9 Quick Tips Learned While Raising $33 Million In Venture Capital

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9 Quick Tips Learned While Raising $33 Million In Venture Capital


As the market improves, my guess is that many of you will likely be thinking about raising funding for your company.  With my latest startup, I’m now a venture-backed startup founder (I’ve raised $33 million in three rounds of capital for my marketing software company).  So, I’ve got some direct experience with the process.  Several of the companies I’m an angel investor in or otherwise involved with have also been in the fund-raising process.  So, along the way, I’ve learned a few things, and I’d like to share them with you.onstartups cash pile


There’s already lots of great content on the web about raising capital and understanding deal terms.  My favorite is the content on Venture Hacks (a must read, if you’re raising capital).  But, I figured it wouldn’t hurt to share some of the “lessons learned” from my own experiences.  Some of these you’ve probably heard before, but one or two will likely be new to you. 

And, a quick note before we jump in:  I’m doing a FREE live webinar with my co-founder at HubSpot, Brian Halligan this Wednesday, February 10th at 1 p.m. ET.  The title is “Money, Marketing and Management with HubSpot’s Founders”.  The idea is to share a bunch of practical tips we’ve learned while building HubSpot (including some insider stuff gleaned from raising $33 million in VC).  If you’re intereted in this article, you’ll probably like the webinar.  If you can’t make this specific time, you can still register and we’ll send you an email with a link to the recorded version. Oh, and did I mention, it’s free? 

Sign-up for: Money, Marketing and Management (aka “Stuff we learned about startups that you’ll probably find useful”)

Ok, back to our article.

Insights From Raising $33 Million In Venture Capital

1.  Get the first round right:  The terms of your Series A deal are very important. Not just because of the impact on that first round, but because many of those same terms are likely to carry through to future rounds.  It’s tempting to concede on some important terms because you’re thinking “well, that’s just life…and it doesn’t seem like that big of a deal.”  Try to resist that temptation.  One of the things I’ve learned is that when negotiating the term-sheet for your Series B or Series C round, the “base” terms (the starting point of negotiations) is whatever terms were in your Series A.  So, if you agree to some non-favorable terms on the “A” round, you’re not just paying the price for that concession in this round, you’re likely going to continue to pay in future rounds as well.  Factor that in. 

2.  Avoid valuation infatuation:  Entrepreneurs often become obsessed with the pre-money valuation on the deal.  Though this is certainly an important element of the transaction there are other factors at play that have significant impact on the raw direct economics of the transaction including the employee stock option pool (and who pays for it). If you get close to finalizing a deal, it is imperative that you have a spreadsheet that helps you understand the economics of the deal.  You should read Jeff Bussgang’s article on the topic.  It is worth your time.

3.  Raise more than you need:  Regardless of how much capital you raise, chances are, you’re going to have wished you raised a little bit more (or perhaps even a lot more).  Within reason, if you have access to capital and the terms are decent, raise more than you think you need.  Don’t get hung up on dilution.  To help you overcome this fear of too much dilution, build yourself a simple spreadsheet that models the actual financial impact to your person bottom-line based on various outcome scenarios.  What you will likely find is that if things go really well and your startup is the spectacular success it deserves to be, the extra dilution is not going to change things all that much.  And, if things go really poorly, it won’t matter either (because those extra common shares aren’t going to make you money).  You might be thinking “I’ll just raise the additional capital in a future round, at a much higher valuation” — which is somewhat right.  But, what you should keep in mind is the transactional cost of the additional round.  Raising a venture-round is a very time consuming process and when your bank balance is getting low, you’re going to really want to just keep working on the business instead of shifting focus back to the funding game.  In short:  If you have the ability to raise a slightly larger round, and the terms are reasoanble, you should probably go ahead and take the extra money.

