Raising Seed Capital: Steve Schlafman (@schlaf) RRE Ventures

RAISING SEED
CAPITAL

RRE VENTURES | RAISING SEED CAPITAL
Steve Schlafman (@schlaf)
RRE Ventures

Last Update: February 3, 2014
ABOUT ME

Principal, RRE Ventures
Raised in Boston, live in NYC
@schlaf
schlafnotes.tumblr.com
linkedin.com/in/schlaf
My values guide me: intellectual
curiosity, hard work, honesty,
humility, empathy and transparency
1
RRE VENTURES
Established 1994
Most active early stage firm in NYC for nearly two decades
Stages: Seed, Series A, Series B
Sectors: SAAS, Fin Tech, Commerce / Marketplaces, Consumer Mobile
Services, Hardware, Ad Tech
Mix of investing and operational expertise
Support platform with unique access to Fortune 500
Stuart
Ellman
James
Robinson
James
Robinson III
Will
Porteous
Eric
Wiesen
Adam
Ludwin
Tom
Loverro
Jay
Hass
2
RAISNG SEED CAPITAL
VC Basics..05
State of Market.....17
Sources of Cash......24
How to Prepare........................................33
The Pitch.......51
After The Pitch..63
Funding Vehicles..67
Resources..73
One Final Thought78

3
Each investor views the world differently so this
guide is far from definitive.
I couldnt include every accelerator, angel or VC.
Im not a lawyer so consult with one before you
raise.
The focus is seed but many lessons apply for
Series A.
These slides are used for a class I teach at
General Assembly.

DISCLAIMERS
4
THE BASICS
5
YOUR FUNDING OPTIONS
Debt / Credit Cards Family & Friends
Crowdfunding Your Customers
Grants
Venture Capital
6
VC is just one option. There are numerous sources so make sure you
evaluate the pros and cons of each.
JOHN BORTHWICK
Remember that funding is a means to an
end, not an end in of itself. The end is
building a product, building a community
and building a business. Raising money
can be a challenge just remember its
not the end. Its the beginning, its the
starting point. Now you have to build.

7
HOW VC WORKS

8
VC Firm
(General Partner)
VC Fund
(Limited Partnership)
Paid 2% fee + 20% of Profits
Limited Partners
(public pension funds, corporate pension funds, insurance
companies, high net-worth individuals, family offices, endowments,
foundations, fund-of-funds, sovereign wealth funds, etc.)
Investment 1
(Ownership %)
Investment 2
(Ownership %)
Investment 3
(Ownership %)
Fund Management
Ownership of Fund
WHAT IS SEED STAGE?
9
Series A, B, C+
$2.5M - $10M+
Out of Scope In Scope
Institutional Seed
$500K - $1.5M+
Accelerator
$20K-$150K
Angel
$25K-$250K
The seed is the setup round(s) where a person or startup venture
approaches an angel or a VC firm for funding their product / idea.
Source: wikipedia
REASONS TO RAISE
10
Your Company
+
VC Funding
=
1. Grow Faster 2. Expand Network 3. Timing
Raise to accelerate growth. VC will help you scale but it absolutely will
not validate your product and market.
PAUL GRAHAM
The other time not to raise money is
when you wont be able to. If you try to
raise money before you can convince
investors, youll not only waste your time,
but also burn your reputation with those
investors.

http://paulgraham.com/fr.html
11
RAISING VC CHANGES
EXPECTATIONS

12
With VC Funding Without VC Funding
IT TAKES MORE THAN SIX
YEARS TO EXIT

13 Source: http://www.cbinsights.com/blog/trends/venture-capital-exit-timeframe-tech
ITS A ROLLER COASTER

14
Back & Forth
Struggles Wins
HUGE EXITS ARE RARE

Source: http://techcrunch.com/2012/04/09/facebook-to-acquire-instagram-for-1-billion/ 15
HERES THE PROOF

16 Source: http://info.crunchbase.com/2013/12/16
The average
successful US
startup has raised
$41M and exited at
$242M
The average
successfully acquired
US startup has
raised $29.4M and
sold for $155.5M

The average IPO-
bound startup raised
$162M before going
public
JAKE LODWICK
Many entrepreneurs underestimate the
time and energy that goes into
fundraising. I wouldnt expect to
accomplish much creatively or technically
until the raise is completely wrapped.
17
STATE OF THE SEED
MARKET
18
VCs ARE RAISING CASH

