Thanks for doing these video's, took some copious notes on “threshhold”, exclusivity period, and your strategy for dealing with vc's.

Chris

Can I ask what your role is, just for cred and context? Do you work for VC? Have you raised money as a CEO?

I wrote on the topic of whether MBAs are necessary for entrepreneurs here: http://www.bothsidesofthetable.com/2009/09/08/a…

1. In regards to Mark's #5 point, not sure if it really makes a difference. Even when deals were passed from other “trusted sources” (i.e., accounting firms, law firms, etc.), they still went to the analyst or associate or principal for initial vetting. The MDs at a lot of VC firms have their underlings vet the business plans. On the flip side, getting a good introduction allows the deal to get a little better vetting.

The reality though is that I have yet to ever hear of someone getting a deal done that came through the “submit plan” section of the website. It's usually not that people ignore the “submit plan” business plans (though, they do get pushed further down in the queue of things to look at), it's just that, to Mark's point, I've found there is a ridiculous correlation between high quality business plans and an ability to get good introductions into VC firms. I think it's basically because the best entrepreneurs I've met are the ones who know how to work the system as best as possible with as few resources as possible. It just naturally flows into how those entrepreneurs get their business plans get into a VC firm. More than anything, it's a self-selection process.

2. Keep the business plan simple. Business plans that can be printed in black and white without too much ridiculous fluff are the best ones. I found in the past that if there's too much legalese, then it means that the business plan was written by a banker. Then the deal is being shopped. That also means that the entrepreneur wasn't resourceful enough to get a deal done without a banker. And all of these things are not necessarily good signs (and as you can tell are sometimes bad signs). Not to say bankers can't get VC deal done, but there is always that nagging feeling in the back of the mind asking “why am I so lucky” to get this deal as it is shopped. Any thing that pops up is also bad. I have seen business plans that actually had pop-ups – they went into the trash immediately. The main point here is simple is good. The reason is VCs want entrepreneurs who can shepherd capital, be as cheap as possible, but get the job done. Anything that's overly flashy, filled with banker finger prints, etc, don't say cheap.

3. If you must take angel money, know when too many and too much is too many and too much. I had one company come in with over $7 million from what seemed like over 100 angel investors (I can't remember the actual number). The investors were also a lot of dentists and doctors and accredited, but unsophisticated investors. It doesn't mean that makes it impossible for a VC to fund, but it makes the VC have to evaluate whether the company is so good that it trumps the potential problems that could arise in the future. Why would having so many investors with that much money cause a problem? Not all, but a lot of investments go sideways if not downwards at times. If the company needs more money, then the VCs most likely will do some sort of a cram down round.

Depending on the situation, that means getting the consent of all the angel investors for the round. The first problem is just the headache of getting a hold of everyone of those investors. It's time consuming and irritating. No one wants to have to do it. Secondly, one is generally dealing with unsophisticated investors. Now you have to explain to them what's happening with the company and why the cram down is happening. If the people are semi-professional angels, then it's not so much a problem, but if the folks are dentists and doctors, then they may not understand and this causes problems. This isn't to pick on dentists and doctors, but I'm using the term to describe people that have a good bit of money that shouldn't be angel investing because of low loss tolerance. Let's say then that you get through all those hurdles. The cram down occurs. The company is a complete success and goes public. Now there's the potential problem of one of those investors in the cramdown having felt cheated by the VCs. They drag the VCs into the courtroom where they tell the judge that the big bad VC screwed the little guy out of their money. What that investor didn't see was the work, perserverance and risk taking the entrepreneur and VC took on to make the company successful – all the angel sees is the success and that they didn't get a bigger piece of the monetary rewards. Whether the VC wins or loses, it's still just something VCs don't want to deal with.

Again, does it mean that a VC won't invest in your company if you took in too much angel / unsophisticated investor money? Of course not. What it is though is another hurdle for a VC or other institutional investor to have to get over to put money in. I've worked with companies that did have significant amounts of angel investors in the company that VCs did invest in. Generally speaking, the angel investors are well known and it's an idea the VCs really did like. More than anything, this point is just something to think about as one looks at their potential funding strategy.

Anonymously Posting

Thanks!
-Erica