VC Fund Raising Manual – 2 Documentation

documents

When you are preparing documents for VC fund-raising, the one piece of advice you will be given by a lot of people is that you need a ‘business plan’ document that you should send to the VC firm. You are also supposed to have an ‘executive summary’ that you can send up front.

Don’t.

That doesn’t mean to say you shouldn’t have a business plan, but I suggest you don’t email that to a prospective investor. There are several reasons for this:

1) VCs don’t read business plans, they are long and boring

2) Neither a business plan nor a business plan summary achieve what you need to achieve at the point of first contact

3) The business plan will start floating round the start-up scene, I have seen many dozens of business plans that were not intended for me

4) There is scientific evidence that shows that submitted a business plan does not lead to successful fund raising. See this interview for the details.

The documents that you should prepare for the fund raising should be alinged with the phases of the fund raising process. In my experience, the following is useful (I will elaborate on a few docs later on):

1) Pre-pitch phase: 2-3 page teaser document

2) Pitch: 15 slide (or so) PowerPoint presentation

3) Due Diligence: Depending on your business, you will need to present the following documents:

Documents related to spending money:
– Financials (past and forecast). Probably prepared in a professional accounting software and exported to either Excel or Word format. If you prepare your financials in Excel, this is fine for a seed stage company.
– Hiring plan associated with the financials (where appropriate)

Documents related to the product, the technology, their development and protection:
– Technology outline (if any). Word document format
– Product outline. Word document format.
– Product development plan. Word document and associated Gantt charts, probably in MS Project
– Patent strategy (if any). Word document.

Documents related to sales and marketing:
– Marketing plan. Probably in PowerPoint format.
– Sales plan. Various formats, but either an export from a CRM system (to Word) or an Excel spreadsheet

Document related to your industry:
– Industry and M&A analysis. PowerPoint format.

4) Legals – after you have signed a term sheet

You should have prepared digital and physical copies of all contracts that the company has signed in the last few years, as well as any previous investment agreements and the articles of association of the company.

General comment:

Prepare all these documents separately. There are many good reasons for keeping them separate.

Different people can create these docs independently without interfering with others.

The content is in relevant formats.

You gain the ability to distribute certain documents specifically to certain people whom you are dealing with during due diligence and legals, but not to others. For example, should the VC hire a technology expert to evaluate your technology, then these people really don’t have to see your financials or your sales and marketing strategy. Likewise, when the VC is asking potential customers about your product, then they don’t need to see your financials, or technology outline or patent strategy either. Having separate documents allows you to compartmentalize your information and distribute it on a when-needed and need-to-know basis. This reduces the likelihood of leakage somewhat. Also, should a VC abort due diligence, you haven’t shown them all your documents, but only a few.

You can also send documents one by one (no VC is going to read all these documents in one go). Also, it gives quite a nice impression when a VC asks you for your […] plan and you can send over a whopping doc one day later.

The first two documents are the most important ones, so I will describe them in somewhat more detail below.

Teaser Document

I suggest this a 2-3 page long PDFed Word document. This document has several purposes:

1) to enable you to pitch to a VC
2) to mentally prepare the VC for the pitch
3) to enable the VC to communicate your story within the firm

The content of the teaser document should cover the most important aspects of your company, but not all of them. It should cover:

Product: what is your product, why does it matter
Market: why are you addressing an interesting market
Team: who will make it happen

The ideal thought that a VC should have when reading this document is: “Hmm, very cool, I want to see these guys pitch…” So, don’t try to answer all the questions in the document. Leave blanks. You are not trying to convince people to do something. Your purpose is to make them curious. To want to know more. To want to meet you and have the opportunity to find out more.

(By the way: obviously you won’t call it ‘teaser document’, right?)

