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January 05, 2006
An Open Source VC experience
I don't often blog something someone else has written, but this is an exception. A friend of mine has been spending the last 8 months or so trying to find VC seed funding for an Open Source related venture. He has been telling me his experiences and I got him to write it down to share, as I figure others can profit from what he's been going through. Obviously your mileage will vary and there is probably some difference in doing this in Europe compared to the US.
And no - they haven't found the funding yet.
The long and winding road
Are you prepared for how long your fund seeking will take? No, are you really really prepared? Unless you're very lucky, it is going to take you a long long time. Months, if not a year at least to find funding. If at all. You will go through the process of approaching a VC (or being approached yourself) then you will jump through the hoops of:
Sending your pitch and business plan, presenting, doing your homework (you will have homework), sizing the market, finding initial customers, building a prototype, presenting again, and again..
All this to then hear from the VC who was "really interested", that you're just not quite right for their investment strategy. And this can take 3 or more months to happen.
And then you start pushing that rock up the hill again.
So, you still want to get started...
Build the VC deck
20 slides are your friend. Certainly not more.
There are plenty of tips out there on what should be in there and exactly what you put in depends on the stage of your venture. Start out with:
1 slide summary at the beginning (we know VCs only read this far - right?)
Customer or market pain
The solution
Why you
The market
Sales and Marketing
The team
Financials
The exit strategy
Next steps
Make sure you don't have anything in there you can't really talk about. If you don't know how big the market is then leave the figures out at the moment (but see below on this). Make sure your presentation contains exact information on how to contact you (VCs still use the phone a lot - so list a number where they can reach you).
The first VC meeting
Be honest and open when talking to a VC. Try not to do any handwaving or flashy presentations. They've heard and seen enough of those. Be short and to the point. Always go to a VC meeting prepared to present (even if they don't ask you to explicitly, when they invite you). Make sure your laptop works and you have all the necessary dongles. Your laptop won't work with the beamer (believe me, it happens) - so take a copy of the presentation on a CD or flash-drive.
Even though you sent the VC your slide deck and other documents - they haven't read them. So also take hand-outs with you and be prepared to start right at the beginning.
When you don't know - say so
Choose the pragmatic honest route when pitching to VCs. If you didn't know something then that is what you should say - and it should never really be a problem. Actually, better than just saying "We don't know", formulate it as "well, we don't know that currently but if it is important then we can work to find that out for you".
Hitting the "hard stop"
VCs don't have any time for you. Which is why the initial summary slide in your deck is your key argument. VCs will come to the meeting and tell you that they have so many other companies to see that day and that your meeting has a hard stop. Meaning you should ask before pitching how long you have. In many cases you will have been told how much time you have beforehand. But remember you have to build in time for discussion (yes there will be discussion) So go back to the “Build your deck” – 20 slides is really the maximum number. If a VC has questions he will not necessarily wait for the appropriate slide in your deck to appear before asking the question – so prepare to be flexible. Answer the questions when they're asked. Try to avoid saying "I have that on slide 13 - let me show you". The VC doesn't want to see slide 13 - she wants the question answered. Now.
Ask questions
Don't be afraid to ask your VC questions. How does she think she will be able to help you moving forward? Do they really do seed-funding? (I´ll come back to that later) What is their investment experience in your target market.?
Write, rewrite and write again
Be prepared to write and rewrite your plan over and over and over again. In fact you will do this so often that you will eventually become so sick of seeing those slides. No, really sick. After every talk with a VC you will recognize which part of the plan is actually missing and you need to work on again. It helps to present to someone who hasn´t spent tireless hours poring over the slides (like you have done). Find a sparring partner who can give you feedback from an outsider´s point of view. You´ll probably often say “they just didn´t get it” – remember VCs are smart people – if they didn´t get it it´s because you didn´t manage to communicate it well enough (or to put it another way – you need to be self critical .. really self critical)
Summarize, summarize
Make sure your business plan has an executive summary at the beginning. In fact make sure all your documents have a summary at the start. On presentations, make that summary no more than one slide. In a document, make the summary no longer than a page. Make sure your summaries contain all the information needed to grok your plan. In particular: The pain, the cure, why your cure (what´s the USP - yes VCs use that term), why you, the team, the market, sales and marketing strategy, financials, next steps.
PDF is your friend
If at all possible send your documents out as PDF. Using Word as a format is not a Good Thing - if only because Word documents can contain stuff you originally thought about but then realized was crap. Or to put it another way, if you've constantly been updating your business plan then you may not want the VC to read the original version hidden in there.
It'll get emotional
You will also go through emotional loops of thinking you're either finished and ready to go or don't stand a snowball's chance in hell or something in between. There will be weeks when you will keep hitting the "reload" button on your email client - just to see if maybe some VC has sent you a reply to one of those business plan emails. Sleepless nights ahead. In fact you'll soon be jumping round the room in joy when you even get an email that says "thanks, but no".
Most times you will not get a reply at all. Deal with it.
You will need people whom you can talk to to keep you motivated. And you will need to play the same role with your business partner.
The VC network
VCs are involved in various networks. It is not uncommon for them to pass the deck or plan around and on to other VCs in their network. So don't be surprised when you hear from a VC you didn't actually send the plan to. Your targeted VC may not be interested in your particular venture at the moment but has passed the plan on and will want to get involved when things move forward and at a later stage.
The VC who receives the slides can be very inventive as to how he then reaches you to talk. Make sure your wife knows you've been sending out business plans when the VC calls at home.
Advanced tactics: Size your market, yes really
Sure, so at the start you're all hip on how big your market is. I mean how long is a piece of string right? In the first talk you have, the VC will probably skip over the market sizing slides (you made them up after all didn't you?). In fact it is probably better to leave those slides "intentionally" blank and explain that you will be doing that as a next step. And maybe even with the VCs help. If you do decide to put figures in there then make sure you know where they came from. And don´t forget the link to the sales and marketing piece “So we size the European market at €270 Million” – Fine but what´s your strategy to win a piece of that great big market ? And when you´re thinking about what funding you need to get that piece of the market make sure you look at a 18 month to 2 year time frame and not just the initial product development phase.
Final word
Once you have been through all this, never ever go back and read what you initially sent out to VCs. You will kill yourself for being so naive.
Technorati Tags: opensource, VC
Posted by Matthew at January 5, 2006 02:57 PM