4.  Know what “market” is:  It’s possible that you’ll encounter some not so favorable terms during your VC negotiation — terms that are not that common.  It’s also possible that your potential investor is just pushing on the edges a little bit to see what they can get away with.  You need to know which terms are actually rare/uncommon.  Your strongest line of defense against weird, non-favorable terms is a line that goes something like “that’s not market”.  This is sophisticated VC-speak for “what you’re asking for isn’t very common in VC deals right now.”  This line of defense has two advantages:  1) it works  2) it demonstrates your savviness. To figure out what the common deal terms are now, track down the report that one of the larger law firms that does a lot of startup transactions publishes periodically.  The report usually includes (among other things), what percentage of transactions have specific deal terms (like participating preferred).

5.  Orchestration is important:  Try to keep the interested parties moving along at as close to the same pace as possible.  You don’t want to get a term-sheet from one VC and have had the first meeting with others.  Orchestration is not easy, but it’s important.  The reason is that to really get great VC terms in a round, the single largest contributing factor is competition.  If you can get two or more VCs competing to invest in your company, you’ll get much better terms.  As it turns out, this is not easy to do because to really get credible competition going, you’re going to need to have several VCs at the “termsheet” stage of the conversations.  If one VC delivers a termsheet to you, but you still haven’t had the second (or third or fourth) meeting with some of the others, it’s going to be tough to get that competing termsheet.  Meanwhile, the VC that gave you the first termsheet is going to be “anxious” for you to accept.  This anxiousness could manifest as simple “prodding” or as an out-right “exploding termsheet” (i.e. a termsheet with a deadline).  So, try to keep your conversations moving forward with several VCs are a similar pace.  The good news is that nothing accelerates the process of other VCs more than knowing that you’ve already gotten a termsheet.  Once you get that first termsheet, you’re likely to get more as the VCs try to jostle for position. 

6.  Beware deal fatigue:  Even in good times, fund-raising is an arduous process.  Be prepared for yet another round of meetings, yet another level of due diligence and yet another round of negotiations.  Don’t try to sprint to the finish line and be exhausted when you get there — you may have another lap to go.  And, it might be the most important lap.  Much like any large negotiation, there are often relatively important deal terms that get finalized in the final stages of the deal.  You need to maintain your energy so that you don’t just give-in on some of these seemingly unimportant “details”.

7.  Don’t Use Your Uncle Larry As Your Lawyer:  As entrepreneurs, it’s not often that we need to engage legal counsel.  In fact, if this is your first startup, it’s possible you’ve never actually hired a lawyer before.  If you’re raising venture capital — you need a lawyer.  And, your uncle Larry who helped you out with that lease agreement last year is not good enough.  You need a lawyer that has done many venture financing deals before.  This is a high stakes game.  VCs are super-smart and they negotiate financing deals all the time.  They do this for a living, you don’t.  You need someone that has competency in this area.  A great lawyer understands the nuances of this game both from the perspective of which deal terms are important, what “market” is (#4 above) and when to stay firm and when to concede.  I’ll say this one more time for effect:  You need great counsel that has tons of startup financing experience.  Don’t be penny wise and pound foolish on this.  Oh, and by the way, you might want to know that you’re likely going to pay for the legal fees of the VC as well (it comes out of the funding round).  I’m not sure why this is, and I don’t like it one bit, but it’s common practice. 

8.  Partner personalities matter:  Yes, ideally you’ll be raise funding from a top-tier fund that’s a great brand.  But, what’s more important is that you fundamentally like the VC partner that is investing in you.  This is a long-term relationship and life is short.  You might part ways with one or key team members along the way (which is never fun), but your venture investor will almost certainly be with you until the very, very end.  If you have the luxury of choice, you should put strong weight on the person you take money from, not just the firm and not just the deal-terms.  I followed my own advice on this in our funding rounds.  We had higher offers than the deal(s) we took, but we solved for the best overall deal and the best partner. 

9.  Switching Partners Is Hard, Do Your Homework:  It’s likely that in the early stages of your VC process, you’ll get introduced to a particular partner at a firm.  Usually, this is based on what area that partner invests in (i.e. which one you “fit” with).  But, in many larger firms, there might be more than one partner that could conceivably do your deal.  Or, you might get bucketed wrong (because your startup straddles a couple of areas of intest for the firm).  If that’s the case, you need to work hard to figure out who the best partner would be (from your perspective) and try to connect with that partner as early in the process as possible.  Once conversations begin in earnest, it’s very, very hard to switch to a different partner within the firm. 

