I sometimes think that certain advice is BGO (blinding glimpse of the obvious) and doesn’t warrant mentioning.  But then people’s actions tell me otherwise.

I wrote recently about etiquette when you meet people at conferences or events so now that I have this done I feel I need to say some words about connecting on social networks.

Let’s start with a discussion of existing social networks and then how to approach people on them.

Facebook.  I know some people link to anybody and everybody on Facebook – I do not.  Facebook is a reciprocal (or symmetrical) network and therefore if you want to follow me by default I follow you back.  The problem I have with this is two-fold.  First, I send lots of private stuff on Facebook because that’s where I connect to my parents, my siblings, my classmates and my wife.  Second, I don’t want to clutter up the stream of information that I have in my Facebook newsfeed with information on people with whom I don’t have a relationship.

What I love about Twitter followers is that we can have an asymmetrical relationship.   There are some people I’ve never met that I choose to follow (such as Mitch Kapor, the founder of Lotus) and some people that follow me whom I’ve not met and don’t (yet) follow back.  I DO read all @’s sent to me and I try to respond to most of them.  I check many people’s profiles when they @ me or follow me.  I’m curious who you are.  Occasionally I will randomly follow people I don’t know just because they look interesting.  Usually it’s because your conversations steam looks interesting, your link goes to an interesting blog or website or you work at a company that interests me.  I read posts for a while and if I see stupid stuff I unfollow.  That seldom happens.  I am interested in a conversation with people of done professionally and respectfully.  But I’m just not ready to clutter my stream with that of 4,500 people and lose the stuff I really want to see from the 450 people I follow.

LinkedIn.  The old standard business networking tool.  I used to guard my network here and only link to people who I knew.  I felt that if people were contacting me to say, “so I see that you know such-and-such” that I really should.  Now I know that everybody links to everybody so on LinkedIn I’ve become less selective.  Why?  Well first I never send any private information on LinkedIn nor to I receive any.  Second is that LinkedIn has become a nice deflection for me since I’m not yet ready to connect on Facebook if I don’t know you.

So on to some FBGO advice on how to connect with people:

If you’re asking to “connect” with people you don’t know (or don’t know well), how should you go about it?  Send people a personalized comment on the intro saying who you are and why you’d like to connect.  I do this even for people who I know very well.  Put in any info about people we know in common, places we may have met or some other relevant fact.  Even if we don’t know each other – finding a common bridge increases your probability of getting accepted.

If you connect to me on Facebook and simply have an invite with no explanation and if I can’t figure out how I know you I’ll just hit ignore.  On Facebook there isn’t even a standard “join my network” introduction.  Sending a blank invite is the equivalent of sending your resume to a company with no cover letter.  People do it, but it’s not professional.

On LinkedIn I have a higher tolerance now.  If you connect to me with the generic BS message that, “I’d like to add you to my professional network on LinkedIn” and I know you, I’ll add you begrudgingly and wish that you had better manners to at least say hello.   If I don’t know you and there’s no message I’ll add people 50% of the time – begrudgingly.  If you take the time to write me a small, private note on LinkedIn then I’ll add you 95% of the time.

The main message here is … if you REALLY want to connect with somebody show them some respect and at least write a one sentence original line to ask for the intro or say hello.  The rest I just chalk up as social networking spam.

Business Etiquette Tips for dealing with Business People at Conferences

This is part of my ongoing series with Startup Advice.  With the LeWeb conference about to start in Paris I thought the timing of this post would be appropriate.

Right after Techcrunch50 Michael Arrington wrote this great post on how to interact at business events and conferences.  If you haven’t read it, please do.  It’s an important reminder.  But so that you finish reading my post first I’ll give you the summary version – when approaching somebody at a show be polite / respectful of time, try to be introduced if possible and never assume the person remembers who you are.  He gives the example of Roelof Boetha, a very well known VC from Sequoia, who always (re) introduces himself to Michael and reminds him who he is even though Michael has met him several times.

When I first read this post I immediately filed away in memory that there was important information to impart on entrepreneurs and led to this post.  Apologies in advance if it sounds arrogant – just trying to impart some realistic advice.

How to (re) intro yourself.  I do about 15 in person meetings / week … that’s about 750 / year.  Let’s assume 500 are new meetings and that I’m exaggerated by 20%.  That’s still about 400 new meetings that I do every year.  Each one has pitched me for between 30-60 minutes.  Then let’s add on all the conferences I attend where I have literally hundreds of 10-minute conversations (at least 15% of which are after a few beers).  Then I get people sending me Twitter comments, blog comments and tons & tons of email intros.

The truth is that I actually do remember almost all of the people I meet.  But don’t assume that I have a Minority Report like machine that can invisibly and instantly gin up my memory.  The most important advice I can give you is – give me context.

It should start something like this,

“Hey Mark, it’s Mike Schumacher from SchuCo Technologies.  We presented to you about a year ago our company that does voice recognition software integrated with IVRs.  We were introduced through Bob Johnson over at NewWorld Ventures.”

Now wait a moment and let me process this.  Most people are visual thinkers and need to access our visual memories.  You should see a light go off in my head and if not feel free to give more context.

“Last time we spoke you had some insights on how we could partner with Microsoft to power their Zune.  You knew a guy there who said that VR was their next big initiative.  Thanks for the tip – we’re now actively engaged in discussion.”

I am too often in the situation at an event where I see a face I immediately recognize but seeing the person out of context I can’t quite place who they are, what their name is or what they do.  With one visual trigger I can usually remember minute details about our discussion.

How to approach somebody after a panel discussion.  Truth serum – my golden rule is that I never do this.  When there is somebody that I really want to meet I care about the context with which I meet them.  Standing in the “groupie” line after a conference is NOT the best way to meet somebody.

But if you feel that this is the ONE chance you’ll have to meet this person then at least do it correctly.  When it’s your turn in the ambush greeting line get all of your energy pumped up and with great enthusiasm say, “Hey Mark, I really enjoyed your panel on social media marketing.  I have a new startup in the space that I think would interest you.  I know it wouldn’t make sense to pitch you here – do you mind if I got a card to follow up directly with you?”

Be energetic, be very brief, get my contact details (if I don’t have a card ask politely whether you can have my email address to send me a pitch deck) and by all means make sure you follow up.  80% of the people never do.  And when you do email me, make sure to remind me of the context that we met after the panel.

Now if you’ve ever talked to me after a panel you’d know that I am pretty gracious with my time there.  I know that people like to talk after a panel so I always stay until the last person who wanted to meet has the chance.  But I recognize people that don’t have enough Emotional Intelligence to recognize when they’ve spoken for too long and the person after is waiting patiently.  I like people who are self aware so over staying your welcome, while people will tolerate it, leaves a bad taste.  If no one is behind you then feel free to linger BUT make sure you ask the presenter – “do you need to get out of here? I’d love to stay and chat but want to respect your time.”

Why isn’t it a good idea to rush the stage after a presentation? As I outlined in my post on How to Get Access to a VC, it matters who introduces you.  It sets context that you’re a valuable person to know from a “filter” that you trust.   And it also shows you’re an entrepreneur.  If you can’t figure out how to get access to somebody in the era of social networking then you’re likely not going to be a successful entrepreneur.  And this advice applies to any senior exec you want to meet – not just VCs.

How to approach somebody you want to meet.  The best strategy to meet people at a conference is to have some “anchor” people that already know other people.  Hopefully these are people that already know and respect you.  And hopefully they’re people who like hanging out with you because you’re going to need to spend some time as their wingman for a while.  Give them the short list (2-3 people maximum) that you would love their help in meeting.  Ask if they mind giving you an intro to give them a chance to say whether it is or is not a good time for them to intro.

So the line goes something like this, “Hey, I was hoping to meet Bob Johnson – do you know anybody that knowns him?”, “Oh, you know Bob?  Do you know him well enough that you’d mind an intro?”  And make sure you send a nice note later to that person as a thank you for the intro.

An even better way to meet.  My second favorite part of a conference is the hallway.  Any readers of this blog will know that I have ADHD and therefore sitting through presentations is like water torture to me.  I can get through some but I find little value other than getting a sense for what is being said.  But in the hallways you find all sorts of interesting characters.  You find lurkers like yourself that want to meet people but don’t want to sit through another dammed panel on the future of X,Y,Z.  This is the best time to meet people and most people are open to you casually walking up and introducing yourself.  If you see me lurking outside the conference door – you can assume I’m open for business.  I here to meet people – come up and say hello.

The best way to meet. Even better than the conference hall is the after party.  You can only get to know me superficially if you come to my office and present for an hour.  You’ll only get the basics if you catch me outside in the conference hall.  You’ll know me ZERO if you ambush approach me after a panel.  But you’d be surprised how well you can get to know me over a Guinness at midnight.  Ask anybody who went to the W hotel after TC50 whether they got to know people better at the W or the conference.  So don’t go to a conference that is really important to you only to bugger off early to catch up on email.  Waste.

