Harvard i-lab | Startup Secrets: Funding Strategies to Go the Distance

[Music] well good evening everybody I hate to compete with food so those of you are getting food just enjoy there's plenty of time to catch up on any of this and it will all be posted up on the website so don't worry so amazingly this subject is one which I always feel like there's tons and tons of content up there on the web on and that there's nothing you can add value to yet I get more questions about this than probably any single other topic which is how do I get funded how do I stay funded and what should I expect along the way so we're going to try to tackle that quite openly tonight with a series of different introductions starting with players like Maya who were lucky enough Mayer if you wouldn't mind standing up just so people know who are from common angels Meyer has recently been made the managing director they're delighted to have her here and the angel group represented by Maya is very typical of what you'd find in the earliest of stages if you're going to give out for angel funding so I hope those of you who haven't had a chance to meet or get sort of information from angels will take a moment to get to know Maya in the course of this evening and then as you go from angel the next typical area that we talk about is seed funding and you'll hear about the context of this later on but we're lucky enough to have Jeffery beer here from seed to eight Jeffery if you'd like to just stand up and make sure people know who you are great to have you here but in the recent years there's also been a new phenomenon which is this whole idea of going even beyond incubators to accelerators and so some of you may know there's a great program in town tech stars and so we're lucky enough to have read Sullivant from tech stars thanks Reed for joining us and again I encourage you all to meet and greet that's the whole point of this is to break those barriers down make this really a transparent opportunity if you do understand this process and then not last but not least in our introduction actually one of my partner's here Carmichael Roberts because he's the smarter better-looking partner and so Carmichael welcome Carmichael specialty is something that I heard a lot of you talk about in these previous sessions which is how do you do funding for not-for-profits and in many instances non-equity funding for exam off-balance-sheet grants or loans etc so he's an amazing resource has done literally hundreds of millions of dollars worth of funding that way which is just an extraordinary thing to see and so is a master of that trade will will get a chance to hopefully again have you meet with him later on this evening the star of our show is actually not here tonight which is always interesting but he will be hopefully and that's Steve pate he's coming live from a board meeting so Steve was the founder of in deca and for those of you who haven't sort of read that story was a wonderful example of an entrepreneur who started just like many of you probably in this audience and built his business to a billion dollar plus valuation and outcome so it's the perfect story for us to have as our case this evening because each of you will probably get a chance to fast forward and ask him the kind of questions that hopefully all own experience your own experience will give you in due course so with that let me jump right in our formal agenda is very much as posted on the website but those of you who know me know that I've throw this away pretty quickly and in all seriousness I will cover all these points but I want to get beyond just talking about how do you fund your startup and what's the strategy for it to the root of what is the sets of the set of things you should really think about what will actually help you on a practical basis and again for those who haven't been to these workshops the idea is not to give you the answers it's to put a framework up that can get you to think through some of the challenges associated with getting funding and I know that this is a pretty typical thing to talk about but actually this is just like sex relationships and money it can get really complicated on the other hand it needn't and so I will just simply say raising money is just like sex a lot of people want to know about it but very few people actually talk openly about it and in fact the whole goal about this is to get beyond this issue that people are afraid to ask about it it feel like somehow there's sort of this opacity that VCS want to protect well we don't we actually would love to produce a movie just like Woody Allen except we're just not that creative so instead you have people like me who are going to give you the chance to ask everything you were afraid to ask and hopefully bring it all out this evening and with that I will just try to get to the bottom line and say actually it is fun once you get it and I wish I was Woody Allen in this pose but instead I'll have to put up with you guys tonight anyway have some fun tonight please ask all the questions you've been previously afraid to ask and get me focused on what will help you because that's what we're all about tonight so the most basic level you should know about the typical sources for funding and they range as I introduced the various different speakers from angel to seed accelerator and then typically equity of some sort we typically talk about that as venture capital growth equity private equity all fits into that category and depends on your stage and then hopefully if you're very successful you get to the place where you're a sustainable business in your own right and you can actually be a public company and you don't need anybody to raise money from other than a public marketplace so that's a typical kind of if you like framework for you to think about but there are a lot of other ways to raise money and in particular in the early stages they can be really important to think about so obviously the best one of all is if you never raise money because you're successfully able to bootstrap your business the first business I did I was lucky enough to bootstrap to being or whatever it was a twenty million dollar plus business and very profitably before we raised VC and screwed everything up from there I learned more in that process than any other period in my life I will tell you and I'm very privileged tonight to actually have the investor who made that bet on me rich them all with me so rich just want to have you introduce yourself since everybody wouldn't typically had a chance to meet somebody of his caliber so rich is my partner and now friend 31 years later we're lucky enough to work together but I learned the hard way you know what I'm going to tell you tonight and that was the whole point of this series was to make this real and to give you a chance to go and think about the things that hopefully if I had had somebody back 30-plus years ago you could have told me all this would avoid a lot of the mistakes that I made now with that said there is a very important thing that's evolving here and I want to make sure that this feels like an open agenda and a dialogue honestly VC is changing and indeed the way funding is coming to market is changing so you've got all sorts of new alternatives like crowdfunding and I'm not going to get into this in detail tonight because it just isn't time but I encourage you to look at these two I mean for example for businesses you have companies like oh sorry funding sources like angel lists which are very successfully helping entrepreneurs get to the initial sets of funding that might be helpful in your case and for for example products and services you've got things like Kickstarter which I'm sure many of you have seen have helped people not only to raise money but in some cases validate their product or service even before it's actually funded which is quite exciting so I think this is an evolving landscape which is an exciting part of the learning opportunity for me too and I'd love to hear from any of you either live tonight or in follow on what you see is changing what you think works for you what you think needs to change and how they should evolve okay so what should your funding strategy be well what an obvious thing to state here is in some cases you should not raise money I mean if you don't have a need don't raise money and there are a lot of personal issues that play into this for example are you somebody's very risk averse if you are take you somebody else's money's probably not a good idea because you're putting them at risk and a lot of pressure on yourself and that is if you have any ethics or scruples and in another instance that's there's reasons why you wouldn't raise money - lots of people want to run what I would describe as a lifestyle business which is perfectly successful in some form or another in generating say cash flows to support their own income but may not generate enough returns to invest in hiring people or building a large business and whether it lifestyle businesses are not necessarily small to give you an example there's a company it's about a two billion dollar lifestyle business maybe some of you've heard of it called SAS Institute as a fellow called goodnight who has a very nice lifestyle trust me his wife built a hotel nearby that I happened to stay at irregularly he figured out how to do it all without taking external capital so you don't have to think about this as just being small it's really just the choice and it depends on your personal profile for things like risk and obviously the kind of hard work that you want to put into things and how you approach things the point being here think about this first before you even get into any of the rest of this presentation because it is very much about what you personally are looking to do and how you're looking to do it and funding follows from that so what's an overview to think about well as most of you know frameworks are always they're to be torn down and built back up so this one changed about five times as I went around a few entrepreneurs and asked them what do you think is the process of building a business you know can you give me some discrete stages and what do you think they would be and these are the stages that I heard from people ideation confirmation which was a different word than I thought of creation validation repeatability etc the point being is that there are some distinct stages that people think about when they're building a business and your funding really needs to follow along with these so let me give you a sense of of what I hear and what we see as VCS and in terms of how to think about this as we go through this but before I even start them I want to share a startup secret right away there are two great times to raise money anybody know what they are well possibly certainly I think that if you're if you're making money you're going to be a very attractive candidate for people but if you're making a lot of money you may not need to raise it and that's your second point if you don't need it then that could be a great time too because people can say okay well so why is this person raising money so thank you that's it that's a great example I'm not gonna add that to my script to what else would people say is a good time to raise money if you have for example a brand new venture and it's full of potential is that a great time to raise money see lots of heads nodding so I think that's one of the times for sure the other times when you have all the proof so I just simplified as this all the potential makes you really attractive because people can get hopefully if you pitched it right really excited about it but guess what they've got absolutely nothing that they can disprove at that point because there's nothing actually proven so it's a very good time to raise money and a lot of entrepreneurs find out how to develop that perfect pitch we talked about last last session and they do it in a way that obviously sets out all the opportunities so that somebody can get excited about it that's a great time to raise money as you move down the road and you start to get data points about for example whether the product is actually working whether the customers like it whether your business models actually you know playing out etc of course everybody starts to do the diligence that then makes it possible for them to create their own theory about how your business will evolve and that gets a lot tougher and so it's a much trickier proposition until of course you get to the place where you've got plenty of proof and now instead of being a bunch of jumbled data points that everybody has a hard time figuring out you hopefully get a vector that you can clearly show is gonna lead to a valuable company that's another great time to raise money but life isn't that simple and unfortunately you're gonna need to raise money multiple times so what I'm gonna recommend is this try to break up this overview whatever these words are that you want to use and think about what are the milestones at each point in time where you can either build great potential or have enough proof to move to the next stage if you don't have those two things don't go and raise money figure out how to get beyond those points so in the early stages a lot of what people struggle with and I literally hand wrote this because I want you to get the feeling that this is fluid is how do they take an idea and validate it or confirm it in some kind of a way with enough people to get to a place where they go you know what this is worth building a product around or this is worth building a company around and if you don't get to that to the point is making earlier don't move forward don't try to raise money figure out what is it that you learned what are the things that didn't get confirmed for you and what questions do you still have and how could you go and address those questions because if you don't address them you can sure as heck expect them to come up with a VC or an angel or anybody hoop that matter who's going to try to fund you so I'd always say it's simply like this ask the hard questions of yourself before they get asked of you so what typically in this early stage I think makes a great basis to develop this kind of you like initial critical mass is things like you know paper prototypes that you can take out to initial potential customers and engage with them help them figure out you know in many instances not the product bio and this is an important point I'll come to that in a second but what what problem are you really solving for them for those of you who haven't seen it and a whole workshop on this which is the value proposition workshop and it's designed to really help you focus in on how can you specify that problem so well that when the customer hears that they go I would pay money for that if you solve it and that's what you're looking for is basically that kind of feedback now you're not literally in some instance is gonna get them to write you a check but if you can get him to write the check get him to literally say okay if you build this I'll pay for it and then your response should be well if it's that painful why wouldn't you invest in me building this with you and believe me that's actually how a lot of great companies get started that's a great means to bootstrap no better money than a customer's