So, what do you think?  Are you going through the arduous process of raising venture capital now?  Or, have you been through the pain before?  Any of this stuff ring true?  Would love to read your thoughts and experiences in the comment.  Oh, and if you have questions you’d like me to address my upcoming webinar (which will spend a fair amount of time on funding), leave them as a comment.  I’ll pick a few and address them.  Thanks.

Posted by Dharmesh Shah on Mon, Feb 08, 2010


Hey Dharmesh, thanks for the info here. Do you have a link to one a report by one of the big law firms, or just to a page where they publish them?

posted on Monday, February 08, 2010 at 8:26 AM by Frederick Cook

Good advice. FYI - Barry Kramer and Michael Patrick at Fenwick publish a quarterly report that sets forth "market" terms in the Silicon Valley. The last one I am aware of is for Q309. http://www.fenwick.com/publications/6.12.1.asp?vid=11

posted on Monday, February 08, 2010 at 8:55 AM by Brad Furber

I like the suggestions, thank you!! I have a business that I am currently seeking funding for, do you have any suggestions as to where the best place is to find $$$'s?

posted on Monday, February 08, 2010 at 9:00 AM by Tim

I just wish to know, what is the % age of your company you shared with your VC, Did the % age remain same on all rounds of funding (or) it may increase, Generally the hands of Vc's stays higher if a company gets funded - so i also wish to know the % age negotiation between you and your VC. 

posted on Monday, February 08, 2010 at 9:01 AM by B.K.Saravanan

I need to raise venture capital but I'm not well connected. How do I go about getting introduced to VC's so I'm not just throwing my business plan on their doorstep?

posted on Monday, February 08, 2010 at 9:24 AM by Rick O'Hara

Are you a VC now ? I'll be using your notes for any negotiation, with anybody, about anything, thanks Shane

posted on Monday, February 08, 2010 at 9:33 AM by Shane O'Doherty

Nicely consolidated post! Congratulations on your successful raise! 
Just a few questions (for an Internet/Web based business): 
1. Typically what is the market size (in which the company plans/is already operating) that often a VC looks at? 
2. What's "in the market" Term Sheet for a Startup currently? 

posted on Monday, February 08, 2010 at 9:46 AM by Harsh Vardhan Thakur

Great post!! Nine excellent points. I wouldn't call out a single one over the others.

posted on Monday, February 08, 2010 at 10:18 AM by Don Rainey

As a former VC who was interested in both your A and B rounds but who was not able to squirm my way in, I think you are forgetting a couple of things that made the Hubspot fund raising process so successful.  
1) You and Brian were great founders who had done very impressive things before. VCs love previously successful execs, and you guys had this in spades. If you try to be too modest here you are going to mislead other startup founders. You need to be upfront and make it clear that you were known entities with awesome track records. 
2) You had really begun to prove your customer acquisition process. You knew where you were getting leads, how much it cost per lead and what your close rates were. You were also doing this in a way that clearly scaled. VCs could easily see the company growing from this. Companies that do not have this "proof" find it much harder to raise capital. Hubspot was not just a technology idea, or just a developed technology - it was a functioning marketing and sales machine. 
Healy Jones

posted on Monday, February 08, 2010 at 10:18 AM by Healy Jones

I believe the spreadsheet you mention for tracking share of the company and dilution through rounds is called a capitalization table in VC-land.  
We have a customizable capitalization model that yields an Excel template. You can customize it by filling in a simple web form. Take a look at <a>http://www.modelsheetsoft.com/capitalization-table-templates.aspx. 
If this "cap table" does not have features you think are important, please tell me about them.

posted on Monday, February 08, 2010 at 10:50 AM by Richard Petti

Thanks Dharmesh for the insights! Very helpful. 
Healy, by "successful exec" do you mean "successful founders" or would that also include "successful employees"?