The Rolls Royce of meeting.  This can be hard for people without financial resources but the best way to meet people at a conference is to try and throw (or attend) a dinner.  Often there is a down time between a meeting conference and the nighttime activities.  Book a table for 10 at a local restaurant.  Doesn’t have to be super fancy.  Invite 4-5 people you know and a few people you want to get to know better.  Partner with somebody else who knows people so that you can access multiple networks and split the tab.  Get an anchor tenant that you think people want to meet so you can tell future people, “Steve Sayers and I are hosting dinner at Maximo’s at 7.30pm with 8-10 interesting entrepreneurs.  It will be people like John Wood from KnownCo and Dave Dodge, a VC from Boston.  We’ll be out in time for the after party.

Dinners are where it’s at.  You have a group of people captive for an hour-and-a-half.  Hopefully these are people that will enjoy being together.  You’ll have to be an active host and a conversationalist.  If this isn’t your forte partner with somebody it is.  At these dinners you build friendships that go beyond a conference room table.  You really get to know people.

The real power of a conference comes before & after.  I’m surprised by how little planning most people give before they attend an important conference.  You’re traveling all the way to Paris.  You’re spending money on flights, hotels and food – not to mention the price of the conference.  And many important people that you want to spend time with will be there.  Make sure to put in your efforts before hand.  Email everybody that you already know who will be there and find out what their plans are.  Email people that you want to meet and are approachable (e.g. not too senior) and ask if they have time to meet.  Plan a dinner.  Scope out the after party locations.  Know which panels you want to attend because of who else will be in the room.  Make sure you’re not nipping out at lunch because that’s maximum networking time.

And then there is afterward.  You collected all those cards – don’t make them useless.  If you email somebody right after you met then you lock in a certain relationship.  Keep it short and sweet – no BS novel like this post!  And make sure that if you agreed any verbal actions / next steps with anybody that it is in your email and that you follow up.  If you didn’t agree any actions / next steps with anybody at the conference – WTF were you doing there?  Long way to go to hear people say what you could already read online or watch on Ustream (powered, I might add, by MobileRoadie – go Michael!)

On December 2nd, 2006 I wrote the blog post published later in this post when I was CEO of startup Koral about my experiences in pitching VCs.After my company was acquired by Salesforce.com I was asked to stop blogging and they took over my blog as an asset in the sale of the company.  My blog was wiped out.  I am very grateful to my friend Zoli Erdos for finding this retro posting for me at web.archive.org.

I had kept a personal blog for more than a year and was new at keeping a professional blog.  I had previously raised VC in 1999, 2000, 2001 and 2005.  I had seen many cycles and decided that since I was going to do it all over again I should write about it.  I had really positive experiences such as working with Greg Gretsch at Sigma Partners where he championed us to a partners’ meeting where we sort of got crucified.  They picked apart holes in our strategy and they were right.  We made changes and Greg was a gentleman throughout the process rather than berating us for our performance (it was our first partners’ meeting).

But we also had some negative experiences, too.  Many.  It included some well known firms that made me come for a team pitch and then only gave me literally 15 minutes when we’d scheduled an hour.  It included one firm who I asked  not to call Salesforce.com as a reference (they were our largest pilot customer) and in their kindness they called Marc Benioff (the CEO) and asked his opinion.  Another called Parker Harris, the co-founder and CTO.  In case VC’s haven’t figured this out yet, shit rolls downhill.  And both of these calls got passed down the chain with sufficient “Chinese Whispers” that by the time they got to me my buyers were perturbed.  No prizes for guessing which VCs I didn’t work with (and still won’t).

I decided to write about my experience and to be blunt.  Not only was it in character, but I also knew that nobody was yet reading my blog.  That changed very quickly.  My blog linked to Brad Feld’s blog because I was so grateful for his series on term sheets and he was one of the biggest reasons that as a VC I felt compelled to blog.  Remember, I was new to professional blogging.  I hadn’t thought about the fact that he would become aware of my link.

On December 3rd Brad Feld wrote a one paragraph blog post titled “Raising Venture Capital” in which he linked to my blog.  There was no viral social networking products back then like Twitter where people could easily discover your content.  It seemed that the main discovery mechanism was the “blog roll” that everybody kept.  It was sort of like Twitter’s list of who you follow but much, much smaller.  The only other ways to get discovered was to have good organic search results or to get covered by a major blog site.  And covered we did.  This blog post ended up on Valleywag (which had much bigger presence back then).

It became a huge kerfuffle with many VC partners writing to thank me for the post, which exposed those that gave their industry a bad name.  And then I was mortified – Valleywag figured out which firm had treated me the worst and published their names.  Gasp.  I had intended to talk about how bad the process could become, not to name-and-shame anybody (and The Funded was not yet around).  The managing partner of the firm called me the next day.  At the end of this post I’ll tell you what he said.

The Original Post:

Venture Capital, By Mark Suster (December 2nd, 2006)

Can it really be a month since my last blog posting? Tempus Fugit. Well … I have had many late nights and I really didn’t contemplate writing many blog postings this month because I spent November in this interesting venture capital / fund raising dance involving lots of late night sessions reviewing legal documents, rewriting business plans and preparing for pitches. We have also been very busy with our next release, which is due out by December 11th (but I’ll save that for a different post). And I guess I have a penchant more for longer blog postings than frequent ones.

So for anybody who has been through the funding process before I hope that this will resonate and for those that haven’t I hope it will be interesting. I don’t plan to write the authoritative venture capital blog, just some anecdotes. If you are interested in reading good blogs about venture capital my favorite two are VentureBlog and Feld Thoughts.

Anyway, the starting point for this blog entry is a cartoon I remember reading in the New Yorker. The picture was of a man in a doctors office that was really irritated. There was a clock in the picture that was set to 9:30. The caption showed the man saying sternly to the receptions, “I had an appointment with the doctor at 9 AM” pointing to his watch. The receptionist replied, “Yes, your appointment with the doctor was at 9 AM but his appointment with you isn’t until 10:00!” Thus is venture capital. You have an “hour” to pitch in your first meeting. It is usual for the partners to stroll in 20 minutes after your appointment so at best you have 40. Prepare to give your pitch in 30 including Q&A. Don’t be frazzled … this is just the way it is.

So far at the company I have raised seed funds of $500,000 of which $470,000 is still in the bank so I’m in pretty good shape. We started building the product 18 months ago so we are in better shape than 99% of start-ups. But nonetheless is takes capital to build out a successful enterprise and I’m not sitting on a pile of it myself. Thus begins the venture capital dance.

The first attention we started getting was after we launched the company publicly at Demo on September 25th of this year. A number of VC’s stopped by our booth or watched our demo on the DEMO website and we had about 5 proactive inquiries. After Office 2.0 we had about 25 firms contacting us – more than I could manage. The first VC I met with came from attending DEMO.  A gentleman had stopped by our booth multiple times and then wrote me immediately after the conference and said that I “HAD to come and meet with his partners the very next week.” Okay. Sure.

I arrived at 12:50 PM in the afternoon, 10 minutes before my start time. I have raised capital 3 times before so I knew the drill. I set up my laptop, connected to the Internet, opened the compulsory 15 page PowerPoint deck and waited for my adoring fans. 1:20 and they turned up like clockwork. Only the thing is, only 2 of the 4 partners showed – we were waiting for the other 2. So I did what one does in this situation – I made polite small talk. I wasn’t feeling it. They looked nervous at having to speak with me impromptu and without the benefit of financial figures to scoff at, product pitches that they’ve seen 100 times and a market sizing to unpick. I’m not trying to imply that all VC’s are socially inept – that’s not the case. But these two certainly were. It got worse.

The third member of the meeting showed up and they sure looked relieved. We all sat down but still had to wait for the fourth. I broke the silence, “so, where do you guys live? Is it a long drive into the City (San Francisco) for you?” They answered politely but behind their words they were thinking, “what kind of idiotic question is that?” as they awkwardly answered that “it wasn’t too bad driving up from Palo Alto every day if one leaves at the right time.” Then, just in the nick of time, 30 minutes past the hour, the straggler turned up. So I was back in the business of pitching to VC’s – a bit like riding a bike I guess.

I started by trying to think I could explain my concept without having to patronize everybody with artificial PowerPoint slides. I thought, what would I do if I was trying to sell to a customer. My plan: verbal 5 minutes to explain the business then straight to product demo where I could cover all of the concepts that would have been in my 2-by-2 charts in my deck. Doh! Dare I steer off the course from the tried-and-true PowerPoint ritual? This approach generally works well with customers because I find it much easier to build rapport when we talk like humans than when we all stare at the PowerPoint slides being projected on the wall.

I was immediately reminded that they were interested in seeing the slides as the main partner who had courted me at DEMO in San Diego shuffled nervously through the print outs of the slides I had sent him in advance. All I kept thinking was, “if you made me send the slides in advance then why the fuck am I now going to spend 10 minutes talking you through them?” I was wrong. “Slides, please.” Okay. This is going well.

