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I recently spent some time with a long time friend and entrepreneur who I’ve funded in the past. He’s working on a new company which I think is really neat and I’m already a user of. He called me for feedback on his fundraising strategy as well as to see if it’s something that we’d be interested in investing in.
It’s outside our themes and different than the type of business we invest in. Given our long relationship and the fact that he’s an awesome entrepreneur, I squinted hard at one of our themes, turned my head sideways, and decided to take a look. We spent a few days applying our process to it (each partner touches it and we give each other real time qualitative reactions) and quickly realized that it really wasn’t something for us as it was far outside anything that we felt like we could help much with beyond money and moral support (which my friend is going to get from me anyway.)
So – I sent my friend a note with my explanation for why we are passing. I offered to help with introductions because (a) he’s an awesome entrepreneur, (b) it’s a very fundable business – just not by us, and (c) I have a lot of confidence that he’ll build a successful business and there are several VCs who I know that I think would like what he’s working on.
His response was dynamite. It was
“No sweat. I knew it was a longshot, so I appreciate you even considering it. I know how many deals you have to pick from.
I’d like to take you up on your offer to help us get funded, but I have a better idea … help us avoid the need for funding (700 clients gets us to profitability).”
He then went on to detail a handful of things he’d like me to do assuming that I’m a happy user of his product. All of them are easy, low maintenance for me, and in several cases actually benefit me.
I love that my friend is much more focused on ramping up his customers than raising money. It’s easy to get lost in the soup of “X company raised $Y” and forget that it’s not about fundraising, but building a business. When I think of some of my favorite TechStars companies, such as Occipital, they bootstrapped for several years before raising any money (well documented in the book Do More Faster) and even then could have easily built their business without raising any money.
Don’t forget to bootstrap.
Last night I gave a talk hosted by SVB at their Palo Alto office. It was part of the “Never Ending All Old Is New Again Venture Deals Book Tour.” I had a ton of fun talking to and answering questions from about 75 entrepreneurs who – at the minimum – enjoyed eating the great food and wine that SVB provided on a luscious evening in Palo Alto. Oh – and I signed a bunch of copies of Venture Deals.
Several questions came up about Convertible Debt. We touch on it in Venture Deals but realized that we didn’t cover it in enough depth so Jason recently wrote a Convertible Debt series on Ask the VC. The series is now complete – here are the links to the posts in order.
- Convertible Debt Series
- Convertible Debt – The Discount
- Convertible Debt – Valuation Caps
- Convertible Debt – Conversion Mechanics
- Convertible Debt – Conversion In A Sale Of The Company
- Convertible Debt – Other Terms
- Convertible Debt – Warrants
- Convertible Debt – Early Versus Late Stage Dynamics
- Convertible Debt – Wrap Up
If you feel like we missed anything, or got anything wrong, or were confusing in our explanation, please chime in on the comments on the post. If you want to see an actual convertible debt term sheet or the actual legal documents, take a look at the TechStars Open Sourced Model Seed Financing Documents.
As a bonus to the evening, I got some direct, constructive feedback from one of the attendees via email later that night. While the “thank you” and “good job” notes are nice, I only learn when someone criticizes me (hopefully constructively, but I can handle it in any form.) The feedback was:
May I make a constructive criticism regarding your talk tonight? Your answers to audience questions tend to be overly long and rambling…..you “overanswer,” to invent a word. You start strong and respond right to the essence, but then your focus blurs and you keep taking verbal baby steps away from the thought stream. If you trim a minute or two off each answer, you can call on more people and hear more questions, which sends more people home happy. I think if you self-critique a video of yourself in a Q&A session, you’ll arrive at the same conclusion.
It’s a good suggestion. I often try to provide additional context to the question, but it sounds like – at least for one person – I went off on a few space jams that weren’t additive. I love the phrase “overanswer” – it’s a lesson from TV interviews 101 (e.g. just answer a question – any question – quickly). Something to ponder as I continue the Never Ending All Old Is New Again Venture Deals Book Tour.
Recently, several entrepreneurs and investors have asserted to me that they don’t think the terms on a convertible debt deal matter much. I was perplexed by the statement and asked each of them to tell me more. In every case, the person hadn’t really thought through the issues. Rather, they were just spouting what they believed was conventional wisdom about terms for seed deals.
In one of the entrepreneur cases, I explained how it was likely that they were going to be on the wrong side of the valuation discussion in the next financing based on one of the terms. In one of the investor cases, I explained the difference between a 2x return and a 15x return – using a real example – based on the way the note was written. And in a third case a separate potential angel investor in the deal brought up a specific term that was important to him that addressed a real concern.
We rarely do convertible debt at Foundry Group – we much prefer to do equity rounds, even at the seed stage. However, many of the seed rounds done in TechStars are done using convertible debt as are many financings of less than $1m. So, if you are an entrepreneur or seed investor, I think it’s important to understand how convertible debt works and what the impact of various terms are.
In Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist, my partner Jason Mendelson and I touched on convertible debt but didn’t go into much detail on the specific terms. A number of people have asked us about them since the book came out so we’ve started a Convertible Debt series on AsktheVC. The first three posts are up:
There are nine posts in the series – coming out every Tuesday and Thursday until we are done. If you notice anything confusing, or incorrect, please comment and/or ask questions so we can clarify and/or fix.
As of today’s announcement that Ted Wang at Fenwick & West has collaborated with a group of bay area early stage VC’s and angel investors to create the Series Seed Documents we now have – at my count – four different standardized seed financing documents floating around the industry.
- TechStars Model Seed Funding Documents (by Cooley)
- Y Combinator Series AA Equity Financing Documents (by WSGR)
- Founders Institute Plain Preferred Term Sheet (by WSGR)
- Series Seed Financing Documents (by Fenwick & West)
Many smart and capable people have either worked on these various docs on signed on as supporters. However, until there is one standardized set of documents that everyone – especially the various law firms agree on – I don’t expect there to really be a standardized set of seed financing documents. I wrote about this in my post The Challenge of The Ideal First Round Term Sheet.
Rather than whine about it, after reading the PEHub article Marc Andreessen on “Series Seed Documents,” and Why VCs Should Start Using Them I’ve decided to try to get a handful of lawyers in a room and try to come out with one set of documents. This might be a futile effort, which will prove the point that it’s impossible to create one standard set of documents. But – I’m an optimist, so I’m going to plan for a good outcome.
I’ll proactively reaching out to the appropriate folks at Cooley, WSGR, and Fenwick & West to organize a one day session, with laptops, somewhere in the bay area. I’ll include a handful of early stage investors (both VCs and angels) in this effort. My goal will be to finish the day with a truly standardized set of seed documents that all of the firms agree to use. Then we’ll open source these and evangelize them across the startup world, at least in the US.
If you are an attorney at a major national or regional law firm that works with startup companies, please email me if you are interested in participating. If you are a VC or angel investor that supports this effort – same drill (email me). Let’s end this madness (which I’ve been dealing with for 16 years and an angel and VC investor) once and for all – the entrepreneurs who we work with deserve better from us.