understand at a very fundamental level what business is all about. Business is about economics, and that means that it is about numbers, it is about the way you make money. You’ve got to understand the numbers of making money if you’re going to run a successful business.

So, let’s talk about some of the numbers that you’ve got to focus on. First of all, there are the long-term financial projections. Now, as you might guess from what I’m saying, I tend to be more on the analytic financial side of things when I evaluate a business. And to me, the long-term financials are really important. I get a lot of entrepreneurs that push back on me and they say, “You know, Bill, why should I do financial projections for this business? I have no idea what the world’s going to look like in five years! And if I pull it together, everybody’s going to know I’m just making it up!” And my response to you is why should I invest in a company where you’re just making it up? Don’t you have some sort of vision of how the future is going to look? Don’t you have a way of understand how the economics of you business might play out? I don’t believe any long-term financials that I read as being accurate, but every set of long-term financials should tell a story. It should tell a story that maps to a vision of the way the future’s going to unwind. So your long-term financials are not a spreadsheet exercise that you give to some consultant who knows how to use Excel. Your long-term financials are a way you tell the story of you business using numbers. And they’re driven by the underlying metrics that drive your business. They’re not driven by cell formulas – they’re driven by how are you going to go get customers? What are you going to spend to go get those customers? What are those customers going to pay you? Some of the points that Guy was making earlier about you business model and Bill was referring to as well, tell the story using numbers, present a vision of the future that makes sense in your long-term financials. And test them with comparables – go find other successful companies that you want to model and say, “Has any company in the history of the world ever performed the way I’m projecting my company will perform?” Almost always, every set of long-term financials we see outperforms the most successful companies in the history of the economy. Get a little reality in there. Go back, look at great companies and say, “Hey, you know, this is what I will look like if I’m a great company” – test you assumptions there.

Now the other side of this spectrum is the near-term operating plan, and most entrepreneurs see that as the first twelve months of the long-term plan. It’s embedded in the same spreadsheet. Probably that’s not a good way of doing it, because one way or another, either you’re going to get too high level and not have a good near-term operating plan because it’s driven off the long-term financials, or you’re going to spend too much time figuring out how many paperclips you’ve got to buy in year five if you use your operating plan as the same tool. So, just tactically speaking, when you are developing a near-term operating plan, understand that it has a different role than the long-term plan. The long-term plan tells the story, the near-term plan says, “OK, what are my levers and what are my variables in the very near-term as I’m raising capital. Can I adjust quickly to rapid changes in the outlook? If things slip, do I hit a brick wall or do I have a way of escaping if things don’t play out quite the way that I’m hoping they will?” That’s the way a VC looks at the near-term operating plan – they want to see that you have the ability to adjust quickly and react to changes in the environment. And they want to know that you’re going to use their capital efficiently during that initial period of time and that you’ve got the runway to get to the next large milestones in your business. That then enables them to understand your capital requirements, not just for this next round of financing, because you’d better understand your requirements over multiple rounds of financing and be able to model out what’s the capital structure of my company going to look like from here all the way out to whether it’s an acquisition or an IPO or whatever liquidity event. Now, again, a lot of entrepreneurs take the attitude, “Well I don’t really know, I’ll probably go raise some more money at some point in the future.” But if you don’t do the work of thinking that through, then it’s going to fall back on the investor to think through what sort of capital you’re going to require, because investors need to understand how is this company going to look over multiple rounds of investing. So I encourage you to do the work of building the model for the way your company’s going to change with different levels of capitalization.

Now, in your Series A, now, you’re going to sell thirty-five, forty, fifty, sometimes even more percentage points of you company. And then you’ve got a Series B, and maybe you have a Series C – god help you, you don’t have to have a Series D, But over time, the way the Series A investors look on your cap table changes pretty dramatically, depending on how things work out. That’s really important to a Series A investor, like Garage. So, do the work of understanding how much capital you need and how your capital structure’s going to change over time.