Pitch Presentation

Endless articles have been written about this one. Have a look at the Stanford Educators Corner, loads of good stuff here, including this one:

As I said before, I have seen 100s of start-up pitches. Some were brilliant, some were disasters, most were somewhere in the middle of the extremes. Your document should cover the same points as your teaser doc, but there is more information in it:

Product: what exactly does it do? What pain does it make go away?
Market: who are the people who will benefit from your product? why is this an interesting market?
Business model: how will you make money? why is this a good model?
Marketing & sales: how will you bring your product to market and how will you sell it? will you have good margins and if so how large are they? what are the costs of sales?
Industry: who are your competitors and how will you compete? are there elements of buyer, supplier or regulatory power that impact you? how are you going to maintain a competitive advantage?
Team: who will make it happen? do you have a good mix of experience and hunger?
Financials: how much money is this going to cost over what period of time? how much revenues do you expect to generate? what are the key variable that will influence your revenue forecasts?
Investment case: is this sector acquisitive? what are the acquisition drivers in your industry? What are the acqusition drivers going to look like say 3 years from now? how do you fit into all of this?

If you can present a case covering the above points on some 15 slides (some 2 slides for each point), you will have done better than most. When I was working at Library House, we asked presenters to cover all the above points in 7 minutes (no more than 12 slides). And yes, it is possible to do that very well.

Overall, the request in the pitch is NOT to get investment. Your simply want to further intrigue the prospective investor. You want them to dig in, to do due diligence on you and work with you during the coming weeks.

As a side note: sometimes you are asked to pitch your company at a public event. In this case, I suggest you don’t include all the detail of a one-on-one presentation. This is more of a shorter ‘teaser’ presentation document in that case.

I will cover how to pitch to a VC in one of the future episodes.

UPDATE 2: Good advice on how to write well can be found here. Good advice on how to present good charts can be found here.

AddThis Social Bookmark Button Subscribe in a Reader Subscribe by Email

VC Fund Raising Manual – 1 Identify Relevant VCs

Purpose of this step: to identify all investors who can actually invest in you.

This first step of raising VC funding is the most important one. Once you actually know which VCs are really the relevant ones to talk to, you minimze wasting your time on irrelevant interactions and can focus all your energy on those VCs that are real prospects.

Update: I have started building a public list of VC funds. You can view them here: http://creator.zoho.com/jenslapinski/list-of-vc-funds I will build out this list until it contains all active VC funds operating in the UK. If you help me, I think we could broaden its coverage very quickly.

Steps for qualifying a VC as a prospective investor

1) Create a long list of all VC firms that you can find that have made investments in the past 24 months

2) Identify those VCs that match you industry sector and your geographic location

3) Identify VCs that have invested in competing companies

4) Identify those VCs that have money to invest in a company like yours

1) Create a long list of VC firms

The best way to find a list of all the active investors is to approach a company that tracks VC deals. There are Library House (where I used to work), VentureOne, VentureXpert, Initiative Europe and many more.

These companies will be able to give you a list of all VC firms that have actually made deals in the last 24 months. A VC that has not made an investment in the past 24 months is an unlikely candidate to approach. Exceptions are newly-formed partnerships that are yet to make their first investment, these should be very high up on your list.

I really suggest you try to get access to such a deal list, it will help you reduce a lot of work later on. If you really can’t get access, then you will have to do with publicly available directores. You can find various on the web.

2) Identify VCs that match you industry sector and your geographic location

By visiting a VCs website, you will be able to see what industries a VC is actually investing in and where their offices are located. Remove all VCs from the long list that do not invest in your industry sector. They are completely irrelevant to you.

Move all VCs who do not have an office near you (near for a seed stage company means no further than a two hour drive) to a B list. As a rule of thumb, the more later stage you are (this means you have raised previous VC rounds or you are already generating revenue or are profitable) the further away a VC can be. VCs hardly ever invest in countries where they do not have an office. Unless you really know what you are doing, don’t approch a VC who is not in you country, unless you are happy to move to a city where they have an office. Move all these VCs to a B list.

3) Identify VCs that have invested in competing companies

When you are on the web sites of the VC firms, check out whether they have current portfolio companies (from which they haven’t divested, yet) that are competitors. As a rule of thumb, do not approach any of these VCs, move them to a C list. There are two reasons for this.

