This is part of my ongoing series with Startup Advice (although this also applies tightly with Raising Venture Capital)

You all know this intuitively.  But on a scale of ABC (always be closing) there is a wide degree of urgency that entrepreneurs show.  As as I’ve said before, I believe that getting things done is one of the major things that differentiates successful entrepreneurs from just reasonable ones.  This is a reminder for all entrepreneurs to remember to be careful about “deal drift.”

I think the perfect saying to have as a reminder is “time is the enemy of all deals,” or as my wife is all too tired of hearing me say, “Don’t pop the champagne until the ink is dry on the contract and the money is in the bank.”

So, where does this all come from and how can you apply it in practice?

Let me start with a story.  When I was raising money for my first company we had closed a seed round in 1999 and were working on our A round.  We had many term sheets (it was 1999 and we had a pulse) and we were deciding which one to take.  We were trying to optimize around a few criteria: price, size of round, number of syndicate partners and, of course, terms.

We ended up agreeing a term sheet for $16.5 million at a $15 million pre-money valuation.  Yes, this was stupid.  But we weren’t optimizing for dilution – we were building a $1 billion+ company and we wanted the runway to succeed.  We had people hearing through the grapevine that we were about to raise money and new investors started calling us to get in on the deal.

My co-founder and other management team members wanted us to hold off and see whether we could get the deal done at a higher price.  I was resolute.  “Guys, I accept that we could probably shop this around for a higher price but we could also end up with nothing.  Let’s take the deal on the table and go build a huge business.”  They accepted my argument.   It was December 1999.  We signed a term sheet.

We moved into the legal process and final due diligence in January and February of 2000.  Goldman Sachs was going to be one of the investors in my firm.  Morgan Stanley found out about us and organized a secret Sunday meeting where they flew in a bunch of bankers to convince us to let them in on the round.  We thought it was a good idea so we brought it up to Goldman.  Morgan Stanley had proposed a higher valuation to let them in.  Goldman said NFW.  Not just on the valuation creep but also on Morgan Stanley being involved.  We were faced with a situation – slow down deal closure to convince all parties to work together or plow ahead.  We plowed.  Morgan Stanley then funded one of our competitors.  That’s a different story.

Our final closure was the first week of March 2000.  We closed with 5 investors including Goldman.  If you remember your history the market crashed the next week.  Many companies that were in the process of raising money did not.  It quickly became impossible to raise venture capital.  Most people who hadn’t already closed their deals were dead.

I lived through this again September 2001.  I don’t even need to mention the date for you to know what happened.  By mid September the entire market was constipated.  Any deal – ANY DEAL – that was pre 9/11 was suddenly in question.  Many deals – VC or otherwise – didn’t ever close.

History repeated itself in September 2008 with that market crash.

So having lived through this I became a very superstitious and paranoid deal guy.  When Salesforce.com decided to buy my company in December 2006 I dropped everything and focused religiously on closure.  I was obsessed with the closure date.  I did everything in my power to get this to be the earliest date possible.  For me it was a binary outcome.  If anything changed (stock market crash, real estate crash, somebody trying to buy Salesforce.com, whatever) I could end up with goose eggs.

This isn’t a story about Black Swan events.  It isn’t even a story about raising venture capital or M&A.  It is a story about the nature of deals themselves.  Any deal.  VC, sales, biz dev, M&A or otherwise.  Time is the enemy of ALL deals.  Unless, of course, you’re the buyer and playing for a lower price.

Things change.  Your deal sponsor could lose their job or change jobs.  Just ask my good friend Stuart Lander.  He was working on a big deal at his company Public Spend when his client, a Miami public official, was arrested for fraud.  True story.  People who were excited about your deal can suddenly become enamored with the next shiny object to come along.  New competitors can introduce stuff into deal dynamics.  Whatever.  I’ve seen it all.

What can you do about it?

1. Don’t over shop – If the deal you’re involved with involves raising venture capital or selling your company you naturally want some competition.  This helps you get your deal done in the first place and it helps you get better terms.

I’m not suggesting to single source.  I’m not being cynical as a VC and trying to get you to accept my offer on lower terms.  I always tell people to take their time deciding and to be wary of Gym Salesman VCs.  But be aware that adding weeks adds risks.  It’s always a trade off.  If you have a deal that you’re comfortable enough with think hard about going for closure.  Think hard about binary outcomes.  Had I delayed my fund raising in 99/00 by even 3-4 weeks I’m convinced I would not have raised any money at all.