And then finally, as I said before, make sure you can articulate clearly what are the sensitivity points in your financial model – what are they key metrics and variables that you’re going to be watching like a hawk – that demonstrate whether or not you model is valid, or whether your model needs adjusting. You should have a dashboard of key metrics – that aren’t necessarily financial metrics. You know, it’s things like: how many days does it take to close a sale, what’s the cost of a typical customer acquisition, what’s the value of a customer once you acquire them, how long does it take to get from point A to point B in any given customer relationship, when will they buy up and up, how many customers are converting from the initial product to the advanced product, how many customers are re-upping in a subscription model. You’ve all these metrics that are the most significant variables in your financial model. You better be able to articulate those very clearly, you better be able to show how they drive your long term financial success, and you better be able to show how you are monitoring them over time. So, those are making sure you get the numbers right. Put all this together and maybe now it’s time to go out and find the right investors.

And I want to talk a little bit about some of the key factors for the process of going out and raising capital from investors. First of all, the reality in the venture market right now is probably the single most important thing you have to do before you go after venture capital is you have to generate some form of momentum in your business. It is no longer the case, if it ever really was the case, that you could sit down with an investor and a napkin, and talk about a brilliant idea and raise capital. Now, maybe that will happen again in the future at some point, but don’t count on it – it ain’t a plan for raising capital. What you have to do first is show you’ve got some sort of momentum. Now you say to me, “But I have no money! How can have momentum without any money?” Well, a lot of other people have figured out how to do it. There a lot of ways you can make progress in the development of your technology, in the development of possible customers, in the building of your team, in getting some sort of alpha or beta or something out there to validate your marketplace before you even have money. You’ve got to figure out how to do that so that when you approach investors you can say, “Here’s what we’ve done with nothing – imagine what we can do with your capital. I’ll help you imagine – here’s the forecast for this business.”

So, step one in the process, step one in the process is generate some form of momentum. Then, then, go target the right investors. You’ve got to make sure when you’re going after the venture community that you’re spending your time wisely targeting the investors that make sense for your business, for two reasons. One: if you go to the wrong partner at the right firm, you may have shot your chance at that particular firm. So, it’s not just about figuring out what’s the right venture capital firm to go after, you’ve got to do the eaxtra level of due diligence and figure out who’s the right partner at that firm. Now, most entrepreneurs, the process looks something, variation on two themes. One is: they go around to their friends and they go around to their ecosystem buddies and they say, “Who do you know in the venture community?” and they compile a list of all the people the people know and they assume that list of “who do you know” is the right community to target. But that’s not right. You’ve got to drill into the next level and find out, each of the people, are they the right people or not or is it one of their partners, or is their firm even relevant. Is it a life science firm and you’re an IT kind of company – I can’t believe how many times that happens, right, or vice-versa, IT firm with a life science deal. The other approach a lot of entrepreneurs take is they find the directories, you find a directory of venture capitalists, and, you know, you get as many email addresses as you can possibly get and then you blast the model out. Now, the great thing about the venture community that has changed over the last five years is nobody uses FedEx anymore – so that’s a good thing, it saves entrepreneurs a ton of money. But it’s also a really bad thing, because it seems like it costs less to send an additional business plan to an additional person. But there is a cost, again, if you send the wrong person your plan you’re going to develop a negative reputation, perhaps, in that firm.

I have to tell you a sad story: just a few weeks ago, I got an email that was, it was an email that at the top of the email you saw this CC list and there were about forty VCs in this CC list. And then below the CC list it starts out “To whom it may concern”. So, you can guess my first reaction was, “This doesn’t concern me!” That’s just the most egregious variation on what happens all the time in the community. Do your homework, figure out who the right investors are, and then, once you’ve figured out, “OK, this person at this firm is the person I want to get to” then you go back to your ecosystem and you say, “Who knows this person? Who has a credible introduction to this person? Who can help me get a credible entre to this individual?” And you try to build as many links into that person before you go out to them. And then you personalize your communications with them, none of this “to whom it may concern” or “dear sir”, which is just great if you’re targeting a woman. You personalize communications, you say, “Hey, I noticed that you’ve invested in this space, you invested in this company, we think our company is complimentary, we think that our company is the next generation” – show that you’ve done your homework, show that you understand the space that investor invests in, spend the time to do the homework, and then target at a more limited number of venture capitalists, rather than hoping that it’s a percentage game: “Gee, if I send the plan to two hundred investors, all I need is two percent of them and I can get my company funded!” It just doesn’t work that way.

