"surviving after investment", 6th and final part of the series "six steps to venture capital"

a successful venture capital investment into a start.up is a big step. having taken this hurdle, it is all now about staying in the game through fulfillment and transparency.

this is the final and sixth step in the series about approaching venture capital, where the systematic approach to acquire venture capital for a start.ups is discussed.

after the motivation got sorted out in step 1, the a-b list of potential investors in part 2 (part 2.1, part 2.2) got filled. the battleground was prepared in step 3, and how to approach venture capital in part 4 (part 4.1, part 4.2). the art of negotiating was the focus of part five (part 5.1, part 5.2). finally now it is all about surviving after the investment.

the entrepreneur has to be prepared to fulfil what he promised when searching for investors. the ultimate consequence of not doing so is simple: losing her job and/or the shares in company.
under-performance in revenues, product delivery and cost discipline lead to additional cash requirements, speaking vc investments. such a „down round“ (lower valuation then in the first round) is mainly done by the first investor. only some start.ups survive this without changes in management and none without the founders loosing substantial shares.

this in mind, a less ambitious company valuation and reachable key metrics (revenues, expenses, cash flow) can lead to a more desirable outcome for the founders already in the mid-term. in vc-language: increase in company value compared to the investment date.


being a start.up, it is evident that not all goals aimed for or promised get reached. ultimately the investor always finds out. many start.ups think they do not - but they always do. from customers, unsatisfied employees and latest when the company runs out of cash.

rather then „performing“ in board meetings transparency is key for survival. no investor, no advisory board member shall ever get surprised in a board meeting (link sun tzu). setting up a three to four week „one-pager“ reporting schema, outlining the good and the bad is one way. involving the investor in a „srum“ like company development process another. demanding input and such giving responsibility to the investor is crucial.

through fulfilment and transparency the so called „shit meeting“ can be avoided. this is the first meeting between investors and start.up after the investment, when the difference between the investment story presented and the reality come to the surface.

recommendation: 1) only promise what can be fulfilled, 2) fulfil what got promised and 3) always be transparent.

this „six steps to venture capital“ series is a guideline on how to get investor on board. every start.up is different, no product, market, investor or founder is alike.
it needs a compelling business opportunity and a thriving start.up team combined with a structured approach and some luck. then venture capital investments are just another task to work on.

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"negotiations" part 5.2 of the series six steps to venture capital

the negotiation process is key for a good contract. in "negotiations" part 5.1 of the series "six steps to venture capital" the general framework got laid out. in part 5.2 it is all about the details.

key points first

time line, term sheet, contract. in that order. never avoid any critical topic at the beginning. they will sooner or later surface anyway, so they shall be dealt with directly.

know the aims
it is vital to know the aims of the negotiations before they take place. the negotiation team has to decide beforehand what they aim for and how much compromise is acceptable.
one way to do that is to sit down for half an hour, discuss, decide and write down the aims to visualize and remember. then destroy the paper, as it must not be seen by the vc by any accident in the meeting afterwords. this holds for each separate meeting. no-one alone compromises the agreed terms in face of the investor. if a rethinking of the agreed aims is necessary, a break out session is necessary.

break out sessions
they are a common way to take speed or emotion out of tense negotiations. every party gets time to rethink, to cool down or to gather required information. start.ups can co-ordinate their negotiation aims. whenever necessary break-out. rather one break out session too much than having agreed to anything without realizing what it means. having experts on stand-by is recommended.

experts on stand-by
lawyers, technical experts, general advisers or friends are source for support during negotiations. they are to be informed ahead so they can be reached when required.



know the terms
drag along, take along, liquidation preference, right of first refusal, pre-post money valuation, milestones, catch-up, pay to play, ratchet, signing-closing, advisory board, due-diligence,... they all can be looked up. e.g. on investopedia or wikipedia. this is investment language, nothing really complicated about. one just has to be able to deal with them, know them by heart and be able to „play“ - meaning negotiate on the different aspects - them.

tiredness
bad negotiation results can not be excused with tiredness. if necessary take break outs, get food, go scream on the balcony - whatever is necessary. then get back and keep negotiating hard.

socialize
vc are (also) humans. they have hobbies, family, worries, hopes. they are like everyone else. avoid the hawks through checking their references (discussed here).

heart & hard
being respectful and friendly is key. negotiating hard at the same time is no contradiction. not only for the negotiations and the daily life after with vc. it also holds for customers, suppliers, sales partners or employees.
at the end of a long negotiation process both parties are supposed to be unhappy with the results - but still happy to have closed the deal. with the negotiations finalized and vc money injected it is all about fulfilling and surviving. more on why it is necessary to deliver in the upcoming sixth and final part of „six steps to venture capital“.


recommendations: 1) define aims: time line & term sheet key elements, 2) take break outs, 3) have experts on stand-by and 4) know the terms.

in the final part of the series six step to venture capital read on how to survive after the investment. clearly not a trivial task.

