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January 16, 2006

The Venture Capitalist Wishlist

Wish By popular demand (okay, two people asked me to do it), here are the top ten ways to attract the interest of venture capitalists. There's no guarantee that if you do these ten things that you'll raise millions of dollars, but this wishlist will get you in the game.

Before you even start addressing the hard stuff, never ask a venture capitalist to sign a non-disclosure agreement (NDA). They never do. This is because at any given moment, they are looking at three or four similar deals. They're not about to create legal issues because they sign a NDA and then fund another, similar company--thereby making the paranoid entrepreneur believe the venture capitalist stole his idea. If you even ask them to sign one, you might as well tattoo “I'm clueless!” on your forehead.

  1. Build a real business. This seems like a “duhism,” but few entrepreneurs do it. Most entrepreneurs focus on quick flips to an IPO or acquisition. Don't get me wrong: venture capitalists aren't necessarily good guys who want to make meaning and change the world. It's just that we've noticed that entrepreneurs who make meaning and change the world usually also make money. Nothing is more seductive to venture capitalists than a company that they can easily imagine having a big impact on the world.
  2. Get an intro. Venture capitalists are lazy people. We don't want to be DeBeers: sifting through two tons of dirt to find a few diamonds. We want things handed to us on a silver platter like when someone we know, and maybe even trust, tells us about a good deal. The best intros come from corporate finance attorneys, college professors, and the CEOs of companies in our portfolio. Intros from these parties will usually result in at least a meeting. (Incidentally, this is a good reason why even though Uncle Joe the divorce attorney could probably do your early legal work, you don't want him to: he can't make any introductions compared to the lowliest lawyer at Heller, Ehrman.)
  3. Obey the 10/20/30 rule. To repeat myself, your PowerPoint presentation should have approximately ten slides; you should be able to give this presentation in twenty minutes; and the smallest font should be thirty points. And yes, this means you--the guy with the revolutionary, patent-pending, curve-jumping, open-source, Google-adwords-optimized way to sell dogfood online.
  4. Show traction. The easiest way to “prove” that you have a real business is to see that you're already generating revenue. It's one thing to believe your bull-shitake PowerPoint presentation; it's another to see cash flowing into your company. You show traction, and most venture capitalists will be willing to suspend disbelief. Fundamentally, you're asking venture capitalists to take a leap of faith with you--we'd rather jump off a diving board than the Golden Gate Bridge. If you can't show traction, then at least line up customer references who will really say, “If they build this, we'll buy it.”
  5. Clean up your act. Going back to my theory that venture capitalists are lazy, you need to present a clean deal to venture capitalists. “Clean” means that there isn't a lawsuit by your former employer contesting the ownership of the intellectual property of your company; nor have you sold common stock to your friends and relatives; nor given stock to vendors in lieu of fees; nor have a disgruntled founder who owns 25% of the company but doesn't do anything but sit around and complain. The more crap that a venture capitalist has to clean up, the less likely he'll be interested in your deal.
  6. Disclose everything. If you have crap that you simply cannot clean up, then disclose it right away--not necessarily in the first meeting, but soon thereafter. When it's making an investment decision or, later, serving on your board of directors, the worst thing you can do to a venture capitalist is surprise her with bad news.
  7. Acknowledge, or create, an enemy. Woe to you that claims you have no competition. It means you're clueless or pursuing a market that doesn't exist. Venture capitalists like to see some competition--it means that there's some validation that a market exists. Then, it's your problem to explain why you have an unfair advantage. If you truly have no competition (and I doubt it), then just say that Microsoft or Google might go after you because these companies do want it all.
  8. Tell new lies. Please refer to my list of the top ten lies of entrepreneurs. Every time you tell one of these lies, you decrease the likelihood of funding by 25%. Do the math: you tell four lies, and you won't get funded. I'd like to add an eleventh lie that someone brought to my attention: “This is the last round of funding we'll need.” That's a joke and a lie.
  9. Don't fall for old trick questions. Venture capitalists will try two trick questions on you in order to assess your degree of cluelessness. (1) Do you see yourself as the long-term CEO of this company? (2) What is the liquidity path for your company?“ The right answer for the first one is, ”My goal is to build a great company. If it means that I need to step aside, I will gladly do so when the time is right.“ The right answer for the second one is, ”Frankly, I haven't given a lot of thought to liquidity. My team and I are heads down and focusing on finishing the product. If we build a great company, I'm confident liquidity of some form will occur.“
  10. Under promise and over deliver. In everything that you say, ensure that your results exceed expectations. Deliver a prototype earlier. Deliver your list of references earlier. Sign up your first customers earlier. Close a partnership deal earlier. Launch earlier. The only thing you shouldn't do earlier is run out of money.

Written at: Back seat of a car going to San Francisco.

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» Tips for getting Venture Capital from Technoogle
Guy Kawasaki posted yet another classic about the top ten ways for a startup to attract the interest of venture capitalists: 1- Build a Real Business.2- Get an Intro.3- Obey the 10/20/30 rule.4- Show Traction.5- Clean up your Act.6- Discl... [Read More]

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Comments

We are creating a newly established corporation focusing on the design, domestic manufacturing, importing, and sales of Ready to Wear women’s apparel and accessories.