Then, assuming you get some venture capitalists interested, you’ve got to nurture a syndicate of investors. A syndicate of investors is always headed with a lead investor, so the first thing you have to do is find lead investors: guys who will write the term sheet, or women who will write the term sheet to invest in your round. And then help build the syndicate around that lead investor. The syndicate is a group of other investors who, for whatever reason, would prefer not to lead – they’re a smaller fund, or, in this particular case, they don’t have the time to take the board position and they want to co-invest in the space – you have to build a syndicate. Now there are a lot of fairly straightforward, commonsense rules about this. You want to be careful when you’re building this syndicate that you don’t go out and say, “Hey! I’ve got XYZ, top-tier, Sand Hill Road VC that’s going to be giving me a term sheet any week now! Wouldn’t you be interested in joining them in this deal?” Well, if you don’t have that term sheet, then you’re going to get in a lot of trouble when this person calls this person and discovers, “Well, yeah, I had a meeting with them. But that doesn’t mean I’m writing them a term sheet!” You’ve destroyed your credibility; you’ve lost two investors in that process. So be very careful about how you cultivate this syndicate and you bring them together. What you want to do is get the lead investor to step up to the table, to commit the funding, and to help you build the syndicate.

If you can have two syndicates competing, that’s even better. That’s a hard thing to get to. Ideally though, you want to get one or two investors who are working with you to build the syndicate. Do not abdicate the responsibility for the syndicate to the investor; you’ve got to be part of that work process, to build the syndicate.

And then, last, throughout the whole thing understand the process of raising capital is a selling process. It’s stunning to me that even sales and marketing oriented CEOs, for whatever reason, they get into the venture process and they sort of lose their way. They lose sight of the fact that this is just another complex selling process, and it requires all of the steps that any selling process requires: you’ve got to qualify your leads; you’ve got to make sure that the person you’re talking to is the right person to talk to; you’ve got continuously do trial closing; you’ve got to figure out techniques to progress the process – “OK, so great! When’s our next meeting? Can we do next Wednesday at noon?” You know, “If I get you this information, will you be ready to give me a term sheet?” All of the standard techniques of selling: “Who else do I have to talk to? When do I get to talk to the rest of your partners? What’s it going to take for you to write a term sheet? How much of the round are you interested in?”
Just standard selling techniques. It also includes being persistent. Amazingly, you get these incredibly scrappy, aggressive entrepreneurs – but when it comes to talking to VCs they kind of feel, “Well, I’ll let them drive the process.” You know, “Have you talked to this firm recently?” – “Well, no. He said he was going to get back to me…” “But why don’t you call them back?” There is a very fine line between persistence and stalking. But, you know, you’ve got to push that line. You’ve got to push that line and, worst case, they say ‘no’ – that’s fine! You can focus your energies elsewhere. It’s better to get to a fast ‘no’ than a long, drawn out ‘maybe’ that eventually ends in a ‘no’. So, manage this like a selling process.

Then, the fifth point, which is kind of a nuance but it’s so fundamentally important and it’s amazing how many times entrepreneurs blow it on this point: you’ve got to build your credibility. There are a lot of factors that enhance and detract from your credibility during this process. Let me run through a few.

Customers – if you have customers who are reference-able, that’s wonderful. So go – perhaps the best way to go get venture money is to get customers first, customers who say they’ve bought what you have, and they want more of it, and they love you. Not everybody can do it, but it’s a great credibility builder. Short of that, there are strategic partners – now that doesn’t mean you have the Software Development Kit from Microsoft and they’re a strategic partner – it means you’ve got a reference-able relationship with a company that really wants to help you succeed. Some earlier seed investors – have you been able to attract some seed investors who are credible world-class investors. Or at least advisors or board members, and we talked a little about that earlier. Are there industry experts out there who you’ve met with, analysts who you’ve talked to, who will vouch for the fact that this is an important new breakthrough, smart industry gurus who can sign up to say, “Look, what these guys are doing is the next generation”. Back to Guy’s MAT: Are you hitting your milestones? One of the things that happens all the time is entrepreneurs, in their first meeting, they say, “But next week I’m going to sign this deal with XYZ person” and a month later they have their second meeting with the VC and they say, “How’s that deal going?” “Well, you know, in essence we haven’t signed it up yet”. And last, don’t lie. Seems kind of obvious, but how many times do we see entrepreneurs who are basically lying during the process. Now, there are lies and there are lies, and, you know, obviously we’ve seen in the news lots of stories of really bad lies. But there are also some subtle lies that you hear all the time, and so, there’s so many of them in fact, we’ve had to compile a list. So, this is my opportunity to do my top ten list and then I’ll close on that point.

