Raising VC with Mark Suster
One of my favorite bloggers right now is Mark Suster, founder or Koral and author of Both Sides of the Table blog. He’s a seasoned entrepreneur-turned-VC and his blog covers all topics relevant to today’s entrepreneur. As a VC, he’s definitely a guy to listen to if you’re looking to raise money, and even if you’re not.
Mark recently posted about raising venture capital and included a link to one of his early posts he wrote during his early days at Koral (which he subsequently sold to Salesforce.com).
Here is Mark’s full “eye-openingly truthful” encounter with venture capitalists in the Bay area:
Venture Capital, By Mark Suster (December 2nd, 2006)
Can it really be a month since my last blog posting? Tempus Fugit. Well … I have had many late nights and I really didn’t contemplate writing many blog postings this month because I spent November in this interesting venture capital / fund raising dance involving lots of late night sessions reviewing legal documents, rewriting business plans and preparing for pitches. We have also been very busy with our next release, which is due out by December 11th (but I’ll save that for a different post). And I guess I have a penchant more for longer blog postings than frequent ones.
So for anybody who has been through the funding process before I hope that this will resonate and for those that haven’t I hope it will be interesting. I don’t plan to write the authoritative venture capital blog, just some anecdotes. If you are interested in reading good blogs about venture capital my favorite two are VentureBlog and Feld Thoughts.
Anyway, the starting point for this blog entry is a cartoon I remember reading in the New Yorker. The picture was of a man in a doctors office that was really irritated. There was a clock in the picture that was set to 9:30. The caption showed the man saying sternly to the receptions, “I had an appointment with the doctor at 9 AM” pointing to his watch. The receptionist replied, “Yes, your appointment with the doctor was at 9 AM but his appointment with you isn’t until 10:00!” Thus is venture capital. You have an “hour” to pitch in your first meeting. It is usual for the partners to stroll in 20 minutes after your appointment so at best you have 40. Prepare to give your pitch in 30 including Q&A. Don’t be frazzled … this is just the way it is.
So far at the company I have raised seed funds of $500,000 of which $470,000 is still in the bank so I’m in pretty good shape. We started building the product 18 months ago so we are in better shape than 99% of start-ups. But nonetheless is takes capital to build out a successful enterprise and I’m not sitting on a pile of it myself. Thus begins the venture capital dance.
The first attention we started getting was after we launched the company publicly at Demo on September 25th of this year. A number of VC’s stopped by our booth or watched our demo on the DEMO website and we had about 5 proactive inquiries. After Office 2.0 we had about 25 firms contacting us – more than I could manage. The first VC I met with came from attending DEMO. A gentleman had stopped by our booth multiple times and then wrote me immediately after the conference and said that I “HAD to come and meet with his partners the very next week.” Okay. Sure.
I arrived at 12:50 PM in the afternoon, 10 minutes before my start time. I have raised capital 3 times before so I knew the drill. I set up my laptop, connected to the Internet, opened the compulsory 15 page PowerPoint deck and waited for my adoring fans. 1:20 and they turned up like clockwork. Only the thing is, only 2 of the 4 partners showed – we were waiting for the other 2. So I did what one does in this situation – I made polite small talk. I wasn’t feeling it. They looked nervous at having to speak with me impromptu and without the benefit of financial figures to scoff at, product pitches that they’ve seen 100 times and a market sizing to unpick. I’m not trying to imply that all VC’s are socially inept – that’s not the case. But these two certainly were. It got worse.
The third member of the meeting showed up and they sure looked relieved. We all sat down but still had to wait for the fourth. I broke the silence, “so, where do you guys live? Is it a long drive into the City (San Francisco) for you?” They answered politely but behind their words they were thinking, “what kind of idiotic question is that?” as they awkwardly answered that “it wasn’t too bad driving up from Palo Alto every day if one leaves at the right time.” Then, just in the nick of time, 30 minutes past the hour, the straggler turned up. So I was back in the business of pitching to VC’s – a bit like riding a bike I guess.
I started by trying to think I could explain my concept without having to patronize everybody with artificial PowerPoint slides. I thought, what would I do if I was trying to sell to a customer. My plan: verbal 5 minutes to explain the business then straight to product demo where I could cover all of the concepts that would have been in my 2-by-2 charts in my deck. Doh! Dare I steer off the course from the tried-and-true PowerPoint ritual? This approach generally works well with customers because I find it much easier to build rapport when we talk like humans than when we all stare at the PowerPoint slides being projected on the wall.
I was immediately reminded that they were interested in seeing the slides as the main partner who had courted me at DEMO in San Diego shuffled nervously through the print outs of the slides I had sent him in advance. All I kept thinking was, “if you made me send the slides in advance then why the fuck am I now going to spend 10 minutes talking you through them?” I was wrong. “Slides, please.” Okay. This is going well.
