VCs on Series A Valuation

May 30, 2014

venture-capitalI had the pleasure of attending a daylong symposium at Dartmouth College last week, Dartmouth Ventures. One of the panels featured these prominent VCs speaking about “Financing 102- After a Seed Round.”

Ned Hill, Managing Director- Mercury Fund

Steve Bloch, General Partner- Canaan Partners

Liam Donohue, General Partner- .406 Ventures


This was a fairly cut and dried panel except a few things stuck out:

On the subject of how to find the right valuation, I was expecting to hear “the market sets the price” and “we look at similar transactions” and the other basic VC valuation tools. However, what I heard was a discussion about “What’s fair?” “How much money the company needs” and “backing into the right ownership.”

Of course, the right ownership is up for debate and the subject of much friction between investors and entrepreneurs. The implied definition of “right” in this case was high enough to provide meaningful incentive for the entrepreneur but also low enough to provide a large stake and significant returns for the venture fund.

The other really interesting part during the discussion of valuation and the preferences that investors get through their Preferred Stock. One VC talked about the idea that “management has an implicit preference” relative to the investors and other stockholders. This refers to the “Liquidation Preference” that virtually all VCs insist on- namely, that they get their money back out before the common shareholders.

The concept of an “implicit preference” (and this is somewhat advanced for 1st time entrepreneurs) is that in a liquidation or exit scenario, the management team needs to be taken care of. So as much as the VCs rights allow them to get their money first, potentially taking all of the exit price, this doesn’t really happen in practice. The buyer will take care of management, often making them whole, since management is needed to run the company and extract the value for the acquirer. This “implicit preference” of management could trump the actual legal preference that the VC gets through Preferred Stock.

The implication from the VC panel was seemed to be that founders don’t have nearly as much downside as it would seem on paper. And that the VCs felt justified in asking for somewhat lower valuations, and higher ownership positions, as a result.

What do you think?


Financial Plans for early stage investors

October 30, 2013

This is a follow up to my prior post ‘Do you need a Financial Plan to Raise Seed Capital?’

I had a number of entrepreneurs ask me what I meant when I described investors wanting to see that the entrepreneur understands the levers of their business. Specifically, people have asked about the “levers” of your business. Simply put, the “levers” are the critical factors that make your business run.

In an Internet media or SaaS company, they might be:

  • Arrivals (consumers or B2B prospects who land on your web site)
  • Conversions (number of people who sign up for your site)
  • MAU, DAU (Monthly active users, Daily active users)
  • Monetization- How do you (plan to) make money from your users? advertising (CPM, sponsorship), premium subscriptions (% who subscribe, price point). What are the assumptions here? Are they reasonable given other similar businesses?
  • Churn- how many users leave the service
  • Marketing Costs- how do you get users to know about you? Paid advertising? SEO? Social media? Costs of development? Costs of advertising?
  • Sales expense- If you’re a SaaS business, do you plan to use sales people or are you freemium? If you use sales people, what will you pay them? How long will they take to ramp up? What quota will they carry? Will you upsell these customers? David Skok of Matrix Partners has written some great, in-depth blog posts about SaaS scaling here.

There can be a ton of complexity if you allow it. To reiterate a point from the prior post, the point is NOT that you have a complex 5 year financial model. It will certainly be wrong, and investors know this. The point is that you have a handle on the KEY metrics that will allow your business to grow rapidly.

Do you need a financial plan to raise seed capital?

October 16, 2013

In addition to working in growth companies, I also mentor a number of entrepreneurs. One question I am asked often is “Do I need a detailed financial plan to raise seed capital?”

It’s an interesting question and one I will answer, but it’s actually not the right question. The right question is “Do I need to understand the financial levers in my business, and my current planned business model (or a few variants) when I talk to investors?”

The answer to that question is unequivocally “yes.” Investors, even seed investors who are investing in you and your crazy idea, want to know how you are thinking about turning your idea into a business. 

So to answer the first question, the answer is no you don’t need one. It’s probably a waste of time to have a complex financial model by month with multiple tabs. (I had a detailed model, but that’s because I’m an analytical person and I wanted to be sure I knew how we might be successful.)

Many entrepreneurs I speak with don’t have a detailed five year projection. They do, however, have a good sense of where the seed money is going to go (something almost every investor wants to know).

I think most early-stage investors know that projections are BS. But they do want to see:

-how you think about the business

-if you understand various levers for generating revenue, AND eventually generating profit

-your level of financial acumen

So you probably can skip the 5 year projection, but don’t skip the spreadsheet altogether. It’s the thinking behind the model that may help convince your prospective investors.

Finding the RIGHT investors

September 23, 2013

I recently went through a low point, a crisis of confidence in our startup’s plan, the team, and myself.

Anyone who has been through startups knows that this happens in the seed phase, often multiple times. (As an aside, I am amazed at how few people admit it.  Everyone else seems to be “crushing it.”)

After multiple phone conversations, I had a Board sit-down meeting where I led the board through a number of alternatives. Our seed stage VC was such a voice of calm reason, helping to guide the conversation and helping me to see the big picture.

It struck home with me how lucky I am to have this VC investor and mentor.

While I know he has a duty to look out for his investment, I never felt that he was doing so during this conversation or the follow ups. What I felt was his concern, guidance, and empathy.

So entrepreneurs, do heed the guidance of those who tell you to do your due diligence on your investors- check with other management teams how your investors have acted when things are not going well. It will give you a sense of what support you are likely to get when you go through it.