money but if you can't get that then at least get to the validation of your problem get real clarity there's a wonderful statement I'm sure many of you've heard at the head of G's innovation actually came up with it which is a problem well-defined is half solved and that's what I look for at this stage we always say the worst thing you can do is to go hurtling down building your product without validating whether it actually meets any need or solves any problem and I got to tell you that's the number one mistake we see at the early stage with entrepreneurs they're so excited about the potential to build something they've got this lean startup book and they've nailed the Minimum Viable Product but they haven't figured out who it's for or what problem it solves that is not a seed investment that is going to succeed in my book now there might be people who disagree with that and there certainly are instances by the way where that is you could easily you argue for example not going to be the case and you know consumer investing is a good good case in point where you probably do have to build something before you know people really understand what it is in fact just to make it very clear how wrongness can be there is a whole piece on on the value proposition workshop I talked about where people may have latent aspirational needs an example would be who thought they needed an iPad five years ago probably in everything Sweden even other thing existed but now anybody's got an iPad will properly very quickly tell you that it's become indispensable whether they're using it for Skype and conferencing in business or whether using it just for personal watching of videos and you know playing of games but the point is even in that instance I would encourage you very early on to figure out how you might validate what it is that is the opportunity ahead of you and then move to the next stage so this piece here is typically friends and family funding seed funding and a funding the difference between seed and a is something we're going to discuss later on but what I would want to point out here is that there is an apparent Series a crunch or crisis out there and there's a reason for it those of you are not rockstar sorry rock fans I grew up in England and this was a band that was important to me in those days Supertramp this is one of the best albums crisis what crisis so I remember listening to this many times than thinking there'd never be a crisis in my life life life was good we were just students listening to rock it couldn't get any better unfortunately the real world's a little different if you get your seed and your Series A funding it doesn't mean to say you're done and in many instances what's happening is in fact a phenomenon that we'll talk a little bit about with Jeffrey later on which is people are getting their Series a tie started their seed funding because people are just willing to throw money out there to see what works but you as the entrepreneur have to actually invest your life so the money is not a big deal to the investor but your life should be to you so the point here about this is there's a crisis here that I want you to think about one step ahead in other words if you take your seed in series a product as a Series A funding how will you move to a place where you have enough value for example a product not just a vision that will give people confidence to make the next investment in you because if you're not going to do that with your series a sorry with your seed then you're unlikely to get your Series A funding and you're gonna find yourself in the middle of this crisis this series a crunch because there are way too many seeds being done and there's nowhere near enough capital available to do the follow-on for all of them so you own this even though people are in my opinion at fault for what I call the spray-and-pray seed investing ultimately because I'm telling about this tonight it's up to you to make sure you stay clear of it you should be thinking ahead about where do you get to with your seed funding and how does it put you in a position to justify people saying yep we should invest more money in you okay that's probably the worst bit of news I was gonna give you tonight we're onto the more fun stuff now assuming you get past Series A we're hopefully getting to a place where not only you built a product but for series BCD you're showing things like customer validation and better still references once you get a number of them and then as you get into later stage rounds how you'll go to market really works building beachheads getting your segments that are defensible and so forth and ultimately I've there are by the way workshops on each of these things up on the site for those of you want to go check it out and ultimately each of these things should generate at some point a clear business model that shows how you're going to make money I don't think many people put this up front but I would also point out that although I've laid this out nice and clearly I also threw it up here is handwriting for a reason you could change the order of this you could do all this in parallel there is no right way or wrong way to do it but the point is again at each stage you're trying to move down the field as it were to show more and more proof of how you're going to build a valuable company and so whether it's through customers or your go-to-market becoming more repeatable or scalable or your business model ultimately getting you to a place that you're profitable each milestone is the basis on which you should be able to show value to any potential investor that would cause them to believe that you can get to the next place and to ultimately a place where you can I Pio the company now investors on the other side of this are looking at two things they're looking at how are you decreasing their risk all the way through this process and how are you increasing the value all the way through this process and at the end of the day when you want to be a public company they'll be looking for one thing which is a financial model that shows tremendous leverage to generate high value for low investment and that's obviously a tall order to start with but I'm big believer that if you start with the end in mind it helps so be thinking about that as you go through building out your business plan however you want to state that and how you will define your own milestones and think about how each of the milestones will cause an investor to say yep this decrease the risk since they were last here and they've increased the value and they're showing clear progress so why wouldn't I invest why wouldn't I take the next step with them because I can see they're thinking all the way through to how to build a valuable public company or if you're a private not-for-profit perhaps it's a sustainable independent entity that can continue on its cause and there's some wonderful examples that Carmichael can share with us later on in that regard now there's one thing I purposely left off this slide and I just like to know whether anybody can give me some hints as to what's missing on this slide I mean there's lots of things but there's a really really important piece of building a company it's not even on here you said that 11 out of 10 it's actually not just management its team but management's a great place to start we are always looking all the way through this process and how are you building that team because guess what in the end this is a people business particularly in the tech world most of your IP walks out the door every night so we really do want to understand what are you doing at each step to build a team that in of its own right can stand alone and grow the kind of business that could become either as I said a sustainable entity as a not-for-profit or ultimately a strong public company and I can't tell you that there's any right answer to how you build your team it's a whole subject in fact again there's a whole post on this on the site about hiring and building the culture and everything else underneath us but I will tell you it's probably the most important thing that's not on this slide for sure and certainly as an investor the thing we're constantly thinking about has the founder for example figured out how to build around their strengths and weaknesses to put themselves in a position to be successful in doing things like shipping a product and actually getting it into customers hands supporting those customers become successful references all of those skills are different and we're looking for people who can obviously in self-aware sense build around themselves throughout this process so hopefully if I just pause here for a second you know have at least a sense of how funding follows the build of the company and how you should try to find your your way through at least making progress on a milestones basis from each round but again I want to be very clear it's not an exact science it's not like for every Series B you've got to have reference customers it can depend hugely on your on your particular business to give you an example from from our own portfolio we had a company called Stuart that went for literally twenty four months without getting a dollar of revenue you might say well that sounds like a high-risk company and what happened to it well good news is it ended up being a two point eight billion dollar exit six years later so it probably was one of the toughest Series B's I remember having in our office but one of the best IPOs and the later acquisitions by Cisco so it's not a perfect science but again the principle is building value reducing risk and being able to show progress at each stage any questions before I move on on this one because it's pretty fundamental I got one in the back there if we could get a mic to you why do you have the business model in the financial model way down the line ahead of the product I mean it shouldn't you have the business model and your fiscal model and how you're going to not just see the problem but how much people are willing to pay for it ahead of developing the product isn't that part of the ideation in the creation fantastic yes yes and yes so I think it's great that you raise that because the point about me literally just throwing this up in handwriting is it's totally malleable when you would spend time on this but I think the point you were making which was really good is right up here all of these elements actually need to be part of your thinking the product the the model that you take to market in and the business model don't fall out of that all of that I think is a great thing to take through your initial thinking and even if it's just the most basic level of thinking about the packaging and pricing for example or distribution channels or what it is that for example might be the cash requirements of delivering the product all those things are great to think as early as possible about so yes thank you I mean thanks for pointing that out and in fact again for those of you haven't been to previous workshops here we talked about this as all part of the critical sort of if like initial piece of thinking through how can you make an impact what is it that you're going to do that is uniquely differentiated and I'm a big believer to your point the business model for example can time to be more important than even the technology breakthrough there plenty of examples of that there's a you know multi-billion dollar company called Red Hat that didn't innovate actually in a product sense they actually you know do nothing other than sell open-source software but their business model of delivering the value behind open source is so unique it's built a multibillion-dollar valuable company so yes great question and that answer great any others before I move on ok let's keep rolling what I want to do here is very quickly run through each of the types of funding that I put up as sources so angel funding I think probably most people would know this as a wide variety of forms it takes it's usually a few thousand to a few million dollars it's typically from individuals and as Maya is going to share with us can be through networks so I'm just going to ping one question at my to get you a sense of what's different about common angels and then we'll have Meyer available as I said at the end for you to talk to you so sir Meyer if you wouldn't mind just popping up here for a second what is the benefit of having an angel Network and give us a little bit of a sense of common angels in this in this scenario so I think just like in any asset class and this you know if this is a sub sub sub asset class it has evolved and it's evolved because the marketplace has become more and more competitive and I think in common angels instance and and in we're not the only one who has evolved this way there's a group on the west coast called tech Coast angels who has also evolved from just individuals making investments to a group making investments and then to a fund and there and the main reason for that is the entrepreneur has the perception that angel Capital can be challenging and and I think there are real examples when that happens to be true but the benefit for the entrepreneur at the very early stage in getting an angel who's has that domain expertise that you you know that you're developing your company for if you can find the right person to help you think through channels or distribution or product design or what as Michael said what's the real problem you're trying to solve that the right angel investor can propel you in ways that that will help you sort of shortcut many many mistakes and I think it's it's I said this to Michael earlier choose wisely right so any source of capital whether it's venture or angel or seed you two you two are doing just as much interviewing as they are of you you want to find the right partner to help you grow your business it's great advice mine so just to give my one little plug here you know we'll put up some of the portfolio companies they've been some fabulous companies that have been funded through angel funding and the benefit of having an angel like Myer or a network like the common angels is that they're angels who've understood that it's important to structure things right from day one so they don't end up with crazy you know term sheets and and instruments that then are very difficult for a series a investor to follow on with so I'm lucky enough to have back for example some of the companies that have come on from common angels and I will tell you that that's one of the big benefits of having an angel network work with you so thanks Maya okay so next up is seed I've already alluded to this and I'm just going to put it very bluntly there are two forms of seed in my book and it's pretty binary the first form is kind of like this guy is spraying the seed out there is literally the spray-and-pray approach and I hit set but there's way too much of this going on and each of you has to think carefully whether this is right for you what I mean by this is basically people are putting out so much capital there's no chance of them taking the time and energy that for example Maya was alluding to earlier that will enable you to get real value beyond just the money and honestly money is not your biggest challenge it may be at the first instance the thing you think you need