Page 1: Market Size. $3 billion industry. Not well penetrated. We’re set to change it. Here’s why those who came before us did not succeed. Man in back of room (the plonker who was 30 minutes late) is now on his Blackberry. No joke. Late and not even the courtesy to listen to me. The partner who said we “must meet this week” is shuffling through his papers and not listening to me either. Partner 3 is listening intently and partner 4 is looking patronizingly at me waiting for the killer question about how on Earth I was going to beat Microsoft.

Page 2: What’s unique about Koral. Experienced and serial entrepreneurs in the content management space. Folksonomy. Consumer approach to software for business users. Viral. Free product. Web service architecture that provides a content management platform for the Internet. Distributed version control model – first in the industry like ours and we are filing patents.

Page 3: Competition. Page 4: Business Model. Page 5: Financials. Page 6: We already have several pilot customers including a very large, unnamed software firm.

Aren’t they tired of this ritual? Well, in this company’s case, yes. Blackberry man is probably asking his girlfriend where to meet for dinner. Gotta-meet-me man is thinking about some other deal. Condescending man keeps jumping in with curveball questions so I am not able to get into the flow. Intent man works for the wrong company. MAN … get out of there!!! Don’t you guys want to see the product?

I start in with the product. Intent man and condescending man love it. We start getting on famously. They are engaged in a beautiful dialog about market adoption and why they have problems managing their documents since they store everything in Outlook. Then, with as much attention as my 3.5 year old son, they promptly tell me that they have another call and leave the meeting at 10:50. Sorry. Couldn’t be helped.

So I’m stuck with the paper shuffler and the Blackberry man. I am not kidding you when I say that I was on the verge of literally saying, “let’s just call this meeting a day. It’s clear you have no respect for me and no interest in my company.” I bit my tongue (which my wife will tell you is rare). I finished the next 15 painful minutes and said goodbye. My only regret … the $25 I had to pay to park in their building. They were seriously the most pompous, self-centered, unprofessional group of people that I have come across in a long time. I went to back to their website and unsurprisingly there were no great companies I had ever heard of. I later learned that they were a spin out from an investment bank. It all made sense. They were not “real” VCs.

Well I am happy to report that it was mostly smooth sailing from there. While I did have many more circumstances that I found frustrating (one firm showed up 35 minutes, apologized because they were trying to vote on whether to fund another deal and then a partner turned up 25 minutes later and kicked us out of the room because he had a conference call) in general I found the process very rewarding. We received a lot of positive accolades on our vision and our product. I visited 14 VC’s, got 8 call-backs for second meetings, had 6 firms indicate an interest to explore an investment and possibly submit a term sheet and 3 companies actually say they were ready to write a check. The other 3 are still pending but since I am close to agreeing a term sheet it doesn’t make sense to pursue things at this stage.

Biggest lessons …

1. people universally said to focus on the SMB market (SME in UK parlance) and MAYBE divisions of corporations. But not one VC thought I should go after big, enterprise clients. I had planned a balance of large companies and SMB/divisional sales but have changed my thinking. Reasons: cost of sales executives, long sales cycles, deep functional requirements.

2. the smartest guys I met in the process said I really needed to focus on customer adoption / usability. Most people agreed that if you had a document management need and were willing to load your documents into our system it was one of the most usable products they had seen. But how do you convince millions of people that need to be educated that they have a document management problems to upload their documents in the first place? We have invested heavily in this. People said, “invest more.” Making user adoption incredibly simple and shortening the time to a light going off in the user’s head that they see the value is critical in driving viral adoption. Think LinkedIn.

3. People were mixed on how much money we should raise. I only want to raise $2.5 million and some people believed ardently that we needed to raise $5 million. I guess it was unsurprising that the people who were sure we needed to raise more money tended to have very large funds. We want to build the company slowly and pragmatically serving the needs of our existing customers.

4. I met a lot of really bright people that were passionate about and experienced in helping entrepreneurs build successful businesses. I think good VC’s really do make a difference. I look for firms in which some of the partners (my partner) have operational experience and know what it’s like to wake up every day and be an entrepreneur. I have raised capital in the past from European firms and from US firms. There is really no other place in the world like Silicon Valley. The amount of experience that exists in these 40 or so miles is phenomenal. I was a bit humbled by some of the companies that were funded by the people that I had met.

5. My partners Tim Barker and Ryan Lissack are both absolute superstars. Tim handled the product management, vision, roadmap and competitive questions like a pro. Ryan was my savior when it came time for questions on how SOLR clustering works, why Postgres was more suitable to us than MySQL and why aspect-oriented programming was delivering us benefits in the development process.

I look forward to the next phase of our business. We will hopefully close on a $2-3 million financing round at some point in January and I can get back to the full time work of running my business. I can get back to sleeping by midnight and posting blogs more frequently. The venture capital process is a necessary and informative experience that is not for the faint hearted. It helps one refine your business focus and share ideas with some of the brightest minds in the industry and be challenged by people who have seen every eventuality in the type of business you want to build. But … I sure will be glad to get back to being a full-time CEO.

END OF ORIGINAL POST

Prologue:

The managing partner of the venture firm called me the day after they were exposed on the front page of Valleywag.  I was nervous and mortified.  He was a gentleman.  He apologized and said that their firm had learned from the incident.  He vowed to make sure that his colleagues never behaved like that in a startup meeting again.  He handled this perfectly.  Here’s the link to the Valleywag teaser article (they have since purged the full article).

This is part of my ongoing series about Raising Venture Capital. This posting was inspired by an email from Rajat Suri who wrote me an email in response to Chris Dixon’s blog post (link below) from August, which recently re-ran on Business Insider and has generated much Twitter chatter.

A few years ago it became fashionable for large VC’s to do seed funding.  With open source software (LAMP stack) and cloud computing infrastructure it just wasn’t that expensive to get your company going and founders just wanted to raise less money.  Some larger VCs felt they were being “scooped” by some younger, nimbler and smaller VCs.  So they set up seed programs that allowed for rapid decisions for $500k or less, often done as convertible debt for both speed and cost reasons.  There are multiple firms that did this.

I was an early cynic.  I told entrepreneurs that it was a bit of a Faustian bargain.  If the large VC doesn’t agree to do your A round then you’re in a bit of trouble.  Why?  Because as a potential A round investor I’m thinking to myself, “if the large VC seed investor has been in the company for 9 months and isn’t leading the round then something must be wrong.  Surely they have more information than I do.”  And I think this line of thinking has started to become conventional wisdom as outlined in Chris Dixon’s excellent blog post saying that you need to be careful raising seed money from a large VC fund.

But I’m no longer an entrepreneur – I’m a VC at a $200 million fund called GRP Ventures, the largest active fund in Southern California.  And I’ve just completed my first seed deal of Ad.ly ($500k) with another exciting deal I hope to announce within 30 days.  What gives?  Am I a hypocrite?

Actually, I’ve changed my views slightly on the issue.  I still believe you need to be careful taking seed money from a large VC, but I believe the arguments for/against are more nuanced than I had previously thought (and times have changed).  Arguments for/against after the jump …

1. I do think you need to be careful with funds that have done 20-30 seeds deals in fairly rapid succession.  Talk to companies that have taken this money and see if they’ve gotten support.  I have spoken at length to one such entrepreneur who tells me that he hardly hears from his VC.  He was told informally that they view him as an “option” whereby they can wait and see if another VC makes an offer.  If a VC term sheet comes in they begin their due diligence process.  I recommend you do your own due diligence before deciding whether to take this money.

2.  The contra is also true.  Many VCs who do lots of seed stage deals are very supportive and active.  Look at Josh Kopelman over at First Round Capital.  I think they definitely qualify as a VC and not a seed fund.  They do many early-stage deals.  Yet talk to virtually any FRC company and they’ll tell you that these guys are some of the most active board members and offer some of the best advice in the industry.  I sit on a board with Howard Morgan of FRC and I can tell you this guy works harder than most and has a punishing travel schedule.  I would say the same thing about True Ventures.  I haven’t met a single founder has hasn’t raved about their experience working with Jon Callaghan, Phil Black or Tony Conrad.  They have a large-ish fund.  But they do small, seed like investments when they like the entrepreneurs.  They’re active, helpful and wise.  And how about Andreessen Horowitz?  I know the jury is still out since they’re so new but I know many entrepreneurs eager to work with them.

3. What exactly is seed funding anymore?  Entrepreneurs want less cash because they want to control dilution and preserve exit options at lower prices.  One of the hotter companies lately in the mobile social networking is FourSquare, which raised $1.35 million from Albert Wenger and Fred Wilson at Union Square Ventures and O’Reilly AlphaTech Ventures.  Is an average of $675k each a seed deal?  Anyone doubt that Union Square and Bryce Roberts will be active?

4. You also need to ask yourself the reverse question.  Are there inherent risks in taking angel money?  If you have a VC that’s bought into you and your business then it’s far easier to put together a bridge round with a VC if you need that $1-2 million to get to your next milestone.  I know raising new VC in the past year has sucked.  But if you already had a VC chances are they tried to find a way to help you preserve your business in the down market.

