Raising that seed round

I gave a “key note” to a room full of entrepreneurs for the “Idea to IPO” forum the other night. The topic: “Raising funds for your startup.” About seventy folks showed up, and we had a lively 90 minute conversation. I’ve coached entrepreneurs through this for almost 23 years. I’ve also invested in dozens of startups (most recently btw Dolly, Quizlet and Skydio). And, I have also actively raised capital for the few companies in which I was a cofounder/quasi co-founder. So, I have some strong opinions to share. And, after the session a handful of attendees suggested I post these on my blog. So, here goes- Buddy’s guide to raising funding for your startup.

TO START
Fundraising can be baffling, frustrating and exhilarating. According to the media, California may be in an extended draught, but money is flowing down the Adobe Creek at flood levels. Just look at all the unicorns – they are no longer mythical creatures, or even endangered species. Ya right! The truth is that it is ALWAYS challenging to raise money. But, if you follow the below guide, you will be successful.
To start, there is a psychology that I encourage all entrepreneurs to adopt as they head into the process. It is hard to make money. So, when you ask an investor to fund your startup, acknowledge this. Investors like knowing their funds are respected.
Next, you have to work hard. The probability of success is dramatically influenced by the effort you invest in the process. To help focus that hard work, follow these four “P’s: Prepare, Plan, Practice, and Predict.

PREPARE
Every fundraising endeavor should start with extensive preparation. Prepare three critical documents:

• An Executive Summary – See the blog I posted on Oct 20, 2014 (https://buddyarnheim.wordpress.com/2014/10/20/writing-an-executive-summary/ https://buddyarnheim.wordpress.com/2014/10/20/writing-an-executive-summary/) — which is a guide toward drafting up this critical document.

• The Deck: This is a set of 12-18 slides that tells your startup’s story. It should be visually pleasing, cover the topics highlighted in your executive summary, and be accompanied by your oration of the investment opportunity. Don’t put too much verbiage in the slides. That is for you to articulate when you present. But, it should be informative and easily understood. Objective facts, particularly around the market you are addressing, is critical. Plan on talking through the slides, without rushing, in about 20 minutes. But, a more engaged audience will likely ask questions and seek more depth. Be prepared for that, and have an alternative dialogue that extends the slide discussion to 30-40 minutes.

• Your Financial Model: You may not have any precision as to your top line projections – revenue and gross margin. But, you should be able to present your business model assumptions. Think of these as hypothesis that you plan to test. This will be a springboard for a discussion around how you see your business evolving, and should reveal the depth of your thoughts. In addition, and arguably more important during the seed fundraising process, convey with specificity how you expect to spend the money being raised. Projected expenses by month; expected milestones to be met and when; how those milestones position your startup for its next fund raise, or unique market advantage. As an investor, an “expense model” is fundamental. Not only does it provide visibility into how the money will be spent but how deeply you are thinking about running the business over the near term. Presumably the funding is simply fuel until the next round of funding. Convey how this money is being spent, and how it ensures the next round at a material valuation increase.

PRACTICE
Make sure your first investor pitch is well-rehearsed. Never go into an investor pitch without adequate practice. If you are unprepared, you are wasting both your time and that of the prospective investor. You need to know your story cold. You need to tell it succinctly, and with clarity and confidence. Anticipate the likely questions. Feel comfortable with the subject matter. Present yourself as prepared, approachable, and self-aware. Use friends, family members, co-founders, other entrepreneurs, and advisors to help you practice your presentation. Rinse and repeat. As a rule of thumb, go through your pitch with a live engaged audience at least four times before you pitch to a proposed investor. And, more practice is better.

PLAN
What? PLAN PLAN PLAN! This means research and really know your prospective investors. Know what relevant experience they have. Know where they have already invested. Make sure they are actively investing. Figure out the best way to approach them. Cold calling is the last resort. Find personal introductions. Cull a list of targets. Confirm they are approachable and active. Make sure you know why your investment will resonate. Prepare a spreadsheet. Each column or sheet should be a category of investors. For a seed round, these may include:
• Friends and family
• Angels
• Seed funds/super angels
• VCs
You may consider also developing a list of strategic investors. But, for a seed deal, corporate VCs are not frequent sources of capital, and may not even be appropriate or attractive in light of the early and uncertain nature of your startup.
In each investor category list out your prospects. Once you take a first stab, invite advisors and other knowledgeable folks to help populate the lists. As you are doing this, annotate each prospect with relevant information you have learned: prior investments, colleagues you have in common, unique personal facts, their backgrounds, whatever will help you personalize your approach and dialogue. Figure out who can help you catalyze a meeting. Make sure you have an answer to why this person/fund is a ripe target.
By compiling this list and the related detail, you can avoid superfluous meetings. Don’t pitch a consumer tech business to a med device investor. Don’t pitch a seed deal to a VC that doesn’t invest at your stage or your geography. Pay attention to the pace of the target investor’s historic investments. If they are not active, they are unlikely.
Once your spreadsheet is populated to the best of your ability, you need to orchestrate the introductions and start scheduling the meetings. Maybe you invite the angels to meet together. But, most institutional investors will expect you to give them a personal pitch. Try not to have your “first choice” investors as the first folks you pitch. Your pitch will improve over time. Stage the meetings, but try to get all the first meetings done in 2-4 weeks. You want to keep the overall time compressed. This reduces the distraction from your business but also may help create a sense of scarcity.