most but the soon as you get the first capital flowing in your business they're going to be a thousand questions that come up and that's when it's really important have somebody who's not only going to pen spend time with you and mentor you but also going to help you develop obviously what is the next stage of your business and that's beyond seed how will you fund it so the series a crunch I talked about is because there's not enough follow on to do that but the really important point is it actually starts right away when you get your seed figure out whether somebody is already committing if you do a bunch of these things and meet those milestones will they do your series a and if they're gonna do that they fall into the second category they're what I would describe is the seed to a investors who are saying to you look we'd love to do your Series A but there are a few things you need to go prove and validate upfront and if you do that then we're gonna be there with you to follow-on now that may not happen for all the reasons that you might missile they may not feel like you've done it but at least start out with the right expectation and so I encourage you right up front to clarify this and we're lucky enough to have Jeffrey Jeffrey beer from seed to a who's got his own viewpoint on this and spends a bunch of his time at the iLab here helping entrepreneurs on these issues so Jeffrey can you give us a sense of how you think about this and what entrepreneurs should take his advice I got the right domain for this topic did not you did yeah so Mike I used to work together we've known each other for 20 years or so I want to add a little bit to what Michael said about kind of seed investing there's a decision you need to make as an entrepreneur which is what are you trying to achieve are you trying to build a company that's gonna require twenty to thirty to fifty million dollars in capital which would take you down a path to say yes you know you want to head towards that venture path and build your company that way but there are a lot of businesses potentially many in the room here that don't warrant raising twenty to thirty to fifty million dollars you may not be building that big of a business you may be building something that you today only see the potential ability in dollar business not a billion dollar business well you may not know so what I'm advising entrepreneurs to do is to just think differently am i raising seed to get through series a which is one path or am i raising seed to prove a certain set of metrics that give me the flexibility later on to decide will I take that venture path or will i finance my business differently because I can't justify a proper venture investment and the way to do that I pitch is to think about the way we think about agile engineering apply that to your business how do you get those proof points early how do you as Michael said reduce risk and ink we value early so if you can yourself raise a small amount of capital angel or seed investment to answer those questions get further down the road so you can make a decision do I take the path that says let me take the Express train to that venture path and I have an IP oval company here orgy it's not as big as I thought but there's an interesting business here because a business that only raises three to five million dollars but exits at a hundred to three hundred million dollars is a very nice investment if you can find one of those but that is not necessarily interesting to the venture community and you want to know that up front great thank you very much Jeffrey so I think those of you haven't had a chance to meet Jeffrey I encourage you to do so afterwards this is like anything being careful about upfront you know having the thought up front about where you want ahead is the best way to get yourself there and it's Jeffrey nicely depicted in this railroad track unfortunate if you get off track it's hard to come back with investors so I mentioned this earlier I just simply put it as follows which is there are a series of things that people typically will say they want you to do in your series a sorry in your seed but I'm going to encourage you to do one thing above all I mentioned specify the problem so that you can really be clear about that in the end what we're looking for is for you to have been thoughtful enough to say that you have validated that this is a business worth investing in and for you that means your life I would just focus right in on that never mind the cap on your gonna raise just ask yourself do you want to invest the next several years of your life in this business even if somebody's willing to write you a check ask yourself that question because on average it takes six to eight years for companies to build serious value or get public or acquired that's a long time so even if somebody's offering to give you lots of money because there's plenty of capital out there question yourself for a second are you ready to go the distance and that should really be the basis on which you personally go through your own confirmation if you will about whether your seed has got you to a place that's worth getting a Series A now fortunately there are people who can actually help you this and we're lucky enough to have one in the audience so I'd like to invite Reed from textiles up here to just share with us how can you get help around that and what is the idea behind the accelerated program such as you run a textile firm welding radical so I first want to say if you look at the different accelerator programs out there I'm going to speak only from my own experience which are accelerators that have a business model as investors so at the early stage there's only four hats you can wear your founder bender investor or you could be a donor so if you follow the idea as you follow the money you can tell the difference between an investor or a vendor Michel landlord there are mass challenges another program in Boston which is really not an investor they don't take equity in your company so techstars is very much a miniature version of a venture capital business we have investors ourselves we invest in two companies that join our program we can only survive as tech stars if you succeed and if we can pay back our investors so we're extremely extremely aligned with your success it's a small amount of time a small amount of money so from the outside sometimes it's hard to see what you get if you're if we're giving you an $18,000 check for six percent of your company and it's only a three-month program how much can really happen so that's one thing to realize that there's a lot that goes on behind the scenes we have a couple hundred mentors that the the community bands together to support you we do have strong results so my business partner Katie ray and I two years ago took on the tech stars program in Boston in two years we've run it's two million dollars fund half a million dollars invested actually only a couple hundred actually directly invested in each program we have invested in fifty-two companies there's a session going on right now you have about a less than 2 percent chance of getting in if you apply two years is not a long time to look for results I mean it's hard to even go out of business in two years so if we look at our oldest cohort 2011 we invested let's call in half a million a hundred times that capital has been invested after us we've had two of the twelve companies hit breakeven some of them go raise up to 13 million you know from brand name investors so there's something there that works if you can get in it's a wonderful wonderful way for first-time entrepreneurs or people who are switching domains we had a HBS grad who had done a successful venture back business it raised a couple yeah 20 million dollars in his past he was a mentor with his next company he applied and we took him into the program he was the first time that he was doing a consumer facing company so that was his his rationale and at the end of the program he said I learned in TechStars what I thought I'd learn at HBS so there's a there's a lot of value implementing I rented so so if you if you can get into one of the top accelerate programs if you're a first-time entrepreneur it's a rapid rapid way to learn to build a network and to learn from each other so 52 companies maybe 300 investors in those companies the companies tell stories about the investors just as investors tell stories about you you can talk about this particular partner this particular angel what do they really like to work with what do they like during the process so it's it's a great family to join if you can get in great read thank you very much I've been delighted to mentor it's been a terrific program they've been some great companies to come through it and as you can hear from Reid what's great about it is it's really sort of a concentrated way to get a bunch of different facets of your business tested early and accelerated through a process of proving whether you've got something that's obviously worth taking the distance so great to have you here Reid again I hope others will get to meet you afterwards okay last but not least I'm gonna call on my partner Col Michael Roberts in a second to talk about this but there's a whole raft of ways that as I put up on that list earlier you can get capital that is not equity diluted and in some cases may be off balance sheet and that's through strategic partnering government support and in particular if you're not for profit business with things like philanthropy now for those of you who are wondering why I'm clicking through the slides fast because we've got a case study coming up later on all of this is going to be up on my site I think you all know to find it so don't worry about trying to take notes on all these things the value is having Carmichael here so Carmichael I'd love to just ask you the obvious question we've got a bunch of people in fact let's get a show of hands how many people in the audience are looking to build something in the web and not for profit big number very big number it's probably you know it's at least 20% of the audience so how would you recommend people who are thinking about building a not-for-profit look at funding yeah I mean you know funding for any of these things is not easy but I think mainly for the non-for-profit what I've what i've seen and Michael's right I've been involved with a few which is kind of odd right because I met Northbridge and a lot of non-for-profit like stuff you know initially what I would do is identify at least one really credible person who's willing to be a you know a philanthropist and back you and and then help explain to others why they backed you I mean instead of doing like a broad stroke how do I show the shotgun meeting a lot of people hopefully someone will donate find one person that's incredible it's very credible and passionate that's willing to put some money in but I think more importantly put some time into shoulder to shoulder and help you excellent so we'll have a chance to ask Carmichael more questions later on but that's a great starting tip and hopefully those of you who are in that category will take a moment to speak with Carmichael and hear some of the other things I would just give him a little bit of a plug I've just been astounded at how creative the use of Finance or the for like finding of Finance and use of finance has been in Carmichael's companies that are doing everything from creating next-generation solar panels to in one instance creating a stent that is stretchable as rubber as strong as steel and resolves in the body a very long-term project and so I think no matter what your venture is there are creative ways to go about doing this and I encourage you to explore them rather than just thinking everything has to be venture funded now there is a special class of funding that comes up quite often and I get asked about this frequently actually usually by companies that have got some period of track of time down the road and that's strategical corporate investing so think about this as you know if you're in the software world VMware decides they'd like to make an investment in you or Intel he's got one of the largest programs out there should you take that money that's a whole discussion topic out of itself but I'm going to boil it down to two things what's in it for you first of all and are your priorities aligned with theirs because what I see happens most on this one is that the investor in their case in many instances has a very simple agenda which is they're actually finding a way to hedge that a start-up might come up with a better idea than something they're doing internally and it's great free R&D for them and that is not your agenda your agenda is probably building your business and figuring out how to get somebody in many instances who's got a bigger brand to give you credibility and help you get to market and maybe accelerate your path and so if those things are not aligned do not take the investor that's not to say this isn't a great idea in some instances it can be company making to get an investor who for example brings the brand that does enable you to get to market but in that instance what I would say is one other simple startup secret get the deal done first on the commercial level before you take the investment because that's the point you have most leverage and many of these corporate investors are completely separated from the business operations in other words corporate development and I'm not going to name any one of these companies at you know company XYZ is miles away usually in a different office in a different city in a different country in some instances from the people who are actually going to take your product and build for example a channel for you so it does not follow that just because you've got a few million dollars maybe even ten million dollars from a strategic investor that you're set you're now going to have their sales force trained and then Center to take your business to market and in fact I've seen so many cases where that doesn't happen so think carefully about this one before you take it and particularly in the early stages because expectations could be very way out of whack so let's simplify all this I said we don't need to make this complicated how should you think about what is right for you in the end there's a whole bunch of personal things I put up I'm not taking the more simplified Harvard approach and putting up a 2x2 what quadrant do we not want to be in here bottom left no bottom that's actually great top left okay who said top left white white top left potential small so your opportunities and so yeah I mean if it takes you a ton of capital and you've got a tiny opportunity that's unlikely to be a great return so what we really want you to do is think through do you have something here that's got huge potential and what's it going to take to realize that potential now obviously if you can have a huge potential business requires no capital don't come near us fear adapt and build it that's you know mr. goodnight at SAS he's got his two billion dollar business you don't need VCS or anybody else at that point go make it happen but if your business is something like Carmichael's 480 biomedical that's got to go through things like you know trials and approvals and everything else but by