Page 1: Market Size. $3 billion industry. Not well penetrated. We’re set to change it. Here’s why those who came before us did not succeed. Man in back of room (the plonker who was 30 minutes late) is now on his Blackberry. No joke. Late and not even the courtesy to listen to me. The partner who said we “must meet this week” is shuffling through his papers and not listening to me either. Partner 3 is listening intently and partner 4 is looking patronizingly at me waiting for the killer question about how on Earth I was going to beat Microsoft.
Page 2: What’s unique about Koral. Experienced and serial entrepreneurs in the content management space. Folksonomy. Consumer approach to software for business users. Viral. Free product. Web service architecture that provides a content management platform for the Internet. Distributed version control model – first in the industry like ours and we are filing patents.
Page 3: Competition. Page 4: Business Model. Page 5: Financials. Page 6: We already have several pilot customers including a very large, unnamed software firm.
Aren’t they tired of this ritual? Well, in this company’s case, yes. Blackberry man is probably asking his girlfriend where to meet for dinner. Gotta-meet-me man is thinking about some other deal. Condescending man keeps jumping in with curveball questions so I am not able to get into the flow. Intent man works for the wrong company. MAN … get out of there!!! Don’t you guys want to see the product?
I start in with the product. Intent man and condescending man love it. We start getting on famously. They are engaged in a beautiful dialog about market adoption and why they have problems managing their documents since they store everything in Outlook. Then, with as much attention as my 3.5 year old son, they promptly tell me that they have another call and leave the meeting at 10:50. Sorry. Couldn’t be helped.
So I’m stuck with the paper shuffler and the Blackberry man. I am not kidding you when I say that I was on the verge of literally saying, “let’s just call this meeting a day. It’s clear you have no respect for me and no interest in my company.” I bit my tongue (which my wife will tell you is rare). I finished the next 15 painful minutes and said goodbye. My only regret … the $25 I had to pay to park in their building. They were seriously the most pompous, self-centered, unprofessional group of people that I have come across in a long time. I went to back to their website and unsurprisingly there were no great companies I had ever heard of. I later learned that they were a spin out from an investment bank. It all made sense. They were not “real” VCs.
Well I am happy to report that it was mostly smooth sailing from there. While I did have many more circumstances that I found frustrating (one firm showed up 35 minutes, apologized because they were trying to vote on whether to fund another deal and then a partner turned up 25 minutes later and kicked us out of the room because he had a conference call) in general I found the process very rewarding. We received a lot of positive accolades on our vision and our product. I visited 14 VC’s, got 8 call-backs for second meetings, had 6 firms indicate an interest to explore an investment and possibly submit a term sheet and 3 companies actually say they were ready to write a check. The other 3 are still pending but since I am close to agreeing a term sheet it doesn’t make sense to pursue things at this stage.
Biggest lessons …
1. people universally said to focus on the SMB market (SME in UK parlance) and MAYBE divisions of corporations. But not one VC thought I should go after big, enterprise clients. I had planned a balance of large companies and SMB/divisional sales but have changed my thinking. Reasons: cost of sales executives, long sales cycles, deep functional requirements.
2. the smartest guys I met in the process said I really needed to focus on customer adoption / usability. Most people agreed that if you had a document management need and were willing to load your documents into our system it was one of the most usable products they had seen. But how do you convince millions of people that need to be educated that they have a document management problems to upload their documents in the first place? We have invested heavily in this. People said, “invest more.” Making user adoption incredibly simple and shortening the time to a light going off in the user’s head that they see the value is critical in driving viral adoption. Think LinkedIn.
3. People were mixed on how much money we should raise. I only want to raise $2.5 million and some people believed ardently that we needed to raise $5 million. I guess it was unsurprising that the people who were sure we needed to raise more money tended to have very large funds. We want to build the company slowly and pragmatically serving the needs of our existing customers.
4. I met a lot of really bright people that were passionate about and experienced in helping entrepreneurs build successful businesses. I think good VC’s really do make a difference. I look for firms in which some of the partners (my partner) have operational experience and know what it’s like to wake up every day and be an entrepreneur. I have raised capital in the past from European firms and from US firms. There is really no other place in the world like Silicon Valley. The amount of experience that exists in these 40 or so miles is phenomenal. I was a bit humbled by some of the companies that were funded by the people that I had met.
5. My partners Tim Barker and Ryan Lissack are both absolute superstars. Tim handled the product management, vision, roadmap and competitive questions like a pro. Ryan was my savior when it came time for questions on how SOLR clustering works, why Postgres was more suitable to us than MySQL and why aspect-oriented programming was delivering us benefits in the development process.
