This past week, I was on a
panel discussion at MIT on the topic of raising funding for an early stage
Also on the panel was Michael Greeley
Ventures. Michael was representing the VC perspective whereas I was there
speaking primarily from an angel perspective (and alternative sources of capital
like friends, family and fools).
Here are some of the
questions that came up in the panel. Since I didn't take notes during the panel
myself, this is my best recollection from the two hour session. Please note that this is not legal advice
and if you are raising funding, you should consult counsel on all legal
1. If I raise
capital from friends and family, do they have to be accredited
Generally, yes. Though
there are ways for pool together interests from non-accredited investors, it's
usually not advisable as it can get tricky and complicated.
2. To raise VC
funding, do I need to have a complete management team
Not necessarily. Many VCs
do not mind considering startups that have an incomplete management team. Some
will actually see gaps in the management team as a positive as that is an area
that they can help with and bring value to the startup.
3. How do I
negotiate the highest pre-money value for my
Entrepreneurs are often
overly obsesssed with the pre-money valuation of their startups. Though this is
an important factor in the negotiations, it is by no means the only one. Often,
non-valuation factors like corporate governance, control and preference issues
end up being much more important than the valuation. Entrepreneurs should look
at the deal as a whole and understand the details.
4. Do investors
read business plans?
For the most part, no. A
great business plan will not guarantee funding (or for that matter, even a
meeting). If you find the crafting of the business plan helpful, then you
should do it. But, investors do not generally require a detailed, written
5. Do I need to
have formed a legal entity before approaching
It's not required for
investors prior to approaching them for funding, but is often a good idea
because it is relatively simple and inexpensive to do.
6. How do VCs
This is an imperfect
science. A common approach is that VCs will determine what the company could be
worth at the time of an exit (IPO or acquisition). They then work backwards
from there, determining what percentage of equity they need to own to generate
the desired returns for their limited partners. Of course, they apply this
approach across a portfolio of investments expecting that a small percentage
will generate significant returns.
7. How do I find
angel investors for my startup?
There's no single answer to
this. In major markets like Boston and San Francisco, many angel investors are
members of angel groups. These groups pool together expertise and resources in
order to make better investment decisions. Of course, there are also private
investors acting independently. Generally, you'll want to find investors that
have a background in the particular idea you are pursuing -- or, an affinity for
it. Angel investors often invest for reasons beyond just pure financial
return. One common reason is to stay involved in the entrepreneurial process
and help entrepreneurs build great companies.
8. How do I pick
the "right" VC?
There are a number of
considerations. First, you should verify that the VC makes investment in the
stage and type of company you are building. Also, it is important to remember
that you are not just picking a firm, you are picking a partner within
that firm. Ideally, you'll find a partner that has made similar investments in
the past and has knowledge of your market.
If you have any other
questions, leave a comment and I'll do my best to answer. Please remember that
I'm not a VC, and don't play one on TV. For content that is much better than
this, I strongly recommend Ask The VC
Brad Feld. It's a great source for information on the VC industry and the
process of raising money.