the way it has the potential to change an industry what's the stent industry worth today Carmichael a few billion died so casual about that I love that just a few billion dollars it's got a huge potential and it is capital intense so guess what it's a perfect candidate for VC funding and that's the real point here you should be able to clearly specify at least for yourself and if not more specifically work it out with the people you're getting money from where you fit in terms of that matrix and what I'd encourage you to do is also do one other thing which is early on talk about the expectations for how long it's going to take you because that's a big part of where things come unglued is usually people have unrealistic expectations about how fast they're either going to grow the business or going to invest and the earlier you clarify that the better so if you get through all of that you probably are a candidate for VC which is my day job and I love this job because guess what we do get to invest in great entrepreneurs whether it's initially a seed amount or follow-on rounds and our goal is obviously to help build great businesses but a couple of things to think about right off the bat some VCS don't do seed and so you may need to find your seed elsewhere and then have that bridge to a VC but lots of VC's now do seeds they actually start with a guy in an idea currently the fastest growing software company in my portfolio actually number one in America too is is Acquia we started out in our camp in our offices with no capital and six months of work to figure out how would have put a business model together around an open source project so really that the first thing I would say is actually look for people who are willing to put the time in because it's the most precious resource even beyond money it should be a start-up secret frankly is that the time intensity is more important than the capital intensity right upfront but if you get somebody to do your first round the things you should start to think about how far can they take you some funds for example only do early-stage investments and they won't go past a Series B for example other funds will only come in at C D or E or you get other funds still that to describe themselves as mezzanine and they only do funding just before companies going public obviously the goal here is to find a fit for you and in particular look for what kind of participation in involvement you want from them so right up front I find people don't spend enough time on this just thinking about what are their expectations of a VC now as I've said this is a framework I'm not trying to tell you these should be your expectations I'm trying to get you to think about them so are you looking for somebody for example who has operating experience or do you feel like you've got that nailed you really want somebody who's a pure investment professional they're very different classes of people many VCS now have come from the operating background that has given them experience in that but I will tell you sometimes that's not the perfect fit for certain entrepreneurs I was lucky enough to meet for example rich early on rich is a true investment professional has given me way better advice than I possibly would have got from people he would have confused the idea of being part of the operating team and got in the way he had a wonderful question and pretty much every board meeting he came to which is what do you think is the hardest question I ever had to answer but guess what it forced me to think what did I really believe and good boards do that and if they have the right judgment can help you stay clear and you're thinking about where should the priorities be and you know what kind of the boardroom with 20 operating guidelines sorry 20 operating ideas from somebody but a clarity instead with one key thing that's really important that will move the business forward so there's a choices and as Maya said very well you know go figure out how to interview your VC and figure out you know what are you going to get thoughts I have for you to think about a things like do you want somebody can help you build your team or your board in my opinion that's very critical and do you have for example somebody who has access to the right kind of contacts that will help you get your business some unfair competitive advantage which is as you've probably all seen my own personal positioning statement that's what I want to try to do for my entrepreneurs is help them get that unfair competitive advantage in one form or another whatever it is and then there may be other things you look for like strategic insights or particular access to channels etc but whatever it is have those expectations up front before you start looking for money because it's actually more important that that's clear at the end of the day guess what everybody's money is the same color this is what makes the difference okay now the second part of our agenda we've got the SEC's behind us it's the relationships and money so I said I hope this could get simplified and I really do believe that it can get simplified but is this is something that requires a little bit of art rather than science so let's start off with the science VC's receive thousands of plans you'd think that's great news it can be great news but the bad news is that most of them end up in the trash and there's probably one reason a bubble that they end up in the trash can anybody tell me before I go any further what that might be there non-targeted yep that could be a great reason any others there are lots of reasons by the way time yeah times a real challenge but it's very hard to read you know thousands of plans as they come through or here thousands of pitches but we do what others chemistry that could be a good reason yeah but before I even get to chemistry what's another challenge that we have well now that would be a big problem and the VCS don't have any money to invest a lot it's actually happening so yeah no there's no question that if the VC firms are not generating great returns they're not going to have money to invest so that's one to pay attention to check out their track record turns out none of this is really the challenge the real challenges with all this signal coming at us are all this noise coming at us how do we find the signal and it turns out that what really helps us is when we know where that signals coming that noise is coming from so we can determine whether it's a credible source because otherwise it's just too hard to filter that fast so on your side the first thing you're going to want to do is this research and most people do the basics they grab the website and they find out about the partnership and if you're in the valley you probably don't even bother doing that you just say oh yeah it's Brand X they've been around for years they've made a lot of money I got to go that that's okay I'm fine with you doing that but you may want to think about a few other steps for example and you were getting to some of these what is the fit do they even invest in this geography do they know the sector is this something they've done before am I at the right stage for them and they early stage or late stage do they have a portfolio that's complementary to mine do they know this space from other entrepreneurs and never mind the partnership who's the partner the individual that I'm gonna want to talk to who has the right expertise or experience or even just interest in what I'm doing that's very fundamental then what's that track record because otherwise they're going to end up with no money as the gentleman in the back said and then this is one of the least thought about things since you raised it which is not just do they have capital today but have they actually done their capital planning so they've got free reserves to invest in you as you build your company because one of the tragedies that happened in 2008 is it even some very big firms I won't name names but some very big brand firms and in the valley just didn't have the capital to follow-on as people got into a tough period and so even though they had you know great investments they were forcing those investments to go out and find capital at the time and that least had opportunity to get it so you want to check this out again one of our the great skills of rich that I've learned is tremendous capital planning and also in our case we were able to invest across funds because we have similar investors so even though for example are investing out a 500 million dollar fund now we're still investing out of the previous five hundred million dollar fund as necessary and still have reserves and we're always thinking about how to make sure our companies have the full reserve that's necessary to take them from what we would say a twosie which is you know the first stage of their lifecycle all the way through to being standalone or required so those are the things I encourage you to do but really the biggest thing that I was getting at is this it's about building a relationship because to find our way through those things even if you've done all that research and you've targeted us perfectly and we haven't got a clue who you are you are part of the noise now I'm trying to change that and I think a lot of VCS are trying to do this - we're trying to make sure we are out in the community and actually making this process totally transparent so I hope I get to meet you and you can you know call me by first name and that's the goal of obviously things like the iLab and it's great we're doing this but it's still tough and so I would triangulate ways to connect with VCS whether it's by going and blogging on their site or it's figuring out how to you know meet them in an occasion like this or get to the same conferences then it makes a big difference and at that point you'll quickly start to run into a huge variety of things that people do differently there is no one process every VC has a different process I get asked it all the time so what's your process for this well let me give you a couple of examples one of my public companies now is Demandware that deal took eight days for us to decide to do I'm really happy to did but we already knew about e-commerce we already knew the founder it was very quick for us to make the decision because of all the background we had on the thing so it was an eight day process that's the good news the bad news is some of the deals and you know I mentioned one the start in our office took six months for us to even write the seed check because we were trying to figure out whether they really wasn't there there we actually weren't sure we'd pick the right particular founding team and so forth so it depends on what's right for the particular opportunity now I've got three simple words on here run your own it's your process actually to run and as much as anything else you should be figuring out whether you are checking off the right things in your own criteria about finding the right VC whether they're the right fit for you whether there's somebody you want to work with and that's the relationship piece so let me at least be a bit more helpful and give you a basic framework again this will be on the sites I'm not gonna run you through the whole thing essentially on your site you should be doing the research and figuring out how to connect with the VC meet them get to know them and bring them through diligence to a point where they basically can't wait to invest in you that's your job on the other side you should know that what the VC is doing is basically the same thing now some in VCS have no thesis and they will just wait for great people other people actually have thesis that there are thesis that they'll write for example I was lucky enough to really see some great things from my partner's Jamie and rich in the mobile space and so we sat down and made a thesis about what was happening in the enterprise mobility space and out of that came an investment actually in one of Myers companies appear Ian it was very easy for us therefore to quickly engage with the entrepreneur but lots of VCS don't do that in which case you're going to have to teach them and you're going to help have have to help them qualify the opportunity and be ready to do that you know be ready to take the approach that's relevant to your particular situation the thing that's interesting in this process is as follows that there's a big part of it that happens around socializing and people sort of often think about this as you know well optional let's put it that way but if you're gonna date somebody and ultimately marry them for at least several years I think you're gonna take a little bit of time to get to know them and so don't ask us whether we can rush this through in seven days do you really want to get married after seven days I doubt it take the time to figure this out and so literally from the first connection start thinking about that the first connection is a very critical one it's often where things go wrong so I've tried to give you a little bit of a sense of what should be in that it's basically the who what why and if you can very quickly tell us your story and for those of you who want to get more detail on that that was last week's workshop or last month's workshop and it's all up on the site I've got a template up there which is you know how do you put the perfect pitch together and it's designed to give you at least the basics of how you introduce what you do uniquely well for who and put it in a story that least in the first session will get their attention but it's all you're trying to do at the first meeting is get to the next step I would encourage you I've told people this in that session not to spew your entire business plan out on the phone with us and try to get us to buy the whole thing in one mouthful that very rarely works and yet you'd be amazed how many times that's what happens hi I'm Joe it's you know it's tough for us to digest it all remember we're seeing hundreds of these but on the other hand if Joe gets on the phone and says look I've figured out how to build a scent that is stronger than steel and more flexible than rubber and by the way I think I can do it in a way that's bio reabsorbable and we think we've got the best team out of George Whitesides lab to get behind that I'm paying attention and I don't need any more than that at that point I'm gonna want to go see Kyle Michael Roberts trust me so you just want to hook and you want just enough and that's the who what why now the next thing I would encourage you to do is think about the process just like any sales process except it's a very special relationship and so you should figure out your own way to build momentum what I mean by that is at every step hopefully you and the VC is beginning to feel like this is something you want to take to the next step and that's like everything something you want to build momentum yet I see most VCS and entrepreneurs get stuck in this stage here where they've met and they've kind of pitched each other or you know gone through the basics of the thing but they don't know what's next it's that awkward third date where you know okay you're on first base now what can get tricky right there so what do you do about that I think the most important thing to do is constantly develop in your mind what you feel are the