PREDICT
To start, a significant number of prospects will not want to hear your story. That is fine. Next, many first meetings will flop. That is also fine. But, if you prepared, planned and practiced, a good number of meetings will go well. This will lead to follow-on meetings and investor diligence. Anticipate that diligence. Know what questions an investor will want to answer. Assemble the documents an investor will want to review Make it easy to find answers.
On the documentation, be sensitive to the document hygiene and access. Prepare a “data room” to make access easy. You can use services like Box or Dropbox. Also, as you populate that data room, be sensitive to the document hygiene. Typos, bad prose, and piecemeal delivery casts a very bad impression. Be organized, and don’t take short cuts. I have a bias toward clean legal documents, clean cap tables, and standard/typical terms with the founders.
Expect investors to seek references. You and your team are arguably the most important assets. Anticipate who can serve as good references, and prepare those folks. It amazes me when an entrepreneur proposes a reference that he/she has not already warned and coached. Keep in mind that some references may be done without your involvement or knowledge. So, be prepared. Think through the common relationships between you and the investor, and make sure you actively manage that prior boss or colleague who may not serve as a positive reference. Maybe warn the investor, or better yet, perhaps enlist the reference.

SUMMARY: Here is a summary of the above for those of you who are unable to plow through my verbose discussion:
PREPARE
• Executive Summary
• The “Deck”
• Financial model (mostly expense waterfall)
PRACTICE
PLAN
• List of prospects
• Warm intros
• Staging your meetings but compressing the overall time
PREDICT
• Don’t get discouraged by “no’s”
• Expect diligence
• Keep readily available tidy documentation
• Plan for authorized and blind references

HBO’s Silicon Valley

I spent a good chunk of the morning yesterday with the writers of HBO’s Silicon Valley (http://itsh.bo/1lfiLJH). They are collecting ideas for Season 3, and they found their way to my office as their legal sounding board.

I must confess that I LOVE the show. I have never been a big TV watcher – in fact those who know me best tease me for having little clue about contemporary TV (other than that which appears on the Discovery Channel (http://bit.ly/1cZBXFT) or 60 Minutes (http://cbsn.ws/1b1lIXE)). But, this show captivates me, and I now have a true appreciation for why — the writers are absolutely brilliant! Sharp, witty, open-minded, and engaging.

My day as a startup lawyer is often filled with many meetings during which I talk with entrepreneurs and investors about complex legal issues, and play out various complex deal scenarios and negotiations.  My meeting yesterday with the SV writers was no exception.  Yet, despite the fact that these folks do not live in this strange world of fast moving startups and high risk investing, they were REMARKABLY literate and nimble in understanding very complex concepts and asking uniquely insightful questions.

So, I am very eager to see what they conjure up for Season 3, although I am confident it will not only be entertaining, unpredictable, hilarious, but also legally plausible.

Writing an Executive Summary

Key to any early stage fundraising effort is a well-crafted Executive Summary, or Exec Summary.  This succinct document describes your new venture and preemptively addresses fundamental questions that prospective investors will have.  I have read hundreds of executive summaries over the years.  And, the few good ones remain very memorable.  But, crafting a good Exec Summary is very hard.  So, this blog entry aims to help make this exercise a little less daunting for entrepreneurs.  Here goes:

First, take some time to understand your audience.  Your Executive Summary is your verbal elevator pitch.  It is a “teaser,” and its purpose is to make your reader eager to learn more.  Don’t expect to “close” with an Executive Summary – its purpose is to lure in the face-to-face meetings.  Assume your audience is smart.  But recognize your readers are also very busy.  And, while you probably know a lot more about your market opportunity, avoid being pejorative.  You need to be instructive and illuminating; descriptive but not verbose.  Carefully think about what assumptions you can and should make, and provide succinct background information as necessary.  At the end of the day, you want your Executive Summary to be (a) a quick read, (b) memorable, (c) credible, and (d) exciting.  Too much information will overwhelm the reader.  Long sentences will bore your reader.  Vagaries will annoy your reader.  Bad grammar will repel your reader.  Be succinct, clear, and compelling.