posted on Monday, February 08, 2010 at 11:02 AM by Dharm

Dharmesh - This is an outstanding post, with great practical tips. Indeed, as a corporate lawyer for 15+ years, I cannot emphasize enough the importance of diligencing the guys on the other side of the table - both the firm and the partners (as you discuss in tip #8). Indeed, I discuss this issue in detail in tip #1 of my post here: http://bit.ly/5Gccio. Needless to say, your tip re retaining experienced legal counsel is spot-on as well. 
Scott (@ScottEdWalker)  

posted on Monday, February 08, 2010 at 11:37 AM by scott edward walker

a best one to read - good job...

posted on Monday, February 08, 2010 at 11:59 AM by Madhu

Dharmesh - useful insights. As you point out, finding/selecting the right investment partner for the long-haul is the objective. 
On the flip-side, there are many things that can happen along the way, which can stress or impact the relationship and confidence between the parties. 
Further, do like your real-world, perspective on valued employees and co-founders (or other significant connections) - they predictably will change, as the business goes thru different phases and cycles. 
Some can be harsh and not endure, although that is less painful than a key investor pulling the plug. 
Will look forward to your continued material and webinars on this key subject for aspiring companies. 
Edmond Hawkeye Hennessy 
Performance Marketing Group 
Author: Market Warfare: Leadership & Domination Over Competitors 
A breakthrough book endorsed by Jay Conrad Levinson - the Father of Guerrilla Marketing

posted on Monday, February 08, 2010 at 12:18 PM by edmond hawkeye hennessy

We are ramping up as we speak to go out for more money. Every point you raised rings true. The one that strikes me the most is: Beware deal fatigue. 
You can also get Fund Raising Fatigue, which can crater your perspective on what a good deal looks like. Knowing the market is important for that but also not taking rejection personally helps get past the "venture speak for no" excuses. 
One other thing that I have found is that you have to have a balanced story that focuses on all aspects of the business -- not just the technology. Scale and exit are also important. 

posted on Monday, February 08, 2010 at 12:38 PM by Jarie Bolander

Awesome post, Dharmesh. I really like the points you make on 'orchestration' and getting multiple, competing investors interested when negotiating valuation and the rest of the terms. I wrote a blog post on the topic of startup valuation (see it here: bit.ly/5w3m1Z) and the long-winded explanation basically boils down to: i) valuation (and other terms) are set by the market; and, ii) your best way to influence the market is to get some heat (aka competition) going for your deal.  
Another tip I might add to your list: in addition to lining up a good attorney who is familiar with "market terms", try to get your due diligence package organized before launching your fundraising roadshow...things like cap table, employee agreements, IP, customer and personal references, etc.  
It can be hard to scramble to put it all together at the 11th hour, and you don't want anything slowing down the deal or causing you to lose momentum.  
Thanks for the excellent content! Nathan Beckordwww.venturearchetypes.com

posted on Monday, February 08, 2010 at 12:41 PM by Nathan Beckord

Most entrepreneurs have little to no funding experience. Healy brings up Dharmesh's past successes – Dharmesh is working in a known environment where as most entrepreneurs are not. There is no discussion about what is required prior to seeking VC funding, like angel investment or personal money invested prior to the Series A Round? Entrepreneurs need to understand the “crawl, walk, run” levels of funding.  
Crawl – Company has a plan and has launched the business (self-funded, CC’s, Family/Friends money) usually over the course of 12-24 months. 
Walk – Proven concept and paid back some or all of their debt and have an actual working business model. May occur within the first 12-24 months but usually won’t impress many VC’s if it isn’t north of a million in revenues. 
Run – Can demonstrate to investors how their model will scale, is sustainable and ramp up quickly with the “fuel” (money) they provide. 
It would help to have information regarding what was originally presented to VC's, i.e. was hubspot profitable, did Hubspot have a patented technology, was there a management team in place, how much of their own money was invested, etc. 
Hubspots current numbers indicate $6-18 million in revenues... where were they when they received their first round of funding? 
Using my own company as an example: 
We are pre-launch, self funded and profitable with enormous scalability. 
We have a patented web-based application, beta tested with a fortune 100 customer.  
$350,000 in pre-sales booked for 2010 and a multi-year agreement to use our services. 
A supply chain and distribution channel established for US, Canada, Mexico and Puerto Rico. 
And with all of these achievements the only thing I can see “to-do” here is hire a lawyer… but I am not even sure we are a candidate for a VC firm… probably more of an angel investor… which gets me back to my original point… 95% (my number) of entrepreneurs need a “You Are Here” map to get started in the funding environment.  
Shark Tank on ABC is a good example of an angel investment that most every entrepreneur will have to go through before they approach a VC firm. So my thinking is all of these quick tips probably should be applied to angel investing. Once you have a good angel investor finding a VC firm with their help should be much easier. 

