Startable - Healy Jones’ & Prasad Thammineni’s Blog

This is the third and final post on dealing with a VC’s entrepreneur in residence during your venture capital fund raise. The first discussed the EIR’s role at a venture firm and the second had suggestions for how to prepare for a meeting with an entrepreneur in residence. In this post I will discuss a few tactics for getting the most out of the EIR - as in increasing your chances of getting funding from the venture capitalist and getting the EIR to help you on other fronts.

Tips for your interactions with a VC’s EIR 

1. During your meetings with the entrepreneur in residence take notes of big questions that you can’t answer. Try to have a follow up meeting to discuss these issues, or even better a working session where the EIR can help you come up with ways to improve your business plan. You are basically trying to prove to the EIR that you are taking their questions seriously and are also trying to use their experience to come up with answers.
2. Be someone who the EIR would want to work with. I know I’ve mentioned this a few times, but if you can get the entrepreneur in residence excited enough to consider joining your startup you are much more likely to get funding from that particular. A big part of this excitement is wanting to work with YOU. 
   
3. Be prepared for the “I want to be your company’s CEO” discussion.   Read the rest of this entry »
   

I hope that this post will be helpful to you as you prepare to meet with a venture capital firm’s EIR. This is the second of three posts about entrepreneurs in residence at venture capital funds and how you might interact with them during your VC financing process. The first is a general introduction to the concept of an entrepreneur in residence and the third will be some tips for your interactions with an EIR.

Preparing to meet with an EIR

The better your discussion with the entrepreneur in residence goes, the better your chances at raising venture capital. Here are some things to prepare before your meeting:

1. Research the EIR’s background. By knowing their bio/background you can get a feel for the lens they will use to think about your business. They might have something knowledgeable to say about some aspect of your startup or have some connections that could be useful to you. Try to take advantage of this. Also see if you can understand where they had difficulty, as they may attack similar parts of your business plan.
2. Figure out how the EIR could fit into your startup. Remember that the EIR’s primary goal is likely to be finding a company to run. Assuming that there was a good fit with your startup, what role would you like to have them in? Get ready to ask questions around this particular function (at the right times during your discussion)… you may get some good advice and they will get to show off their experiences.
3. Search for shared connections with the EIR.  Read the rest of this entry »
   

As a startup founder trying to raise venture capital you may be introduced to a venture firm’s “EIR.” Startup founders should welcome these interactions, but should also prepare carefully for meeting with a VC’s entrepreneur in residence. An entrepreneur in residence has slightly different motivations than a typical venture capitalist, so an understanding of the role of an EIR and a the right homework can be very beneficial in your quest to raise venture funding. This is the first in a 3 part series on venture funds’ entrepreneurs in residence and your startup’s fund raising process.

First, a little definition that I’m making up on the fly describing an entrepreneur in residence

Entrepreneur in Residence: (”EIR” or sometimes “venture partner”) is a previously successful entrepreneur/manager/CEO/CTO working for a venture capital firm as an advisor to the VC on new investment opportunities and seeking to join a startup as a key member of the management team (usually as CEO) when the venture firm finances it.

The EIR’s role

So what is the purpose of an EIR?

1. An EIR is probably looking for a job. While they are usually paid something by the venture firm, their real end goal is to find a cool startup to join… usually as a CEO. Thus, your job as a startup founder looking for capital is to get this EIR so excited about your company that they want to work there. You may not wish to give this person the CEO role, or even let them near your startup. But knowing that the EIR’s purpose is to take such a role at a startup can be used to your advantage. Try to get the EIR so pumped up about your business that they want to join it - even if you don’t want them to. I’m not saying you pretend to offer them a role and then yank it away, I mean make the company so exciting that they can’t stop talking about how great it is to the VC firm’s partners. Consider this part of the game of raising venture capital.
2. An EIR provides expertise to the VC firm’s diligence process.  Read the rest of this entry »
   

2008 proved to be solid from an online advertising perspective, showing impressive growth according to the 2008 Internet Advertising Revenue Report, released by the Interactive Advertising Bureau (IAB) and PricewaterhouseCoopers LLP. $23.4 billion was spent on online advertising last year, up from $21.2 billion in 2007 - a 10.6% growth rate. 

I am still digesting the report, but there were a few interesting tidbits. As you would expect, search really grew robustly last year by almost 20%. Display also grew by 8%, not bad considering that overall advertising supposedly shrank last year. Digital video advertising grew by over 125% to $734 million - still a small amount, but moving quickly into becoming a real category.

A couple of other interesting items:

Approximately 57 percent of 2008 full year revenues were priced on a performance basis, up from 51 percent reported in 2007.