First: many VCs don’t invest in competing companies, all sorts of problems can arise as a consequence

Second: there are VCs that will give all your documentation to their portfolio companies, if they think it helps them. You would not really want that to happen…

4) Identify VCs that have money to invest

I have seen a lot of people waste a lot of time pitching to VCs who simply could not invest in them. This is the best way to waste a huge amount of time.

There are two reasons why a VC may not be able to invest in a company:

a) The VC has no money to invest

b) The company is asking for an amount of money that is incompatible with the fund that a VC has

In order to be able to assess the situation, it is extremely important that you know the following about the last fund that the VC has raised:

– What exactly is the vintage date (aka ‘first close’) of that fund?

– How large is the last fund?

Quick background on VCs

In order to understand the importance of the last fund’s vintage date and size, it helps to understand how VCs work. Venture capital firms (VCs) are fund management companies that manage funds. The fund management company will typically manage several funds. Each individual fund is typically structured as a partnership. The partnership consists of two types of partners. General Partners (GPs) and Limited Partners (LPs). The GPs are the individuals working at the fund management company (these are the ‘VCs’ you will meet and whom you can see on the website). The LPs can be either institutions (pensions funds, fund of funds, banks, insurance companies, operating companies, universities, etc) or rich individuals that have invested their money in the specific fund in question. The GPs are responsible for investing the money in start-up companies.The most important thing to understand is that there are two types of funds: Fixed terms funds, and open-ended funds (also called evergreen funds). A typical VC fund will be a fixed terms fund. The typical running time will be 10 years. This means that the VCs will have a first close of their fund (sometimes referred to as the ‘vintage year’ and ‘vintage month’ of the fund). Once the VCs have the money in the bank, they can actually start investing.The typical investment pattern of the Fund will look like this (from vintage date forward). VCs are usually bound by their Fund agreements to invest 60% of the Fund in the first four years of the fund’s life time. What they don’t invest, they have to give back (as a rule of thumb). They must then invest the remainder in years 5-7, but they are contractually prohibited to invest in companies they are not already invested in. As a generalization, the overall contractual agreement will look like this:Years 1-4: invest in new start-upsYears 5-7: invest only in existing portfolio companiesYears 8-10: no further investments

Here is a rule of thumb of what kind of companies VCs will invest in, based on the latest fund that they have raised:

Year 1: Seed stage and later

Year 2: Series A and later

Year 3: Series B and later

Year 4: Series C and later

Year 5+: no investments in non-portfolio companies

When a VC with a fixed term fund sells their holding in a company, typically all of the money is handed to the investors in the fund. It does not get recycled into new investments.

Evergreen funds by contrast operate differently. These funds will recycle back to the fund a good proportion of their money that is generated when a portfolio company is sold. These funds will either have money to invest when they are new (similar to fixed term funds) or when they had had a large ‘exit’ (exit means selling a portfolio company).

The second important aspect is to understand what impact the size of the fund has. The size of a fund will determine what kind of companies a fund will invest in. Not in terms of what stage they are in, but the total capital requirements of that company. What this means is as follows. Imagine there is a VC with a $50m fund. The VC will have a contractual obligation to invest no more than 10% of the fund in a company. That would be $5m. If you are asking for a $5m Series A round, the VC could not invest, as there would be no opportunity to place money in any eventual follow-on round. In this case, your capital requirements are too large for this particular fund.

A second example might be a VC firm with a $1bn fund. This means the VC is looking to place at least $25m per portfolio company. If you went to this VC with a company that has a total capital requirement of $10m, they would simply not be interested. Your company’s capital requirements are too small for them.

So, for each VC firm that is on your list, you should figure out both the vintage date and the size of their last fund. Then compare that with your own situation. Remove all firms that have funds that are too old for your stage. Remove all firms that have funds that are either too large or too small for you.

There are three ways of figuring out what the last fund was:

– ask the VC (be specific, as for the date of the first close of the last fund), many VC firms will be press releases on their websites that will give you an idea of what the last fund was.

– Google for the name of the VC and ‘fund’ and ‘first close’ and you will find some press stories that are not on the website.

