I Took The Techstars 'Venture Deals' Course So You Don't Have To (Part 1)
Here's what I learned about the world of venture capital
Part 1: Welcome to Venture Deals
Techstars collaborated with Kauffman Fellows on the free, “Venture Deals” course to support startups with knowledge about raising capital and how investments work with early-stage entrepreneurs. It’s based on the Venture Deals book written by the Co-founders of Foundry, Jason Mendelson and Brad Feld who is also the Co-founder of Techstars. The course was open for a short while and applications are currently closed but I took it and I’m going to share a quick breakdown with you.
Part 2: The Expert
The course is taught by six experts: Brad Feld, Co-founder of Techstars and Foundry, Elliot Robinson, partner at Bessemer Venture Partners, Miriam Rivera, co-founder and MD at Ulu Ventures, Nicole Glaros, Chief Investment Strategist at Techstars, Jaclyn Hester, partner at Foundry and Jeff Harbach, President and CEO of Kauffman Fellows. What a lineup, right???
Part 3: The Ecosystem
This part of the course explains the roles and people within the ecosystem and the best practices for investor engagement. The first step to engaging with investors is deciding how much money you are looking to raise and what you will do with the money. Next is to decide where or who to go to for the money. Here is a list of fundraising options:
Friends and Family
Entrepreneurs / High Net Wealth / Family Offices
Angel Investors
Incubator/Accelerator
Corporate Venture Capitalist
Venture Capitalists (Micro VC Fund / Seed / Mid Stage /Late Stage)
Limited Partners / Institution
The instructors also emphasised the value of learning everything you can about the VC firms you’re reaching out to, to understand their values and how they align with yours.
Two thought-provoking questions we were asked to think about and write out:
For you, and your team, what values do you want to align with your investors?
Besides a big check, what qualities, connections, and support are you looking for in a lead investor?
Other important players in the venture game are legal counsel. Startups who are fundraising should have a lawyer/counsel and this person should not be a family member or friend who has never done a deal in the venture capital space. You should also choose someone who knows the key terms that matter to most investors and who understands the market you play in. Essentially, your legal representative should be a good representation of you and your company.
Before reaching out to investors, there are some steps to prepare your company for the fundraising process.
The first is to build a data room that contains the necessary data, such as financial documents (projections, valuations), customer validations, marketing and business plans and other important business documents. The second is to put together a pipeline for investors, to properly target the right ones for your startup.
Some documents to include in your data room are:
Legal contracts
Investor pipeline
Founder agreements
Investor pitch deck
Employment agreements
Executive summary
Vesting agreements
Business plan
Demo
Financials
Beta test data
Financial model
Private Placement Memorandums (PPMs)
Sales and marketing plan
Product analysis and data
Information about how much you're raising and how you'll spend it
Information about the company
Short-pitch messages at various lengths
Investor Engagement Best Practices
Some best practices for engaging with investors during the fundraising journey:
Do your research.
Be intentional. Don't mass email investors, tailor your message to the individual.
Build relationships, not transactions.
Be clear on how much you want to raise, and be prepared to justify the amount and provide details.
Only raise the amount you need.
Manage your emotions. Don't let the investor perceive you as desperate, and keep your emotions in check during meetings.
Be authentic.
Deliver on your promises.
Avoid asking an investor to sign an NDA or emphasize patents.
Understand that no often means no. Try not to take it personally.
Always be honest and transparent. Don't lie.
Speak up if you witness or experience bad behaviour.
Part 4: Preparing to Fundraise:
“..you’re either fundraising or you’re running your business, you cannot do both simultaneously” — Nicole Glaros.
Having this in mind, here are some questions that were recommended to prepare for fundraising:
Why do I think I can generate 10, 15, 20x returns to my investors?
What does the exit for my business look like?
How long do I want to run this business?
What's your fundraising option? What type of financing are you leaning towards for your business? Why do you think that would be the best approach?
Investors are generally looking for large returns on their investments. According to the statistics, 7 out of 10 companies in every investor’s portfolio will lose all their investments. So when you engage investors, they are likely accessing your company based on the possibility of huge returns to make up for their other losses.
