Lecture 9 - How to Raise Money (Marc Andreessen, Ron Conway, Parker Conrad)

Um but I want to start with uh a question for for Mark and Ron which is by far the number one question probably be a link answer what do you guys decide to invest in a founder or a company either of you no no no no you first um well we have a slide on that we have we have an app for that bring um Mark can start while we try to get your slide up okay bring a guys So so say the question again what makes you decide to invest in a founder or a

company so what what makes us invest in a company is based on a whole bunch of characteristics I've been doing this uh since 1994 right before Mark got out of uh the University of Illinois so SV Angel and its entities have invested in over 700 companies so to invest in 700 companies that means we've physically talked to thousands of Entrepreneurs and there's a whole bunch of things that just go through my head when I meet an entrepreneur and I'm just going to talk about what some of those are um and literally while you're talking to

me in the first minute I'm saying is this person a leader you know is this person rifle focused and obsessed by the product um I'm hoping cuz usually the first question I ask is what inspired you to invent this product I'm hoping That it's based on a personal problem that that founder had and this product is the solution to that personal problem um then I'm looking for communication skills because if you're going to be a leader and hire a team assuming your product is successful you've got to be a really good communic and you you

have to be a born leader um now some of that you might have to learn those traits of leadership but but you better you better take charge and be Able to to to be a leader uh I'll switch back to the slide but let's let Mark yeah I I agree with all that I guess and there's a lot of detail to this question that we could talk about um and we maybe even a little bit different than Ron and that where we are different than Ron that we actually invest across stages so we invest at

the seed stage Venture stage growth St stage um and then we invest in a variety of different business models consumer Enterprise and a bunch of other variations so there are kind of fine grained answers you know that we could get into uh if there are specific questions uh two general concepts that I would share um so one is the Venture Capital business is 100% a game of outliers it's extreme exceptions uh right so the conventional statistics uh are you know on the order is on the order of 4,000 Venture fundable uh companies a year that

want to raise Venture Capital uh about you know about 200 of those will get funded by what's considered a top tier VC um about 15 of those will someday get to $100 million in Revenue um and those 15 from that year uh will generate something on the order of 97% of all the returns uh for the entire category venture capital in that year um and so venture capital is such an extreme Feast for famine business you're either in one of the 15 or you're not uh or you're in one of the 200 or you're not

um and so the big thing that you're just looking for no matter you know which sort of particular kind of criteria we talk about they all have the characteristic of you're looking for the extreme outlier um the other thing I'd highlight that we think about a lot internally is we have this concept invest in strength um versus lack of weakness um and at first that sounds obvious but it's actually fairly subtle um which is sort of the the Default way to do venture capital is to kind of check boxes right so you know really good

founder really good idea you know really good uh you know uh product uh really good initial customers check check check check okay this is reasonable I'll put money in it um but what you find with those those sort of check box deals and they get they get done all the time but what you find is they often don't have something that really makes them really remarkable and Special right they don't have an extreme strength that makes them an outlier on the other side of that the companies that have the really extreme strengths often have serious

flaws um and so uh so one of the cautionary lessons of venture capital is if you in if you don't invest in the basis of serious flaws you don't invest in most of the big Winners and we could go through example after example after example of that uh but that would have ruled out almost all the big Winners over time um and so at least what we aspire to do is to invest in the one in in in the in the startups that have a really really extreme strength along an important Dimension and then be

willing to tolerate some other uh you know set of weaknesses Ron we got your slide up okay I I don't want to over dwell on on the uh the slide but um when you first meet an investor you've got to be able to say in one compelling sentence That you should practice like crazy what your product does so that the investor that you're talking to immediately can picture the product in their own mind probably 25% of the entrepreneurs I talked to today still after the first sentence I don't know what they do and as I

get older and less patient I say back up I don't even know what you do yet um but so try and get that perfect and then I want to skip to the second column you Have to be decisive the the only way to make progress is make decisions uh procrastination is the devil in startups so no matter what you do you got to keep that ship moving if it's uh decisions to hire decisions to fire you you got to make those uh quickly uh all about building uh a great team once you have a great

product then it's all about execution and building a great team Parker could you talk about your Seed Round And how that went and what you wish you had done differently as a f of the raising money sure so um um um actually I think my my seat around uh most of the stuff with my current company felt like uh from a fundraising perspective felt like it came together relatively quickly um but actually one of the experiences that I had I I started a company before this that I was at for about six years and my

co-founder and I pitched um almost every VC firm in Silicon Valley I mean we literally went to like 60 different firms and they all told us no and we were constantly trying to figure out you know how do we how should we adjust our pitch and how should you know how should we do the slides differently and how do we tweak the story and that sort of thing and at one point there was this sort of key Insight that um someone gave me when I was pitching actually someone at Coastal Ventures um and um this