The new company’s strategy is to maintain development and enhance promotion of our exclusive high-end “Women’s Couture Collection”. Stemming from this collection is the continuous release of new and affordable labels that appeal to the masses of Middle America.
This brand awareness will allow us to simultaneously cater to our existing affluent customers but also create entry points into the key department store chains.

Implementing the strategy will take place through:
The creative expertise and fashion industry recognition of our designer and his Design Team.
We've also added a Senior Sales Executive from within the industry, as one of the key principals. Her role is to leverage her strong buyer relationships in the large department store chains and land the big volume orders that we are pursuing.

We have orders in hand with several large orders pending. The upcoming challenge is to properly fund the business and the Cost of Goods related to these orders. In this pursuit we are seeking to source the working capital that will fund the operations of 8 - 11 million dollar revenue business over 18 months. Revenue sources could include:
1.) Purchase Order Financing
2.) Receivables Financing
3.) Equity Investments

Greetings.
I would like to pose these questions,
How can a person who is in a life and death dire situation ask for help and not seem like a lazy golddigger?
And what if this person has done some research into a bussiness idea reach out to someone willing to take an interest?
I am this person, I am in a dire situation, and I need to change things a.s.a.p.
I have done some research on what would most benefit my community, but, I have no one to talk to about this.
There are alot of charties out there that offer people help, but, I have yet to come across one that offers mentorship.
If I could find just one person, that person could not only have a major impact on me, but, also on my community.
Thanks for your time!!

Dear sir/ma'm

i am thinking to set up my own english magazine for civil services in india so i am looking for venture capatalists those are interested to invest in service sector.

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Hello this is a very good side!

Right. What is your thinking as a VC if you see a non-US product that you believe could be a winner?
I am thinking, of course about web-based, english-laguage products.

Hi Guy! What helpfull stories! Thanx! BUT: After the "big crash" I heard a speech from the CEO of a VC at the university whre I studied e-business management. He told us how much capital we could raise in the early stage of a new product. He wrote to the flipchart "Capital = f+f+y2". Nobody had an idea about that, till he told us "Capital = family + friends + you squared". That's what we did with our new product. We raised about 1.6 Mio. Euro from private investors to develope the product and prepare the step to market. Now we are going to create revenue and then we try to find a VC for international growth. Do you think we need to get rid of our private investors first? Whereever I came till I read your blog I heard "Family&Friends Capital shows an investor that the people around you trust in you" and now I read that this won't help??? Please tell me what we should do ... Thanx.

Very well done, Guy. I've considered trying to get some VC for my projects to turn it full pledge, but I decided to keep it on a lower scale for the time being until things start picking up quite a bit more. I hope you are doing well.

Sincerely,
J Dingman

Guy - BTW, thanks for putting the blurb in about NDAs. I get so chapped when people want me to sign them (they don't want money from me, but time and attention). I have been sending such folks to "A Good Hard Kick in The Ass" by Rob Adams. Now I'll send them here :)

I love your blog, very well written. I am very new to blogging so I just looked at yours since it was featured on the TypePad website. I was strangely coincidental that your most recent post was about public speaking, just recieved my first request to give a talk to a group. I found your tips and advice great and something to heed; however as I sit there reading your advice,"if you have nothing to say, don't speak" I glanced up at your blog header and there it says that bloggers are people with..."nothing to say writing for people with nothing to do." If that is really how you feel why are you blogging anything? You are "speaking" to an on-line audience. I think you have some good things to say and I need to prepare myself for this speaking engagement. You have something to say and I have things to do, and you helped with that, thanks.

Andrew - regarding the friends and family money. I think this is one of the catch 22's of the venture business. On one hand, most VC's won't touch you without a prototype or some customer traction. On the other hand, they frown upon friends and family money that could get you far enough along for them to consider you.

However, I agree with trying to avoid this money if at all possible. VC's want clean structure and an easy to manage shareholder group. The last thing you want is to get caught between VC's with one interest, and grandma who may be getting her ass diluted off. Shareholder conflict can be a huge drain and possibly even mess up an exit.

I think any VC worth his salt will appreciate your foresight in putting together a true value add advisory group. Most of the time it is net positive.

I have just funded my third company - this blog is a great resource.

In item #8 you talk about the top-10 lies of entrepreneurs. Where can I find that list?

The 10/20/30 rule never dissappointed me! Thanks, Mr.Kawasaki

PS. Maybe because I had the chance to listen that rule live:)

witch revenue models are actual and take in serious consideration in Silicon Valley VC?

Hi Guy,

Great blog. Two quick questions...

1. Why is "nor have you sold common stock to your friends and relatives" such a bad thing? Seems like a great way to get any venture off the ground is through friends and family investment. Am I missing something?

2. How does a good advisory board look potential investors? I think it's a good sign an entrepreneur is acknwoledging they don't know everything, yet I can see how a VC may find them troublesome or fear they'll get in the way.

PS. Your comment box is really narrow and hard to type in;-)

Skype was the perfect example of a company not based in USA.

I agree with Abhimanyu - could you talk about the possibility to getting VC funding if you're not near San Francisco? Good post, helpful insights.

Right. What is your thinking as a VC if you see a non-US product that you believe could be a winner?
I am thinking, of course about web-based, english-laguage products.

Very well written. Thanks for the information. Is it also possible for you to sometime talk about right techniques for getting attention of VCs who are a few thousand miles off? Or is that something that is notally impossible?

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