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: 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).

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Elements of a Successful Start-up

FosburyThis weekend has seen an eruption of emotion in part of the blogosphere. It all started with Jason Calacanis posting some of his thoughts on how to run a start-up company here. This has resulted in many articles on the topic, including Duncan Riley from TechCrunch, and there was another follow-up article by Michael Arrington at TechCrunch.

All of these discussed various aspects of ‘how’ to run a start-up or a start-up business. Arrington says that the two most important aspects of a company are hiring the right people and managing your cash extremely well. I think these two aspects are important, but they are not everything.

For what it is worth, I believe there are three fundamental aspects that will determine the success of a company. They are what the company does, how it does it, and who actually does the work. The diagram below shows what I mean with this.


In my view, the founders of a company, and at a later stage the hired senior managers as well as the board, will determine the strategy of a company, its operational structures and processes as well as some of the tactical details on how things are done. They will also hire new staff into the company.

Let’s have a brief look at these three aspects.

Strategy -“The next bounce of the ball”

There are obviously many aspects of strategy, but this is a short blog post. If I had to pick one thought on strategy, it would be “the next bounce of the ball”.

I have borrowed this phrase from Ronald Cohen and his book: “The second bounce of the ball”. The concept behind this thought is very simple. Cohen explains this phrase using his personal history of founding Apax Partners, the private equity firm. He started out doing corporate finance work, managed to transition into venture capital when that became ‘hot’, then transitioned into buy-ins and then into leveraged buy-outs. Basically, Apax rode the subsequent waves of the European private equity industry and managed to grow very substantially with each of them. The point here is this: you need to be able to ride markets as they appear and expand; it is the easiest and fastest way to achieve substantial business growth. For Apax, that was the transitioning through the various phases of the private equity industry. For example, let’s say you create the best video-sharing site in the US right now, you would have a hard time to grow to a substantial size: you would be too late. If you set up the same company six years ago, you wouldn’t have been able to achieve growth either, Internet access was probably too slow and digital cameras not widely enough spread by then.

So, if you can predict the next bounce of the ball in a significant market and focus your company on that bounce, you will probably do well, provided you can execute.

Operations & Tactics – Execution: How to get it done

With operations, I mean both organizational design and the processes that flow along that design. For example, you will create different operational divisions in your company. These divisions will have different objectives and there will be ways in which they communicate with each other.
It is very easy to get this wrong. For example, should the marketing function be aligned with product management? Or with sales? Who manages customer support? How do does the sales staff interact with engineers? How do engineers interact with customers?

I have embedded a good podcast (audio only) where Andrew Frame, founder of Ooma describes, amongst other things, his thoughts on organizational design.

Overall, I find that there is very little good literature on organizational design out there. Each company will have different requirements, too. In my mind there are two important aspects here: Think it through and keep it very simple. As a start-up, don’t do the fancy stuff like matrix structures. They will slow you down and add little value at an early stage.

When Jason Calacanis talks about buying cheap tables and expensive chairs, he is describing tactical elements of how to run a company. Other such examples are going staff flexible working hours, buying them free coffee, etc. you could call these the tricks of the trade. Tactics essentially describe how small groups of people interact with each other and use their resource to achieve very specific goals. These tactics are useful for those ones that will make it happen, the people in your organization.

People – “Making it happen”

I fully agree with both Arrington and Calacanis on this point. People are the ones who will make it happen. Taken from Arrington’s post:

“The most important part of hiring correctly is to not hire the wrong people. The second most important part of hiring correctly is to hire the right people. What that means is that it is better to not hire anyone at all if you can’t find the right person. And if your startup fails, all the perks, time off and general coddling that many outraged commentators called for isn’t all that useful.

So who are the right people and who are the wrong people? It’s not that hard to tell. The right people are the ones that really, really want to work with you. You can tell they’re excited to be a part of the team. They actively look for problems to solve, and then solve them. This is a personality type that is very easy to spot once you know what to look for – they have fire in their eyes. They’re warriors.

I’ll take the fired up warrior any day over the more experienced but otherwise meek alternative. Skills can be learned quickly on the job (excluding certain specialized skills, which mostly means developers for a young [software] startup). But if you aren’t already the kind of person who’ll just get the job done no matter what, you’ll likely never be.”

A former boss and mentor of mine said to me that the people you want to hire in a start-up are the ones you would have wanted to have next to you in the trenches in Word War I. The ones you just trust to help you through this. I think that sums it up.

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How do I develop a great product?

This weekend, I met a friend of a friend who told me that she wanted to start her own company. She asked me what the most important, or most difficult thing, in the process was. My answer was that the most difficult thing is to find customers and to make them happy. Happy customers will come back and buy more from you. They will tell their friends about you. If you can start a business with a few happy customers and grow it from there: perfect. In the second most ideal situation, you have extreme confidence based on buyer interaction that you will have customers whom you can make happy.

So how do you get to have happy customers? The basic answer is that you need a product or service that, from the customer’s point of view, is simply great. The press frequently displays these successful products as ‘an act of genius’. This is very misleading. In my experience, you get ‘great’ products when you continuously iterate and improve them. Hardly any product is great first time round.

For example, let’s take the iPod. The iPod is a result of the genius of Steve Jobs right? Wrong. The iPod was actually not very successful for a very long period of time. Over three years to be precise. Don’t believe me, look up the sales numbers on Wikipedia. The iPod was released in 2001, but it took until 2004 before the sales numbers really started to take off. There is a number of contributing reason why this is, but one is certainly the way in which the iPod had been re-iterated and continuously improved over time.

In many companies (and in the mind of many entrepreneurs and journalists), the way in which products are developed, marketed, and sold follows are more or less linear process:

product planning

There is no feed-back loop within the system, or maybe there is feedback, but the company doesn’t care about it. More successful companies operate an iterative system that uses feedback:

product planning

If you continuously iterate and improve your product, you will (eventually/hopefully) arrive at a point, where your product really hits the sweet-spot of the customer. Beyond that, you run into a zone of diminishing returns (see how the iPod sales figures haven’t really improved beyond 2005?).

How many iterations does it take? Depends. It took Microsoft three iterations of Windows to get to a successful product (Windows 3.1), and six to make it really work (Windows XP). It took YouTube one iteration to make it work (embedded videos and the ‘find similar’ function). It took four generations of iPods. It took 2.5 generations of the Toyota Prius (the first generation didn’t sell well at all and the second only sold after the first face lift). Adobe Acrobat needed one iteration (the free Reader).

So, back to the friend of the friend who wanted to start a company. The mistake many start-ups make is to think that they can produce a successful product without having to go through several iterations, before they actually hit the sweet-spot. That is when companies usually go bust.

In my mind, the key to successful start-up is to keep the burn-rate low, get a product out in the market, sell it a bit, spend very little money on marketing and sales, see what customers think, modify your product and then to re-iterate that process. Eventually, you will get to a point when you either hit the sweet-spot or where you don’t. If you do, then is the time to start hiring additional staff, premises etc. If you can’t find the sweet-spot after a number of iterations, it may well be time to shut down and start something new.

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