VC said guys you Know he was looking for some very particular kind of analysis that we didn't have on hand and he was like guys you don't get it he was like you know if you guys were the Twitter guys you guys could come in and you could just be like and like you know put whatever up here and like we would invest in you but like you guys aren't the Twitter guys so you need to make this really easy and have like all this stuff ready for us and all this kind of stuff and

I I took like the Exactly opposite lesson of what he I think wanted me to take away from that with which was like geez like I should really just figure out a way to be the Twitter guys and like that's that's the way to do this um and so so actually like one of the reasons I I started my current company or one of the things I I found very attractive about zenitz is as I was as I was thinking about it it seemed like a business I was so frustrated from this experience of Having

tried you know for like two years to raise money from from VCS and it sort of decided like to hell that you can't count on there being Capital available to you um and so this the business that I started seemed like one that like like actually just maybe I could do it without raising money at all like there might be a path to kind of you know there was enough cash flow it seemed compelling enough that I could like do that and it turns out that those are Exactly the kinds of businesses that that that

investors love to invest in um and and it made it incredibly easy um so I I actually think like I mean Sam was very kind and said I was an expert in fundraising the reality is I don't actually even think I'm very good at fundraising um it's probably something I'm like less good at than than you know sort of other parts of my job um but I think if you can if you can build a business that's you know where Everything's like moving in the right direction if you can like be the Twitter guys like

nothing else matters and if you can't like you know be the Twitter guys it's very hard for anything else to make a difference um for things to kind of come together for you why why did that VC say be like the Twitter guys when the fail whale dominated the site for two years it kept growing anyway cuz it worked yeah the other point I want to make is bootstrap as long as you Possibly can I met with one of the best founders in Tech who's starting a new company and I said to her well when

are you going to raise money I might not and I go that is awesome you'll never forget the bootstrap so I was actually going to close on on on on this but I'm just going to accelerate it because par Parker I think just gave you the most important thing you'll ever hear U which is what I was also going to say uh which Is so the the number one piece of advice that I've ever uh read and that I that that I tell people um on these kinds of topics as always uh it's from the

comedian Steve Martin who I think is an absolute genius uh wrote a great book on his startup career which obviously was very successful the book's called Born standing up and he literally it's a short little book and it describes how he became Steve Martin and the Heart of the book is he says you know what's the Key to success he says the key to success is be so good they can't ignore you um right and so in a sense like all this we're going to have this entire conversation and I'm sure we'll keep having it

about how to raise money but in a sense it's all kind of beside the point um because if you do what Parker's done and you build a business that is going to be a gigantic success then investors are throwing money at you um and if you come in you know with a Theory and a plan and no data um um and you're just one of you know the next thousand um it's going to be far far harder to raise money um the other so that's the positive way to put it is kind of be so

good they can't ignore you in other words you're almost always better off making your business better than you are making your pitch better um the other thing the the that's the positive way of looking at the negative way of looking at it of the cautionary Lesson is that um and this gets me in trouble every single time I say it but I'm on a ton of flu medication so I'm going to go ahead uh and just let it rip um raising venture capital is the easiest thing a startup founder is ever going to do um

as as compared to recruiting right as as compared to recruiting engineers in particular is as compared to recruiting engineer number 20 um is far harder than raising Venture Capital um selling uh to Enterprise Customers is harder um getting viral growth going on a consumer business is harder getting advertising revenue is harder um almost everything you'll ever do is harder than raising Venture Capital um and so I think Parker is exactly right if you get in a situation in which raising the money is hard um it's probably not hard compared to all the other stuff that's

about to follow um and it's very important to bear that in mind um you know it's often Said raising money is not actually a success it's not actually a milestone uh for a company and I think that's true and I think that's the underlying reason um it just it puts you in a position to be able to do all the other harder things related to that um what do you guys wish Founders did differently when when raising money um and specifically Mark you know you mentioned this relationship between money and how that applies here so

maybe we could start With that yeah so the single biggest thing that people are just missing um and I think it's all of our faults we're all not talking about it enough um but I think the single biggest thing entrepreneurs are missing both on fundraising and how they run their companies is the relationship between risk and cash um so the relationship between risk and raising cash and then the relationship with risk and spending cash um so I've always been a fan of Something that Andy rff taught me years ago uh which he called the he

calls it the onion theory of risk um which basically is you can think about a startup like on day one um it's having every conceivable kind of risk right and you can basically just make a list of the risks and so you've got you know founding team risk you know do the founders are the founders going to be able to work together do you have the right Founders you're going to have Product risk you know can you build a product you'll have technical risk right which is maybe you need a machine learning breakthrough or something