progress points to share with the the VC and go validate it with them so I actually happen to have an entrepreneur I won't call Matt by name we've been lucky enough to work with his in the audience he's done a magnificent job of constantly telling me here's what I'm going to do and by the way I want to share with you you know when I'm ready how it's turned out and sure enough he's come back regularly you know sometimes it's a couple of weeks sometimes a couple of months but he's constantly come back and shared with me how he's progressing so we're building our relationship he's building credibility with me and every time he does that I get to know a little bit more about the business there's a natural momentum building as opposed to coming in and pitching it all upfront and making a whole bunch of promises that you can't fulfill and then you're stuck so I really encourage you to think about this as building momentum now the biggest challenge I see entrepreneurs face in this one is that they expect themselves to have all the answers and I'm amazed how many times entrepreneurs will come to us and say well you know I'm not sure I can pitch you because I don't have a complete financial plan I don't have a complete financial plan for probably six months into my first business I didn't even know what a financial plan was by the way but that's a whole nother story the reality is we don't expect entrepreneurs to have all the answers we don't expect them to have complete business plans most entrepreneurs when we see them are incomplete in at least one of these six categories team product value proposition go to market business model and I left off one other which is financial plan they're incomplete and at least one of them if not all of them so my real recommendation to you is to make sure that instead of worrying about any of that you have at least one area that you really stand out in because that matters preferably it's something like a perfect you know ten in terms of your background experience to solve the particular problem that you're going after so you know when Carmichael for example to do keep using that example talks about you know what his team is and it it's a group of people out of the the Whitesides lab they're uniquely qualified to solve that problem as it turns out but there was also an element as it turned out of materials right where was the the other part of the team from while blankets lap another incredibly valid source I mean it probably doesn't get any better how those guys ever actually worked together on a board before so that there you go I mean now we're talking a completely obvious thing stand out thing Bob Langer George Whitesides on the same board doing something truly unique I mean that stands out I don't give a damn whether they've figured out what their business model is or how the products gonna come together at that point in time we're going to pay real attention to that and so this is what we're looking for we're looking for you know real standouts even if they're incomplete rather than a very generic broad brush set of things that covers all the bases but really isn't exciting I'm running one of them okay so the dating game it's really not a game it's a very specific function it's dating and validating and this is important because it's not typically thought of as something that entrepreneurs do it's typically thought of as something that the VCS do and that's the diligence it's actually important to you so I've already said this to you in enough form that I'm not gonna go into it tonight and in fact there's a post up on LinkedIn if you want to read about it which is how to evaluate investors the VCS on the other side of things we'll be doing the following work so you expect it now beginning to know the team they'll be doing blind references doesn't matter what references you give us we're gonna find out who you haven't told us about your peers people you've worked for or if you haven't had a job before just spending time trying to understand how did you form your team we're trying to obviously understand the business and thanks to the lady who raised this earlier we will try to understand all aspects of it even if there are lots of it that are incomplete because even if it's just to say to ourselves okay we know we need to find somebody's going to help figure out the business model here or that's something that we need to work on as a value prop or whatever it might be and we're trying to check under the hood usually we're not smart enough to know anywhere near all the areas that come to us so we'll get experts from the field other investments that we've made to come in and work with you and in many instances this is a great learning experience for yourself so don't view it as oh my god I've got to do the diligence if you at us hey this is great how would I get access to this person any other way why don't I use this as an opportunity to learn from an expert in under no Whitesides lab or whatever about this particular product I'm trying to bring to market and guess what as they're trying to validate assumptions maybe you'll learn what you've missed and try to identify for yourself how much you fill that in this should be a collaborative process as my point it's not a well the VCS have got the microscope oh my god what am I gonna do now it's a an opportunity of you to figure out where are the gaps what could you fill in how could you learn who could you reference and indeed see whether the VCS have got the network that actually can help you get there okay next big challenge typically is when do you get the term sheet this is a toughy now this is not a session about term sheets there are lots of great sessions on those and I'm happy to organize one if somebody wants plenty we do at the iLab but when you get the term sheet is very different in my experience from firm to firm and there's lots of ways to characterize this but I'm simplified down to two some firms will give you a term sheet really early and it could be you know right up front and that could be great if it's a really solid term sheet other firms will give you a term sheet after they've done the diligence and they're really clear that they're literally at the process where the only thing that's going to get done is the legal paperwork to turn that into documents which would you rather have anybody I'd rather have the second one and why is that because it has more certainty because it's something at the time you looking for the capital you've got investment needs that are quite clear so if they've done the diligence then the probability of you closing that funding is much higher couldn't have said it better myself I need you up up here next time now what happens if somebody's already given you a term sheet really early on and you like that firm but maybe there's another firm that you also like a lot and they haven't given you a term sheet yet because they typically do it here what should you do then I mean should you just take the early term sheet and say go ahead make it so that you can talk with the VC about okay I have been shopping this idea around this firm has presented me with this idea what what is your offering what what can you do to help me help us achieve this dream together that's a great thing to do now what if all that goes great and you've still got another firm out there who hasn't given you a term sheet but you'd like to work with should you just carry on yep let's say that let's say the relationships great so you like everything about this this firm and they've given you a term sheet up here but they haven't done the diligence yet I'm still shopping around I like your terms where are you on the diligence I mean to be wanting to move this forward are my terms acceptable to you okay thank you basically you put the offers together and you make one offer you of another we haven't got the second offer yet that's the part of the problem and this hat this is a real scenario by the way you're hoping you'll get this so you've got a bird in the hand here but the diligence isn't done it's not easy anybody who care to take this one on Jeffrey you've been through this give us a heads up what would you do I wouldn't sign the first term sheet there's no way I'd sign that term sheet if there's any loopholes and hang on to it I'd keep working a second partner and I'd be transparent about that okay and and what's going through your mind as you're doing that well startup secret you probably won't put up there Michael Michael venture guys are competitive oh I don't like losing deals to other venture guys yeah so to the extent you can turn the tables and make venture guys be pursuing you because they don't want to get excluded from the deal that's a tactic that typically will accelerate ideal closing I think that's that's a great example I think you were getting at that as well right I don't know your name by the way novice oh no but thank you so I think there is a lot to go into this I'm just gonna try to simplify it down to three things the first thing that I was trying to get across here that Jeffrey I think is hinting at two is if you have a term sheet before somebody's do the diligence to the point that jaws fat was making earlier on you're really not sure that they're actually going to get past the point of diligence and say we'll do this deal the diligence could go wrong they could find out a whole bunch of things they don't like they don't really know you that well if they haven't done the diligence they've only just met you and you might have had you know a great pitch with them and the chemistry seems great but the real work starts after that so to the point jaw spats was making you're really not at a point where this is much of a commitment now maybe they're a firm that's going to skip diligence but that will leave me with a lot of questions very few people will go from term-sheet to close without doing diligence and I'd be very suspicious of that firm so this term sheet is an interesting place to be but this is a much better place to be in my experience where somebody's actually done the diligence and the term sheet now is something that actually means that they are going to close the deal and the only piece they're really going to go through at that point in most instances legal now they may give you other expectations they may say for example if there are later stage firm we want an all-hands partner meeting that'll be the final thing you do but I've even had deals blow up in that instance not not my deals but deals that entrepreneurs have been bringing through for me a 30 million dollar financing blew up on me last year after all of this had been done and the term sheet was given here at the final partner meeting believe it or not it blew up and if you ask the company about it that was six painful months and they gave up a bunch of term sheets that were here so that's why Jeffrey's point was so relevant VCS and I'll sew anything up here that's the whole point about this is these are very competitive so you want to keep them working until you've got to a place where you can really compare office which was your point never that I'll like for life because they weren't apples and oranges that's what I was so they were apples and oranges that's the point I was trying to make earlier down here there'll be like for like so multiple term sheets down there that's a great thing but until then you really don't have a deal great question so I'm Joseph I'd ask what if they insist on some limited exclusivity rich you deal with us all the time well what would you do when you far enough down the track but for an early stage company I mean it's all about relationship invested yep I couldn't say I couldn't say it better myself not only is it about relationship and should you say no but in my opinion it's not really the kind of relationship you want if they're trying to force something on you the kind of relationship you want is a natural fit that that feels like it's mutual I mean it's the equivalent of being told okay you know I'm pregnant now one I mean that's just not what we want to be we want to be in a situation where we have the option to move forward for valid reasons together so you don't want to get too pregnant in your deal anywhere in this process you want to be very clearly able to make your choice at the end together all right I'm going to be struck off the VCS if I carry on with this line of argument but is is a VC who's willing to give you time to meet and connections within their network but not willing to invest will they ever turn into an investment down the line or the fact that they're saying we don't want to invest in you or where we think you have a lot of potential but we're not investing at this time is that someone you want to keep in your pipeline and on your radar or is that someone that you just know as an individual as an the partner is a good mentor but you move on call Michael do you want to give never an answer to that so if I were to sort of sort of capture I think it's a great question but I couldn't see because I was over there okay I'll make sure I see your face so I'm gonna take you a question I'm gonna broaden it a little bit and answered and then some so you start talking to VCS and the real question is when do you know that they're seriously gonna do something with you versus when are you sort of you know meandering a bit maybe they'll help you maybe they won't you know how does all that impact I would say this is my experience as an entrepreneur and a VC it typically if it's meandering a bit it's probably not gonna happen alright and I would say your probability goes from you know what was already love were just to you know less than 5% you know and I'm probably being you know generous with it and what is meandering a bit I mean meandering could be that you are you know you're spending a couple of months I mean that's a to me that's a long time I can't imagine that I think anybody working with me would know in less than two weeks whether how serious I really am and if you and it would be crystal clear it wouldn't be a guesswork so I think you know my general advice would be you get beyond a month and you feel uncertain that it's probably not gonna happen and then your specific question which is they're still trying to be helpful I would say there are a lot of good people out there who are not going to necessarily do the deal but will genuinely help you and again I'll just use your common sense to kind of fish that out I know I've done that a lot where but I'm pretty clear that I'm unlikely to do this but I'm gonna help you know I'm gonna help out great thanks Carmichael I have one piece of advice that I just give on top of that which is have a very simple conversation after every meeting with your VC and say okay so was this a good meeting and do you want to move forward or not just qualify it and by the way if you don't get a really clear sense you want to kill it because your greatest cost there is your opportunity cost of not going in spending time with the next VC and building the next relationship and I see far too many entrepreneurs wait too long to really qualify is that VC interested if you don't feel are interested if you feel like as Carmichael said you've been a couple of months me and going around in the desert give it up move on and find the next one okay so we are lucky