"negotiations" part 5.1 of the series six steps to venture capital

finding the right vc is difficult. getting a good investment deal is worse. though with the right preparation, much can be done to achieve a result, which is mutually favorable.

this is the 5th part of the "six steps to venture capital" guide, where the systematic approach to acquire venture capital for a start.ups is discussed. after the motivation got sorted out in step 1, the a-b list of potential investors in part 2 (part 1, part 2) got filled. the battleground got prepared in step3. now it is all about bringing home the money.

experienced investors will take advantage of unprepared start.ups. therefore key topics have to be covered before going into the actual negotiations. to know more about strategy and preparation, see sun zi, moltke and douglas adams for start.ups. basically every contact with the vc can be considered as part of a negotiation process.

overall
time line - term sheet - contract signing & closing are the cornerstones of vc- negotiations. after the 2nd meeting the vc should have figured out the idea, market, business model, competition, exit channels and team - the investment story of the start.up. that done, it is all about nailing down a deal. that´s the same for the potential investor as for the start.up.

time line
the time line outlines the time frame from the beginning of the negotiations until the money flows. agreeing on the time line is rather non controversial and allows to get know to each other. simple does not mean irrelevant. by committing to a time line (especially) the vc has to reserve resources, meaning money.

term sheet
next thing is the term sheet. using common (non lawyer) language, all the important topics of the investment get outlined in it. it is basically a multi-page text document which both parties sign. example see here. whatever key topic relevant to the start.up or vc has to be part of the term sheet.
struggling for compromise is part of this process. moving key topics to be solved „afterwards“ or through proposals of lawyers in the final contract often leads to late break ups. thus involving high lawyer bills and wasting weeks of negotiations. typical time line to reach a term sheet is four to eight weeks. every party covers their own costs. granted that the negotiations were successful, it´s then about fixing a contract.

contract
the final contract gets drafted on the basis of the term sheet. it should merely be a reformulation in lawyer-language. a common lawyer between the vc and the investee reduces costs. based on a well negotiated term sheet, it rarely leads to a break-down of the investment process. the paperwork can produce contracts between 35 to 100 pages.

the costs are typically covered by the start.up after the investor injected money. a maximal allowance for the cost should already be settled in the term sheet, anywhere around thirty thousand dollars/euros. anything above is to be covered by the respective parties.
time line for the contract should be four weeks. two weeks for signing and another two to four weeks for closing finalize the process.

giving the general line (term sheet - contract signing & closing), there are some topics which deserve an in depth coverage, like knowing the terms, break-outs or tiredness.
this will be covered int the upcoming part two on "negotiations" of the series "six steps to venture capital"

linktip: for the MIT 100k participants: executive summaries

updates start.up financing mindmap

the european business angel network and the european venture market are now @ the start.up mindmap.

the members area of the european business angel network gives an european wide overview of business angel networks in the respective member countries. e.g. germany has four listed business angel networks.

the european venture market takes place for the 11th time. registration for entrepreneur is open. time & location: 19th & 20th of may 2009, berlin. prices for entrepreneur presentations are 450-535€.

"approaching venture capitalists", part 4.2 of the series six steps to ventture capital

at the 2nd round meeting it goes along the same lines as on the first round. know your pitch, stick to your talking time. know who answers which questions. do not correct each other giving answers.

now it is time to hand out your references. and again: set up the schedule (yes or no, negotiation schedule, term sheet, final contract signing-closing). this tests the real interest of the vc, namely through assigning resources for the evaluation. having mastered the 2nd meeting, this either leads to a „no“ or a jump directly into the negotiation part. this will be the next part of the series.

having reached the 3rd round brings one positive problem: the vc´s approached until now were form the b-list. the leanings form the presentations and meetings will pay off, through refining the approach, the pitch. based on this, it is then time to go ahead on a-venture firms. keeping the b-vc as back up can be helpful.
following the same procedure as outlined above it is about making it to the 3rd round with two a-vc. the main difference now being, not to learn & to improve but getting qualified a investors.

there remain some side topic on approaching vc, which are worth looking at: timeframe, lawyers, costs, consultants and exclusivity.

as a general time frame, 6 month from the start of approaching vc until closing an investment are a reasonable timeframe for europe. 4 month are more seen in the anglo-saxon world.

lawyers are generally only necessary after drafting the term sheet. until then common sense suffices as singning anything which would cause obligations on the start.ups side are not necessary.

until a term sheet is signed, no costs of any kind should be accepted from the start.up by a credible investor.

if any kind of corporate finance/m&a,... -consultants which promise to bring investors to the start.up are involved, special care is required. upfront payments may sound plausible but as cash is a scare resource, only success fees should be accepted, based on real cash inflow on the start.ups account. generally start.ups have more then sufficient capabilities to acquire vc interest - if they do their homework. and paying a consultant just to be told to do the homework could be seen a waste of money. the combination of a compelling idea with preferences (see part 3) opens vc doors without the help of others.

recommendation: 1) approach 3 b-vc, 2) follow up after one week, 3) fix 1. meeting/conference call, 4) be prepared, 5)push for go/no + next meeting, 6) reach 2. & 3. meeting. 7) watch timeframe, lawyers, costs, consultants and exclusivity.

how to succeed in the negotiations with the investor will be the focus on the 5th part of the "six steps to venture capital" guide. that much can already be said: the aim is, that both parties are unhappy but still want to close the deal.