There are a lot of things that entrepreneurs say during the process of raising capital that just demolish their credibility. So, the Top Ten List of Lies That Entrepreneurs The Most Frequently. Lie #10: Our projections are conservative. Now, most people don’t think that’s a lie, but it is. It is – your projections aren’t conservative, you know they’re not conservative, you know you’re going to miss those projections, just stop using the phrase “our projections are conservative”. Lie #9: Our target market is $56 billion. You know, you may be able to add up all the economic activity in every sector in which you’re possibly going to do business, but that has nothing to do with your target market. This destroys your credibility when you say this. Lie #8: We have a world-class team. Now, I know you’re proud of your team, I’m sure you have a great group of talent on your team, but it probably isn’t world-class unless, I don’t know – is Jim Clarke here in the audience? You may have a great team, but don’t tell us it’s a world-class team because it probably isn’t. They may be smarter than anyone else in the world on a specific topic – tell us that, and let us know why that is. Lie #7: Our average sales cycle is 90 days. Well, you know, your first customer who ever bought your product only took ninety days from the time you started to the time you ended. But understand that is not an average. That is not an average – that is at the far end of the bell curve. The average is what happens over the long end – you have not yet sold all the guys you haven’t sold yet. The average is going to be much longer. Lots of entrepreneurs get trapped because they build into their model this ninety day sales cycle, when in fact it’s nine months. Or twelve months. Or longer. Be realistic about your sales cycle. Lie #6 – and Bill touched on this one: We have no direct competition. Almost certainly, you have competition and, as Bill said before, if you think you have no direct competition it’s because you haven’t done the work to find them, or it’s because you’re lying to us. Either way, we’re not that excited about the work you haven’t done. Lie #5: No one else can do what we do. Well, you may be the first team to produce this particular prototype of this particular technology, but everybody knows that with enough resource and talent other people can do it. This is not a compelling competitive advantage. What we want to know is why your competitive advantage is sustainable. Why it is that because you have these three people on your team that your team will be able to sustain your technological advantage over multiple product cycles – that’s a competitive advantage, not the fact that you’ve tinkered together a technology that no one else has bothered to build yet. Lie #4: All we need is 2% of the market. I want to target the company that wants to go after the 98% that you’re going to skip. That’s the company I want. Lie #3: We’ll be cash-flow positive in twelve months. You know, God bless. From your lips to God’s ears – but it ain’t going to happen. Lie #2: Our contract with Nokia is going to be signed next week. Well, don’t start talking about when that contract is going to be signed until after it is signed. You can talk about conversations you’re having with Nokia (if that’s OK with Nokia), you might even be able to get a reference-able relationship discussion. But don’t promise contract signature dates until after they’re done. Underpromise, overdeliver. Surprise investors with momentum. Don’t miss milestones and destroy your credibility. And Lie #1 is: I’ll be happy turn over the reins to a new CEO. You know, as another venture capitalist likes to say, there’s a big difference between the CEO, the entrepreneur you’re talking to, who you know they understand the process, that they’re good at the early stage and they want to bring someone else in the later stage. But then there are those entrepreneurs whose fingers you have to pry off the steering wheels with a crowbar. It’s OK, some entrepreneurs can make that transition, others can’t and shouldn’t, and know that they shouldn’t. And there’s a big difference between the two.

So, in summary: What’s the best way to raise venture capital. Again, answer the first question – make sure you understand that your business is, in fact, venture fundable. Make sure you set your business up the right way. Articulate the fundamentals, both in prose and then understand the economics – make sure your financials tell the story of your company. Understand that raising venture capital is a selling process and use your best selling techniques through the process and then throughout the process build your credibility. So, that’s the best way to raise venture capital. The fact of the matter is: not every company will be able to succeed at the end – we’re going to talk about that later this afternoon. I’m going to be back on stage to talk about The Art of Bootstrapping.