Where do I start?
Talk with everyone you know. This is a relationship business, and you will be surprised by who knows whom. Get feedback, and determine which venture capital firm's investment criteria focuses on your industry.
You're looking for “smart money”, money that can help you, not just fund you. Everyone’s money spends the same, the key that entrepreneurs must look for are investors who will be valuable in assistance, guidance and relationships.
What are the stages of Venture Capital?
There are 5 stages of venture capital: Angel, Seed, Follow-on, Mezzanine, and Bridge Loans. The assumption is that valuation will increase through each stage and risk will decrease.
Angel Stage: Primarily friends and family members
Seed Stage (or 1st Round): First investment by professional investors
Follow on Stages (Rounds 2-x): More rounds of professional money
Mezzanine Stage: Last expected round before an IPO
Bridge Loans: Money that is loaned with the expectation of converting into equity at the next round of financing, usually with a discount to the per share price
For any company, a drop in valuation between rounds is disastrous. When valuations do not increase, it means that the management team did not execute according to plan. This also means that future investors will be less likely to invest, given that the potential of the company is now in doubt. A fair valuation at each round is critical. If you get too much in one round, you will be in a far worse situation with follow-on funding. Thus, it is important to get a fair valuation for your company at each stage.
What is a fair valuation?
A fair valuation balances company ownership with potential execution value. When the entrepreneurs and employees own too little of the company, there is no longer an incentive to work hard.
Understand that a good investor group will never want to cut down good entrepreneurs or an employee force to less than 1/3 of company ownership. In this day and age, the employees are the ones who will make the company execute. Without them, the investors are left with a piece of paper, and a whole lot of unusable raw materials. Investors are looking to own part of a huge pie, not the majority of a small pie, and certainly not a failure.
Pre-money? Post-money? What are they?
Pre-money is the value of your company before the investment is made.
Post-money is the value of the company after an investment is made.
POST-MONEY = PRE-MONEY + INVESTMENT AMOUNT
How much money should I ask for?
Look to get enough money to validate the next stage of your business. This is advantageous to both the investor, less money is at risk, and for the entrepreneur, there is less equity being given away.
How should I calculate valuation?
The potential of the opportunity, the management team, and how much value the current investors bring combine to determine valuation.
The only fair way to determine this is by a 3rd party transaction; but since we don't invest in a company that is about to be bought, we have to take similar metrics and apply them to a particular company.
When using another company to base your metrics, however, you're falling into the success bias. Only the companies like yours that have survived are available to use as metrics. And of those companies that have survived, only the successful ones are the ones for which you will have access to the metrics and numbers. So realize that while you may be along a similar path as an E-bay or an Amazon, there are hundreds of other companies on your same path that have died off. Investors have seen a lot of similar companies, and have invested in some of the failures. Their point of view will be tinted towards a holistic view of the space.
What is the key element in the value of my company?
The company is worth part of the potential of the company, but mostly, its value lies in what you have already achieved.
The more risks you eliminate, and the more you achieve, the greater the valuation on your company pre-money. Between the idea and the execution, the execution is much more valuable. With the web, ideas are spreading rapidly. When you sit down with an investor, you can be confident that 5 other meetings are being held at the same time, with the same idea being discussed. Thus, the idea has little value, it is the execution which matters most, and execution will determine which group will be successful.
What are the criteria for Draper Triangle investments?
In general, we look for high gross-margin businesses in large markets, not narrow niches and we place heavy emphasis on a great management team.
We are looking for entrepreneurs who want to change the world. Our portfolio "sweet spot": Internet of Things, SAAS, Robotics, Mobile, actionable Big Data,and Med Devices
We like to keep an open mind and consider unique opportunities. However, we will not invest in areas where we cannot be helpful. Shops, metal bending plants, chemical processing plants, these are examples of areas with which we have no experience. These are are areas in which we will not invest.
Read more about the specifics of our investment criteria.
How much of the company should I expect to sell?
There is a range, depending on several factors. In general, the more stable the company, the less you need to give up in terms of equity.
How mature the company is, where you are in development, and what partnerships you have established all combine to influence how much of the company we feel we require to secure our partners' investment.
Potential counts for something, but execution, and delivering on potential is what investors are looking for. The more you have already delivered, the better off you will be as a company, and the more investors will want to give you their money.
For risky ventures, it's not unheard of to give 50% of the company in the first round. For a company that has established the partnerships and validated the technology, less is possible.
Will the VC take over the Board?
Venture capitalists will want to protect their investment, especially at the high risk, early stage of the company, but even so, majority board control will be rare.
A good VC will want to protect his company, and will need the ability to make things happen. However, every VC knows that it's the entrepreneurs who run the company, not the investors.
Board size should be small -- the last thing you want is too many people interfering with the company. Ideally, a 5-member board is enough for a small company. Look for a 2-2-1 breakdown. Two people from the company, 2 VC investors and 1 3rd party who is chosen by both sides. Ideally, the 3rd party should have industry knowledge, and be the person to break the ties in the best interests of the company -- not the investors, and not the employees.
How much time do you spend with portfolio companies?
We all have start-up experience, and we give as much assistance as necessary to make the investment successful for both of us. We try to make sure you're a home run.
What is the process to get an investment at Draper Triangle?
There's a process for everything and securing financing is no different. Generally, we follow an 8-step plan for making investments.
The typical process goes as follows:
Business Plan Review
Management Team Presentation to Principals
Evaluation of Opportunity
Principals Meet to Discuss Opportunity
Initial Term Sheet Discussions
In-depth Due Diligence
Final Term Sheet
At any point, events may arise that can disrupt the investment process. But we realize that the entrepreneur still has a business to run, with or without the investment, and we try to disrupt that business as little as possible.
When events occur to upset the investment process, we try to respond as quickly as possible. We understand that a fast "no" is better than a long drawn out process where the entrepreneur and investors keep meeting to no avail.
To get started, submit your business plan to us electronically.
Do you sign NDAs?
No. Signing an NDA provides too much risk to the investor, and truly, the disadvantages of an NDA outweigh the benefits to the company seeking funding.
It hurts the entrepreneur by preventing the investor from talking to others who know more about the space than he does. The type of advice and questions that need to be asked are the same pieces of information that fall restricted under the NDA. So there are few advantages, and a great disadvantage for the company when an investor is unable to talk about the company due to a signed NDA.