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Marc Andreessen, Ron Conway and Ben Silbermann on “How to Raise Money”

HIPLegal is hosting a brown-bag lunch series for entrepreneurs, to watch and discuss videos of an exciting educational series, “How to Start a Startup.”  Sam Altman, President of Y Combinator, is teaching this series as a class at Stanford this fall and is making the classes available online. Along with guest lecturers like Marissa Mayer, Peter Thiel, and Ben Horowitz, he will be covering the fundamentals: how to come up with ideas and evaluate them, how to get users and grow, how to do sales and marketing, how to hire, how to raise money, company culture, operations and management, business strategy, and more.

HIPLegal is holding a weekly brownbag lunch to view and discuss each session on Wednesdays from 4:00-5:30 pm at our office (20195 Stevens Creek Blvd., Suite 250, Cupertino).  We watch one video per week (50 minutes) and then hold a discussion for about 40 minutes.  We brainstorm ideas, bounce them off each other, and refine them over the course of the series.  This is a 20 session program that should be a great program for anyone who is in the process of starting a company or is thinking about one day diving into entrepreneurship.  The full curriculum and the videos to date are here.

Please fill out the survey here and let us know if you are interested in attending the series with us.

Session 9 – Marc Andreessen, Founder, Andreessen Horowitz and Founder, Netscape, Ron Conway, Founder, SV Angel, Ben Silbermann, Founder & CEO, Pinterest, “How to Raise Money.”

Takeaways (speakers’ comments intermixed):

Leadership

A founder must have super focus and be obsessed by the product.  Investors want a founder who has personal investment in the product and company.  They want to know: What inspired you? What personal problem did you encounter that your product solves?  Founders also must have strong communication skills.  Founders must be decisive – procrastination is the devil in startups.  And, they must build a great team that can execute.  It helps if you are a “born leader”…

Founders need to be able to pitch their company and product in one compelling sentence.  This is something you should practice, and have down cold.

When looking for funding, “Be the Twitter guy” and raising money is easy.  Basically, the product is so good that they can’t ignore you (to paraphrase Steve Martin).  Make your business, not your pitch, better.

Find good co-founders.  The mark of a successful company (e.g., Airbnb) is that all founders are just as good as each other.

The Business Side

Bootstrap for as long as you possibly can.  If you give away too much of your company early, you will not find investors, even if the idea is very good.  You will also guarantee that you will lose control of your start-up.

Raising money is the easiest thing you will do.  It is not a milestone – it just enables you to do all the other things, which are much harder.  Convey operational excellence in your business plan.  When things go well with an investor, document it in writing (note: VCs will not sign NDAs) – if an investor commits to something, send a confirmatory email.  Investors have short memories, and the investment isn’t real until the check clears.

There is an “onion” theory of risk and funding: on Day 1, all you have are risks (founders, products, technical, etc.) and no money.  You peel away those layers of risk through funding and achieving milestones.  By doing so, you justify raising more money, removing additional risks, and achieving additional milestones.  And, the cycle continues…

Startup pic

The Investor Perspective

SV Angel’s Perspective:  For seed funding, SV Angel looks to invest $1-2M per investment.  About 1 in 30 companies will get funding (about 1/week).  At this point, their investment leads come through their network, not cold calls.  The process involves a short executive summary on the investment opportunity, a vote on whether to make a phone call, a phone call (assuming a positive vote), a meeting (if the phone call goes well), background checks on the company and market (if the meeting goes well), and then a commitment to invest.  If you get a call from them, it’s a very good sign, and you are on the path to funding.

For Series A funding, typically the company will have already been through a seed financing round.  It is rare for a company to go straight to Series A (unless it is a serial founder with a relationship with the VC firm).  Andreessen Horowitz receives 2000 referrals each year – the best come through seed investors (take-home message: carefully consider who you want your seed investors to be, as they can open doors for you later).  Seek the funding you need and no more.

What is the maximum percentage of your company that you should sell for funding?  For seed funding, 10-15%; for Series A, 20-30%.  VCs are more ownership-focused than price-focused, so don’t give away too much ownership in the seed round.  At some point, if you’ve given away too much, the founder and the team will lose control, and be demotivated.

The VC business is a game of outliers and exceptions.  In any given year, there are roughly 4,000 venture fundable companies.  About 200 will get funded by a top tier VC firm.  About 15 of those will get to $100M in revenue.  Those 15 will generate about 97% of the returns for that category of venture capital that year.

VCs look to invest in strength rather than in lack of weaknesses.  Companies with extreme strength may have serious flaws, but may still get funded because of the extreme strength.

Avoid investors with no domain expertise, with a rolodex that is not useful, or who are in it just to make money.  Investors should be investing for life, and should bring something other than money too.  You want to respect your investors and choose investors you can learn from.  Trust is very important.

Conflicts for VCs are most significant in their opportunity cost.  Typically, VCs look to invest in only one company per category.  Every investment locks the firm out of the category.  Investments also tie up the time and bandwidth of the general partners of the firm – they can only sit on about 10-12 boards.

When things go well, founders are in control; when things go badly, investors are in control.

We will skip this Wednesday’s viewing – Happy Thanksgiving!

On Wednesday, December 3rd at 4pm, we will watch Session 10, Alfred Lin, Former COO, Zappos and Partner, Sequoia Capital and Brian Chesky, Founder, Airbnb, “Company Culture and Building a Team.” Sign up here if you can join us.  Email contact@hiplegal.com if you’d like to participate by phone.