– There are some very expensive databases (e.g. VentureXpert) that you can buy that will tell you the vintage date and size.

In April 2008, I created a little list of all VC funds (that I could find) that invest in IT/Internet companies based in the UK. A screenshot of this listis included below. I only include this list as an illustration of the kind of information you should collect for yourself:

VC funds

(Comment on the list abvove: I have probably missed a few funds: mea culpa!)

Once you have a fund list like the one I show above, you will find it very easy to identify the VC firms that you should approach.

Final comment

When you ask a VC whether they have money to invest in your company they will always say yes when they think your company will eventually get funded by somebody (provided they invest in your country and industry). They will always want you to send them the executive summary and/or to come and pitch, even when they have no personal interest in you and/or can’t invest in you.

There are two reasons for this. First, a VC wants to be ‘in the deal flow’, so they can see what is going on. This keeps them informed on the sector. The second reason is that a VC wants to and needs to be seen to be in the deal flow. This is important, because their co-partners and other investors need to see them as being in the deal flow. No less important is that VCs often report back to their LPs what percentage of companies that got funded they actually saw before the deal. If a VC firm sees most of the deals that got done, this means they were in the deal flow and it is important for LPs to know that their GPs actually see what is going on.

What this means is that when a VC wants to see you pitch, this does not mean they actually have an interest in investing in you, nor does it mean that they can invest in you. They might just let you pitch, so they are in the deal flow. This is fine, you can use these VCs to practice your pitch.

I will tackle how to approach each fund and how to practice your pitch in a separate post (Part 3 of this series).

AddThis Social Bookmark Button Subscribe in a Reader Subscribe by Email

Related articles

Zemanta Pixie

VC Fund Raising Manual

VC funding

How do you successfully raise VC money?

When I was working as the VP of Analysis at Library House, a business information and research company focussed on high potential start-ups and specifically on venture capital-backed companies, I worked with dozens of VCs, analyzed well over a 1,000 start-ups, and saw many hundreds of start-ups pitch.

During my five year tenure, I have come to one fundamental conclusion: most companies don’t raise funding, not because their company is not interesting enough, but rather because they don’t actually understand how VCs think and work. They also do not understand the process of how to raise venture capital.

Today, I read an article by Josh Kopelman, in which he mentioned a ‘ Founder’s Manual for Pitching a VC’. I think the notion of some sort of manual is a great idea. I personally think that although the pitch itself is important, it is just one component of many when raising VC funding. Starting with this article, I thought I would write up the ‘VC Fund Raising Manual’. This will include not just the pitch, but effectively the whole process.

VC Fund Raising Manual

Outside of scope: I will not discuss whether find raising from VCs is a good or a bad thing or whether other options are more appropriate or how to compare them or how to choose. Or how to raise angel funding. Or how to bootstrap. I just can’t find the time to explain them all.

This manual is for those that have already made up their mind that they want to raise VC funding. It explains the process of doing that.

In this manual, I will do a great deal of generalization and simplification. Please keep this in mind.

Introduction

Overall, what one needs to understand when raising funding is that there is a highly conserved process of going about this. Most VCs follow this process. It is important that you understand this process and all the drivers that are important at each individual step. The VC fund raising process looks (more or less) as follows:

1. Identify relevant VCs – 8 weeks

2. Prepare documentation – 8 weeks (you select VCs at the same time)

3. Approach relevant VCs – 6 weeks

4. The pitch – 30 minutes

5. Commercial due diligence and further meetings – 10 weeks

6. Full partner pitch and issue of term sheet – 4 weeks

7. Term sheet negotiation – 4 weeks

8. Legal work – 4 to 8 weeks

9. Sign deal and money in the bank – 1 day

Total time for fund raising: 2 months preparation and on average 7 months actually raising the money. Please note that this is a gross generalization, it might be shorter or longer than this, but as a general assumption, this should be fine.

I will explain each step in detail using separate blog posts.

AddThis Social Bookmark Button Subscribe in a Reader Subscribe by Email

Related articles

Reblog this post [with Zemanta]