to make it work or you're going to be able to do that um you'll have you know launch risk will the launch go well you'll have you know Market acceptance risk you'll have Revenue risk a big risk you get into in a lot of businesses uh that have a Salesforce is can you actually sell the product enough money To actually pay for the cost of sale so you have cost of sale risk um if you're a consumer product you'll have viral growth risk well you get the thing of viral growth and so a startup at

the very beginning is basically just this long this long list of risks right and then the way that I always think about running a startup is also the way I think about raising money which is it's a process of peeling away layers of risk as you go right and so you raise seed Money in order to peel away the first two or three risks right the founding team risk the product risk maybe the initial launch risk you raise the a round to peel away the next level of product risk maybe you peel away some recruiting

risk because you get your full engineering team built maybe you peel away some customer risk because you get your first five beta customers right and so basically the way to think about it is you're peeling away risk as you go You're peeling away Risk by achieving milestones and then as you achieve Milestones you're both making progress in your business and you're justifying raising more Capital right and so you come in and you pitch somebody like us and you say you're raising a b you know the best way to do that with us is you say

okay I raised the seed round I achieve these Milestones I eliminated these risks I raise the a round I achieve these these Milestones I Eliminated these risks now I'm going to raise a b round here are my Milestones here are my risks and then by the time I go to raise a seed round here's here's the state that I'll be in and then you calibrate the amount of money that you raise and spend to the risks that you're pulling out of the business um and I I go through all this in a sense this sounds

kind of obvious but I go through all this because it's a systematic way to think about how the money gets raised And deployed as compared to so much of what's Happening especially these days which is just oh my God let me go raise as much money as I can let me go build the fancy offices let me go hire as many people as I can and just kind of hope for the best uh I'm going to be tactical um for sure don't ask people to sign an NDA um we rarely get asked anymore because most

Founders have figured out That if you ask somebody for an NDA at the front end of the relationship you're basically saying I don't trust you so the relationship between investors and Founders involves lots of trust um the biggest mistake that I see by far is not getting things in writing you know the my advice on the fundraising process is do it as quickly and efficiently as you possibly can don't obsess over it for some reason Founders get their ego involved in Fundraising where it's a personal Victory it is the tiniest step on the way as

Mark said and it's it's it's the most fundamental hurry up and get it over with but in the process when somebody makes a commitment to you you get in your car and you type an email to them that confirms what they just said to you because investors have a lot of investors have very short memories and they forget that they committed to you that they were going to finance or they Forget what the valuation was that they were going to find a co-investor you can get rid of all that controversy just by putting it in

writing and when they try and get out of it you just resend the email and say excuse me um and hopefully they've replied to that email anyway so get it in writing um in meetings take notes and and follow up on what's important I I want to talk a little bit More about tactics here um just how does the process go can people email you guys directly do they need to get an introduction how many meetings does it take for you to make a decision how do you figure out what the right terms are when

can a Founder ask you for a check you want to that was about that was like that was like six question a lot of things yeah okay good it's the process why don't you describe why don't you describe cuz you'll describe seed and Then I'll I'll describe yeah yeah so yeah so uh SV Angel you know invests in seed stage startups so we like to be the very first investor we normally invest today in a round that's a million to 2 million uh it used to only be a million so if we invest 250k that

means there's five or six other investors in that syndicate um SV Angel has now a staff of 13 people I do no due diligence anymore I am not a picker anymore I just help on major Projects for for the portfolio companies that are starting to mature but we have a whole team that processes we at SV Angel end up investing in one company for every 30 that we look at and we end up investing at about one a week uh think what's interesting is we don't really take anything over the transom uh our network is

so huge now that we basically just take leads from our own network uh we evaluate the Opportunity uh which means you have to send in a really great short executive summary and if we like that we actually vote although I'm not in this meeting anymore but the group actually votes on do we make a phone call that's how important time is in this process and if enough of the of the uh of the team at SV thinks it's interesting then they appoint a person to make a phone call to that founder usually somebody on our

team who has Domain experience if the phone call goes well Bingo we want to meet you if SV Angel asks you for a meeting we are well on our way to investing if that meeting goes well uh we'll do some background checks um backdoor background checks uh get a good feeling about the company the market that they're going after uh and then and then make the commitment to invest and then start start helping get other value ad investors to be part of The Syndicate because if we're going to Have an equal workload we want the

other investors in this company to be great Angel Investors as well so I'll talk a little bit about Venture stage kind of the Ser the series a stage you know that follows um so to start with I think it's fair to say at this point that all the top tier Venture capitalists um pretty much only invest in two kinds of companies at the series a stage one is if they have previously raised a seed round um and so it's it's Almost always the case when we're doing a series investment that the company has a million

or2 million dollars of seed financing you know from from Ron and and folks that he likes to work with um almost always by the way Ron just to be clear um and folks he likes to work with um so first either they have a seed round so if you're going to race series a the first thing to do is raise seed because because that's that that's generally the the the the way the the Progression works at this at this point um every once in a while we'll go straight to a on a company that hasn't