enough to have rich here and he and in my opinion literally epitomized this phrase in every dealing I had with them which is the process of doing the diligence became the deal we very quickly figured out during every stage of working together what was this deal gonna look like how much capital do we need etc unfortunately not everybody can be enriched to more and be so successful as to endow a school like the d'amour McKim School of Business at Northeastern but thank you rich for doing that the whole local community is very grateful to be doing it but he's a great VC and that's the reason he got to do that and so if you have to find a VC who's not trained that way train him yourself here are the questions first of all how much do you need this is you know the most important question to my mind in least that in the deal sense the need piece is the piece I'm emphasizing and by need I mean run the numbers if you haven't got an accountant that's okay we're not looking for a tenth decimal point accuracy here we're looking for an understanding of what do you think it's going to cost to get from whatever stage you're at to the next stage with enough validation and proof as we talked about earlier to say you've built value reduced risk and build the assumptions it doesn't matter as much about the spreadsheet but if you can assess things like the dependencies and figure out what it's going to take to get from A to B that's what we're looking for and you yourself need to know that long before you come and ask us for money and you need to be able to say it for yourself okay I know it's going to take me this amount of capital we typically recommend by the way and this is again it's a Northbridge specific thing but I think most VCS would say this at least eighteen months of runway can every us think why eighteen months yep well said absolutely that because it typically takes three months even if you've got a very efficient process to raise around so you really only got fifteen months but then guess what you don't want to be right out of capital before you do that so you probably start raising after yeah well years not going to give you enough time to get in many instances the proof you need so guess what you probably want 18 months of runway and that's the way to think about it but you know every business could be different and you may say you need only six months of capital because it's so clear to you what you've got to get done in that six months that you'll be easily able to prove it or at the other extreme you have a set of things like for example a you know an FDA approval process that's going to take way longer than that and so you meet a different amount of funding so it's business dependent so more important than the spreadsheet as I said are the assumptions and I always recommend that there's at least a cash flow projection in that don't worry about all the other detail and for those of you want to see this all this is again up on the sites part of the perfect pitch there's a set of financials and template for what are the minimum sets of things we typically look for up there in the end I look for one thing which is what I call realistic optimists so most of you will walk in with a plan that says we're going to go from zero to fifty million in three years by getting two percent of a billion-dollar marketplace or five percent of a billion-dollar marketplace it's a great idea unfortunately there are precisely less than point zero zero zero one percent of companies that do that a few names that were considered fast-growing companies at a time that broke that with things like Compaq or more recently things like Salesforce the rest of you I'm afraid it doesn't happen sir you could come in with a plan that says well it's gonna take you ten years to get from zero to 50 million unfortunately VCS are a bit more greedy than that and they probably will look at that and go Jesus that sounds unbelievably boring why would we invest in that sir what you really want is a plan that looks a little bit more realistic but it still got real upside in it now the jerk about this is honestly none of us know what's going to happen that's why I said right up front the plans not as important is all the assumptions and how you talk about them and how you're realistic about them is what we're going to be assessing and the really funny part about it is all of this is wrong what usually happens is this it takes way longer than all of us thought it would but if it's really successful it's also way bigger so in a nutshell just trying to find that balance of being a realistic optimist put your assumptions behind it and that should help you and inform you know how much you need now the second question is subtly but importantly different which is how much do you want well we've really covered this already it's make sure you are thinking through all of the milestones and as I said I've got about 18 months but there's one other thing that's obvious here which is you really don't know so allow for what you consider to be an acceptable fudge factor or variation in all the things that are outside your control and there are lots of them let's face it number one is usually the market now how quickly will the market adopt your solution or how quickly will it develop etc so that brings me the final question which is putting that together what should you raise now why isn't that just the first two well let's think about this I said we're gonna talk about strategy tonight one strategy might be a very dilution sensitive strategy where you are very risk tolerant and you have no problem at all absolutely taking the risk that you're on and nail your milestones which case you'll raise just what you need and not a penny more and there are entrepreneurs I know by the way who are absolutely oriented this way we'll never raise a penny more than think they need that's just fine I would always recommend you raise it at that point in time to close it I've seen some investors make that mistake but these kinds of entrepreneurs certainly tend to be just-in-time entrepreneurs - they raise it just before they need it and they just nail it and some great entrepreneurs take the strategy and I see a lot of people there smiling at this and others even grimacing at the thought of it well you might be in the second category you might be one of those entrepreneurs who feels like you need to raise more than you need and you know money is cheap and so hey it's only a little extra galician I'm not that fussed about it I want the extra cushion and I want to have the room to get things wrong or to experiment well then raise more than you need and raise it before you need it well before you need it there's nothing wrong with either strategy you just have to identify which one's right for you or if there's something in between and that's the difference here that in many instances is subtle but very fundamental including by the way getting comfortable with your investor being in the same place as you because some investors love the top strategy and some investors love the bottom strategy and there's no right or wrong here but what is important is that you're in sync with your investor when you go into them so the last piece of advice is pretty obvious which is either way timing is everything and you should assume the unexpected the worst mistake we all make I'm talking about VCS and entrepreneurs is we overestimate you know the pace at which things get adopted or the pace at which the business grows and we underestimate the amount of capital and then we find ourselves in a position where we're not raising money from strength that's not where you want to be ever no matter which of those strategies you take so early on try to be thoughtful about your timing and expect the unexpected what other factors are there well some businesses are very predictable so you know for example if you've got a business that's driven entirely by transactions and you can see transactions every day as for example in the case of an e-commerce business then that's actually a great way to be able to look at how you're your future cash needs micro if you're a business that's inventing something and you go to get approvals processes through things like government agencies that would argue that's a pretty unpredictable business and you need lots of leeway so think about things like how predictable your businesses and build that into your fundraising and do climate about it now I also put one other thing on here which is sometimes you're in a marketplace where there's what I would describe as either winner-take-all dynamics or the classic geoffrey moore sort of example where the guerrilla takes 60% of the marketplace and then the second player the chimp takes 30% the rest fight for the last 10% if that's the case you'll bounce she'd probably matters because customers going to look at who's got the credibility and that by the way may be more than cash but this could be a factor in at least and so can be important to having a strong balance sheet I've certainly seen that in some cases and last but not least is valuation it's actually the sixty four million dollar question and it's the one where most entrepreneurs get really stuck and I've already told you you know how to think about this which is you know strategy about whether your solution sensitive or not in my opinion this is the least important question to think about why because I've modeled it hundreds of different ways and I'm happy to share these models with you every time you go back and look at how much you haggled upfront on the valuation and then you look at the end outcome the question is really the same was the business successful or not if it wasn't successful it doesn't matter if you earned a hundred percent of Joe Blow now if it was successful and you managed to earn one percent of Google I'll take that all day long over Joe Blow and so it's really about how can you figure out how to set your capital up to be a part of your success and not a problem for you and for those of you want to get into this I'm happy to do a sort of a deeper dive on it but what i always recommend entrepreneurs do is this they project out the valuation not for this round that they're taking but where does it take them in terms of the next round so in this simple model which again you'll see up on the site when i throw it out there if you raise money for example on five on five simple series a and so you expected to get a hundred percent growth and you just did there some basic calculations you said okay by my pre money sir my post money was ten million dollars and next time i'm gonna want to raise another ten million dollars and i'm gonna want to do it and a nice step up I'm expecting to double the size of my business or get all this proof etc then that's a twenty million dollar pre-money ad ten I'm now at thirty million dollars post money for the next round so that's the the ramp I'm on what does that imply in terms of just some basic things that I might have to do I'm going to use a simple revenue multiple of five I mean this is really basic math that implies I've got about a six million dollar revenue run rate do you really think you're gonna have a six million dollar revenue run rate at the end of your series a I don't know maybe you are and maybe that's up C great but if you're not and your math is taking you such that you're actually going to do this which is scenario B down here you're going to be out of whack everybody's expectations going to be out of sync when you raise your next round if you're only on a three million dollar of and you run right now you try to raise money at a double and all your team's disappointed and everybody's out of sync and this goes on all the time what's much more important is that you then therefore have the conversation early on with your investors about okay never mind the round we're raising now the a but what's gonna happen in the B how are we thinking about the C I'm just saying one one round ahead it's too hard to think beyond that and always put the vector out there and think about what is it that you're setting as expectations together that you can get in sync on that when you end up raising the next round you've met all those milestones we talked about earlier including the financial one that adds up to the right valuation so more another time but hopefully that gives you a sense of why thinking about valuation vectors is so important all right one simple startup tip here is therefore to summarize this don't just value things evaluate them always be one round ahead of thinking put it in all your metrics and think about the things that the unknowns that you might have to do including the time to fundraise and at the end of the day think about what we're trying to do which is make sure you have the capital to capitalize on what your opportunity is and know more now entrepreneurs also played this game so I'm just going to try to get rid of it they try to put up the ultimate expert potential they say well Salesforce went public at X you know billion dollars or you know Genentech was worth several billion dollars and I just applied their multiples to mine and you know we're gonna get there you can play the game all day long unfortunately not only do we not know nor do you and it is meaningless and trying to figure out what percentage you might own of this notional company that reaches those valuations when by the way the market will have changed by then the multiples people are using will have changed the competition all look different it's just meaningless so I really encourage you if you have to do this do it for fun and then put in your bottom drawer and forget about it but there is one tip that's very important along the way fundraising should be a continuous process so between each round to use that famous Glen claireandross quote always be closing always be developing the relationships with the venture investors who are coming next for the next round develop between the the rounds make sure that they're ready when you are ready to say I want to take money to get that closed so I'm always amused at this point that just like that other slide you know I left off one important thing I've left off one critical critical piece here anybody tell me what that might be what's what's the other element that's so critical to allow for in your fundraising what's the other capital forum that's absolutely essential debt well that could be a piece of it revenue is an important piece of it but what's important what other form of capital do you want to build in your business I talked about it on that first slide and I said here's everything on this slide but we're actually trying to build underneath this a really great team hey you were listening that's awesome I think the most important capital you raise is human capital it really is its building this team and so actually the other factor for what you raise and how much you raise and it's literally at least as important is your option pool because this enables you to hire the people you want and if you want the best you're going to have to pay for them and they're going to expect equity and you're going to need to have that equity in your option pool and you do not want to have to go and renegotiate that with your investors so agree that upfront make sure it's part of your thinking and if you really