So in order to increase an investor’s confidence in your startup, it’s helpful to be able to show structure, in the form of a data room, and any traction you have been able to achieve without funding.
Fundraising Options
Convertible Debt - CooleyGo
What You Should Know About Safes - CooleyGo
Venture Debt
Venture Capital
Stages of Venture Capital - SVB
Corporate Venture Capital
• State of Corporate Venture Capital Report - SVB
Mariam Rivera also discusses Corporate Venture Capital, which essentially is taking a venture deal from a large corporation. This kind of deal typically happens when the corporation operates in a similar or adjacent space and could potentially use your product.
Three questions to consider before taking a CVC investment:
Is your technology a fit for that company?
How do they make their decisions if they are financially motivated?
How will taking their money impact future investments and the construction of your board?
Investors typically have a fund cycle that’s broken down into five phases:
Fund Formation: the fund formation phase will set up the fundamental aspects of the fund to be made operational.
Raising Capital: this is the phase where fund’s operator(s) start to raise capital from investors.
Investment period: this period is the most active in the fund’s cycle because it’s when the capital is put to use i.e the fund begins to build its portfolio and disburse capital.
Divestment: this is the transition period to liquidate the fund.
Liquidation: In this period, all investments are sold off and all proceeds are distributed.
Some questions to ask prospective investors as part of your due diligence:
Where are you in the fund lifecycle?
What is the length of your fund?
Can you tell me more about the fund you're working with now?
What type of investments are you planning on for the remainder of this fund - what size checks?Are you raising another fund - if so how soon do you plan on closing?
What percentage of the time do you follow on with a 2nd and 3rd investment?
For more context, read portfolio construction by Ulu Ventures.
Valuation
A valuation is the estimation of your startup’s worth and it determines how much money anyone with a stake in the company will reap when they exit.
Recommended valuation communication strategies for entrepreneurs:
Understand how valuation is viewed across the venture ecosystem and in your market
Clarify if it’s pre- (value before the investment money) or post-money (value after the investment money) when you’re offered a verbal deal by a venture capitalist
Don't name your price first or early
Never lie about an investor being in your round when they haven’t committed
Have a Plan A and Plan B in mind and know when to walk away
If you really like an investor, but they are the lowest price, be open and talk with them to see if they can raise their price
The highest price, may not be the best value-add investor, you have to identify what's important to the growth of your business.
Additional Resources
Balancing the Art of Valuation With the Science of Dilution - Techstars
o Blog
o Video (1 hour).How to Talk About Valuation When a VC Asks -
Both Sides / Mark Suster
Cap Tables
A cap table is a document, like a spreadsheet or a table, that details who has ownership in a company. A typical cap table would contain ownership of all stakeholders including employee options.
Employee Options
Employee stock options allow employees to buy a piece of your company at a discount in exchange for their dedication and commitment. This is a way to compensate employees, especially when you can’t afford to pay the market rate or at all.
However, there are factors to consider when building the employee options part of your cap table:
What employees are you looking to add with this next raise?
What does ownership look like for your executives?
How much ownership has been issued to employees?
How much ownership will be reserved for issuance?
How fast are you planning on giving ownership? And to what levels of employees?
These questions are important because investors can learn a lot about a company by its cap table. If the cap table is very long because of previous owners, and/or the terms are restrictive, it can deter new investors so it’s important to keep a clean cap table.
"Don't just understand your cap table today, the best thing you can do is add that column (on your spreadsheet), go look at what that Series A would look like, and play it out before you fundraise." - Elliott Robinson.
Additional Resources
• How to Create a Cap Table & Cap Table Templates - Carta
• How to Tell the Story of Your Startup's Cap Table - SVB
• Sample Cap Table (Simple) - CooleyGo
• Startup Cap Table Management - LTSE
• The AVC Cap Table Template - AVC / Fred Wilson
Here are some more resources shared within the course:
How Venture Capital Works - Harvard Business
ReviewThe Ladder of Proof: Uncovering How VC's See Your Startup - NFX
What Do Professional Investors Do to Mitigate Risk When Investing in Startups? - CV Capital
I really hope this helps you as it has helped me. In my next post, I’ll share the learnings from the second half of the course. As always, rooting for you and see you on the other side of success.