Next, start preparing an outline.  Here are the topics you must address:

• Market Background – Give visibility into the market and where you see the opportunity. Often an industry background paragraph helps orient the reader.  Succinct objective data can be very compelling.  But, make sure you have your facts straight.  Your credibility rests on how accurately you describe the market and your opportunity.
• Your Solution – Use this to highlight the product or service you are building and why it will address the void you see in the market. Be specific about key differentiating functionality.  This will help demonstrate the depth of your insights.  Be clear about how you foresee your product or service being uniquely valuable to future customers.
• The Strategy – With the right product or service, describe how you plan to penetrate the market. Again, be specific.  Presumably your strategy is evolving.  Outline your hypotheses and how you plan to test those hypotheses.  Don’t be overly tactical.  But, provide enough precision so that your reader can appreciate the depth of your thinking.
• Competition/Competitive Landscape – Educate the reader on the current solutions in the market. Be tactful about how you point out the deficiencies of these alternatives. But, avoid unnecessary bias.  Be objective, and be quantitative where possible.
• Your Unique Advantages – This is where you discuss those unique characteristics of your venture that give you an unfair advantage. It may be some unique IP, a change in the applicable laws, the prowess of your founding team, or recent changes in the market.  The key here is to flag for the reader those truly unique attributes about your venture that enable you to be the first to capitalize on a large, perishable market opportunity.
• Summary Financial Information – This may range from a simple summary of the significant milestones you expect to hit once you raise your round. These are the milestones that, if accomplished, position you well for raising your next round.  Or, this can be high-level projections about revenue and expenses.  The key is to shed light on how you plan to spend the money you seek to raise, and what value you will create with that funding.
• Make Your Ask – You have the reader’s attention.  Now, make your ask.  Be sure your reader knows what you want.  “We are seeking to raise a minimum of $1.0 million.”  This will help qualify prospective investors, and bring efficiency to your follow-on meetings.

Once your outline is complete, you need to get drafting.   For many, writing is very difficult.  Don’t beat yourself up if you start spinning your wheels.  Just force out a first draft.  You can then step away for a bit, revisit and then refine.  As you write, be sure to convey your thoughts in “Plain English.”   If you are an engineer, your vocabulary may include terms that are unfamiliar with the MBA investor.  Your Exec Summary is not where you display your technical vocabulary or your fluency with acronyms.  Put your feet in the shoes of your reader – and write so that your message can be quickly understood.

Good luck, and please add your comments to this blog entry.

What is the Proposed Valuation?

Spartina 2014! Assembly of Spartina-backed startups

Last week I attended the 9th Annual Spartina Offsite – a two-day retreat hosted by David Hehman and Howard Love.  I have known and worked with David and Howard for almost two decades, having first met David in the mid 90’s when he was fresh out of Berkeley and starting his first successful startup, HealthDesk.  Through David, I met and started working with Howard as well.  And, over time the three of us have worked together supporting and co-investing in an assortment of startups.  Our first “liquidity event” came from an investment in a startup called Mongo Music (which MSFT bought in 1999), and we have had the good fortune of enjoying seed investments in OpenTable, Trulia, Hotel Tonight, among others.

“Spartina” is an umbrella under which Howard and David house the investments they co-fund.  And, with a portfolio of dozens of companies, the agenda for the retreat included hourly sessions allocated to each founder/CEO during which each company gave a brief update, and then posited one significant business challenge for the group to discuss.  Mind candy!  And, the conversations this year were incredibly frank, candid and illuminating.

In any event, one of the more memorable conversations involved the market for that “second infusion” of early-stage capital.  Keep in mind that all of the attendees have already raised some seed capital.  But, the bulk are facing the need to raise a new round over the next 12-24 months.  So, our conversations centered around raising that second chunk of funding.

To start, we discussed the clear shift over the past decade by traditional VC funds toward later staged investments.  Series B is the new Series A after all!  So, we discussed where early-stage entrepreneurs find that second infusion of capital to help fuel that critical stage of market penetration and expansion.

Manu Kumar of K-9 Ventures (

Is Early Stage Investing Binary?

I am attending the 9th Spartina Summit, which is a two day off-site hosted by David Hehman and Howard Love, two brilliant entrepreneurs and angel investors with whom I have had the privilege of counseling and co-investing over the past 16 years. Founders of their portfolio companies and an assortment of angels are attending.  We had a fantastic discussion today about seed investing.  The topic – how much do terms matter?   My take:  the vast majority of returns on a reasonable portfolio of seed investments are driven by a subset of “breakout” companies.  The rest rarely move the needle.  Pick well – that is the priority.  Terms should be sane, but are much less important.  Thoughts?