raised a seed round really the only times though that that happens are when it's a Founder who has been a successful founder in the past um and is almost certainly somebody we've worked with in the past um so we actually we haven't announced but we just we just did one of these we'll announce in a few weeks um where it's a Founder who I was an angel Investor actually I think Ron was also uh in uh the team's company in like 2006 um and then the company did its thing and then ultimately was acquired by

another big company um and then that team now was starting their new thing so in that case we're just going to jump it straight to an a uh because they're so they're so well known and they have a plan all lined up for it but you know that that's the exception it's almost always uh proceeded um uh proceeded by a Seed round um the other thing is uh yeah I guess I mentioned this already but we we get similar to what Ron said we get uh 2,000 referrals a year through our referral Network um a

very large percentage of those are referrals through the seed investors and so by far the best way to get to by far the best way to get the best introductions to the a stage Venture firms uh is to be able is to work through the seed investors or to be a or to work through something Like white combinator uh speaking about terms um what what terms should Founders care most about and how should Founders negotiate maybe Parker we can start with you on this one sure well I think um probably precisely because of what Mark

said the most important thing at the seat stage is is pick the right seed investors because um they're going to sort of lay the foundation for future fundraising Events you know they're going to make the right introductions and I think there's a enormous difference in the quality of of an introduction so if you can get a really good introduction from someone who a venture capitalists really trusts and respects um you know the likelihood that that's going to go well is so much higher than sort of like a you know a much kind of a much

much more lukewarm introduction from someone they don't know as well um so at the seed Stage probably the best thing you can do is find the right investors um and then um how does a Founder know who the right investors are well I think it's really hard I mean so one of the best ways I mean you know not to give a plug for YC but um you know YC does a very good job of telling you exactly who they think those people are um and um and can really direct you towards and and I

actually have found it to be like pretty accurate in terms of like who you guys Said we're going to be the best people like they ended up being the most helpful um as as we were raising subsequent rounds sort of you know really provided the best introductions and the people who maybe I thought were you know seemed okay but we're not you know like we're not as sort of highly rated by YC like they they that ended up being the case that they were kind of like real Duds um in the seed round um someday

we're going to publish our list Of these people oh my god there going to be a lot of upset people you do so H how do you think about negotiation how do you figure out what the right valuation for a company what other terms well so I started out I mean like when I was raising my seat around I really didn't know and I mean we had conversations about this I I probably started a little too high on the valuation side um and the so as you guys know like why comat sort of culminates In

this thing called demo day where um you get sort of all of these investors at once who are looking at the company um and I started out um trying to raise money at like a 12 or a $15 million cap um uh which is like not quite the same thing as evaluation but but sort of R roughly equivalent um and everyone was like that's crazy you know that's that's completely nuts there like you're like too big for your britches like that that's completely just wouldn't work and So I ended up sort of walking it down

a little bit and and within sort of the space of a couple days said okay well I'm going to raise it nine and then suddenly for whatever reason that had sort of hit some magical threshold on the seed seed stage that it was below 10 that it it seemed like there was like almost infinite demand for the round at a at like at a 9 million cap so no one would pay 12 but at a $9 million cap um it felt like I probably could have Raised like $10 million um and the the round came

together um you know in in in roughly about a week um at that point once I kind of hit that threshold and so there seem to be and they probably fluctuate over time but there seem to be these sort of like thresholds particularly for seed stage companies that that that investors will think of as like this is what you know like above this level is like crazy like doesn't matter and there's sort of like a rough Kind of range that um that people are willing to pay and so you just kind of like you you

have to just kind of figure out what that is um get the money that you need don't don't raise any more than you need and and and just kind of get it done and uh you know at the end of the day like whether whether you raise it 12 or 9 or like six it's not it's not a huge deal um for the rest of the company is there a maximum amount of the company you think that Founders should Sell in their C round and a round Beyond which problems happenening any of you feel like

that's a better question for you well gosh I don't know I mean I mean um you know I think um on on I mean I don't I don't know the rules on this stuff I think um the the tricky thing is I mean it seems like they're kind of rough particularly for like a series a um you're probably going to sell somewhere between you know 20 and 30% of the company because um you know Below Venture capitalists tend to be a lot more ownership focused than price focused um so you might find that it's actually

sometimes when companies raise really big rounds it's because you know the investor basically said listen I'm not going to go below 20% ownership but I'll pay more for it um and so and and above 30% probably sort of weird things happen to the cap table like it gets hard you know down the line to sort of um you know for there to be enough room On the cap table for everyone and so everything seems to come in in that range um so uh you know that that probably just is what it is um in most