I’ve seen this directly myself as a VC.  I’ve offered to fund an early stage company where I promised cash in bank in less than 30 days.  They accepted and we had cash-in-bank in sub 2 weeks.  They were off to the races building their company rather than raising cash.  Within 6 months they raising another round at an up round.

Conversely I offered the same deal to another entrepreneur who decided to shop around longer.  I told him my term sheet wasn’t “exploding” (meaning you put pressure to sign immediately or you’re out) but that it didn’t have an indefinite end date.  6 weeks’ later he didn’t have any other term sheets.  I offered a second time to fund and even increased price a little bit.  Second time he also kept shopping.  It’s been a while and he still doesn’t have a term sheet.  It’s a great company and a great team so I’m pretty sure they’ll get funded.  But if it “drifts” too much longer I worry.  You never know.  Anything can happen.

Especially in VC.  There is a fatigue factor.  If deals drift people start whisper campaigns.  It is a tight-knit industry.  Like it or not everybody knows each other.  “Hey, did you guys see ABC company?  Yeah, we passed, too.  I heard they were struggling to get a term sheet.  What’s going on?  They were raising since last August.  Strange that they haven’t gotten a close yet.”  Don’t shoot the messenger.  I’m just telling you the kind of stuff I hear all the time.  It simply is.  Better that you know.

2. Don’t grind every detail – The first cousin of the over-shopper is the over-grinder.  It happens on all deals.  I’m not saying to throw in the towel and don’t negotiate important points.  But think about what you really care about in deals.  Try your best to stand your ground on as many points as you care about.  If it’s a biz deal you might care about IP protection, revenue share, investment commitments to joint marketing – whatever.

But I sometimes see people get bogged down in PR releases, cancelation clauses, minimum guarantees, whatever.  I’m not saying that these points are unimportant.  On each deal they might be more or less important.  Decide what’s important to you.  Grind on that.

Avoid over grinding.  You know that every turn of the legal documents can add weeks.  Some senior legal guy needs to approve the changes and then run it by his lawyer to be drafted.  Some senior business unit head needs to approve your changes.  Each grind introduces more uncertainty both in terms of elapsed time and other unknown variables.  On the VC front, I advise other VCs I know to also be careful about over grinding.  You don’t want to enter important new relationships with bad feelings.  It’s not worth it.  Grind wisely.

3. Don’t be complacent – What really winds me up is when entrepreneurs are complacent.  I see people who just have a blind belief that the deal will eventually just get done.  They’re not bothered when the lawyers didn’t get the documents out when they promised.

Opposing lawyers used to hate working with me.  If they promised they’d ship documents and they weren’t released I’d be straight on the phone with them.  If they missed 2 deadlines (they always miss the deadlines – sometimes their fault, sometimes the clients) then I was straight on the phone with my negotiation partner to ask him/her to push the lawyer.  I always made them commit in an email to the day they would ship documents and then I’d hold them too it.  I’d send them their email and point out the docs were late.

Lawyers are like any humans.  The squeaky wheel gets oiled.

Don’t be complacent.  Push hard to document turns.  Push hard to set up the technical reviews, the due diligence meetings, the reference calls – whatever.  If they want reference calls be ballsy.  Help schedule the actual calls for them.  I’ve done it.  I’m sure you all have your tricks – feel free to add in the comments.

If they promise the next meeting in 3 weeks see if you can make it in 2.  Or 1.  But Mark, you met us and told us to come back in 3 months?  Can we push you?  Sometimes.  Read the tea leaves.  Sometimes I’m not yet convinced about the deal and you need elapsed time to have proof points.  I’m not talking about being pushy for the sake of being pushy.  But when you genuinely have “buying signals” then be ambitious about your meeting dates.  Offer to fly at the drop of a hat if need be.  Offer to meet at 7am or 7pm to make schedules work.

Just don’t be complacent.  Time is the enemy of all deals.