19 Source: Preqin Special Report: US Venture Capital Industry (October 2013)
AND SEED DEAL VOLUME
REMAINS STEADY

20 Source: http://www.cbinsights.com/blog/trends/2013-seed-venture-capital
DOLLARS INVESTED ALSO
REMAIN CONSISTENT

SIZE OF SEED ROUNDS
GROWING

$ in millions
SAAS & EDU WON 2013

THE NEW FRONTIERS
24
Cloud Compte
Social Platforms Digital Currency
Wearables Connected Home Context Compute
Connected Cars
UAVs
Mobile Services Private Space
Bioinformatics
Industrial Internet
SOURCES OF SEED
CAPITAL
25
BEN LERER
Try not to fall in love with a firm focus
more attention on the partner leading the
deal. Ultimately that partner will be the
person you have to deal with so raising
from a great firm but putting someone on
your board that you dont love wont end
up working out.
26
NOTABLE ANGELS
RRE VENTURES | RAISING A SEED ROUND
27
Bill
Warner
Gary
Vanyerchuk
Esther
Dyson
Mike
Lazerow
Naval
Ravikant
Dharmesh
Shah
Jason
Calacanis
Joanne
Wilson
Max
Levchin
Elad
Gill
Mitch
Kapor
Karl
Jacob
Scott
Belsky
Paul
English
Dave
Morin
Michael
Birch
David
Tisch
Mark
Cuban
Kal
Vepuri
Jerry
Neumann
Lee
Linden
ACCELERATORS
28
A three to six month startup boot camp that provides mentoring, office
space and access to capital in exchange for 3-6% of common stock.
NOTABLE SEED FUNDS
29
Seed funds tend to invest $50K - $750K in an institutional seed round
which is usually up to $1.5M. These funds invest together as a syndicate.
VCs w/ SEED DEALS
30
VCs typically lead $3M-$10M+ Series A rounds but some invest $50K -
$1M in seeds to back great founders and / or learn about emerging tech.
CORPORATE VCs
31
Corporations often have funds that invest in startups for strategic and / or
financial reasons. These funds typically focus on Seed and Series A.
CHRIS POOLE
The airport / friendship test is real. When
youre pitching investors youre at your
best you need to pick people who will
support you at your lowest points as well.
32
HOW TO PREPARE
33
LAUNCH & LEARN
If technically feasible you should launch a minimum viable product (MVP)
before raising capital.
Benefits of launching
Validate early hypotheses
Social proof / traction
Feedback from real customers
Evidence team can ship
Develop bootstrapper mentality
Easier to raise capital
34
If you werent embarrassed by the first
version you launched too late.
-Reid Hoffman
BRE PETTIS
Bring your product to market as quickly
as possible so you can start to learn from
your users.
35
FIND A GOOD LAWYER
36
Once you determine VC is the right funding option for your company
make sure you partner with an experienced law firm.
SEEK ADVICE
37
Before you kick off the fundraising process, build an experienced advisory
board that can help with strategy, introductions and general advice.
Investors Successful Execs
Venture Capital
Professors Industry Experts
Founders
Influencers
GINA BIANCHINI
Find a tribe of fellow entrepreneurs a little
ahead of you in progress who will give you
honest feedback and clear direction on
your pitch and more importantly the
progress you need to show in order to
raise money in the first place. The pitch is
nice but the progress is critical.
38
Location Expertise / Focus Partner
Brand Support & Relationships Strategy & Stage
CHOOSING YOUR VC
39
When selecting your investors there are a variety of factors that should go
into the decision making process beyond financial terms.
MATT LAUZON
Make sure you spend whatever time and
energy is necessary to involve investors
who are aligned with your vision.
40
STRUCTURE A PROCESS
Create a spreadsheet or use a CRM like Streak.com for targeting and
tracking your VC conversations. Heres an example you can use:
Firm / Angel
Weight
(1-5)
Stage Location Strategy Sector / Focus Relevant Companies Point of Contact Title Email Referral Last Contact Next Steps
Investment
Amt.
A16Z 1 Target SF A, B Marketplace, SAAS FiftyThree, Airware Chris Dixon Partner [email protected] Steve Jobs 12/15/13 Follow up
NextView 1 Intro'd Bos Seed Mobile, SAAS Directr, Sunrise Rob Go Partner [email protected] Tom Brady 12/12/13 Follow up
Lerer Ventures 2 Intro'd NYC Seed Media, Commerce RapGenius, Buzzfeed Eric Hippeau Partner [email protected] Jane Jacobs 1/5/14 Schedule mtg
Floodgate 2 1st Pitch SF Seed Marketplace, SAAS Outbox, Chegg Mike Maples Partner [email protected] Sally Ride 1/8/14 Send deck
Lightbank 3 Dilligence Chi Seed, A SMB, Local, Marketplace GroupOn Paul Lee Partner [email protected] Mark Zuckerberg 1/15/12 References
SV Angel 4 Decision SF Seed Consumer Square, Airbnb David Lee Partner [email protected] Bill Campbell 1/16/14 Call on Wed
Founder Collective 5 Commit Bos Seed Marketplace, SAAS CustomMade, IFTTT Eric Paley Partner [email protected] Jason Calcanis 1/20/14 Finalize terms $250,000
41
SET ROUND SIZE
Estimating the amount of capital youll need requires more art than
science. Here are some tips to keep in mind during your quest.