cases so at you know at the seed stage I mean what I've heard there doesn't seem to be any magic to it but it seems like 10 to 15 % is what what people say but that that's mostly just what I've heard I'm curious thought I I I agree with all that um I think it's important to get the process over With um but I think it's important for the founder to say to themselves in the beginning at at what point is my ownership start to demotivate me um because if there's like a 40 %

delution in an angel round I've actually said to the founder do you realize you've already doomed yourself you know you're going to own less than 5% of this company if you're a normal company and so these guidelines are important the the you know the the 10 to 15% because if you keep giving away more than that there's not enough left for you and the team and you're the ones doing all the work we actually we'll walk we' we've seen a we've seen a series of interesting companies in The Last 5 Years that where they just

we just walk simply we won't we won't bid simply on the basis of their cap tables already destroyed uh outside investors already own too much um there was a company we really wanted to invest in um But the outside investors already owned 80% of it when we when we talked to them and it was still a relatively young company they had just done two early rounds that had just sold too much of the company um and literally we were worried and I think accurately so that it was going to be demotivating for the team um

to have that structure one more question before we open up for the audience um for for Ron and for Mark could you guys both tell the story of The most successful investment you ever made and how that came to happen other than zenefits Zenit yeah other than other than Zen uh uh for me clearly it was the investment in Google in uh 1999 uh and we got Google return out of it um but uh funny enough I met Google through a Stanford Professor David chian who's in the School of Engineering uh he's still here uh

he was actually an angel investor in Google and an investor In our fund and kind of the quidd pro quo we have with our investors in the fund is you have to tell us uh about any interesting company that you see and we loved it that David chittan was an investor in our fund because he had access to the to the computer science Department's deal flow and we were at this party at vra's house in full tuxedo I hate Tuxedos and D if anyone here know David Cherian because you know for sure he does not

like Tuxedos and he was in a Tuxedo but I went up to him and we complained about our attire and then I said hey what's happening in at Stanford and he says well there's this project called backrub uh and it's search and it's search by Page Rank and Rel Y and back in today page rank in relevancy everyone says oh you know that's so obvious in 1998 that was not obvious that Engineers were designing a product uh based on this thing called Page Rank and all it was was a simple algorithm that said if a

lot of people go to that website um and other websites direct them there there must be something good happening on that website that was the original algorithm rthm um and the the motivation was relevance so I said to David I have to meet these people and he said you can't meet them till they're ready uh which was the following May funny enough I waited I called them Every month for five months and uh finally got my audition with Larry and Sergey and um right away they were very strategic they said we'll let you invest if

you can get sequia we don't know sequa but they investors in Yahoo and because we're late to Market uh we want an oem deal with Yahoo and and so I earned my way into the investment in Google about you so I'll tell one on the other side which is which is Airbnb um Which we actually were not early investors in we were we did Airbnb as a growth round uh we did the first big growth round in Airbnb um yeah at about a billion doll valuation in 2011 um and I think that will turn out

to be I believe that will turn out to be one of the spectacular growth Investments of all time we'll see but I think it's going to be I think this is really going to be one of the big companies um so I'll tell that story because it's it's Not a story of pure genius um it's a um we we we passed we didn't even meet with them I don't think we met with them the first time around or maybe one of our Junior people did but it was one of these it's you know I said

earlier that vure capital is entirely a game of outliers right one of the key things with outliers is the ideas often seem completely nuts up front um and so of course the idea of a website where you can have other people stay in your house Um if you just like made a list of the ideas that are like most nuts that would be like right there at the top um um and then um and I have a very nice email from you yeah good good hopefully I was very courteous in my stupidity um well the

second most stupid idea you could possibly think of is is is a website where you could stay in other people's houses um and so the Airbnb uniquely combined both of those bad ideas um so of course it turns out they've Unlocked an entirely new way to basically software East real estate they they've unlocked this just gigantic Network effect fact it's a gigantic Global phenomenon it's going to be enormously successful company so part was just coming to grips with the fact that we had whiffed on our initial analysis of the idea um and that the numbers

were clearly proving that we were wrong and and the customer Behavior Uh was clearly proving that we were Wrong um so one of our one of our philosophies at our firm is we're multi-stage the big reason for that is so we can fix our mistakes um and we can pay up to uh to get in later when we when we screw up early on the other thing I'll highlight though is uh the other reason why we pulled the trigger at a high valuation um when we did was because um of our we had spent time

at that point with Founders um with Brian and with Joe and with Nate and there's a Friend of mine in private Equity has this great line Egon der has this great line he says um when as people progress through their careers they get bigger and bigger jobs and at some point they get the really big job and it's some people about half people um grow into the big job and about the other half people swell into it uh right and you can kind of tell the difference um there's a point where people just lose their