Many angels were forced to fold given their tremendous losses in real estate and the stock market.  I’m a big fan of having angel investors, don’t get me wrong.  In SoCal we have great operators like Klaus Schauser, John Greathouse, Matt Coffin, Kamran Pourzanjani and others.  In NorCal there are legends like Ron Conway, Jeff Clavier, Mike Maples and the Energizer Bunny, Dave McClure (and I’m CERTAINLY never going to say anything bad about my friend Dave after reading this awesome blog post)-

I think having the right angels involved at an early stage is critical.  I prefer to see deals that have great people around the table before they come to me both as validation and because I know that the company will be more focused once it’s worked with these teams (not to mention having cash so they’re further along).  But unless you get top-tier angels who have deep pockets don’t assume that angels are necessarily a better option than VCs.  Might be, but not a given.

5. I’d also say that I’m not quite as negative about funding someone else’s seed deal anymore.  I now know that the mega funds that did too many seed deals aren’t paying enough attention to them.  So I’m not put off by the fact that I’ll be used as a stalking horse or that there is something wrong with the company provided I’ve spent quality time with management and can make my own assessment about the team and business.

6. Chris talks in his blog post about your A round pricing being lower if you have a VC seed investor.  His argument is that when you find a new VC to invest there will be some kind of collusion between the A round investor and the inside seed investor.  I could definitely see that happening.  But I’m not really sure it is necessarily so. Pricing a new round is always a function of how competitive the deal is so just because a VC seeded the deal doesn’t drive down price if 3 VCs are competing for the deal.

I told Sean Rad at Ad.ly when I invested that I’d like to do his next round but as a VC I can never guarantee that I will (nor would an angel).  I told him he’s free to shop around the deal and see what price the market will pay.  I also said we’d like to co-lead the next round if an external investor is so inclined.  I can’t see how Sean is any worse off with me than he would be with angels?  In many ways I feel he’s better off.  As a decent size fund we’ve validated the team and concept.  And if he’s performing well (he is) and wants to do a quick round to avoid a lengthy funding raising process he has the option of talking with us about doing his A.  As I always tell entrepreneurs – it’s far easier to talk with VCs when they’re already partially pregnant.

So how can I justify doing seed investments?

Simple.  I plan to do a few but not so many I can’t manage them.  I have 3 total companies I’ve invested in this year (2 A’s, 1 seed) – soon to be four.  All of these are referenceable.  I think all of the founders would tell you that I’m active, supportive and engaged in their businesses, customer interactions and talking about future fund raising requirements.  If you talk with the founders of the 3 businesses where I wrote personal angel checks for I think they’ll tell you that I’ve actively helped with their fund raising processes.

When we funded our two seed deals we used the Y Combinator Open Source Term Sheet and were highly entrepreneur friendly.  I offered a WAY cleaner term sheet than any angel “club” deal that I’ve seen in SoCal or even from the seed fund investors themselves.

See, I don’t think it’s a question of To VC Seed or Not to VC Seed, I think it’s the age old question of who you’re working with and how well they reference.  I’m surprised at how little referencing some founders do on their VCs.  I’ll save that for another post.

You’re never going to have a gaurantee with ANY investor that they’ll commit to the next round.  But great companies who choose great investors invariably have an easier time.

In the first post in this three part series I described why I believe the VC market froze between September 2008 – April 2009.  In the second post I argued that as of September 2009 the pace of VC investments has increased rapidly (at least for software / Internet investments – the only sector on which I’m competent to comment), but only for those remaining VCs who have new enough funds and aren’t plagued by “the triage problem.”  This is a direct result of innovation around the iPhone / mobile computing, Facebook / Social Networks and Twitter (as distinct from Social Networks).  It is also a result of pent-up demand.

In the following post I argue that this increased pace may be temporary.  I obviously don’t have a crystal ball so the economy could fare better than my gut, but here’s why I’m cautious for some time in 2010 or early 2011:

Why is the future still so unpredictable?

1. Consumer spending is 70% of the economy and will continue to be stretched – We can look all we want at tech innovation, VC funding cycles and hot M&A deals, but ultimately growth and therefore investment must be underpinned by revenue.  This is tied to having consumers who feel confident enough to spend.  It affects even B2B companies because ultimately most must sell to companies who sell to consumers and if they suffer they cut back on suppliers.

Consumer spending is where I’m dubious.  I believe that consumer spending over the past 15 years has been fueled by a great run up in the equity value of property that gave consumers what economists call “the wealth effect” and even though the Wikipedia cites some economists who believe it’s only theory – I suggest you read this excellent piece on the Wealth Effect in the Economist – it conforms to my views.

So we loaded up on flat screen TVs, multiple generations of iPods and trips to Hawaii.  We spent our future since the equity was artificial.

So why the ’09 bounce?

When the market run started in March people were relieved that “the world wasn’t ending” so they started spending again.  See point 2 below.  Unemployment coupled with a stock market drop will stop this spending cold IMHO.  I’m not a doomsday guy, but just believe that we won’t see a V shaped recovery, which could make VC funding more difficult for tech start-ups (don’t shoot the messenger!).

2. Unemployment continues to rise – Unemployment as of September 2009 is 9.7% but the truer number of underemployed is a whopping 16.8%! That’s around 1 out of 7 working-age Americans.  To understand this in great detail see this very important blog post by Henry Blodget on the unemployment rate in the US and its impact on the recovery.

3. If these factors impact earnings the stock market may be headed South – If unemployment rises housing prices won’t.  Consumer spending will decrease.  This will likely cause the stock market to contract.  When this happens it takes our 401k’s with it.  The cycle becomes self fulfilling.  Eventually it becomes self healing, but I don’t believe consistent growth will happen too quickly.  That said, the IMF (international monetary fund) is more bullish.  The IMF just raised its global growth forecast from 2.5% to 3.1%.  I wonder, though, how much of that is emerging market and how much of the industrialized nation growth is due to stimulus money, which in turn either dries up or forced inflation?

4. If a stock market correction is severe expect a return to the Dog Days of VC is inevitable –   If you read my post on why the VC market dried up in the first place you’ll see that I believe there is a strong (but not 100%) correlation between investor sentiment in the public market performance and the willingness of VC’s to investment money at a rapid pace.  Bad stock markets mean less IPO’s and lower prices for M&A.  This has a tangible impact on the valuation of start-ups and the pace of investment.  If the stock market holds then the pace of VC may hold steady.

5. Don’t forget our industry is still contracting & is threatened by regulation – But it’s worse than just the correlation with public markets and the lack of confidence this cause in some.  The VC constipation is coupled with structural changes in our industry.  Want to know how bad it is to raise money as a VC right now?  Check out this interesting piece on PEHub talking about how Stanford is discreetly looking to sell it’s asset portfolio!  If Stanford has to cut back on VC investing, you can imagine how bad it is getting.  And not only are the total numbers of VC’s decreasing and the amount of funding  in the VC industry as a whole is decreasing but the industry is also threatened by regulation.  I’m not saying regulation will happen, but if it does it will only pile at the wrong time.

My personal views? I believe that innovation will be part of what drives us out of the recession / long-recovery eventually.  I believe that “necessity is the mother of all invention” and that bad times will cause great people to rise to the occasion.  I believe that investments now will lead to leaders in 5 years from now.  So I believe that now is the perfect time to build a company and the perfect time for early-stage investors to bet on innovation. If you’re a startup, in bad times there is less over-funding of your competitors and therefore less pressure to give everything away for free.  You have less wage pressure and less staff turnover.

But I believe I’ll be in the minority of wanting to invest in down markets.  So if I am unnecessarily concerned in this blog post (great!) then the world will be fine for fund raising.  But if I were your friend or adviser I’d remind you, “hope for the best, plan for the worst.”

My advice: if you’re raising a $750,000 round and you have demand for $1.2 million – take it.  If you’re raising $2 million and can close on $3 million – don’t optimize to minimize short-term dilution, optimize for contingencies in case the market gets worse.

Please do not read that I think an early-stage company with limited product and only beta customers should go straight for a $5 million fund raising.  My advice in my post Should You Even Raise VC still holds.  I believe that over funding can be as destructive as under funding.

But I also believe that squirrels that save for a rainy day live when the winter is unexpectedly long.

p.s. I hope that the above factors don’t come to fruition.  I hope that my assessment of the markets is unnecessarily fearful.  My good friend Jeff Cohn sometimes jokingly says that he things being a bear is antithetical to being a VC.  I disagree.  It’s not my job to be a cheerleader.  It’s my job to invest wisely in entrepreneurs who are capital efficient, who innovate in ways that pay off economically in good markets or bad and who plan for worst-case scenarios.

In my previous post, The VC Ice Age is Thawing (for now) I wrote about the reasons why the VC market came to a screeching halt in September 2008 and remained largely shut until at least April 2009.  There are now signs the VC market has gathered pace meaning it’s a great time to be fund raising.  This post highlights some of the reasons why the market is moving again and what entrepreneurs should do about this.