4. Get people in person – One technique that isn’t aggressive and always works is to get all the parties in one room.  You need your key negotiating partner and both sets of lawyers.  You can streamline what would have taken 2 weeks in document turns and accomplish more in a single day.  Plan well for your negotiation so you know what you’ll give in on.  Be willing to take breaks to let your partner call his senior people for consent.  But get everybody to commit to sitting in the room until the terms are pounded out and creative solutions are reached for areas where you are at odds on terms.

And, I can never link to this clip enough.  ABC: Always Be Closing.  There is no better movie scene than this.

I’m writing this post as part of my series with Advice on Raising Venture Capital but will file it under Sales Tips as well since it applies equally to both scenarios.

Congratulations.  You’ve found a VC partner or principal who has invited you to the Monday partners’ meeting.  Or on a sales campaign you’ve finally gotten your project sponsor to take you to the “executive committee” where decisions are made and budgets are agreed.

So you arrive at the meeting in the comfort that somebody has championed you to this point.  Every 1:1 meeting you’ve had to date has been collegiate and productive.  What could go wrong?  A lot, actually.  Here are some tips to keep in mind for the big day.

1. Information Asymmetry - The biggest problem that presenters face in large (5+ people) is information asymmetry.  You come into a meeting where your sponsor (the person who invited you to present to the partners) knows a lot about you and the rest of the room may have varying degrees of knowledge.

This is true whether your at a sales meeting or at a VC firm.  Sometimes a company presents at a partners’ meeting that has been well vetted and thoroughly discussed prior to the meeting so all partners know a great deal about the presenting company.  Other times the partner wants to test whether there is support before sinking in tons of due diligence time.

Either way, don’t assume that the entire room is up to speed on your company.  Also, you might be presenting your telecom company to a 6-person team where 3 people are telecom experts and the other 3 have only superficial knowledge.  These kinds of meetings present challenges as some people want to go deep and others are at 50,000 feet.

Make sure you discuss this expectation with your sponsor before the meeting.  Understand how knowledgeable the room will be around your industry and your product and importantly – agree a plan with your sponsor on how to play the meeting.  Getting his / her buy-in to your approach is important as they can help you steward the meeting in the right direction.

I would normally recommend you address the issue early in the meeting with the group to set expectations.  I would try a line like, “I know that some of you might be social media experts and others may be less deep on this particular area.  My plan would be to start the presentation at the 50,000 foot view and then dive down to a more granular level once we’re all base-lined.  Does that sound ok?”

This last question is important.  You need to let the energy of the room guide you.  If people want to go straight to details then staying too high level will also irritate people.  But … watch out.  If one vocal person blurts out, “just give us the details, we all know social networking” don’t assume that person speaks for the entire room.  It’s a delicate situation but I recommend saying something like, “OK, that sounds great.  Happy to do that.  Just to check – does everybody feel comfortable going straight to details or does anybody want 2 minutes on the basics before our deep dive?”

I’m surprised in sales situations (and believe me, raising money is a sales process) how often the presenter takes direction from the most vocal person who usually speaks first.  They don’t always speak for the group.

Regarding information asymmetry – take me as an example. I’m no dummy on businesses that are in the financial services sector, but my 3 partners have been investing in the space for 20 years so I’m clearly on a different level.  30% of our last fund went into deals in this sector.  My partner, Brian McLoughlin, attends almost all Financial Services conference, makes a number of investments in the space and has relationships across the sector.  His immediate focus when these companies present is an order of magnitude more detailed and knowledgeable than mine.  In our current portfolio 3 or his 4 investments are in the Fin Svcs space.  But when you present to both of us you still need to keep me in the dialog.  Vice versa is it’s a SaaS platform company where I spent nearly 10 years running companies.

2. Scoring an “own goal” – The most common mistake is one I’d call scoring an “own goal.”  It is when you’re in a meeting and somebody throws out a question that is a slight “red herring.”   They were thinking of the question as you were speaking and they blurted it out.  This happens often is sales meetings or VC meetings.  Some presenters take that as a challenge to inform the person who asks the question about everything the presenter knows on that topic.  What started out as an innocuous question asked purely out of interest can become a total time waster if it’s not pertinent to your storyline that you’re trying to convey.

I saw this happen recently with a VERY polished presenter (and somebody we’ve decided to take to the next stage so it obviously didn’t kill him) but he felt compelled to answer every question asked at great length even when not that important to the overall picture and it was quite distracting to the flow of the meeting.