I look forward to the next phase of our business. We will hopefully close on a $2-3 million financing round at some point in January and I can get back to the full time work of running my business. I can get back to sleeping by midnight and posting blogs more frequently. The venture capital process is a necessary and informative experience that is not for the faint hearted. It helps one refine your business focus and share ideas with some of the brightest minds in the industry and be challenged by people who have seen every eventuality in the type of business you want to build. But … I sure will be glad to get back to being a full-time CEO.
END OF ORIGINAL POST
Prologue:
The managing partner of the venture firm called me the day after they were exposed on the front page of Valleywag. I was nervous and mortified. He was a gentleman. He apologized and said that their firm had learned from the incident. He vowed to make sure that his colleagues never behaved like that in a startup meeting again. He handled this perfectly. Here’s the link to the Valleywag teaser article (they have since purged the full article).
Andreesen’s advice to Old Media: Burn the Boats
In a recent TechCrunch post, investor Marc Andreesen talks about old media.
Legend has it that when Cortes landed in Mexico in the 1500s, he ordered his men to burn the ships that had brought them there to remove the possibility of doing anything other than going forward into the unknown. Marc Andreessen has the same advice for old media companies: “Burn the boats.”
Yesterday, Andreessen was in New York City and we met up. We got to talking about how media companies are handling the digital disruption of the Internet when he brought up the Cortes analogy. In particular, he was talking about print media such as newspapers and magazines, and his longstanding recommendation that they shouldshut down their print editions and embrace the Web wholeheartedly. “You gotta burn the boats,” he told me, “you gotta commit.” His point is that if traditional media companies don’t burn their own boats, somebody else will.
Andreessen once famously put the New York Times on deathwatch for its stubborn insistence on trying to save and prolong its legacy print business. With all the recent excitement in media quarters recently over Apple’s upcoming iPad and other tablet computers, and their potential to create a market for paid digital versions and subscriptions of newspapers and magazines, I wondered if Andreessen still felt the same way. Does he think the iPad will change anything?
Andreessen asked me if TechCrunch is working on an iPad app or planning on putting up a paywall. I gave him a blank stare. He laughed and noted that none of the newer Web publications (he’s an investor in the Business Insider) are either. “”All the new companies are not spending a nanosecond on the iPad or thinking of ways to charge for content. The older companies, that is all they are thinking about.”
But people pay for apps. Wouldn’t he pay for a beautiful touchscreen version of a magazine? Maybe, if it were something genuinely new that blew him away. It would have to be more than an article with video and graphics though. (I agree, otherwise it’s no better than a CD-ROM).
Oh, and he points out, that the iPad will have a “fantastic browser.” No matter how many iPads the Apple sells, the Web will always be the bigger market. “There are 2 billion people on the Web,” he says. “The iPad will be a huge success if it sells 5 million units.”
Despite trying time and again, Andreessen’s observation is that media companies have no aptitude for technology, nor do they really understand what technology companies do. The one thing technology companies do really well is deal with constant disruption. “Microsoft is going through this right now,” he points out, “Ballmer is not complaining about it.” He’s tackling it head on. So did Intel when Andy Grove gutted it to shift from memory chips to microprocessors. So does every technology company CEO. It is ingrained in the industry Andreessen comes from, so it is just obvious to him: “You are cruising along, and then technology changes. You have to adapt.” Media companies need to learn that lesson fast. To the extent that their products are now delivered and consumed as digital bits, they too are becoming technology companies.
Beyond the iPad, he believes that all the talk once again from big media companies about erecting paywalls or somehow charging for news, articles and video online is shortsighted at best. He comes back to the simple fact that the open Web is where the users are. Talking about paywalls and paid apps is like saying, “We know where the market is and we are not going to go there.” Print newspapers and magazines will never get there, he argues, until they burn the boats and shut down their print operations. Yes, there are still a lot of people and money in those boats—billions of dollars in revenue in some cases. “At risk is 80% of revenues and headcount,” Andreessen acknowledges, “but shift happens.” You’d have to be crazy to burn the boats. Crazy like Cortes.
Bands, tours, partnerships…and tequila!
My good buddy from high school is in a band. This has been his life’s work, and his life’s dream, and I KNOW that if he is tenacious and consistent, the dream will come true.
The band is touring for the next two months, up and down the Midwest, South, and Northeast. They had looked at different avenues to fund tour costs, and they decided on a sponsorship with an organic Tequila company. I actually want to call it a “partnership” because they emphasized they are partners, not sponsors.
Its a quarterly partnership, meaning the band receives money every three months; half the money at the beginning of the quarter, half the money at the end of the quarter. The partner also has the option to renew after each quarter, assuming results are good.
I would imagine results consist of “product placement.” They want to see their tequila in bars and clubs. The band pushes the product and becomes unofficial salesmen at each stop. Another facet of the deal is exposure. As a touring band, or any band, perception is your livelihood, and then of course great live shows. But you need to be careful about being a salesman for something other than your music. Some bands can do it, they can push a green initiative or an awareness program, but I think those work because they are philanthropic.
