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.

The “Hoosiers” Guide to Startup Success

November 13, 2012

ImageBasketball season is upon us. I am a big basketball fan and I also coach my kids’ teams, so I am pretty attuned to the change of sports seasons. As both a coach and a fan of the college and pro games, I am pretty psyched.

As a coach, I am starting to think about what my practice plans will be, the offense and defense, how to teach and drill but still keep it fun.

One of the great things about basketball is that the game has flow and rhythm, it is not just a series of plays that start and stop like football and baseball. One of the keys for me in coaching is to teach the kids how to read and react to situations to keep things flowing. Most baskets are not scored from the initial play but from a reaction to the defense or by being opportunistic, like getting an offensive rebound.

As I reflected on it, I was struck by the similarities between basketball and startup success:

You need a great team to achieve success.

Stars make it much easier to win, but only if they blend in to the rest of the team. (See the 2008 Celtics team for proof of that)

You can win without stars (or beat teams of stars) if you execute perfectly. The movie Hoosiers shows us that.

No matter how good your plays or your plan, reacting to the situation is more important. Plan B, C, D and beyond are crucial. This is why the best offenses are not about running a play, they are about a framework for scoring. Plays and systems are just guides, ultimately you need to think on your feet and react in the moment.

All teams need to play offense and defense. Strategic planning is often about thinking “what if” enough times.

All players can improve skills and fundamentals to help the team win. Teams get better when individual players get better.

Tenacity and scrappiness can take you a very long way. In basketball, rebounding and getting a loose ball often make the difference in winning. In startups, you get told “no” a lot more than yes—from customers, investors, friends, you name it. But the most successful entrepreneurs power through all that.

Early Stage Business Development

October 19, 2012

Rob Go of Nextview Ventures had a blog piece about basic marketing for start-ups that I thought was pretty accurate and it prompted me to think about doing something similar for business development.

So here goes, directed to startup founders and early stage CEOs.  What is business development for startups, really? You think you should be doing it but you’re not sure exactly what it is or means.

1. What are your objectives?

You are severely resource constrained, but partners and alliances can be a very powerful accelerator for your business. This is because you probably don’t have a huge sales team, and some potential partner already has the customers you want. By working together with them, you may be able to acquire those customers more quickly and without the need for a huge sales team.

  • Find channel partners to produce more revenue
  • Make your product more salable by integrating it with the other pieces customers will want
  • Find other products to sell along with yours (you control the customer)
  • Find an acquirer (usually starts with one of the above), also called “date to marry”

2. Who is your team? Do they have the skills? Do they have the time? How are they compensated? Many times, CEOs ask sales people to take on this task and there are a number of reasons why this can backfire. It can also work great if you carve off dedicated resources, give them a different time frame (business development deals take longer than other deals), and a different compensation plan.

3. Prioritize your possible partners

There are a ton a possible partners out there, and your board and advisors will be throwing more names at you (“You guys should partner with XYZ Corp.”) Be brutal in prioritizing based on the factors that mater most to you, either revenue impact, market share, brand name, etc.

4. Outreach- like a sales pitch

This IS sales, so prepare like it. Get a warm intro to the partner if you can. Know what your value-add is to the partner and what your company will do for them. Do your homework. Have a special pitch prepared that is different from your normal pitch.

5. Structure

Start with a basic term sheet, but be conscious that you may want to replicate this so be wary of highly beneficial terms like exclusivity, equity, market standoffs, “most favored nation,” and the division of effort between the two companies required to get the products to work together

6. Tools & Process

Know how you plan on tracking the leads that come in, either your system, their system, or both. You may need to change your CRM or other tools.

7. Revenue generation

You may be joint-selling, but most likely one company will be primarily responsible for turning leads into paying customers. Whichever that is will need marketing and sales support, product marketing, training, pricing, dispute resolution, etc. They will need a “go-to” person or people for all of these things. Typically this is a Relationship Manager. It may be the same person who closed the partnership, but it may not. This “down stream” activity is THE key difference between BD and sales and why great BD people can wear so many hats.

8. Assessment

How is the partnership doing in generating awareness, leads, and revenue? How much has each party invested? Has each party done what they said they would, when they said they would?

9. Rebalancing your efforts

Periodically, it makes sense to think through your biz dev strategy and look at all of your partners. Certain partners will be more important than others. Make sure you treat them that way and be prepared to terminate those that don’t perform, or at least to allocate fewer resources to them.

Done right, business development can be a huge accelerator to early stage companies and provide important leverage to your overworked team.