Use the lesson I was taught many years ago: A, B, C (answer, bridge, communicate).  Answer the question, bridge back to what you wanted to originally talk about and then get back to communicating your messages.  Warning: you need to determine whether questions are really “red herrings” or truly something that the group wants to explore.  If it’s the latter – you can’t move on.  2 quick tactics:

- it is acceptable to say, “did I answer the question thoroughly enough for you?”
- if you’re pretty sure it’s a Red Herring then simply say, “that’s a great question. Do you mind if I answer that a little later in the presentation?  I have a few slides later that address that.” (obviously if you say that you need to come back to the question either later or after the meeting. tip: write it down when asked / parked)

3. The “Detail Merchant” – The third thing you need to worry about in a group presentation is the “detail merchant.”  This is the person who wants to ask you the most detailed questions about every aspect of your business – sometimes details that aren’t relevant to the group getting a good picture of your market opportunity, your team, your competitive positioning, etc.  Sometimes they do this out of interest, sometimes it is to show the group how smart they are and sometimes it’s just because they’re a nudnik.  I’ve experienced this in many sales meetings I’ve made and unfortunately in many VC pitches I made.

These are the bane of many sales meetings but there always seems to be one – even when well intentioned.  The problem with letting the detail merchant take over a big meeting is that they’re driving the meeting toward their agenda and not yours.  More importantly, they’re often driving the meeting to an objective that doesn’t meet the needs of the other participants in the room.

It happens to all of us at VCs – usually in a mild, benign form.  Sometimes I find myself really interested in the technical details of a companies product and after a few questions on the topic I look around and find my partners disinterested in this line of questions.  Other times I find them wanting to know the details of one component of a business before I have understood the market landscape and I’m screaming inside my head that I want to understand the overall concept before the deep dive.  It’s different than a “Red Herring” in that it’s not an irrelevant question it’s just that you’re getting too detailed before the group as a whole understands the complete high-level picture.

Whatever the reasons you need to be conscious of this.  Here’s how to deal with it:

- first, you must always answer and acknowledge the question. Do this be repeating it and writing it down.  “You want to know about the terms of the deal we signed with CBS and the reaction of their new VP.  Let me write that down.”
- If you can answer at the highest level you should.  “The new VP is very supportive of us – we’ve met him three times.”
- As with the Red Herring question you must “bridge” back on the main storyline of your presentation.  You say, “It’s an important topic.  If it’s OK with you I’d love to answer it in just a couple of minutes after the next few slides.  I think the context may be easier.  Is that OK with you?”
- That last question is key.  If they say, “no, I’d prefer you cover it now” then you must.  You can allow a detail merchant to drive you down 1 or 2 rat holes because you need to meet their needs.  But you need to be sure that you’re not meeting their needs at the expense of everyone else.  You need to have a relationship with your sponsor that after 2 rat holes you’ve agreed with him / her that he’ll help you bring the meeting back to a level that’s appropriate for everybody.
- If the detail merchant is really persistent you might try the line, “If you have a few minutes after our presentation or later today I’d love to come back and give you all the details you’d like. I have tons of information I’d be happy to share 1-on-1 with you.” Sometimes that works.

Allowing one partner or one executive in a sales pitch take you down a rat hole might ruin the overall flow of the presentation for the group it it’s entirety.  As both an entrepreneur (in VC and sales meetings) and as a VC I’ve seen this happen many times.

4. The “Naysayer” – Another difficult situation you can run into is the naysayer.  It’s the person who is always flinging out the skeptical question at you like, “Google could easily do this,” “how can you ever get mass adoption on a tool like this” or “not another social network – just what the world needs.”

Naysayers are difficult to handle because they set a negative tone for the room.  I talked about a situation where this happened to me when I was raising money in Silicon Valley for my second startup.

I find with naysayers is to acknowledge the issue they’re negative but to not discuss it in depth.  “I understand your concern about Google.  It’s obviously something we’ve spent a lot of time thinking about as well.  The short answer is, ‘we believe that our niche focus on backing up documents in the financial services sector will mean that their more generic approach of being a platform won’t be a competitive threat for the segment of the market we hope to serve’ but I’m very happy to have a much more detailed dialog with you at the end of the meeting or one-on-one afterward if you’d like.”