There’s no doubt (at least anecdotally) that the pace of VC investments in early-stage technology companies has picked up in the past few months.   The real irony of the market thaw is that the biggest symbol of the freeze as I mentioned in my last post is when Sequoia released its famous “RIP Good Times” PowerPoint deck alerting companies to dark days ahead and Ron Conway famously wrote emails to portfolio companies encouraging people to slash and save and prepare for the impending doom in the market.  This is one book-end of the cycle.

I hear from several sources that Sequoia is very active in the market aggressively chasing several deals and even driving up prices on some early-stage deals.  And Ron Conway has proclaimed that he wants to do up to 40-50 rapid-fire deals in the next 18 months in what is becoming known as the “real time web” (e.g. Twitter, FriendFeed and other real-time “feeds”.)

When the NVCA or PriceWaterhouse surveys come out at the end of year I’m not saying they will necessarily will show aggregate $$$ or deal numbers up.  Why?  Because you have multiple forces at work.  Volume has no doubt picked up at active firms.  But there are many zombie VC’s with no more investments left in their portfolios so it’s hard to know which trend has more impact.

So what is driving the new energy in the remaining venture capital firms when we kept hearing how much the whole industry was “against the ropes?” …

1. The Market rebound – Let’s face it, just as investor sentiment is unnecessary shaken when the markets dive it also becomes overly optimistic when markets bounce.  As of near the end of September 2009, we’re up 46% since the March 9th nadir (yes, I need to find a way to use one of my SAT words ; – ) .  Sentiment is strong in personal portfolios and up commensurately with VC’s expectations that their last fund will now be worth something (and along with that increase the partners’ personal wealth).  For what it’s worth I think the market recovery is also driving consumer spending and if the market declines … WATCH OUT! (but I’ll save that for post 3/3).

2. IPOs and M&A have returned – and with them the investment bankers have staged a rebound.  There have been a number of high profile tech IPOs in the recent months including companies such as OpenTable and more recently LogMeIn.  M&A has shown some spectacular results including Zappos to Amazon for $928million, Sun to Oracle for $7.4 billion and Omniture to Adobe for an astounding $1.8 billion.  More tellingly was the sale of Mint.com to Intuit for $170+ million because it showed VCs that a well-executed investment can still garner a quick, solid results (the company was sold around 3 years after its foundation).

Investment banks that last September seemed destined for bankruptcy are suddenly feeling flush and motivated to stimulate more business.  Every major VC has a stable of portfolio companies that were “in a holding pattern” – too small for an IPO yet the VCs didn’t want to sell them cheaply in a fire sale.  VC’s are working hand-in-glove with the investment bankers to prepare for IPOs or create auction-style trade sales.  I can tell you first hand than bankers are out making road shows to gin up interest in VCs and institutional investors.  There is a lot of pent-up demand.  At GRP alone we have a few companies in eight-digit millions in … EBITDA! – IPO-able in any normal market.

When you start to visualize your own portfolio exits your checkbook becomes more available for new deals.

3. You can’t get paid for sitting on the sidelines – I always tell people that when recessions start managers in large companies get rewarded for cutting costs.  The more Machiavellian the manager is the quicker he/she rises.  But this cycle of cutting comes to an end because ultimately you can’t cut your way into business growth.  Let’s be honest – the same is true for VC’s.  As I mentioned in my last post that between September 2008 – March 2009 most VC’s were keeping their heads down because you didn’t want to be seen investing in an imploding market.  But you can’t keep your pocketbook on the sidelines forever and still expect LPs (limited partners or the people who invest their money in VC funds) to pay you 2% management fees every year.  So eventually the money has to start flowing. (note: there is one rare exception – in 2006 Sevin Rosen declared that Venture Capital was broken and actually returned money to their LPs!  As I often quote Fred Wilson, “The VC business isn’t broken, some of the participants are“)

But in addition to structural reasons such as the market upturn, the increase in IPOs and the need to put capital to work, some real innovation has also encouraged a new round of investment.

4. The success of the iPhone – The success of the iPhone and more importantly the App Store has led to an increase in early-stage VC fundings that mirror the Web 2.0 style euphoria that swept the Valley beginning in 2005.  Along with Facebook and Twitter investments (see below) this wave is more diverse but no less speculative.

The iPhone success is more profound than just iPhone apps.  With the iPhone, Apple finally broke the hegemony that the telecom carriers had over mobile applications and that has stifled innovation for too many years.  While iPhone is really still the only true game in town for mobile applications investors can see in the near future a world in which multiple mobile applications platforms will likely exist – perhaps with Blackberry, Palm Pre and Google’s Android operating system gather more momentum.

Mobile will likely spawn a whole new wave of innovation because it’s pervasive, location aware and always with you.  Players such as Foursquare, Tapulous and Bump Technologies are attracting huge investor attention not to mention the huge hype around augmented reality applications such as Layar.  We’re only in the second inning on mobile.

5. The growth of Facebook and social gaming led by Zynga – Another obvious trend is Facebook.  Notice that I didn’t say “social networking.”  Much like iPhone is the only mobile platform in town, Facebook is the only “closed network” social networking platform in town.

There was an initial wave of euphoria when Facebook first opened their platform that led to numerous people announcing Facebook Funds and many companies being formed.  We then saw a lull as Facebook struggled to figure out monetization.  Luckily the social and casual gaming companies showed them the way.  With players like Zynga and Playdom earning nine-fugure millions of dollars it’s clear that there is big money in monetizing social networks.

There have also been many high profile financings of infrastructure players to support these gaming platforms including Offerpal Media, SuperRewards (bought by AdKnowledge), Gambit and more recently LA-based Sometrics.

I attended the Facebook Fund Demo day about a month ago in Palo Alto and it blew me away the pace of innovation and the focus on monetization that came out of this group.  Hats off to Dave McClure, Hiten Shah and others for instilling a “money talks” attitude in this group.  There has already been at least one high profile funding from this class, which is Thread – a product that raised $1.2 million even before the demo day to help you integrate your social network with dating ambitions.  Seems an obvious fit.  With First Round Capital, Sequoia and Founders Fund obviously a lot of respected investors think highly of its potential.

At 300+ million users, money is bound to be made from Facebook platform companies and about every innovative company that I see these days is integrated with Facebook Connect to scrape a user’s social graph.

6. The growth and $1 billion valuation of Twitter and its impact on business – The Big Thaw discussion would obviously not be complete without discussing Twitter.  The fact that Twitter recently raised money at more than $1 billion valuation in just 4 years of operations energizes VC’s to believe that there is money in them thar hills.

But more important than Twitter’s value is the ecosystem.  Although too early to call, it seems to me like this phenomenon is gather more steam than even the first two.  What Twitter certainly got right was making itself a narrowly defined platform with an open API and encouraging all of the data that flows through its system to be open.   This has unleashed several classes of companies:

(the following list not comprehensive – I don’t have the hours or MIPS to do a full research here – just from the top of my head)

-          Twitter clients including Tweetdeck and Seesmic for desktops, UberTwitter, TwitterBerry, Tweetie and many more for mobile devices and CoTweet and HootSuite for businesses.

-          Twitter search tools like OneRiot and Collecta

-          Twitter URL shorteners like Bit.ly

-          Twitter listening technologies that help brands monitor mentions of their brands and judge +/- sentiment like Radian6, Buzzlogic and Visible Technologies

-          Twitter content hubs and traffic drivers like Social Approach

-          Twitter authority like Klout

-          Twitter ad networks like Ad.ly

-          Twitter analytics platforms like Awe.sm

-          And really broad players like PeopleBrowsr that seem to fall into many of the categories

Frankly, I could just keep going such is the scope and breadth of this emerging ecosystem.  So what does this mean for you if you’re an early-stage company looking for funding?  It means that now is a good time to raise money.  Don’t wait for your perfect business development deals to come to fruition that are 6-months away in your pipeline.  Remember the proverbial words of wisdom, “strike iron while it’s in the fire.”  I see too many people who say, “I want to only raise X now, because in 6 months I’ll be worth more when I get X,Y, Z completed.”

It’s true that we may be at the “beginning of the end” of the recession.  But we may also be at the “end of the beginning” (to quote Churchill) of the deep recession.  I believe the data are not yet clear.  In my next post I talk about what worries me ahead and why I think you’re better off raising money now.  To be clear, I don’t have a crystal ball that forecasts the future or I’d quit my VC job and purely be a day trader.  But I do believe it’s too early to proclaim victory.

So get out there and start raising your capital!  And my final post with my views on —>>  VC Funding in 2010 – 2011

This is part of my ongoing series, “Pitching a VC.”  Getting a meeting with a prominent angel or VC is difficult enough.  Some advice on how to do that was covered in this link – Getting Access to a VC.  This post covers the day after.  I spoke about the topic on Fox Business News yesterday in a great session with TechCrunch50 winner RedBeacon and will post it along with my other VC Videos when Fox puts it on their website.

So you just had an investor meeting.  It sounded like they really liked you.  The promised to follow up with: calls, using your product, talking to customers or “noodle on things.”  Will they?

OK, if I’m going to be honest with you then you need to promise not to shoot the messenger.  Despite best intentions they probably won’t follow up on their actions. And unless you just won the TechCrunch50 (e.g. you’re hot) it probably won’t go very quickly (unless we return to the boom days of VC, which I suspect won’t happen again soon).