Approximately 39 percent of 2008 full year revenues were priced on a CPM or impression basis, down from 45 percent in 2007.

and

Financial Services advertisers represented the second-largest category of spending at 13 percent of 2008 full year revenues or $3.0 billion, down from the 15 percent ($3.2 billion) reported in 2007.

Automotive advertisers accounted for the third-largest category of spending at 12 percent of 2008 full year revenues or $2.8 billion, up slightly from the 12 percent ($2.5 billion) reported in 2007.

How did auto manage to increase ad spending while financial services shrank? I guess we know who is using their bailout dollars to try to sell their product vs. having it sit on their balance sheet…

Of course, none of this mitigates the fact that venture capitalists are not very interested in investing in pure “advertising” based business models (i.e. sites trying to generate their revenues off of their users’ eyeballs…)

In a similar vein to my post from a couple of days ago about how poor Q1 2009 VC exits were, today there are reports that Q1 was also very poor for venture capital funds looking to RAISE capital to invest. While this isn’t a surprise, the actual dollar amount of the drop was pretty stunning: $2.4 billion raised vs. $6.7 raised in Q1 2008. That is very substantial 64% drop. Only 23 VC funds raised $, as compared to 57 in the first quarter of last year.

This is bad for entrepreneurs, because fewer venture firms and less money means it will be much harder to find firms with dry powered to invest in their startup. To make matters even worse (for the true startup seeking funding) the types of funds that invest in young companies dropped even more. Early stage and multi-stage (funds that do both early and late stage investing) dollars raised dropped by almost 70%.

There is a lot behind this drop. Some funds are not trying to raise money right now due to the economic climate. Many limited partners (those who invest in venture funds) are having liquidity problems and are not able to invest in anything, let alone a fund with a seven to ten year horizon. But there could be something more sinister here - the VC model has not created great returns for investors since the dot.com crash. Are investors starting to lose faith in the asset class of venture capital??

Keeping with the theme of periodically giving you info you probably don’t need about pitching your startup to venture capitalists:

VC Pitch Tip #9 - Don’t show the VC the IRR the can get from investing in your business

Providing a venture capitalist with an exit analysis that shows how great of a return they will get from investing in your startup is one of the biggest rookie moves you can make. VCs don’t need you to show them how much money they will make by investing in your business. Doing those exit calculations is kind of the VC’s job. That’s what we do. Sentences and graphs saying:

• “A $5 million investment in our business will be worth $150 million in four years”
• “Investing at a $12 million pre-money valuation will yield a 25.32x return for the investor”

are very off-putting. Venture capitalists cringe when they see these sorts of things in presentations. Don’t waste a slide on it and don’t waste the VCs time.

It’s pretty obvious that if your company goes from nothing to $50 million in revenue in three years there is a return to be made. Attempting to sell the venture capitalist on exactly how much they will make is unnecessary and distracting. Stay focused on explaining how the company GROWS to that $50 million size and leave the exit modeling to the VC.

I recently was pointed to the NVCA’s Q1 venture capital exit numbers, and the only conclusion that can be drawn is that:

Q1 2009 venture backed exits were horrible

No surprise here, but still, seeing it in a chart hits home how poor Q1 was this year. (These charts were released recently by the National Venture Capital Association.)

Wow. That’s a banana in Q1. Not a single IPO. I think the really important thing here is to realize a few things about IPOs - they are more than just events that make venture investors money. These are funding events for companies that have grown beyond the startup phase. IPO proceeds are used to hire new employees, write the next version of the product, expand facilities and make (hopefully) intelligent acquisitions to round out product lines and gain access to new distribution channels. The lack of IPOs in Q1 and the poor showing in 2008 will do more than just delay wealth creation: it will slow innovation.

M&A exits were not much better (but at least there were some.)

The real impact of this downturn in M&A can be seen by the average exit value for M&A this quarter. Not only were there fewer exits but their value has plummetted:

The average M&A exit value dropped by more than half. Note that a $50 million exit is not a home run for most VC investments. At that level of exit, if a VC was to make 5x their money on a $5 million investment they would have to own almost half the business! (the math works as follows, assuming a 1x liquidation preference and no other money into the company than the VC gets their $5 preferred return plus will need at least $20 million in common stock returns to get to a 5x, $25 million return - $20 million on a $40ish common stock return is about half the company.) That’s not a very realistic capital structure, at least from what I’ve seen, so I don’t think most VCs were jumping up and down for their average exit value this past quarter.

Early in the post I mentioned that the lack of exits impacts more than just wealth creation. The capital returned from exits is often recycled back into other startups by a variety of means, either by limited partners investing in new venture funds, venture capital funds using some early returns to cope with over-allotment issues in existing funds, and entrepreneurs taking the wealth they have created in seed funding/starting new companies. If this period of poor exits continues for an extended period of time we could see a serious slow-down in financing for new technologies.