minds um and one of the issues With these companies that are sort of super successful hypergrowth companies is you know you you know this this Airbnb was sort of the classic case of these super young Founders who hadn't run anything before so how are they going to be at running you know this sort of giant Global operation and we just were tremendously impressed and are today every time we deal with all three of those guys uh how mature they are how much they're progressing um you know It's like they get more and more mature they

get better and better judgment and they get more and more humble um as they grow um and so that made us feel really good that not just was his business going to grow but that these were guys who were going to be able to build something and be able to run it in a really good way you know people always ask me uh why do you think Airbnb is such a great company it's funny we're obsessing Over Airbnb but and I say to people it's because all three founders are as good as the other founder

that is very rare in the case of Google two Founders one of them is a little better than the other one but but hey he's the CEO every company has a CEO I think I think we just got the tech crunch headline every company has a CEO every every company every company has a CEO why am I saying this when you start a company you have to go Find somebody as good or better than you to be the co-founder if you do that your chances of success grow astronomically and that's why Airbnb became so successful

so quickly the anomaly is Mark Zuckerberg at Facebook yes he has an awesome team but but the Mark Zuckerberg phenomenon where it's mainly one person that is the outlier uh so when you start a company you have got to find phenomenal Co-founders All Right audience questions yes so obviously the conventional wisdom about why you raise money is because you need it um but the more I get off conventional wisdom the more I'm starting to hear another story about why you raise money and I'm actually hearing Founders say it's more to facilitate the big or in

the worst case to facilitate the aqua instead of just fizzling out into nothing to what extent is that accurate thinking or fla thinking does Raising money help you uh with an exit or an Aire well if you if you pick good investors who have good rolodexes and domain expertise in what your company does they're going to add a lot more value than the money and those are the types of investors you should be looking for oh yeah so the answer to the question is clearly yes but also in a sense it doesn't matter um because

you can't plan These things according to the downside um and so I mean that's the scenario you are not obviously are not hoping for um and so while the answer is yes probably that shouldn't enter into the decision-making process too much it might on it might enter into which investor to raise money from it probably doesn't enter into the whether to raise money question that much I don't think you intend to start a business just barely Capital you still want to Hand up with some you guys have any advice about how to deal with X

talk about demotivation and so on not everything is like to start some software it's viral whatever else what's your Founders do uh for Capital companies still so this is um I would I would double down in my previous comments on the The Onion theory of risk and and the staging of risk and cash which is the more Capital intens the business the More intense and serious you have to be about exactly what's going to be required to make the business work and what the staging of milestones and risks are um because in that case you

want to line up you want to be very precise of lining up because the risk is so high that it all go sideways right so like you want to be very precise what you're going to accomplish with your a round and what's going to be a successful execution of the a round because if you Raise too much money in the a round that'll seriously screw you up right later on down the road and the you know because you're going to raise the C D E rounds you know and then the cumulative uh dilution will get

to be will get to be too much and so you have to be precise on every single round you have to raise as close to the exact right amount of money as possible and then you have to be as pure and clean and and precise with the investors as you can Possibly be about the the risks and the Milestones but this by the way is a big thing this this is actually I'm really glad you asked a question it kind of goes back to what Parker said like look if if you walk in if you

walk into our firm and you've got Twitter or you've got Pinterest you've got something and it's just viral growth and it's just on fire and it's just going to go like those are the easy ones like it's just like let's put money in it and let's Just feed the beast and off it goes um but if you walk in and you're like I got this really great idea but it's going to take $300 million staged out over the next five years probably across five rounds you know it has a potentially very big outcome but boy

like this is this is not Twitter like this is going to be serious heavy lifting uh to be able to get there um we will still do those but the operational excellence on the part of the team matters a lot more Um and one of the ways that you convey the operational excellence is in the quality of the plan um and and and so back and back to the Steve Martin thing be so good they can't ignore you the plan should be very precise and there are way if your Capital Equipment intensive there are ways

of borrowing money in addition to venture capital yeah you can right you can kick in a venture debt and then later on lease financing but again that That underlines the need for operational excellence because if you're going to raise debt then you really need to be precise on how you're running the company because it's very easy to trip the covenants on a loan and it's very easy to lose the company um and so it's it's a it's a thread the needle process that demands a just sort of a more advanced level of management than sort

of you know the next Snapchat what are some badid for Investors that you shouldn't work with for your company yeah this is a good question how do you know what can what's a sign you should avoid investor well it's the inverse of what I said about a good investor if it's an investor who has no domain expertise in your company does not have a Rolodex where they can help you with introductions both for business development and in helping you do the intros for series a you should not take That person's money especially if they're in

it just to make money uh and you can sus those people out you know pretty quickly yeah I would I'm glad you asked that question bring up sort of a broader point which is um if if if your company is successful you know we're talking about our you know I think generally at least the companies we want to invest are the ones that want to build big independent franchise companies so we're talking about a 10 or 15 or 20-year Journey um you know 10 15 20 years you may notice is longer than the average American