posted on Monday, February 08, 2010 at 2:27 PM by Steve Scott

This is a fantastic post Dharmesh. We are in the middle of fundraising now and this is very timely and sage advice. We've heeded advice from others about hiring a great attorney and I think we did--we choke at the bills, but it's been well worth it. Thanks!

posted on Monday, February 08, 2010 at 5:55 PM by Chris Rodde

Great informative post as usual Dharmesh

posted on Monday, February 08, 2010 at 8:25 PM by VentureDen

This is great advice for someone like me who is looking for VC in a third world country (Indonesia). We are a niche company specializing in assisting exporters to the United States. My question is - should be diversify in order to improve our viability - we have many, many excellent local contacts.

posted on Monday, February 08, 2010 at 9:18 PM by John Fenton

This is very sound advice. One more item worth adding is that you don't have to go through this arduous and time-consuming journey alone - or with the cold comfort of a lawyer as your only companion. Does that sound like fun or what? There are corporate finance advisers (like Evergreen Equity in Sydney) who can work with you to sharpen your pitch, introduce you to potential funders (a warm call is always better than a cold call) and support you through the negotiation and documentation phases. Well worth considering.

posted on Monday, February 08, 2010 at 10:14 PM by Adam Burck

A very helpful resource to add: 
The Handbook of Financing Growth, by Kenneth H. Marks. He is also a the Founder & Managing Partner of High Rock Partners, Inc., an (Investment Banking industry). The Handbook would be an invaluable wealth of information to help business leaders and advisers in this field gain a firm solid understanding of the financing strategies. 
A lot of current business owners and managers, found that many of their capital plans fell apart because of a lack of professional business development advice available and the shortage of advice on how to access external investors. 
The Handbook also outlines the full spectrum of funding alternatives currently available to emerging growth and middle-market companies and presents the practical strategies and techniques you need to be aware of when considering the capitalization, and growth or sale of your, or your client’s, company.

posted on Tuesday, February 09, 2010 at 3:51 PM by Melissa

Great post, unfortunately, few entrepreneurs have the luxury of competing investors in this environment. I find myself advising people to take your funding where you can find it. 
With respect to what is market, there are some interesting variances between the east coast and the west coast. One commentator mentioned Fenwick's publication, which covers deals done in the valley. Our publicaton, EEC Perspectives, provides similar data concering terms, valuations, numbers of deals etc. in the New England area. Q4 and year end data should be published this later this week. I understand it is bad form to plug your own stuff on other people's blogs, so I wont say more, but if you search you should find. 
With respect to legal fees, the bad news is that they are high, but the good news is that lawyers are not immune to the general economic environment and we want new promising clients. Don't be too shy about having a serious conversation about cost (before your lawyer starts chalking up the hours) with your lawyer. If there is a good chance for a long term profitable relationship, he or she may surprise you.

posted on Wednesday, February 10, 2010 at 11:41 AM by dave broadwin

Very good advice... I'd also add that it must be something you are completely passionate about. Raising money from outside sources when you don't have interest in your business is a quick deal killer. 
Jon @ WoodMarvels.com

posted on Wednesday, February 10, 2010 at 11:22 PM by Jon

I find this post fairly naive Dharmesh. You raised this money because you have a successful track record. Full Stop.  
The rest is just BS so you can feel good about yourself and peddle "advice". I am always perplexed why so many people like to pretend otherwise.