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"approaching venture capitalists", part 4.1 of the series six steps to venture capital

„giving and taking“ is the name of the game now. start.ups have bright ideas but no money, investors have, well, money and the need to earn profits. so both parties have a mutual interest to find to each other. therefore mutual respect should be the basis of the interaction on both sides.

this is the 4th part of the "six steps to venture capital" guide, where the systematic approach to acquire venture capital for a start.ups is discussed.

after the motivation got sorted out in step 1, the a-b list of potential investors in part 2 (part 1, part 2) got filled and the battleground got prepared in step 3 now it is time to approach the potential investors.

first thing to do is to contact three venture capitalists from the b-list (as laid out in part 3).

the best way to contact is through references (see here on general discussion of references in the context of venture capital). if that is not possible, it is worth to investigate on how to get in touch best with the respective firms. there has been an interesting discussion on that topic also at web2.0 berlin 2009, see here.

in case of doubt, just call the vc firm and ask which way of contact they prefer. when calling though, be prepared for the (unlikely) event, that you get put through directly to a vc partner or his associate. in this case, either just ask how to forward your project or use the opportunity to try the already prepared (and peer group tested!) 2 minute telephone pitch. depending on the latter, the executive summary could be looked with more or less care at the first screening.

having found out the way to contact, send the executive summary and announce to get in touch personally one week after.

follow up after one week as said. use whatever way fits best, e.g. by using an open approach like, „any questions, additional information wanted“. key is to find out if they interested or not. it is not worth to run after a vc for 2 month. reading the executive summary takes 10 minutes.
2nd thing to find out is how to set up the next step. be it a personal meeting or a online presentation/telephone conference. know how the time frame for meeting will be and who will attend.

when succeeding to get the 1st meeting/online presentation prepare the team: ceo and cfo are sufficient. prepare the pitch and stick to the time frame. decide who answers on which questions beforehand.
also the start.up has to have the questions to the investors prepared. a start.up which has no questions to the vc did not prepare.

at the end it is all about fixing the next steps. when - if not directly - to get an answer for go/no-go and about discussing the timeline for a follow up meeting.

if an invitation for a 2nd round discussion got nailed down, it is a ll about making it to the 3rd found. the basic idea is the same as for the first encounter. ahead of the talk, fix time frame, fix topics, check on participants (investor, start.up). additionally prepare references, have the non disclosure agreement (nda) cleared out in the meantime (so that legal stuff does not waste scare meeting time and legal topics potentially poison the spirit, long story short, that often leads to accept the nda of the vc).

handling the 2nd round meeting comes up at the second part of "approaching venture capitalists", part 4.2 of the series six steps to venture capital.

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interview with Andraž Tori of zemanta: part 2/2

this is the second part of the interview with Andraž Tori of zemanta. the first part can be found here.

Andraž, what does seedcamp and pitching mean for your company?

pitching is a fabulous experience of explaining your idea and trying to inspire other people. pitching is one of the best things, when you have a start.up.

seedcamp was a great experience, because it gives start.ups a chance. that's very important for early stage start.ups. having the possibility to present your idea to somebody that matters can help you to move your idea forward.

seedcamp was a very fortunate event as the timing was exactly right for us. this is the part of the start.up life that you can not plan for. you need to work hard as hell, but at the end you also need to have a bit of luck.

you have already left some tracks in your personal career, informatics olympiad medal winner, co-founder, open source developer and now zemanta. what`s next?

well [laughing], i do like to do cool stuff that interests me, that helps people and has some impact on the world. that's what i am going to do for a long time. but first and foremost we have to make zemanta a big success.

bostjan spetic and your are the founders of zemanta. ales septic, the ceo of your company was not among the founders. how was it to have a non-founder becoming the ceo?
it is an interesting experience. we already worked with ales before and we rely on the good sides of everybody in the team. handing over control was not really a big topic, as we were always running the company very consensually. there is always disagreement about certain topics but it is important to find a proper consensus and then honour the decisions.

semantic technologies are hard to tackle. how do you trade between a very domain specific vs. a more generic approach for your product?
we started with a very generic approach from the beginning. it is just now that we start to add specific things that are required for special areas of application. that is not the usual thinking but that helped us.

anything else you would like to talk recommend new start.ups for the beginning?
be very clear from the beginning of what kind of value you provide and to whom.

the other thing is, just do it. it is not perfect in the first iteration ever. just put something out, see what others say and how they use it. learn on that and create a new thing. it is not a bad thing to be wrong sometimes. then go ahead and improve – you sometimes fail and you just improve again.
that is probably what we haven't still completely consumed from the silicon valley type of entrepreneurship [in Europe]. failing is just part of succeeding. failure is still a failure but it is not the end of the world. it is as good experience to learn and do it better next time.

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