marriage um this is significant uh the choice of key investors in particular investors who are going to be on the board uh for a company I think is just as important as who you get married to which is extremely important um these are people you're going to be living with and partnering with and relying on um and dealing with in position you know in in Conditions of great Stress and Anxiety uh for a long period of time and I the big argument I always make is um and I I make this make this all the

time sometimes people believe it sometimes they don't which is like if everything just goes great it kind of doesn't matter who your investors are um but almost never does everything just go great right even the big successful companies even the big you know Facebook and all these big companies that are now Considered very successful you know along the way all kinds of went you know hit the fan over and over and over and over again um and there are any number of stressful board meetings and discussions and late night meetings with the future of the

company at stake where everybody really has to be on the same team and have the same goals and be pulling in the same direction and have a shared understanding and have the right kind of Ethics um and the right kind of Staying power um you know to be able to actually weather the storms that come up um and one of the things that you'll find that is a big difference between first time Founders versus second time Founders is almost always the second time Founders take that point much more seriously um after they've been through it

once um and so it really really really matters I I always thought and I believe that it does it really matters who your partner is it really is like Getting married and it is worth putting the same amount of time maybe not quite as much time and effort into picking your spouse but um it is worth spending significant time really understanding who you're about to be partnered with um because that's way more important than you know did I get another $5 million in the valuation or did you know did I get another $2 million in

the check the marriage analogy is great I know at SV Angel uh our attitude is when we invest In an entrepreneur we are investing for life because we want to invest in if we made the right decision we're going to invest in every company they start and once an entrepreneur always an entrepreneur so we we actually do consider it a marriage we're we're Investing For Life one one thing that I that which is another way of saying what Mark just said is I always look for um in that first meeting um do do you feel

like you respect this person and and do You feel like you have a lot to learn from them CU sometimes you you meet with with VCS and in the initial meeting you kind of feel like man they're just like slow on the uptake or they don't get it or they don't see it and sometimes you walk in and they have this like just such an incredible amount of insight into your business that you walk out of there being like man I don't even if these guys didn't invest that sort of hour that I spent with

them was such a Great use of my time I felt like I came out with a much clearer picture of what I need to do and where I need to go um and that's such a great microcosm of what the next couple years are going to be like um you know like don't if if you feel like you would want this person to be really involved in the company even if they didn't have like a checkbook that they that they brought with them that's probably a really good sign and and if not that's probably a

really a Really bad sign what's on the deal making activities of angels and VC the time money or the lack of company what's the constraint on how many companies you guys can invest uh SV Angel's kind of gotten comfortable with one a week uh you certainly can't do more than that that's a staff of 13 um so it's it's really the number of companies R if you had if if you all Worked twice the number of hours would you invest in twice the number of companies uh I would advise against that I would rather just

add value more value to the existing company maybe you could I'll take the roll question for a second um maybe you could could you talk a little bit about conflict policy uh or not or not conflict policy well SV Angel actually does have a written conflict policy um but most when we H end up with A conflict it's usually because one company has morphed into another's space we don't normally invest in in companies that have a direct conflict if we do we will disclose it to the other company to both companies and keep in mind

at our stage we don't know the company's product strategy anyway we probably don't know enough to disclose but our conflict policy also talks about this really important word which is trust in other words we're off to a bad Start if we don't trust each other and and with SV Angel the relationship between the founder and us is based on trust and if somebody doesn't trust us then they shouldn't they shouldn't work with us Mark will you invest in competive companies uh yeah so this is actually so let me go back to the original question I'll

come back to that so the original question is this is the thing we talk about most often in our firm so this is kind of the the the Question is at the heart of I think how all venture capital operates um which is the question of constraints so the big constraint on a top tier Venture Capital firm the big constraint is the concept of opportunity cost um so it's the concept that basically everything you do means that there are a whole bunch of other things that you can't do um and so it's not so much

the cost and we think about this all the time it's not so much the cost of we invest $5 million in a Company and the company goes wrong and we lose the money that's not really the loss that we're worried about because the theory is we'll have the winners that'll make up for that in in theory um the cost that we're worried about is every investment we make has has two implications for How We Run The Firm um every investment we make uh number one rules out conflicts uh and so our policy for sure on