1. Runway: Raise enough capital to give yourself 18 months. Keep in
mind it will likely take 3-6 months to raise a Series A.

2. Dilution: Every time you raise a round, try to sell no more than 10-
25% of the company.

3. $ Target: Set a modest raise amount. Its always better to nail your
target, say youre oversubscribed and then increase the size of
round depending on investor interest and terms / dilution.
42
MIKE KARNJ
Think about your next milestone and
work backwards from there to determine
how much money you need to raise.
43
KNOW YOUR BRAND
Your brand equals the sum total of positive and negative interactions that
partners, customers and employees have with your company.
44
In this ever-changing society,
the most powerful and
enduring brands are built from
the heart. They are real and
sustainable. Their foundations
are strong because theyre
built with the strength of the
human spirit, not an ad
campaign.

-Howard Schultz, Starbucks
TINA SHARKEY
Entrepreneurs should think about how to
unlock the narrative from their product or
service. What is the true story they are
trying to tell? What types of stories do
they want their users to share?
45
CRAFT YOUR STORY
The story behind your company and product is often one of the most
important things an investor will want to know. Dont underestimate it.
Its not what you do, its why you do it.
-Simon Sinek
What was the impetus for starting
the company?

Why are you obsessed with
solving this problem?

How did the founders meet and
decide to partner?

Why are you willing to sacrifice
years of your life to work on this?