Please don’t get me wrong – some questions you will be asked that are challenging your business are totally legitimate and need to be discussed.  I’m mostly talking about when you get what is clearly in your perception questions asked in a hostile tone or that sound negative / dismissive – especially if they persist from one single person.  Judgment from you on the day as to which scenario it is will be very important.

If they persist the room will be aware of it and will start to discount the person as long as you handle it professionally.  Unfortunately if you “take the bait” and seem defensive it normally just makes both of you look bad.  The other great thing about the “cover it later” approach is that it gives you an excuse to all on this person later one-on-one afterward and build a relationship.  Why not follow up after the meeting and ask whether you can come see him directly to show him some data you have.  Any excuse to build a relationship with the naysayer and turn a negative into a neutral.

But the overall advice is similar to the detail merchant – you can’t let the naysayer take your agenda off course or everybody else – including you – loses.

5. The “Silent Partner” – The final mistake that I see many people make is not engaging the “silent partner.”  Just because somebody doesn’t speak up and challenge you in your meetings doesn’t mean that they won’t be against your company / idea when the internal discussion happens.

As a sales person it’s your job to flush everybody out and find out what their thoughts / feelings are.  In a positive way, of course.  The best tool for engagement is the question.  If you notice a partner that hasn’t spoken or seems to not be paying attention (hopefully not on a Blackberry!)?  Get them involved!

Find a way to ask them a pertinent question and ask for their point-of-view.  “Bob, if I’m not mistaken you have some experience in social games through your involvement with EA.  I know that mobile is slightly different but how do you see this space playing out?”

Work the room, folks.  Whether in sales or in raising VC these are often group decisions.  You need everybody engaged, everybody knowledgeable about what you’re doing and you need to get all issues / risks in people’s minds out on the table and in the open.  This will only happen through your asking questions, listening to what each person is saying, writing down key notes and testing with the group whether you have understood all of their concerns.

I was recently in a meeting with a company that had met 2 of my partners twice before our meeting so my partners’ knowledge was already much deeper than mine.  I didn’t ask any questions in the meeting because they were already going too deep relative to my knowledge.  After the meeting the CEO came into my office and asked if I had 5 minutes.  We spent 30 minutes together.  He got all my issues on the table.  I thought, “brilliant.”  He gets it.

Information asymmetry, detail merchants, naysayers and silent partners are all potential landmines.  You’ve got to learn how to deal with group dynamics to avoid presentation rat holes.  All that said the next step is the most important.

6. Pre-Meeting Prep – So much of your performance in the big meeting is tied to the preparation you put in before hand.  It’s so important that it’s going to be the topic of an entirely separate post.  But for the sake of completeness in this post – before you arrive at a big meeting you need to know in advance: who will be there, what their views are, how they normally act in meetings, what the relationship is between individuals and whether they’re knowledgeable about your space.  Just winging it on the day is a much lower probability outcome.

You can only do this if you have a “champion” on the inside.  Make sure you’ve spent enough time with your sponsor in advance of the partners’ meeting that you feel confident they’ll advocate for you on the day.  One sign of whether they’re truly supportive is how well they help you prepare for the big meeting.

Last night I attended the inaugural Open Angel Forum event started by Jason Calacanis, a fellow LA resident.  Jason started the Open Angel Forum in response to his frustration that entrepreneurs were being charged by some angel organizations to present at their events.  He wrote an excellent blog post on this topic.

As a former entrepreneur, I’m a big supporter of Jason’s goals.  Asking young companies with limited capital to pay to present to a group of potential investors is insane.  Yet many would-be entrepreneurs feel that they don’t have enough access to investors and that the opportunity to present to a group will help them short circuit the fund raising process.

This can be true if it’s the right event, but most of these events suck.  And frankly one of the skills of an entrepreneur is figuring out how to get access to people that they don’t know and one of the ways that potential investors (like it or not) can judge one part of your skills is in seeing how you use ingenuity to gain access.  If you want some tips on getting access I wrote a post on how to access VCs but the same logic applies to angels.

The event last night in Los Angeles was great.  Local angel investors totaled 18 people including Matt Coffin, Brett Brewer, Kamran Pourzanjani, Jarl Mohn and many others that young entrepreneurs would be blessed to work with.  Also present were NorCal angels including Ron Conway, Chris Sacca and Shervin Pishevar.  It was also great to spend time with the founder of TechStars, David Cohen, who will head up Open Angel, Boulder.