Venture and growth rounds um is that we don't invest in conflicting Companies and so we can only invest in one company in a category and so if we invest in Myspace and then Facebook comes along a year later like we're out we can't do it right um and so we we basically lock every investment we make locks locks us out of a category right and and the nature that's a very complicated topic when you're discussing these things internally in these firms because you only know the companies that already exist right you you don't know The

companies that haven't even been founded yet right and God help you had you invested in you know an early company that was not going to be the winner and you were locked out by the time you know the the the winner emerged three years later and you just couldn't make the investment so that's one issue is conflict policy um the other issue is opportunity cost on the time and bandwidth of the general Partners um and so going back to the concept of adding Value um you know we're fir typical typical firm we're fairly typical firm

of eight General Partners um each General partner can maybe be on 10 10 to 12 boards in total if they're completely fully loaded um so it's basically Warren Buffett talks a lot about investing is you basically want to think about it as a ticket that you have a limited number of holes that you can punch and every time you make an investment you punch the hole um and when you're out of when You're out of holes to punch like you're done you can't make any new Investments um and that's very much how Capital operates and

so um the way to think about it is every open board slot that one of our GPS has at any given point in time is an asset of the firm that can be deployed against an opportunity but every time we make an investment it takes the number of of slots that we can punch down by one so it reduces the ability for the firm to do New Deals um And so every investment we make forecloses not just the competitive set but other deals where we will simply run out of time um and so and this

is sort of a big thing of like well this goes back to what I said earlier like this company's pretty good it seems fairly obvious that it's going to raise entra funding why didn't you fund it well on its own if we had a limited capacity we probably would have like it'll probably make money but relative to getting Blocked out of the competitive set and relative to not having that open board seat for for an even better uh opportunity um we pass on that basis a lot um it's pretty widely agreed that that um it's

easier than ever to build an MVP to launch to get traction um time we know that there are C deals that happen pre MVP or even pre-launch and pre-ra so those instances where you do do a SE company that either doesn't have a product or hasn't launched compressive Traction what do those deals look like and what do you make that judgment based on what conv you to invest with no product and no traction uh what would convince us which is what usually convinces us is the founder and their team themselves so we invest in people

first not necessarily the product idea the product ideas tend to morph a lot so we will invest in in the team first if it's if it's pre users the valuation is going To tend to be corresponding lower unless one of the founders you know has a a Success track record yeah for us it's almost always if there's nothing at the time of investment then it's almost other than a plan um it's almost always a Founder who we've worked with before or a Founder who's very well known um by the way the other thing worth highlighting

is you kind of in these conversations in all these conversations you kind of the Default assumption is we're all starting consumer web companies or consumer mobile companies um there are you know other categories of companies Capital intensive is one that's been brought up but I'll just say like for example Enterprise software companies or Enterprise these days SAS you know application companies or Cloud companies it's much more common that there's no MVP right it's much more common that there a cold start um and it's much more Common that they build a product in the AR and

there's no point to have an MVP because the customer is not going to buy an MVP the customer actually needs the full product when they first start using it um and so the company actually needs to raise 5 or 10 million doll to get the first product built um but in almost all those cases that's going to be a found a Founder who's done it before I think it's time for one more question can you talk about the board Structure and inv perspective and you guys talk about the ideal board structure um gosh um uh

I think um so so in in our board um we're fortunate that we have um there's myself and my co-founder and um a partner from adri and Horowitz um which um I think probably removes the fear probably creates a little more trust because it sort of removes the fear that like you know uh someone's going to come in and just like fire you Arbitrarily because like it's time for a big company CEO kind of thing but in most cases I think if you if you trust if if you trust the people that you're working with

um it it shouldn't really be an issue um because there are so there's so few I mean things almost never come to like a board vote and by the time that they do it's like something's deeply broken at that point anyway um and and most of and most of the the power that BCS have comes Outside of the board structure it's protective covenants that are built into the financing round so it's like you can't you know take on debt you can't sell the company you can't there are certain things you can't do without them GRE

to it anyway um so it's probably like less of a big deal than than people make it out to be what what I found sort of is is that uh it seems to me that as a Founder if things are going well at the company you have sort of Unlimited Power Visa your investors like almost unlimited like no matter what the board structure is and no matter what the covenants are in the round like if you say listen I want to do this and I think this is what we need to do and even if

it's like a good investor or a bad investor even the bad investors will be like you know like let's let's let's make it happen CU they want to like ride this rocket ship with you and when things are going badly it does not Matter what protections you've built into the system for yourself like you know at the end of the day like you need to go back to the trough to get more money and um you know if if if like things aren't going well like they're going to have all all of the cards in

their hand and they're going to get to renegotiate all the terms and exactly they'll change all this is what happens actually when a company gets in Dire Straits it actually doesn't matter what The terms of the prior rounds are they all get renegotiated this is I think the fundamental rule of raising money uh other than never have a down is that if things going well the founder control and Company needs more money and things are going badly investors control I've been on boards for 20 years public and private I have never been in a board

vote that mattered it's always been never never a vote um many discussions Many controversies many issues uh never a vote um it's the decision has always been clear by the end um and it's either been unanimous or very close to unanimous um and so I think it is almost all around the intangibles and almost not all around the details okay thank you guys very much for coming in today pleasure