So have we stumbled across a new business model? I’ve mentioned “crowdfunded” music projects and the profit sharing/stock market dynamic. But this new model joins two parties, with complimentary goals and assets and lets them work for each other.
Assuming you find a partner with the same values and goals, this is viable option. It is a challenge to manage and balance promotions between two entities, some will succeed and some will fail. I know this band can do it, because they have to.
Crowdfunding and the Recording Industry
Tim Kappel, Loyola University New Orleans law student, submitted a paper to the Entertainment Law Initiative (ELI) last spring. The paper discusses the growing popularity of “crowdfunding” music projects and the legal issues it presents. Crowdfunding it basically like the stockmarket for bands. You chip in $10, you own a piece of the band. Investors are usually rewarded with perks that can include free albums, backstage passes, etc. The sites focused on this model: Slicethepie, Sellaband and Bandstocks, all vary when it comes to terms of the deal, length of exclusivity, and licensing rights, but they all share the same business model.
The legal issues addressed in Tim’s submission include conflicts with Internet gamblign laws US Securities Laws. Click on the link below to read the full paper.
Check for Trademark
Here’s a post from the IP Law 101 Blog. I thought it provided good insight into WHEN a company should start looking at trademarks. Sooner rather than later!
Picture this…Some friends and I decide to start an internet business and we choose a catchy and SEO friendly name. We invest money into start-up operation costs. We purchase the domain name, legally incorporate, obtain business bank accounts, hire personnel, create a logo, and order marketing materials. We send out press releases and obtain investors. We are ready to go. We realize this is a hot concept, so we want to obtain trademark protection for the business name and identity. We hire an attorney to assist with obtaining trademark registration and he discovers the name is already trademarked by another company. Yikes!
Unfortunately, I see this scenario very often in my practice. When choosing a business name or identity during the start-up phase, most business owners simply do not think about trademark registration. However, in my legal opinion as soon as a business owner chooses a company name a trademark search to assess the availability of the name or logo should be done immediately. Taking this proactive approach can save a new business from wasting dollars on a name and/or identity they can not own. Furthermore, if a trademark search clears a business to register the chosen name, logos, or other brand identifying material, the business should immediately file for a trademark to claim ownership of the mark. Very often individuals tend to infringe on company and or trademark names if they see the potential in its success! Remember, the first to use the name in commerce is the priority trademark owner!
Here are a few trademark search tips I recommend when starting a business and choosing a company name.
1. Do a preliminary search on Google to ensure that a trademark right has not been claimed in the company’s business name;
2. A preliminary search on Google will cost mce_marker. However, Google will not find viable and valid trademark rights of companies that are not on the internet or do not have active advertising and marketing campaigns. To fully ensure your company is not infringing another trademark owner’s rights, a more comprehensive search can be done.
3. Hire a trademark attorney to perform a comprehensive search. A comprehensive search will include:
* A search of the USPTO database, all 50 states trademark databases, company names that have incorporated with the state, trade names, the Copyright Office database, and the internet.
* If you plan to sell your product or service in another country, you can also obtain an international search.
* The cost of a comprehensive search for a name only starts at $550.00. However a search performed for a logo and name, starts at $950.00. International Searches do require much larger fees.
There are several companies that perform comprehensive searches. Here are a few:
CT Corsearch.
CompuMark
4 Trademark.com
These companies gather the information but do not analyze it or ensure your trademark is not infringing. A trademark attorney can analyze the contents of the search and give you a legal opinion regarding the availability of your mark.
Entertainment Lawyer Peter Dekom on “Everything”
The video features Peter Dekom, one of the most powerful dealmakers in Hollywood, discussing all things entertainment. His deep knowledge of finance and business make this an exceptional look at change in the worlds most visible market.
Yelp.com: Race to the Courthouse
Online reviews site Yelp.com got hit with their second “extortion” lawsuit today. The suit, claiming Yelp removed positive reviews from D’Ames Day Spa’s page, was the second of its kind filed against the compan in the past week.
Yelp CEO Jeremy Stoppelman explicitly denies the claims, and wrote a blog post in response to the suit titled “Different Day, Different Lawyer, Same Meritless Claim: The Classic Race to the Courthouse.”
These copycat suits get filed in what is known as a “race to the courthouse,” where lawyers jockey to be named the lead lawyer of the case and take the biggest share of legal fees, beign among the first to file a suit increases the chance of being put in charge of the case.
The suit claims that Yelp removed 13 or 14 positive removes about the Day Spa. Stoppelman writes that the Spa has admitted that it solicited the reviews in question, white the site has repeatedly instructed businesses not to do.
Read the Complaint via Scribd: LePausky v. Yelp
The Hip Lawyer 