5 companies presented for 7-8 minutes each followed by Q&A.  2 of the companies were immediately interesting to me and I have already followed up with next steps, which I guess is testament to Jason’s goals of making sure that high quality, early-stage companies get funded.  In my next post I will write about one of the five companies.

Jason plans to set up Open Angel chapters in many US cities and eventually internationally.  My only suggestion to Jason would be to emphasize more of the presenting companies being local.  I think most great angel investing is done at a local level.  At the earliest stages of a company you want to raise money from people local to you because distance = their time, attention and focus.  And that’s really what you want.  It was great to meet some promising companies from outside the area but 4 out of 5 wasn’t the right balance for me, personally.

There was some Twitter chat before the event about whether this “replaces” local angel funding communities like the Tech Coast Angels.  It does not and that’s a good thing.  While TCA has had it’s challenges (and updating your website certainly wouldn’t hurt your image, guys. Seriously, it kinda stinks) it is a legitimate funding source for Southern California entrepreneurs and has produced successes including GreenDot and MyShape.  We don’t need competition – we need more overall organizations like Jason’s to helping young entrepreneurs more easily reach angel investors with no payola.

Hat’s off to Jason – you’ve started something important and of great substance.  I look forward to tracking the progress.

Oh, and hats off to Tyler Crowley and Alex Miller, the magic guys who really do much of the work behind the scenes to pull off these great events that Jason dreams up.  They deserve more credit.

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 VCs and Corporates 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!)

This is part of my ongoing Raising Venture Capital (VC) series

Yesterday I had lunch with a really interesting and capable serial entrepreneur who is raising his A round.  The topic of  ”strategic” investors came up.  It felt like Groundhog Day because I have this conversation again and again – literally dozens of times each year.  And I had 2 “strategic” investors in my first company.

So I thought I’d try to lay out a framework for how you should think about it as many you will inevitably be faced with this experience.

What is a “strategic” investor and why do you keep putting the word “strategic” in quotes?

When people refer to a strategic investor they are usually talking about an investor that comes from the industry you serve as opposed to an independent venture capital investor.  I put strategic in quotes because they are often anything but “strategic” and thus the term can be an oxymoron.   Many serial entrepreneurs who have been burned would use something less kind than quotes.

But they’re promising to massively increase my uptake, they’ll give me huge legitimacy and maybe they’ll buy me some day?

Yeah, I know.  And Microsoft always convinces me that their next version of Windows won’t be slow and I get fooled every time.  When they promise to help you with marketing, sales, distribution, integrated product development, etc. it sure is tempting.  And they probably have every intent of helping you.  But the venture guys don’t make the calls on what the product / business guys  do.  The reality is that their core business is not venture capital.  So push comes to shove they will be driven by their core business (as they should be) – not the $5 million they put into your company.  You are the tail, not the dog.

OK, so maybe they won’t be helpful. Most VCs aren’t either?  What’s the difference?

Great question.  It’s true that many VCs over promise how helpful they’ll be with introductions / strategic advice / recruiting, etc.  But this is benign.  Strategics can have some negative impacts:

1. You’re not their core business – their interest will swing more wildly with the markets
When times are good “strategics” want in.  They’ll pay up for it and promise much.  When times are bad many cease investment activity all together.  OK, I know this is true with VC also, but to a lesser extent.  Investing is our core business.  We have nothing else to revert to.

2. They value their core business more than your success – and they should!
I saw this directly.  I had two strategics in my first company.  One was the hardest working guy on our board and the biggest mensch.  He was also chairman of a $6 billion company!  I loved working with him and learned much from him.  He tried his best to balance his needs and ours.  He was a needle in a haystack in that I think he really cared about my success.  He also wasn’t the venture guy – he was the big cheese.  But even he would feel conflicted when I had to cut the engineering team because he valued our product more than his investment.  When we wanted to sell the company he was very hesitant because he didn’t want somebody to buy us who might not be a good steward of the product going forward.

