“The Secrets of Unlocking Access to Venture Capital – as a Career or for Funding” with Ravi Belani, Venture Capitalist and Instructor at Stanford University
by Dan Galatin
March 2012 Event
Ravi Belani, a venture capitalist and instructor at Stanford, presented at the March 7th meeting of the SVPMA. Mr. Belani discussed techniques for gaining access to VC funding, understanding term sheets, and even transitioning to venture capital as a career. He focused on providing information that is not readily available on the web but stemmed from his own experience as a venture capitalist at Draper Fisher Jurvetson.
Fundraising pitches should include certain common elements such as information about the team, the target market, and the product. In general, there are two ways to pitch: based off of potential or off of existing product traction. The biggest factors for attracting Series A fundraising are the team and the market. Pitch decks should be short (no more than 12 slides) with an appendix.
The size of the fund you pitch to should mirror the exit outcome you expect. For each investment, the VC needs to return about 1/3 of the value of their fund. It is not worth trying to raise money from a large fund that doesn’t match the size of the outcome you expect, since your incentives will not be aligned with the VC’s. It is worth pitching to a variety of funding sources (large VCs, angel investors, and strategic investment funds), since different types of sources will be interested in different types of markets at any given time. The advantage of getting funding from VCs is that they have reserves to provide additional cash if required.
In some ways VC is a job with a lot of authority but very little direct responsibility – arguably the opposite of product management! VC is not an industry, but a consortium of a few core decision makers managing a large amount of money. Each firm has developed its own culture, but overall VCs are all “hunters” psychologically. The odds of getting funding are low, but VCs tend to want to learn about all opportunities out there. VCs think about what advantage they have in investing in a given company over other VCs. Therefore, you should appear like “healthy prey” that the VC wants to chase, and demonstrate that you have attracted a lot of attention from funding sources. Before simply approaching a VC firm for a second meeting, try to find another source of funding, demonstrate a significant milestone, or demonstrate product traction. Remember that the entrepreneur’s greatest asset is the restricted opportunity for VCs to invest in the company.
As an entrepreneur, you should try to unearth the biases of the firms you are pitching to: is the VC focused on the team, the product or the market? VCs will be considering whether they like you and can work with you for the next several years: are you passionate and yet coachable? VCs often judge the fit around the entrepreneur’s vision and personality, more than tangible, objective criteria. The best way to approach VCs is through a trusted shared connection. It’s worth shooting high and approaching the managing director of the fund, and keeping the fundraising process short and intense to demonstrate interest within the VC community.
In Series A funding, the valuation is a function of the ownership needs of the VC and the amount of capital the company needs (typically for the next 18 months) – not anything having to do with the intrinsic value of the company. For Series B funding, the company will be valued based on its results and typically need to have a step up (ideally 3x) from the Series A valuation. As part of understanding the term sheet, one should be aware that the employee pool usually comes out of the founders’ share of company. Other funding terms that entrepreneurs should pay attention to include vesting schedules; board composition and control; terms for paying back the investors (liquidation preferences); and rights the VC has to sell stock at the same price as the founders.
Finally, Mr. Belani recommended that if you’re interested in becoming venture capitalist, act as if you’re fundraising: attract the VC’s interest by knocking on a lot of doors, but not get attached to any one opportunity. Demonstrate interest by sharing reports and analysis with the firm. The best way in is to become a successful entrepreneur and become a VC later on!
Dan Galatin has 19 years combined experience in product management and software engineering. He is currently a Senior Product Manager at Keynote Systems and can be contacted at email@example.com.