Some tips on raising venture capital from William Reeve

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Serial entrepreneur turned angel investor, chairman and venture partner with DFJ Esprit, William Reeve recently asked me for comments on an article he is writing on “How to pitch for funding” and when I saw the final version I immediately wanted to put it on here.  Will has written the piece to go in the British Venture Capital Member Directory 2010, a paper directory which will be out in June and I’m pleased to say that both he and they were happy that I post his article today (you will be able to get a copy of the directory from the BVCA , Tommy Nguyen, +44 (0)20 7420 1852 or e-mail [email protected]).

BVCA Directory : How to pitch for VC funding : An entrepreneur’s perspective

By William Reeve, co-founder and formerly President & COO of the leading international online film rental firm – LOVEFiLM.com

My introduction to venture capital was in 2003 when I co-founded the DVD rental business known as LOVEFiLM.com, which now has four leading European VCs as investors: Arts Alliance Media, Balderton, DFJ Esprit and Index. The business has grown strongly to around £100m revenue, with decent profits, and is building a unique position in the digital entertainment space. This experience has proved invaluable subsequently as I have helped various firms, including Graze.com, True Knowledge and Zoopla.co.uk, form and grow with VC funding. What advice can I offer entrepreneurs considering VC funding?

· VC funding isn’t right for most businesses… Most successful businesses never need VC funding. If the only reason you need funding is because you can’t figure out how to make money, then VC isn’t your solution. And if you can’t raise money from friends/family, you’ll probably struggle with VC too. But if you have a nice little fire burning, and want to pour fuel on the flames, then VC is a fantastic way to do it – but you’ll get a partner who expects you to create an inferno.

· …but if you fancy it, build a relationship as you would court a future spouse. Nobody decides to get married on the first date. And likewise, VCs do not decide whether to invest at the first meeting. Successful entrepreneurs cultivate a relationship – with the right initial introduction, then a mixture of formal and informal meetings, occasional update emails and even the occasional playing-hard-to-get huff. Once the relationship is stronger the formal pitch becomes the way to pop the question, but a lot of ground needs to be covered first.

· Then brace yourself: you’ll give up 30% each funding round. This is bizarre; surely how much you dilute is based on what you’re worth and what you need, and not much else? Not in the real world. In practice most VCs want a large minority stake, and good entrepreneurs want to dilute as little as possible. When conducted between consenting adults, the mating ritual invariably leads to the same outcome – somewhere between 25 and 40% equity dilution. So make sure the amount you need and the valuation of the business you expect support this sort of maths, or else you’ll likely end up finding the only partners who’ll have you are those who have little experience in the ways of the world.

· And make sure you’ve got the right help. VC funding has its own special set of traditions and jargon. Read up on it – there are several good objective blogs which cover the basics well. If you haven’t worked with VCs yourself, consider using an adviser, or getting a Non-Exec Director or seed investors with the right connections. That’ll help you learn the pitfalls of ‘3x participating preference’, ‘reverse vesting provisions’ and ‘weighted-average anti-dilution protection’.

Finally, remember to be positive and passionate no matter how badly the meeting is going, and get used to the fact that unless you hear ‘yes’, you’ve heard ‘no.’

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  • Very good article; short and to the point, wish more entrepreneurs would be aware of this.

  • Using an advisor can be a double-edged sword. Entrepreneurs who bring on corporate finance houses for fund raising who have no business experience in the target tech sector may actually find themselves in a loose-loose situation. I don’t believe the startup environment is one for traditional bankers. In fact, the relation with the advisor could be more holistic – business support and advice and help with capital raising as well. This, in a way, harks back to one of your previous articles on choosing a banker who understands your story and why the company and its cash flows are valuable (that was of course in an M&A environment)

  • Agreed. Raising venture and helping small companies is a specialised area and advisors with little experience can often hinder rather than help, despite their good intentions. That said the good ones are worth their weight in gold.

  • I couldn't agree more!

  • Thanks a very good read