Remember that most fund raising takes time.  It’s about building long-term relationships and showing traction over time.  If you haven’t read how to build VC relationships and demonstrate traction make sure to read it.

Why don’t VC’s follow up? Because VC’s (not unlike yourself) are tremendously busy.  The partner you saw is probably sitting on 5-6 boards which means he or she will be busy helping existing portfolio companies.  They probably have 3-4 deals that are further along in their pipeline of deals they are considering (e.g. ahead of thinking about you).  They have probably seen 4-5 new companies this week minimum.  And they have responsibilities for helping to manage their fund.  Plus, now they need to Tweet, use Facebook, attend conferences and keep a blog!  Not to mention what happens in years where they also need to raise a new fund.

I am really surprised how many entrepreneurs pitch me and then I never hear from them again.  I guess they assume that since I didn’t email or call I must not be interested.  This isn’t always the case.  Anyway, the video from my interview is right below and my guide is after the jump.

So how to proceed?  Read the following as a guide

ENTREPRENEUR NEXT STEPS

1. Stay on the radar – You need to find a very polite way to persistently be on the top of the radar screen of your VC.  Start with a very short thank you email the day after your pitch.  If any actions were agreed this should be in the email.  If they said they’d use the product it should have the password.  If they wanted to talk to people this should have the contact details.  If any junior people attended send them separate emails and help them get up to speed on the product.  It is much easier to follow up by calling the junior staff (again, just as you would in a sales campaign).

2. Show a sense of momentum – After a week or two has passed and you haven’t heard back it’s time for step 2.  A polite follow up email saying, “just wanted to follow up with a quick summary of some exciting news.”  Yes, I know only 2 weeks has passed.  That’s why in your original meeting you should hold back some news that you have so you can bring it up later.  Sinister?  Not really – just a good sales tactic.  You’re just trying to stay on the radar screen.  I suggest in your email you say, “I know you’re really busy so I’ll make sure to check back in a week or so.”

3.  Find a way to help the investor – Not everybody has the capacity to do this but if you can you should try.  Did anything come up in the meeting where you think the investor could use your help?  Did you mention an executive contact that they’d like to meet?  Do you know a “hot” company that you think would like an intro (if so, make sure it’s one that’s not currently fund raising ) Do you have access to an event that’s coming up and you want to invite the investor?  Whatever.  Doing a “not over the top” favor is a good way to build rapport.

4. A reason to reengage – By now if you’re in a normal VC or angel process 4-6 weeks might have passed.  If you know that the best VC processes can take 4-6 months you won’t feel the time pressure.  If you left funding to the last minute you’ll need to be more aggressive, which is a shame.  But your next step is to find a reason that the VC needs to see you again.  This could be a major new release of the product that you’d “love to show the VC because he’ll find it interesting” and you promise to only stay 20-30 minutes.  Or maybe you had a major customer win that you’d like to walk them through.  Or a major shift in strategy.  Whatever.  You need to push the next meeting.

5. Multiple endorsements / touch points – The same strategy that works to get intro’s to people works to get momentum from people.  They need to hear about you from multiple touch points.  It needs to be masterfully orchestrated by you but very subtle.  You need to find out who influences the partner.  Who knows them well or at least somebody that they see on a regular basis.  It needs to be somebody you know and trust.

In a perfect world you say, “I met a few weeks ago with Joe Partner at Big VC Co.  He seemed to be interested.  If you happen to see him I’d really be grateful if you would mention how much you like our product / believe in our company / that you knew me well when we worked at Yahoo! (or whatever is appropriate).  I want to be subtle about it so if you talk with the VC please don’t over play it.”  The more people who mention you the better.

6. A sense of urgency - This is the critical bit.  I call it the “prom conundrum.”  Let’s face it – everything we do now is some derivative of what we did in high school.  Four guys are thinking of asking you to the prom.  They don’t because they’re also thinking of asking Susie.  But if they hear that somebody else is seriously thinking of asking you to the prom – BOOM – you get asked.  I wish it weren’t so.  It is.  That’s human nature.  (reminder: don’t shoot the messenger – I’m just telling you how it is).

So how do you create urgency?  First, you do need to create multiple interested parties.  You can’t fake it.  Then see point 5 above.  You need to find a way to get a whisper campaign going that somebody else is thinking about asking you to the prom.  If all else fails you give the VC a call with a very subtle and polite message, “Just wanted to keep you updated on our situation.  We’re getting some strong interest from a couple of firms.  We don’t have a term sheet yet but seem close.  We really liked your firm and just wanted to get a sense on what else you need from me to help your process.”

7. Extra Credit Tip - I’m going to get pounded for saying this so I’m making it optional (but it is a very smart strategy).  Do the VC’s work for them.  What, what?  Yes, I said it correctly.  They’re having a tough time understand how big you can be?  Do the market sizing analysis for them and send it.  They’re worried about competitors? Do a 5-page PowerPoint competitive assessment.  They said they’d call references but haven’t?  Ask your senior customer client to proactively call them.  They aren’t sure about your business model?  Come in and walk the associate through the details.  VC’s (like you) are busy.  The more you make their life easier the quicker you get to yes.

Guidelines for following up

1. Be subtle – All this said, there is such a delicate balance between polite persistence and being a pest.  You need to sail very closely to the line of acceptability without ever crossing it.  You need to show chutzpah without being annoying.  Smile when you’re asking for more meetings and say, “I’m really sorry to push you but I guess you’d want to invest in somebody who pushes customers  bit, too?”  It is not something I can ever teach somebody – it’s like art – you know it when you see it.  People cross the line often.  It’s not pretty.

2. Be concise – Unlike this post you need to be very brief in all communications and meetings.  No VC reads long emails – no time.  If you ask for (or they offer) a favor – ask for 1 and only 1 for now.  I sometimes get requests for 4 things at once.  In this case I’m like a deer in the headlights – I don’t know where to start – so I usually don’t.  When I get one request – I do my best to help.  If you ask for a follow-on phone call or meeting promise to be brief and deliver on that promise.

3. Be persistent – Can’t emphasize this enough.  Don’t be offended that they didn’t respond via email.  Senior people get busy, bogged down and behind.  Send a few times.  I covered the topic on the post I emailed a VC but never heard back.

4. Use multiple channels - My email is always overloaded.  If I don’t respond I promise you that I’m not ignoring you.  If I’m not interested I’ll tell you.  I am just overwhelmed.  If we’re connected on LinkedIn or Facebook – try a short ping there.  If the VC uses Twitter regularly then this is a perfect place to connect.  I love it because it’s restricted to 140 characters so you have to be concise!  But avoid anything confidential unless it’s a DM.

5. Let time pass – If you email me on Tuesday and remind me on Thursday (which happens) you’ve crossed the line.  If you’re feeling pressured because you’re nearly out of cash – then you started the process too late.  That’s not my fault.  Desperation never sells well.

6. Be gracious – Be extra courteous in all communications.  A little good graces goes a long, long way.  Be apologetic of taking up time.  Be thankful for work put in.  I know it’s their job, but it makes a difference so being nice never hurts.

7. Accept “no” for an answer – I can’t emphasize this enough, if you do get a “no” then politely move on.  It’s OK to ask if they know a VC that might be a better fit and ask for a VC intro.

If you think they’re telling you “no” but don’t know for sure I would recommend the following email, “Dear VC, I get the sense that you guys are not interested in investing in my company at this stage.  I appreciate all of the time you put in and hope to convince you next time around.  We are talking to other parties – it would be very helpful if you could confirm that you’re no longer interested just to help me better manage my time.”

Voila.  Make it easy for them to say “no.”  Better that you at least know.  Otherwise they’re not likely to tell you.

This is part of my ongoing series, “Pitching a VC.”

I recently wrote a blog post here in which I argued that the best VC meetings are discussions and not sales pitches.  Many people agreed and added that even the best sales meetings are also discussions and not pitches.

A few weeks ago I sat through two very contrasting presentations and wrote this blog post right afterward.  I’m just getting around to posting now.  Both presenters are anonymized.  I hope that when you’re presenting to a VC this will give you some sense of what might be going on in our minds.

A Tale of Two Pitches

Last week I had two very contrasting presentations from entrepreneurs that gave me the idea for this post.

Pitch 1:

I had an awesome young entrepreneur come in this week to talk about his seed stage business.  It was a 1-on-1 meeting between the two of us.  He wasn’t really ready to raise VC but wanted to meet me early in his process and wanted some help thinking through potential angel or seed stage investors.  He was introduced by a senior technology executive that I really respect in the LA area and a close friend of mine told me separately that he would like to invest if they did a friends & family round.  Needless to say I was positively predisposed to this individual before the meeting started.

I highly recommend to all entrepreneurs to take the time to find the best sources of an introduction because it really does make a difference.  It is worth any amount of extra effort if you are really interested in the VC you are approaching.  If you haven’t already read the post on how to approach a VC it’s here.