value building a great team get a big option pool and make sure you're ready to hire the best possible team you can so let's summarize all that what really matters is investor fit picking the right amount of capital raised including the human capital and then timing it and obviously there are other things to clear the bar like terms etc but I would summarize it all like that and to bring it back to basics it can be fun when you finally raise it so it needn't be complicated and I really encourage you to pick your own path to this and find yourself in this embrace as Woody Allen did with your investor hopefully not literally sorry all right well I was just the appetizer and now we have the main course and delighted to have Steve popper here and Steve was literally at this juncture some decade or plus ago with his company in deca so Steve please come on up and jump in and grab the stage here and tell us your story and how did it played out for you welcome Steve thank you everybody [Applause] so just I'll just do a quick few quick slides on you know what and deca was a software company the big idea was trying to make search much better I'm not gonna bore you with what our product was you're all using it every day whether you realize it or not it's out there all over the web you know it kind of made it easier for people to interact with products was kind of the initial idea but then we ended up solving business intelligence problems for the world's largest organizations like IBM which became our largest customer we solve their thorniest problems even though they're the world's largest business intelligence software company and services provider for business intelligence anyway so uh and then the ultimate conclusion was great right so in the end we got a big number six largest acquisition ever by Oracle when it was announced although it's been eclipsed since then but the and actually you know this is a deal like any other which was 60 days from first call to announcement okay so very quick you know you've got a deal done now I'm gonna talk a little bit about our difficult fundraising earlier in our you know life cycle which formed the behaviors which is why I got that deal done in 60 days and didn't want the world the change before I could get it done okay so um the company was started just a few hundred yards from here over in Hamilton Hall and fact there's the first version of our product in my dorm room at Hamilton that's the you know version zero zero zero one of our database that Oracle ended up buying so with that in mind how many people here were in in their professional careers in ninety nine show hands there's a few and so everyone kinda those folks with their hands raised knows know how crazy it was then right and this chart kind of exemplifies why it was so crazy so venture capital as an industry you know kind of four to five billion a year being put into funds right which are you know which is you know what it means about that much being put to work on a steady state all the way to you know over a hundred billion in 2000 okay so what that means is lots of money's being shoved out there in series days right so that makes it pretty easy right in fact when we were founded was there took me three days to get the original angel financing actually had several venture firms actually one of my professors over at school ultimately invested as the third one in that angel round and by the end of the year we had a great you know series a financing and we were off to the races so um getting to that first customer was really easy you know you know even though we were a basic research project actually this is an important point we got funding to do something that should have been built in a university and then spun out but because it was the bubble we could assemble a team of scientists and we got funding to do it and we're gonna come back to that why it's so important macroeconomics matters so much in terms of what you can do at any given point in time the we got lucky bringing the right scientists together the like I said the funding was easy we got a set of highly credible venture capitalists and individuals right that both of those were very important and then first customer was a six-week sales cycle in the summer 2000 alright so think of all of you guys trying to find customers of several hundred thousand dollar customer very conservative financial services company okay so and we were conservative so we focused on getting them live for the next six months we didn't want to get five customers we want to do it the right way right we're gonna get that customer and make them successful prove it out and then scale so in mm we start looking for customer number two okay we get to talk to a lot of people by descent price January 2001 all those people were fired so the world had changed basically it was a you know all these internet groups looking to do new things were gone so we were trying to find customer number two unfortunately while we're looking for customer number two we're on the other side of this macro private equity situation or venture situation more specifically what you'll see is you know the amount of capital raised you know declined to about a third so that means all those companies that were funded the year before now I mean they're you know and a lot of stuff Michael talked about was sort of this idea of eighteen months then I mean the different set of rules people were operating under so everyone's looking for capital so if you thought those thousands of business plans were tough try standing out when everyone's trying to you know triage their own portfolio and you're trying to find capital right and all in your existing investors right they can't they're really reticent to to lead an internal round because they don't want to set price it sets problems with their limited partners as a whole set of cascading things so you're kind of out on your own okay that doesn't mean we didn't get help and introductions I mean I spoke to just about every venture firm you know that I could identify over the course of nine months right and you know the other challenge that was happening while we were needing funding originally I had a goal of finding some customers that we're gonna help us fund this and stretch our runway okay but this was the first year-over-year decline in IT spending ever okay so this is an industry for 40 years spendings going up and up new companies oh I got discretionary money to spend on new things all of a sudden it declined so all the discretionary stuff was gone and this was one of my you know one of the quotes that was very painful I'd run it to people to say I spent eight million dollars last year trying to solve this problem it didn't work but you solve it but I don't have any money to spend with you okay so very painful okay we built a great product great technology yet the world had changed like the rug had been pulled out from under us the initial inspiration for our technology was solving a business problem in e-commerce and this goes to one of the things about the investment community it swings like a pendulum right and it's not always rational okay so for instance in 2001 what we were told ecommerce was dead can't make any money in e-commerce software and we all know how laughable that is but that's what I dealt with talking the person after person okay so the good news is while we were out pounding the pavement right who wants to be customer number two of a venture back software company right a year later from the first customer and they're gonna run out of cash in a few months right so not an easy set of circumstances but we taught to lots of people look if we had a few value-added angel investors that were great one was a chief investment officer at another financial services company that kind of you know told this team find a way to use this stuff and so I think they had gotten tired of those demands over time and so by the time we got to them they're like we had this problem over here which they know this is incredibly difficult and none of us want to touch throw it to them so but we embraced it we solved that problem and we expanded our vision to be a platform company so we loll longer with just ecommerce right so we satisfied the main objection there you know and but we still couldn't get commitment fortunately in parallel we were you know doing what we could to build an experience team which was very important is even more important than normal times because the pendulum swung from late 90s experience wasn't important in fact it was a bonus to have less experience you know almost right it's a new world people are thinking differently pendulum swings good thing we you know had built a very strong team with lots of experience you know during 2001 so the you know like I was saying we're gonna we're gonna go through a few uh a few events that took place we're speaking to every firm out there as of August 1st we have cash for another ten weeks okay and so finally after all that searching we get a term sheet and it's from what I'd call the bottom feeder this was someone that the proposal wouldn't have been worth pursuing I would have taken it so people would have had jobs but I wouldn't have stayed much longer right cuz it's just you got to have incentives people got to have incentives to the business and if someone wipes out everyone where's the incentive you might as well start a new one it's just a job at that point okay and the better venture firms recognize that everyone's got to be successful in it okay but by getting that first term sheet suddenly the insiders had something to work with they could be they could say to their partners look we've got an external pricing it's gonna destroy the company let's do better than that so we can save it but at least you know and it wasn't it was a down round that the insiders were proposing but it was something that was bearable now whether it would have remained bearable over the lifecycle of the company that's a hard question to answer but it was a start but that put in motion we there was another firm that in the background we'd stayed in touch with that had known a lot of members of the management team and had some success with the investors and members of the management team I describe them as the last venture firm on the planet that decided to get into tech okay so it's 2001 and is it for whatever reason they decided we should get into tech right and we were lucky we found that firm that was the first bit of luck okay the second bit of luck and I want to emphasize this word luck because especially in difficult times anyone that's successful is this that's the some amount of luck that happened to information and you shouldn't believe them if they say otherwise right and good times the luck is the good times or you know the winds you know in your back right so while they were so as we're trying to find additional customers that year right we build up about ten interested parties these are prospects and I'm I can't remember what we's the language we use to describe them but it would have been something like you know people working with us or some some you know choice language that is ambiguous but not customers because they weren't but we're talking to all these potential investors right and they want speak to references so we haven't had a second customer right they want to get an idea what's going on right and you can't have a prospective customer talk to 20 investors that's kind of kill their confidence right you know I mean so so you have to ration he's very carefully okay and so of the 10 any given prospective investor may have gotten three names and even that we were very careful okay so this firm we gave three names - and as luck would have it one of the partners at this firm live next door to one of the executives that a company called arrow electronics so our electronics was one of the companies that was very interested in what we were doing in fact they were trying to solve a problem with their IBM mainframe that we were able to build a demo for it just crushed it right it just was so much better and so they're having like you know probably talking over the fence or maybe it's a barbecue I mean I imagine it something like that and somehow the name and deca comes up and the guy from arrows like all that stuff is fantastic and so here the partner at this firm thinks wow I just found some proprietary dilligence right that really gets me you know this is this is the real deal because otherwise if you're an investor you're always skeptical of the names that someone's provided to you just like when you're you know you have employ someone you're interviewing their references you got to be skeptical you always gotta find your um your proprietary sources for those okay so we got lucky they're huge luck so over the Labor Day weekend as of August 21st we got that insider term sheet right it was gonna close on September 7th so that's much better than a bottom feeder but then this other firm comes in right on the 30th of August and works with me over Labor Day weekend to come up with a term sheet that we could present at our board meeting on September I don't know what's a second I think it was a third and that board meeting was originally intended to ratify the insider term sheet we'd already started working with lawyers okay um you know I'd made clear to my investors I'm still talking to others because I'd like to do better but suddenly I had that other term sheet so we had a decision as a board do we go with the term sheet that's gonna close that Friday right which was I think the 7th okay or do we go with the term sheet that's gonna close a week later on September 14th okay so a lot of discussion around it and a lot of the discussion is around are they a good partner right are these people that have you know are they you know good ethics is the people who want to work with a lot of stuff Michael was talking about it's a marriage it's not a you know it's it's something you know as the entrepreneur you know keep in mind these are the people that can fire you right they can you know cause a lot of pain on what you're trying to build so you want to make sure you compatible you know views of the world and but that ethics piece like are these the type of people that are gonna stand by you in tough times okay that's something that would really emphasize so the following week what happens nine eleven okay we're right in the middle of this okay and yes there's a lot of horrible things going on but we have our own little micro problem to deal with which is I've got five six weeks of cash right and then people are out of jobs okay you know and so you know thoughts crossing the mind you do you cut everyone's salary to minimum wage you can keep benefits and stretch it out longer because you're gonna need time because you know all bets are off I mean there's a there's a term of art called force majeure right act of God okay and that's basically in a lot of deals that's the first thing people did you know a lot of backers they just pull the ripcord look I'm not doing anything there's too much uncertainty in this world okay so to the credit of this firm ampersand ventures they they convene a partner meeting and they said nothing about this company has changed as a result of 9/11 they said we're gonna do the deal and one of the partners was