Malcolm Gladwell – why we need more lawyers

I had the privilege of lunching with Mr. Malcolm Gladwell last Friday in Manhattan.  He was the guest speaker for our firm’s (Perkins Coie LLP) annual partner retreat which was held at the Grand Hyatt in NYC last week. With over 400 partners, who flew in from our 19 offices worldwide, it was quite an assembly.  The venue = a stunning dining room across the street from Grand Central Station.

Mr. Gladwell spoke to us for over an hour about why the world needs MORE lawyers!  Here is a summary of his argument:

In the olden days most problems were puzzles, which MG defined as problems for which the information was incomplete.  An example:  a middle-aged man starts suffering from hip and lower abdomen pain and blood in his urine.  After visiting his physician, the doctor concludes he may be facing a prostrate issue.  The patient then undergoes some testing including perhaps a biopsy.  And, if the tests reveal indications of prostrate cancer, the recommended route was singular – prostrate removal.

Nowadays, most problems are mysteries, which MG defines as problems for which we have an abundance, perhaps too much, information.  An example:  we now routinely run PSA tests on middle-aged men, which gives us predictive indications of elevated PSA levels which can be markers for pre-cancer prostrate behavior or one of three types of prostate cancer.  With this, the doctor may collect even more information, starting with an ultrasound and maybe concluding with one of a variety of biopsy types – lots of decisions for the doctor to make.  After that, the doctor needs to assess what type of cancer or pre-cancer is emerging, and then make a recommndation based on this and the age and condition of the patient.  Some prostate cancer is slow growing and unlikely to ever pose a health issue.  Another type can be very aggressive and highly fatal irrespective of the preventative treatment.

MG argues that in the latter scenario the physician’s job is much more difficult.  He needs to not only be able to sort through the abundance of data, but also know his patient and be able to make a customized recommendation, , which he then needs to deliver tactfully to the patient  and be highly consultative (e.g., what is the right solution?? for this indication?? and for this patient?? —   prostrate removal, radioactive seeding, radiation therapy, nothing?).

From this MG argues the skills and training for this new challenge – to solve increasingly complex mysteries (as opposed to puzzles).  He then recited the list of skills that lawyers are trained to develop in and after law school:  deep data analysis, crafting arguments and counterarguments from both sides of an issue, excellent communication skills (both verbal and oral), attention to detail, pragmatism, economic balancing, moral triangulation, law compliance, and interpreting complex messages, etc.

The macro point of MG’s talk was that we live in a world that has an increasing number of mysteries (an abundance or over-abundance of data) and fewer puzzles.  Yet, other than in law school, our schools do not train us to sort through and make sense of this abundance of information.  MG’s book Blink talked about following your gut when making decisions.  But, it was predicated on a crisp understanding and prioritization of the relevant facts.

To do this, go to law school!!!  As I was told before I enrolled at the University of Illinois in 1989, “it’s the best education you can get!”

Swimming Alcatraz!

This past Sunday I was able to cross off another item on my “bucket list” — swimming Alcatraz!  I swam in the South End Rowing Club’s Alcatraz Invitational Swim (see http://georesults.racemine.com/South-End-Rowing-Club/events/2014/Alcatraz-Invitational-Swim—2014/results) and did pretty well.  There were purportedly 903 swimmers; I placed in the top ten for my division (“skins”) and 5th in my age group.  It was quite an experience — swimming mid-Bay with hundreds of yellow swim caps and twice as many arms splashing all around me in the water.   And, the magnificence of the Bay Area once again was awe-inspiring.  Having lived here for almost 21 years, I am still humbled by the beauty of the Bay Area and having a completely unobstructed view of the Golden Gate to my right as i thrashed away in the 66 degree was indelible.  Next up:  the swim around Manhattan – perhaps….  By the way, in the photo from left to right: me, Matt Glickman, Kurt Buechler, Daniel Mitz, and Alex Kaplinsky – nice work boyz!!!!

Getting started !!!

Welcome to my blog! I am dipping my toe in the proverbial blogging waters to see if I can better convey and share my various observations and thoughts about startups, entrepreneurialism, and other topics that preoccupy me from time to time.  I have been advising startups for almost 22 years, and making seed investments almost as long.  It is my passion, and I love working with and advising entrepreneurs. They are the most courageous and passionate of people, and they inspire me to be creative, questioning, and committed.  This blog is aimed to support and perpetuate those brave new ideas and the challenges of old norms. I hope this venue furthers the entrepreneurial spirit of its readers. If you like what I write, please join in the conversation. If you don’t, feel free to move on. All innovation results from trial and error.