The other strategic was a train wreck.  One month after investing the guy who invested left his firm.  The guy who took over said, “I never believed we should invest in dot com’s.  I will be on your board but don’t ask me for anything.”  He literally said it that bluntly.  His words were an understatement.  He fought me for 3 years and actively worked against our interests – I think to spite the guy who put in the money.  I struggled to get every signature or consent.  The market knew he was an investor yet he wouldn’t promote us within his own company.  You can imagine how that made us look in the German market where his company is a big deal.

In retrospect he was right for his business but it sucked for me.  Keep that in mind when you’re thinking about ’strategic’ money.

3. Many strategics have less experience in helping entrepreneurs
Another big question you’ll want to answer is whether your strategic investor has a long history in investing in startups.  How have they behaved in good times and bad?  Make sure to reference check with other portfolio companies.  I often talk about why you want “smart” money (yes, I use quotes because I know it’s not always as smart as it promises to be).  But working with VCs means you’re working with people who deal with entrepreneurs as their career.  When you deal with doctors or dentists for angel money, for example, you’re dealing with people who don’t.  The same can be true with strategics.  So make sure you know what the team and what the individual is made of.

4. Many strategics have bureaucratic decision-making processes
One of the problems in working with corporate entities is that the venture arm doesn’t always have an autonomous decision-making ability.  As a VC I need to get buy-in from my partners when tough stuff comes up.   But I only have 3 of them and they spend every day dealing with these kinds of situations.  Imagine your investor has to call the CEO of a $20 billion company for approval for your merger or sale.  Fun.

5. You may struggle to land their competitors as your clients
So you took money from the largest player in your industry.  That’s awesome because you now have credibility.  But guess what – number 2-10 in the sector now you view as an agent for the evil empire.  It will be much harder to get deals done there and may drive people to your competitors.  I know that you’ll tell them that BigCo owns less than 20% of your company.  Remember, they’re not venture investors.  They don’t see it that way.  They see you as an extension of their competitor and that all information will flow to the corporate parent.

6. You may find that when you want to sell your company it is harder to get a fair price
See point 5 above.  If you thought it was hard to sell your product to the competition try selling your company.  Yeah, I know it happens all the time.  But for an M&A department that is already super busy they don’t want to be seen as a stalking horse for the company that owns 20% of you so sometimes they don’t even want to bother.  Plus, many acquisitions happen when you are already partnered with the company so you may have to get beyond the hurdle in point 5 before getting to this step.  So if you ask many bankers they’ll tell you that there’s a “discount premium” that you’ll get at the time of the sale as a result of having a strategic.

So should I ever consider taking money from strategic investors?

There are times where strategic money makes sense.  I personally recommend it in the following situation: When you have your A round and/or B round done, the business is progressing well and you’re not early stage.  That way the strategic isn’t as involved in the early-stage messy stuff when you need to quickly change direction when your strategy isn’t working and need to get more funding rounds done.

There is a second reason I recommend this.  You can often get 3 or 4 strategics to invest alongside each other and then nobody sees you as an extension of another company.  You may not get fierce competitors to co-invest but perhaps you can get enough closely related companies that you don’t have the branding problem I’ve spoken about.  Also, you have more leverage to not take them all on as full board members.

You may also do your due diligence on the firm you’re talking to and find that they’re an outlier.  You may find that they’ve been investing for 15 years, their entrepreneurs love them and they’re entrepreneur friendly.  So if you get good feedback just make sure that you understand the framework above to think about how to best mitigate your risks.

Are any strategic investors better than others?

Yes.  There are many funds that are associated with corporation that are structured as proper VCs.  Three examples where I know the teams personally, respect them and have heard great feedback are: Steamboat (Disney), Comcast Interactive Capital (CIC) and Intel Capital.  I’m sure there are many more.  What I’d point out in all of these firms is that they have had a long view of the VC market, they are pretty independent from company decision making, they aspire to make money on the fund rather than fuel their core business, they are structured like VCs and therefore attract A-quality people and none of them over promise that their company will ‘make you.’  As a result the market knows this about them and doesn’t view them in the same way.  They are strategic with no quotes

Where can I go for help?

Try VentureHacks, The Funded or OnStartups- three great communities to tap into other entrepreneurs and ask them for their experiences.  Oh, and maybe a few of you will meet me in the comments section to discuss your experiences.  I’d love to get the debate going.  And if you know any great strategics please list them.  I’d love to give them some recognition.

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 (after the jump):

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