stranded in Minneapolis remember the planes weren't flying okay got a rental car drove back to Boston we got the deal done the following week on the Wednesday we lost three business days I mean that's insane right but that's why it's so important to pick the right partner you know and so it's so important for you to check the references on the partners that you're working with right and there's some of you got to cultivate some of your proprietary references not just what someone's providing to you okay so the let's see so some of the lessons right so we can bring this to a close macroeconomics matter more than almost anything else and all this stuff if it's a very favorable environment it's gonna be a lot easier and you're gonna have so much more to go she a leverage if it's a terrible environment I mean you know we could we could make you a ninja of fundraising but the if you were to build the you know the model the statistical model the variable around the economy is gonna have more of an influence on the outcome than anything else so the next thing is fundraising starts long before you're pitching to your investors you know whether that's building your team a lot Michael talked about a lot of us whether it's the chips the reason why I was able to get my first seed financing and two or three days is cuz there was cultivated relationships over prior months sometimes you I mean I also raised twenty five million in five weeks from first meeting and never meeting someone before so you depends on the environment you can go both ways okay um get any term sheet and never stop looking for options until the round is done okay even one that might be squishy my personal belief is it's something that you can work with right it sort of puts others on notice you know what something's gonna happen and you and it gives you something that you can manage to get to it to an outcome the next thing is in venture it's a multi play game relationships matter for the long-term so this is the condensed version the presentation I could talk a lot about some of the negotiations and you know horse trading with some of our existing investors that got us all to a happy place as we went through you know some of these difficult times so you don't want to sort of take your funding raising event as it sits this one time you're gonna use whatever leverage you've got to get the best possible deal you want to try to do what's a fair deal okay in the context of the macro-environment that you in that you're in and you know hopefully if you picked a good partner they'll return that favor when times are tough okay the we already covered this luck is not optional okay so just to be very clear you know you can have a great plan be very capable but if you don't have luck on your side it's and it's not gonna get done you don't you don't be too hard on yourself but you've got a cultivate luck so it you know it doesn't just happen right you got to do things like if I wasn't pounding the pavement talking to all those prospective customers I wouldn't be cultivated that luck okay so um the last one is once you agree on a deal get it done before the world changes okay and we're all products of our environment okay and having gone through 2001 having gone through 2008-2009 okay in fact you know to close this out when we were in in 2011 when we've received an offer from a large company to acquire in Decca at first we were ignoring it because we just released tons of R&D we're very excited where it's going and you know it's like just keep going but in early August the u.s. lost its triple-a status actually was very coincident around we got the first stop for us lost his triple-a status right his Treasury bonds and Europe it was a one in four chance Europe could cause another 2008-2009 and after having gone through that twice there was no way I was going through another one of those with a thinly capitalized company I mean those are tough things to deal with okay and so it was how fast can we make something happen so we didn't hire a banker we just you know we called up the people that we knew that you know we're you know fairly sizable acquisition so it sets to a small number of folks call up Oracle they'd always told me if we're gonna disappear to give him a call I said look we're gonna be disappearing I understand if you don't waste time on the deal and two days later had the sort of pitch of our lives pitching to the senior executive over the phone at Oracle we kind of knew we had nothing to lose so we just punched him in the nose we call this baby ugly in some cases you know in a sense that how we could help what you know complement their product line and you know what he recognized we were bringing database technology in the world of search within ten days we had a letter of intent and we just raced to get through diligence and paperwork you know just cut through all the red tape we could to get it announced so two months or 60 days is kind of a record for that sized transaction no banker etc it's a product of experience that when you have a deal on a table get it done so with that so thank you very much Steve I'm sure all of you feel like you're actually living that experience the way you just described it and it sounded tiring frankly so I'd love to encourage questions from the audience but before we do just so everybody can start thinking of them for Steve here and by the way we started about 15 minutes late so we're just going to give you a chance to to jump in here you know right at the beginning if you can go all the way back there what what made you decide to do it and a rather than a seed and you mentioned you know this thing should have been funded in the university same or a little bit about that a lot of people here think yeah and I rushed through it but the reality is we had used actually a convertible debt no in the summer of 2009 teen 99 yep which raised about a million and a half and then we raised a Series A which really was the B I mean it's yeah the terminology is you know you can pick whatever letters you want but that closed in that spring right so the first thing was around a million and half to two and then we closed an eight million dollar round in the spring and then in the fall of two thousand one week load we did a first close of I think something like twelve million because we wanted to get money in and there were a few others that needed more diligence you know we did a second close to to finish it out thanks tons of sense so questions for Steve hi there that was very inspirational and nerve-wracking just hearing you go through the process I wanted to actually rewind to kind of pre ninety nine you would entered business school huh I'm in grad school right now as well wait what was kind of can you talk about the ideation kind of process what you're thinking kind of your technical background I know you've made some hires just thirty seconds of my background I studied operations research in undergrad didn't I mean didn't know anything about the world of consent self consulting and banks which was fortunate because I went and worked for a old line company and CR teradata okay big company was actually losing a lot of money at the time was part of AT&T and I became a product manager so a product management is the first thing to take away from that and a place where a lot of people could teach me things right they also taught me a lot of how not to do things you know by observation right but I got a lot of responsibility early on I ended up though at a start-up on the west coast called Inc to me which was the Google before Google I was already into parallel computing and so I ended up there and I ended up creating there cashing business okay and I then went back to grad school got involved with some startup so I was there I was on the you know 50k team for Akamai could have dropped out done that got involved with some others and so asked but I'd already left a great startup to go back to school so I'm like I'm gonna go through school and then I wanna start something that was my that was my plan and the spring start hang on some different ideas and one of my good friends from from college I said you got to come up here something's gonna happen and he had been trading on eBay okay and I'll make this much shorter because I can go into it in great detail but it's you know in the interest of time he was selling some stuff at these prices I couldn't believe like stuff that you get for free selling for 50 dollars on eBay and I'm like it those prices I want to sell everything I own and so we're doing a thought experiment you know you know we look for some objects on there and the same item would have many different prices and it's like that's not an efficient market what if we could capture the prices as auctions expire and build a price catalog right so imagine a stock market you didn't know less trade it wouldn't be very efficient right so we did some analysis we imagined you know we had a hundred million things in one place that was a canonical catalog of the items sold and against the thought experiments not an easy thing to do and then we thought well if you're gonna monetize this something's got to be three clicks away okay if you take a hundred million things though and build a taxonomy of that you know and you allow for things to be in more than one place you quickly find that you'd have to be about thirty levels deep in order to get to an object and if you say assign a probability of 95% you picked the right choice each step of the way it's zero that you ever get there and at that moment we realized the problem to solve is how do I type in a concept in this case it was Sinatra right we're looking and we're looking at Sinatra memory Lea and get a Sinatra store instead of a Sinatra list and basically what we had recognized inadvertently is a core challenge of relational databases which is if you know the perfectly form question you can ask that of a database right but how does a database give you the relevant questions to ask so we kind of inverted it and we had to build the technology to do that but it turns out because it was a fundamental database problem it's the same problem that exists in business intelligence so it shows up in a bunch of places okay by the way actually I'm gonna add one thing just before we lose that what Steve just said there was just a perfect example of a story that if you could tell that to an entrepreneur is gonna get them absolutely hooked because it was a real-world example of something that Steve had experienced with a very real problem that you could instantly see would have huge implications in e-commerce or business intelligence that's just such a great entrepreneurial instinct that Steve has that I just encourage you to recognize and think about how are you forming your potential opportunity and how will you tell that story I hope you don't mind me putting on spot like that but but presumably that story you play that story over and over and it didn't really change to even to the end right I mean there was a lot of you know things along the way but effectively that's what Oracle bought yeah Oracle bought that story I probably use that story when they did diligence yes that's worth remembering so in a 0 to a billion dollars that was the story sorry question fact right and this this is a journal question and this can be for anyone else who's been up and to speak as well um but talking a little bit more about the human building the human capital I'm at a point where I need I need to really dig into this but I'm trying to bootstrap myself how do I convince the people and the right people and find those right people and get them to do it for peanuts and equity okay so it's your persuasiveness how desperate they are no but I mean it's all it's no different than selling any investor they're investing their time okay which is which most likely is they're scarcest resource so they got to believe in the opportunity they got to believe in you okay you know how do you sell yourself to them right is your background appropriate for it right and sometimes you may not get your a list it's like you're recruiting a you know a baseball team you may not get your first round draft picks but can you get a second or third round right make some progress and build up from there okay but there's no magic to it I think it's it's it's you know the the best thing you could do is you've got a few people that might be more credible than you in that particular market because they had specific experience or maybe you have all the credibility if you do then you're not gonna have a problem probably getting someone to work with you but you can get some others to help Bouch for the opportunity and help you with that right so getting you know some friends advisor types that might be very specific to that market could be very helpful for you great question I'm just I'm curious you went through two rounds of raising and you went through hell and back going through the different economic downturns what made you say we're gonna go acquisition this time well I didn't have another option in those other two times okay so and I mean you know it's it's it's as much art as science is to assess you know what's the value of what you created what's the risk in going further there are a lot of other constituents you have not only investors we have people who invested time over many years right and this is an opportunity for them to you know have the resources to go start something you know that sort of thing so there's a lot that goes into the calculus right there's no simple answer you know also you know it was preferable to not be a public company as far as I was concerned right there's a lot of reasons we could go into Annette it's like almost a whole discussion but you know there's no know one thing I can point to but having the option that gave us the you know chance to consider it I mean was part of that process also looking out for your people I mean it's it's really I I'm very empathetic and sympathetic to that point that you you look out for your people as much as you look out for the company because they are your company yeah and I'm just curious like was I mean this it sounds like you went with what would help them and the company survive but I'm curious was you're going with Oracle the most beneficial deal for your capital your human capital the it turns out I mean it was basically the question of as we had more than one option than Oracle was that option going with Oracle also the best for the people at the company right and both options had pros and cons okay so it wasn't like a clearly dominant thing right I was pleasantly relieved when we made the announcement and people knew what the other option was quite a few people came up and said I'm glad you made this choice okay so that that felt good and in the end you know I think it was the right choice for you know for a lot of reasons well just to keep us on time I'm gonna say a very big thank you again to Steve we really appreciate [Applause] [Music]

Channel: Harvard Innovation Labs

Views: 75,856

Rating: 4.9062181 out of 5

Keywords: harvard i-lab, harvard innovation lab, michael skok, startup secrets, north bridge venture partners, funding, seed money, venture capital, angel investment, endeca, steve papa

Id: MuTdS29M1o4

Length: 116min 26sec (6986 seconds)

Published: Tue Apr 16 2013