How you got to the VC is important, but once you’re in the meeting it’s obviously up to you to make the most of it.  We started by talking about this person’s background.  He had spent many years at Yahoo! during the better days and we had lots of discussions / debates about Yahoo!’s strategy and missteps.  But we talked much more broadly about Google, Twitter and Facebook.  We talked about browsers, desktop widgets and interactive television.  We talked about measurable marketing.  We talked about online video and the need to build & track audiences online.

I found myself so engaged in the discussion that after 90 minutes I realized we hadn’t even broken out his PowerPoint presentation and I had a hard stop.  So we scheduled our second meeting for next week where he could actually tell me more about his company.  In the meantime I signed up for his product and began playing around with it to get a sense myself for how it works before our next encounter.

Importantly he did have a presentation ready to go.  On any given day I could have been really pressed for time and asked to get straight to the presentation – you can never predict how the meeting will go so you must be prepared to show a deck, do a demo or just have a conversation.

This meeting was a 10/10 for me.  Who knows whether I will find his company interesting when I see the details at our next meeting.  But so much of my decision on investing is based on the individual(s) that getting a chance for a true connection with somebody where you understand how they think about life, technology, management, etc. is important.

Pitch 2:

This entrepreneur had a full house.  He was from out-of-town so even though he hadn’t been properly vetted by an individual partner before the meeting, we had all of our available investment staff sit in on the meeting.  He was introduced to one of my partners by a very trusted source so we were ready for big things.

He started by showing a 5-minute video describing why the market that he was in was such a great opportunity.  It had the graphics of a highly produced Hollywood-like video with the voice-over of the cheesiest television commercial presenter you could imagine.  Let me state me bias – there is NEVER a scenario where you should lead with a 5-minute video.  Even worse when all it is doing is explaining your high-level market concept.

I kept thinking 2 things during the video: 1) this is cheesy and painful and 2) why is he giving up the opportunity to build rapport with us by telling us this stuff directly?

After 2 minutes of torture I suggested that we stop the video.  He seemed uncomfortable doing that so he let it keep running.  After 4 minutes I instructed him to stop it.  He reluctantly did.  We asked the individual to tell us what he actually did.  The video was so high level and was explaining how advertising was all becoming measurable (duh) but we had no sense what his company’s role in this process was.  We all know that television broadcast commercials are not targeted.  We all know that many companies have tried to deliver targeted advertising on the web.  Sir, what do you actually do???

What struck me is that he was never able to get into a discussion about the past of targeted advertising technologies –  what had worked and what hadn’t.  We weren’t able to have a discussion about who his target customer base was, why they would use his products and why advertisers would pay for that.  We didn’t get a chance to adequately discuss the chicken-and-egg problem of getting users signed up and advertisers signed up simultaneously for which his business was dependent on.

Basically, the fundamental problem that I saw with the whole painful hour was that he was in “sales mode” the entire time.  He was so concerned with getting across his points that he failed to have a dialogue and engage us.  A VC is never looking for you to have all of the right answers and the best VC’s know that we don’t either.  We just want to hear how you think about your business, your industry, your competitors.  We want to hear that you’ve thought about the risks.  We want to hear your mental flexibility on issues and how you debate them.

I guess there are some similarities with the infamous “case” interviews that strategy consultancies give.  It’s not always the actual answer we’re after but the quality of your thought process and how you arrived at the answer.  Through this discussion you establish rapport and we build a relationship.

It wasn’t going to happen with this individual.  He ended the meeting by telling us that he wasn’t really even raising money.  If he had been raising money he would have been prepared to discuss all of these issues.  He was defensive and seemed affronted that we wanted to discuss the complexities of building his business.  I believe in seeing VC’s before you’re ready to fund raise (see my post here), but if you’re not prepared to have a discussion or debate about your company or industry then don’t bother.

I am left wondering if he really had no interest in ever raising money from us – why was he there?  Why would he waste his time and ours?  Sheesh.

This is part of my ongoing series “Start Up Advice” but I’d really like to call this post, “VC Advice.”

If a company has reached a level of success, has been around for a few years and you believe the company has potential to break out into a much bigger company then you should let the founders take money off of the table.  It’s that simple.  Only then are you truly aligned.

Not FU money, but “feed the family” money.  And to be clear – I believe it is also in the VC’s interests.  I’m not trying to open Pandora’s Box and suggest all founders should be able to cash out – far from it.  But the handful who are building something of substance need to be able to take the pressure off in a way that creates a similar objective to the VC.

I think too many VCs simply don’t understand this.   When you’re too far removed from renting a house, driving an 8-year-old car, worrying about how you’ll put your kids through college or coming home to a spouse who wants to know why you don’t just get a “real job” then it’s hard to identify.

I know this is a controversial topic.  No matter what I say some people are going to believe passionately on the other side of the argument.  On a panel that I sat on with a prominent VC in 2008 he stated that there were no circumstances in which the founder should take money off of the table.  I believe this is wrong.

Let me start with a couple of stories.

A friend of mine is a serial entrepreneur and is running a high-profile, early stage company in NorCal.  He’s been at it since 2005.  We trade emails on the topic of entrepreneurship often.  We exchanged ideas when I was an entrepreneur along side him in NorCal in 05-07 and my point-of-view on founder / VC relationships hasn’t shifted even 1% since I went to the dark side.

We were trading emails on a recent rant posted on The Funded about founders’ equity and here is what my friend wrote to me in our exchange (printed anonymously with his permission):

Actually FWIW I think at least in cases of folks like me (and this seems also to be part of what Founders’ Fund tries to do), many of the challenges of working with my VCs would be eliminated if the investors would support partially liquidity for founders after X years. The VCs basically have liquidity in management fees along the way, in the sense they get paid decently along the way. Founders however are asked to take low salaries and never really get back the time they worked for free. At some point, this breaks if their isn’t an exit or IPO. I think it breaks for most people after 3-4 years.

The net effect for [my company] for example is we are now doing reasonably well. We should end the year with a few million in fully recurring revenue and we’re projected to double next year. We could do more in 2010 with more VC investment; the doubling assumes only ratable increase in marketing spend to achieve profitability. But more spend = more viral opps = more revenue down the road. >50% of our revenue in now viral.

However, without any liquidity at all for my cofounder and me, it makes more sense to grow more slowly and be profitable next year and stay there.

My investors don’t seem to understand this, yet it will materially impact their ROI IMHO b/c the absolute return to them will be lower …

The are in a delusional world where every founder just works for a pat on the back, forever. For a while but not forever.

I agree 100% with my friend.  I couldn’t have said it any better.  VC’s who don’t get this are naive.  I’m not being Pollyana-ish for the sake of being nice.  I know that eventually if your company is out of cash and you need the money you’ll take it even on punishing terms.  It’s your baby.  It’s what makes you a missionary CEO rather than a mercenary CEO.  But the day after you’ll wake up and see yourself more as a manager than an owner.  It happens slowly and subtly.  You start leaving the office earlier.  You work less weekends.  You stop catching the early flight.  You lose the dream.  And importantly you start thinking about your next gig.  That’s when the VC has lost.

I know because I’ve been there.  In my first company I had to raise money in April 2001 or die.  I took money with a 3x participating preferred liquidation preference with 8% compounded interest annually.  Coupled with my participating preferred from 1999 and 2000 I had more than $55 million of liquidation preferences.  Ironically our business started to perform very will by 2004 but by then management had lost the dream of a huge upside.  We managed the business because we felt responsible since we raised money.  But there’s no doubt we took the edge off.

Fast forward to my second company.  I founded it in 2005 at the age of 37.  I had just moved back to the US from living in Europe for 11 years.  We had never purchased a house in Europe because we always knew we’d move home at some point.  When we moved to Palo Alto we rented a place.   I raised $500k in seed money to start the company.  The very modest salary that I drew didn’t come anywhere near meeting my monthly costs so I had to eat into savings.  I had a 2.5 year old boy and another one due in 1 months.

The company did well in 2006 as we delivered a phenomenal product that got much industry acclaim at conferences and with initial customers.  Many term sheets ensued.  By then I was still on the board of my first company but it hadn’t yet sold (it ended up selling in 2007 to a publicly traded French company).  So by this point I hadn’t had an exit.  I had some diversity – 2 companies – but nearly the diversity of a VC.

So here’s my question, along the lines of my friend’s comments above.  How on Earth would any VC think that our incentives were aligned?  They had their nice salaries and I was approaching 40 and still living on a modest salary with good savings over many years but no big exit yet.  It was all on the promise of a potential exit down the road and sometimes you don’t end up with that even with the best of execution or intentions.  They vacationed at 5-star resorts; I saved up my frequent traveler points and traveled free.

And then the offer came in to buy my company.  I had that against the backdrop of several term sheets.  The offer wasn’t FU money but it was enough to change my life forever.  This made me think hard about the relationship between VCs and entrepreneurs.  VC’s have diversification and management fees.  Entrepreneurs have much more immediate upside but often all-or-nothing outcomes.  If a founding team could take enough money off the table to take the pressure off at home or as I sometimes call it “feed the family” money but not take too much money off of the table then incentives would be aligned.