What is your cause, your belief?
46
GEORGE PETSCHNIGG
Write a pitch deck for the people you
want to hire first, and investors last. When
starting out, the first audience for your
deck should be your founding team. Use it
to get on the same page. The next
audience is your first few hires, they
should believe in the vision to join. The
final audience is investors and it turns out
they are no different from a great hire in
terms of what motivates them to believe.
47
BUILD PITCH DECK
48
BUILD PITCH DECK
49
NEIL CAPEL
Get to the point in the first few slides.
Dont wait to get it perfect you wont.
Additionally, practice beyond belief. Keep
practicing sell a story! Be amazing.
50
HOW TO CONNECT w/ VCs
Events & Classes AngelList
Venture Capital
Your Network Accelerators
Twitter + Blogs
Founder Intros
51
Angels and VCs are generally networked so it shouldnt be too hard to
find them if you look in the right places and hustle.
THE PITCH
52
YOUR OBJECTIVE: FOMO*
53
*Fear of missing out
Your goal throughout the process should be to create excitement,
demand and scarcity for your round. Investors often move in packs.
FIRST IMPRESSION IS KEY
Most VCs usually form an opinion of the founder and opportunity within
first 10 minutes of a pitch. Early stage investors generally look for:
Traction You + Team
Social Proof Product
54
NOAH BRIER
Be prepared to answer, why are you (and
your co-founders) uniquely suited to solve
this problem?
55
GETTING TO YES
1. Get Warm Intro 2. Review Product
3. First Meeting
4. Diligence 4. Partner Meeting 5. Term Sheet / Close
80% 60%
15% < 1%
56
Every investor / firm has a different process. Some make a decision in
30 minutes while others take months of diligence. Heres my process:
30%
DAVID EISENBERG
Dont be afraid of sharing your flaws in
your business, market, strategy or team.
Investors would rather back an
entrepreneur who is honest, who knows
her flaws, and who has a reasonable
hypotheses about how she might
overcome these challenges with more
resources and time.
57
WHAT I LOOK FOR
Complementary Team Story & Purpose
Differentiated Product Some Traction / Proof
Emerging Markets
Distribution
58
When evaluating super early stage investments there are a number of
things that I look for and place value on. Here are some them:
ZACH SIMS
Work on something where youre the
user youll always have user empathy
and youll never tire of solving the
problem.
59
WHAT I LOOK FOR (CONT)
Action Not Analysis Strong Culture
Venture Capital
Data Driven Hustle / Hacking
Customer Obsession
Great Design
60
Here are some additional things that I look for and place value on when
meeting with seed stage companies.
QUESTIONS TO ASK
1. What are the next steps in the process?
2. What concerns do you have?
3. How much time do you typically spend with your
companies?
4. Can you walk me through your decision making process?
5. How do you think you can help our company?
6. Do you lead and / or follow?
7. Whats your typical check size?
8. How does your firm think about follow on investments?
9. Is there any additional information youd like to see?
10. Which investors do you enjoy working with?
61
During the process make sure you carve out enough time to learn about
the firm, its process and how they think about your opportunity.
THINGS TO AVOID
As I mentioned earlier every investor is different but there are some
general things to avoid throughout the process.
Product demos that dont work
Derivative product and positioning
Long answers filled w/ buzzwords
Trying to have all the answers
Long pitch decks
Dont have clear raise amount
Asking for investor intros after one passes
Overemphasizing PR and press
No product team in place
Pitching different partners in firm after a pass
Bringing non-founders to 1
st
meeting
Too many emails / follow ups
62
AYAH BDEIR
Never change your pitch to tell an
investor what they want to hear. While it
might get their attention in the short term,
you quickly wont be able to keep up an
alternate story, or if you did, youll end up
with the wrong investor.
63
AFTER THE PITCH
64
YOUR ACTION ITEMS
Debrief w/ Team Send VC Requests Review Pitch Notes
Note Questions / Issues Edit Pitch Deck Update VC Pipeline
65
Immediately following each pitch session there are some best practices
you can implement which should help you throughout the process.
Terms
DECISION TO CLOSE
66
Once you have a signed term sheet in place, there are a number of final
steps you will need to complete before getting back to work.
Negotiate
Term Sheet
Build Investor
Syndicate
Review
Docs
Sign &
Wire
Legal
Diligence
Usually four to twelve weeks
JARED HECHT
Assume everything that can go wrong will
go wrong so have a plan B, C and D.
Nothing is ever done until the money is in
the bank.
67
SEED FUNDING VEHICLES
68
When a startup raises money, one of three financing instruments are used
and which one is always specified in the term sheet.
Preferred Equity SAFE Convertible Debt
CONVERTIBLE DEBT
69
Source: http://www.avc.com/a_vc/2011/07/financing-options-convertible-debt.html
Convertible debt (A.K.A Convertible Note, A.K.A. Convertible Loan) is when a company
borrows money from an investor or a group of investors and the intention of both sides is
to convert that debt to equity at some later date.
Speed
Simpler terms and less paperwork so
can close within weeks

Cost
Cheaper than equity from a legal
perspective

Control
Founder retains majority of voting
stock

Valuation
Delays valuation discussion unless
note is capped
Source: http://techcrunch.com/2012/04/07/convertible-note-seed-financings/
Key Terms/Elements Why Convertible Debt?
Discount
The % reduction in price the debt holders
will get when they convert into equity in the
future

Valuation Cap
A valuation ceiling on the conversion price of
the debt (common for seed deals)

Conversion
Point in time when holders of the debt will
convert their investment into equity (typically
occurs in the first equity funding round
following the convertible debt issuance)
SEED PREFERRED
70
Seed Preferred is a type of equity seed funding instrument that provides certain rights,
privileges and preferences to investors.
Alignment of Interests
Both the founder and investor have
unlimited upside