posted on Monday, February 15, 2010 at 2:28 PM by David Davis

Pardon my newb comments here, but is venture capital something for new and unique companies or products? What about raising money for something that I know works, but need to expand upon? Could I get venture capital for that, or should I just stick to a business loan?

posted on Wednesday, February 17, 2010 at 1:52 PM by Victor

Good post with lost of useful tips. I think the commenter above who mentioned that knowing where you are (bootstrap vs. pre-rev vs. revenue vs. expansion capital) is right on. It will ensure you're getting 'funding fatigue' with people who can execute against a deal if they do so choose, and you're not chasing capital guys that don't play in your field, and at your funding level.  
This also means that as you bootstrap more and grow revenues, you theoretically may need less capital from external sources. This takes you out of play from some of the big names who do $5-$10mm minimums. Do your research and you'll find those who fall in your sweet spot. 
The second point is that I believe a good law firm is worth the fees. I know that our attorney has played a key role in helping me understand the current angel and VC landscape, and how to position deals accordingly. If you have a strong idea/prototype, a law firm may extend you credit terms enough to cover your initial set up and round. They're betting that your idea is solid enough to get funding so they get paid back. Also, it encourages them to make intros for you. Finally, from day 1, they can help you structure your company in a way that the smart money likes to see. Down the road, you avoid having to go back and fix things - which is neither pleasant or inexpensive.

posted on Wednesday, February 17, 2010 at 10:04 PM by Steven Cox - TakeLessons.com

Hey all! 
->> @Healy Jones  
You solved the case. People here should read his comment. 
I understand you are not God :-), but you have an impressive background and that is half way to success. 
Another great post.

posted on Thursday, February 18, 2010 at 9:02 AM by Fernando Emmanoel Borba

Thanks everyone for your comments, and I would like to make one point clear: 
Raising VC is *not* by any means easy, and I don't want to mislead anyone. I've been vocal on this blog and in my public speaking sessions that the odds of raising money from venture capitalists is actually very, very low.  
HubSpot was a special case. I'll write about this in a future article, but the summary is that we had a bunch of things stacked in our favor so we weren't the "typical" case (by far).

posted on Thursday, February 18, 2010 at 10:10 AM by Dharmesh Shah

Startups are an important sector in the investors industry and we must all support them. Check out startup reviews on http://www.vcgate.com/2009/09/28/adimos-takes-the-wiring-out-of-your-home-entertainment-system/

posted on Tuesday, February 23, 2010 at 4:19 PM by John Dwight

Startups are an important sector in the investors industry and we must all support them. Check out startup reviews on http://www.vcgate.com/2009/09/28/adimos-takes-the-wiring-out-of-your-home-entertainment-system/

posted on Tuesday, February 23, 2010 at 4:28 PM by John Dwight

Sou do brasil e quero muito poder trocar experiências com você que possue total sapiens sobre o capital de risco. investidores aplicam em paises emergentes e esse é o nosso caso, pois temos um projeto audacioso voltado para uma empresa que constroi casas e prédios no estilo light steel framing e estamos atrás de recursos financeiros para podermos montar a nossa indústria de casas e prédios nessa modalidade, light steel framing aqui na região amazônica do Brasil. 
Saudações cristãs, 

posted on Thursday, February 25, 2010 at 8:22 PM by LUIZ SUZANO

Dharmesh - I need a full proof NDA to present to a few VC meetings I have coming up. Something that covers patent laws possibly with a severe penalty. Actually, can you send me a NDA that you have or where I can obtain a rock solid NDA? I have seen a few already and I am not impressed. Great Article by the way.

posted on Friday, February 26, 2010 at 2:47 PM by John Magagnini

Loved your 9 tips and decided to re-assess them relative to the area we work with. Companies raising capital PRIOR to Venture Capitalists. 
I've reworded some of the sections but found most applied and the structure worked. 
The 9 tips for "pre-venture capital" can be found here ... 
ASSOB - Capital Underdogs

posted on Saturday, February 27, 2010 at 4:41 AM by Paul Niederer

Sorry ... Link above should be ... 

posted on Saturday, February 27, 2010 at 4:46 AM by Paul Niederer

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