The entrepreneur would be free to “swing for the fences” with the VC’s.  I truly believe it aligns incentives.  But it is clearly not warranted in all cases.  I think the following circumstances warrant consideration, but there is no doubt it is deal specific.

A strawman set of rules (or for my UK friends, “a starter for 10″)

1. Founders need to have been in the company for a few years.  Probably a minimum of 3.
2. Company needs to have achieved some significant early milestones.  Probably revenue based.  I think a few million of revenues is probably a reasonable goal.  Let’s say, $2-3 million minimum – maybe more?
3. The company has to have the potential for a break-out on the upside down the road.  Otherwise, what incentive exists for the VC  to put in more capital or to have the founders earn money.  It can’t just be a gift.  The VC is hoping that by buying your shares they will be worth more in the future.  You’re hoping to derisk your life.
4. There has to be a degree of lock-in for the founder to make it quid pro quo - there are easy ways to do this.
5. It should be enough money to take care of basic needs but not extravagant needs.  Basic needs vary by location and personal circumstances (e.g. married with kids vs. single and 25 years old).  For a typical 28-35 year old founder I think the right number is probably between $500k – $1.5 million.  I’m assuming this in Silicon Valley, LA or similar locations. But money off of the table is comensurate with the stage of business.
6. Founders have to also be the KEY employees going forward.  Only people who are delivering value going forward can take money off the table.  It’s not charity – it’s an incentive alignment.
7. Obviously for super successful companies (Facebook, Zynga, etc.) these rules don’t apply.  No one could fault Mark Zuckerberg if he wanted $20 million.  He’s earned it.
8. If the founder has earned a few million in the past the rules don’t apply.  The rationale is to align incentives.  If you took out $3 million in your last deal I’m assuming our incentives are already aligned.  Another $1 million isn’t going to fundamentally change your life.  You’re probably wanting $10 million plus on the next deal.
9. You get a carve-out for rule 7 if you’re recently divorced and your spouse is devouring your money.  Joking aside – I’ve seen this twice already.

I don’t know – I think these are directionally correct.  I’d love people to weigh in on the comments with where you think I got it wrong or what points I should add.

Post script: The VC’s rationale in our debate was:

• “all money in a start-up should remain in the company.”  Only if it’s truly early stage would I agree.
• “it’s not fair to the rest of the employees who don’t get to take money out.”  Two answers from me.  In most start-up companies a handful of people really determine the majority of the outcome of the company.  I’m not saying others aren’t important but a few really drive the economic value.  So I think it’s OK for the “key players” to monetize.  But if that’s not egalitarian enough for you then you can always have everybody take a proportional amount off of the table.

This is part of my blog series “Pitching a VC.”

I’ve sat through a lot of VC pitches and having been CEO of an enterprise software firm for many years I’ve also sat through many customer meetings with sales teams.

There is one classic mistake that I see across both types of meetings – “the tell & sell”  presentation.  This involves a person who leads a PowerPoint presentation in which the presenter feels more comfortable racing through pre-practiced slides and rattling off charts & bullet points than having a discussion.

The presenter comes out of the meeting proud at having gotten through all 30 slides (and maybe even a demo) with a bunch of smiling faces and nodding heads and no discussion.  After the sales meetings I would ask the exec afterward, “how do you think it went?” and always be surprised when they’d say, “great, I think they really liked it.  They seemed to agree with everything I said.”

In our internal sales training sessions I would always teach our young sales execs that this seemingly good meeting was probably not as good as they thought.  People are much more likely to buy into you as a person and us as a firm when they’ve been involved in a discussion with you about their problems, your solutions, who else has been using your product, etc.  They might even like to challenge some of your assumptions.

The advice I gave to my sales execs is the same advice I would give to you:  smiling, nodding heads are normally not a great sign.  In the best case they might prefer to ask you questions but you didn’t prompt them and they’re being polite (although this is less likely in VC who are not known for being wallflowers!).

The VC might have tried a few times to prompt a discussion and you didn’t take the cue but instead reverted back to slides.  This happens often and I bet most presenters never realize it.  Most worryingly, many times it means that they have decided that they are not interested in your product (or investing in your company) so why bother having a debate / discussion with you.

It is easier for them to finish up 45 minutes, politely shake your hand and say, “we’ll get back to you”  once they’ve had a chance to “noodle on it.”  Ever heard that?  Far better that you noodle with them.  I believe that the best meetings are debates.  The following are some tips for the discussion style VC meeting

UPDATE: My initial post talked more about a debate than a discussion.  David commmented here that the problem with my phrasing it as a debate is that I don’t want to encourage any entrepreneurs to think that they should try to “win” the discussion by proving they are right (as you might do in a debate).  So I’m softening my message to “discussion.”  See note at the end of the post for a funny story on this.

Tips in a discussion led VC Meeting

1. Tee up your slides to prompt questions – The best way to avoid racing through your slides in a tell & sell style is to tee up your slides to prompt questions.  We used to do this in our sales slides.  After walking through the “problem statement” slide, the build on the bottom of the slide would always say, “Have you experienced similar issues in your company?”

It was just a way to remind the sales rep to create a dialogue.  If you get nervous in meetings or have a hard time remembering to stop you can simply build the prompt into your slides.

2. Stop often and seek feedback on direction – In addition to asking questions to prompt a debate you should always check for feedback from the VC.  Examples are “would you like me to go into more details about how we calculated the market size?”, “would you like me to tell you more about the team members who aren’t here,” or “would you like me to jump into a product demo now or tell you more about our market first?”  Be careful not to jump into a long-winded discussion on any topic without seeking cues from your audience on whether they’d like to go deeper on the topic or move on.  I think this is one of the single biggest mistakes that presenters make.

3. Be careful about the way you ask questions – I’ve sat through many meetings with groups of people where the presenter would say something like, “Do you know what REST is?” or “You know the company Constant Contact, right?”  Questions like this in a crowd often elicit “yes” answers even when people haven’t heard of the technology or company.  Most people in general don’t want to admit in front of peers that they haven’t heard of something that they think they should know.  If your presentation requires an explanation of RSS vs. ATOM always best to say, “let me quickly state how RSS and ATOM are different.  I know you might be aware of the differences but let me quickly cover it and if you want me to go deeper I’d be happy to.”  If the VC knows the difference TRUST ME they’ll tell you.

4. Don’t be defensive – Don’t view any question by a VC as an affront to you.  I know that they could have worded it more politely and in a less condescended tone, but view the question as an opportunity to have a great discussion.  View the question as engagement!  Remember that a VC doesn’t always care that you have “the right” answer provided that you have a high quality thought process.

Having a discussion is a great way to build rapport with the person asking the question.  It’s OK to say things like, “I could see why you might think that Google would go into our market.  It’s a valid concern and we worry about it, too.  Here’s why I think Google won’t initially be a threat to us and how we would respond if they entered our market …”. So the next time you get a zinger from a VC – be thankful.

5. Answering with a question – Another suggestion is the “answer a question with a question” technique.  First, you must actually answer the question that was asked with you before you ask a question back.  It’s really annoying in any meeting when you answer a question directly with a question.  But it’s OK at the end of your statement and it’s a great way to get people talking.

Example:

VC, “Do you really think that customers will pay $5,000 / month for your product when there are free versions of X,Y,Z on the market?”

You, “We’re not too worried about the free products because they target a lower-end segment than we’re targeting.  We tested the $5k price point with a handful of customers and they didn’t seem price sensitive … From your experience do you think $5k price point will likely be an issue for us?”

6. Don’t be afraid to say “I don’t know” - I don’t think any VC is looking for the entrepreneur who knows everything.  In a way I think most VC’s want to see that you’re mentally flexible, sufficiently humble and not afraid to admit when you’re wrong or don’t know something.  For many difficult or unknowable questions don’t be afraid to say “I don’t know.”  Some obvious things that are not acceptable for the don’t know answers: “how will you spend the $2 million once you raise it?”, “Who are your competitors” or “Who do you need to hire first after fund raising.”  You’d be surprised how many people don’t answer these questions confidently.

7. Get back  with an answer – There are two great things about saying you don’t know the answer to a difficult question.  The first is that you have a chance to ask, “do you have any views on the topic?” and thus hit the goal of getting the VC talking.  Even more importantly you have the ability to say, “that’s a great question.  I’m not actually sure what the answer is.  I’ll look into it and get back to you.”  It gives you an opportunity to email the VC after the meeting with more information and the potential to continue the dialog.

UPDATE:  We once had a company present to us in a full partner meeting.  The presenting team had a partner champion at GRP that was advocating the deal so we were positively predisposed to seeing the pitch.  It mid 2008 and one of my partners asked what they were going to do about costs given the recession.  The COO of the company said that he had read some economic council’s forecasts and technically we weren’t in a recession.  My partner shot back with data of his own.  A real debate ensued.  It wasn’t pretty.  I kept wondering, “why would this guy want to have a debate over a topic like this that had no relevance to proving whether his business idea was sound?”  In the end we didn’t invest.  A large determinant was this gentleman’s lack of EQ in this situation.