Valuation
Sets baseline valuation right on
closing date

Tax Implications
Capital gains clock begins to tick

Industry Standard
Many seed deals are currently being
funded with seed preferred
Key Terms/Elements Why Seed Preferred?
Source: http://www.avc.com/a_vc/2011/07/financing-options-preferred-stock.html
Source: http://techcrunch.com/2012/04/07/convertible-note-seed-financings/
Price / Valuation
Pre-money valuation / price-per-share
Liquidation Preference
Amount VCs receive in sale before proceeds
are shared with founders based on ownership
Founder Vesting
Determines timing of when founders and
employees earn their equity (e.g. 4 years)
Pro-Rata Right
Right for VCs to invest in future rounds
Board Seats
Lead investors usually require board seat
privileges to vote in strategic decisions
SAFE
71
SAFE Simple Agreement for Future Equity is a newly-formed funding instrument
meant to replace convertible notes; essentially, SAFE has the benefits of convertible debt
without the debt portion (maturity date and accrued interest).
No Maturity Date
Less pressure on startup to raise
further capital in tight timeframe

No Accrued Interest
SAFE is not a loan founders will not
owe accrued interest

Speed
Very simple terms and quick funding
timeline

Cost
Limited transaction costs due to
standardized forms
Key Terms/Elements Why SAFE?
Equity Financing Event
SAFE investors will be issued a form of
preferred stock, and the SAFE instrument
will expire

Liquidity Event
SAFE investors will be have the option to
receive cash payment or common stock,
and the SAFE instrument will expire

Dissolution Event
SAFE investors would have preference over
capital stock owners in the distribution of
assets
Source: http://ycombinator.com/safe/
Source: http://techcrunch.com/2013/12/06/yc-safe/
Monthly Email Update* Strategy Sessions
Network w/ Portfolio Real-time Crisis Mgmt Share Hiring Plan
POST INVESTMENT
72
So you closed your round and have cash in the bank. Now what? Here are
some way to engage with and get value from your investors:
*Include whats going well / not well, key metrics, hiring update, financing update, roadmap, help wanted
Specific Intros
BEN KAUFMAN
You should be really fucking
uncomfortable if the money youve raised
overshadows the work youve done.
73
RESOURCES
74
SUGGESTED BOOKS
75
Before you start the fundraising process, reading these books will help
prepare you for dealing w/ VCs and launching your company.
SUGGESTED VC BLOGS
Chris Dixon, A16Z: cdixon.org
Roger Ehrenberg, IA Ventures: informationarbitrage.com
Brad Feld, Foundry Group: feld.com
First Round Review: firstround.com/review
Paul Graham, Y Combinator: paulgraham.com
Semil Shah, Angel: semilshah.com
David Skok, Matrix: forentrepreneurs.com
Mark Suster, Upfront: bothsidesofthetable.com
Tom Tunguz, Redpoint: tomtunguz.com
Hunter Walk, Homebrew: hunterwalk.com
Fred Wilson, Union Square Ventures: avc.com
76
INVESTORS ON TWITTER
77
As noted earlier Twitter is a good place to engage with VCs and share
ideas openly. Here are some of the most active.
Marc Andreessen
@pmarca
Chris Sacca
@sacca
Chris Dixon
@dixon
Josh Ellman
@joshelman
Vinod Khosla
@vkhosla
Naval Ravikant
@naval
Kevin Rose
@kevinrose
Howard Lindzon
@howardlindzon
Brad Feld
@bfeld
Jeremy Liew
@jeremysliew
David Lee
@davidlee
Mark Suster
@msuster
Dave McClure
@davemcclure
Fred Destin
@fdestin
Keith Rabois
@rabois
IN SUMMARY
78
Raising any amount of capital is never easy. Youll hear no more than
youll hear yes. For many of you it will be a long but rewarding process.
VC is just one financing option to consider
Raise to accelerate growth
Investors come in difference sizes and flavors
Prepare, work your ass off and hustle
The real work begins after you close your round
Take advantage of resources on the web
The real work begins after you raise
ONE FINAL THOUGHT
The magic in business isnt raising
money but making money.
-Mark Cuban
79
THANK YOU

Michael Kim, Cendana Capital
Anand Sanwal, CB Insights
Maxim Spiegel, Sterne Agee
80
GOOD LUCK!

Steve Schlafman (@schlaf)
Principal
RRE Ventures
81

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