Peter K. Adams

Cheat Sheet / Updated 03-10-2022

Navigating the world of venture capital as you seek to raise funds for your business can be scary and confusing because of the high stakes. After you identify whether venture capital is a good choice of funding for your company, you can begin to seek out investors. When seeking venture capital, you need to know who the venture investors are and where to find them. You also need to take certain steps to prepare yourself and your company for the scrutiny you’ll experience as potential investors strive to learn more about your company as they decide whether it is a good candidate for venture capital.

Article / Updated 03-26-2016

There are a few times when your attorney more than pays for himself, and negotiating your venture capital deal is one of them. The value in having an experienced attorney goes beyond his knowing the law and includes his having enough recent experience to know what the generally expected negotiation norms are and, even better, to know how the parties have behaved in negotiations in past deals. Although you’ll be doing much of the negotiating with the venture capitalist directly while you pitch your company, having your attorney conduct the detailed negotiations for you is best. That’s why they are paid the big bucks! You’ll be in a long-term relationship with the venture capitalist after you close your deal. You don’t want the inevitable challenges that occur during negotiation to spoil that relationship. It’s better to let your attorney be the bad guy. Selecting an attorney is critical. Depending on where you live, you may find only a handful of seasoned securities attorneys who have the knowledge and experience to do your deal. Follow these suggestions: Ask a lot of questions about what kinds of deals your attorney has negotiated and how recently your attorney has been working in securities. Securities law is highly specialized work, and you need someone who does nothing other than this kind of deal. Choose someone who has worked with venture capital companies. Don’t go with someone who specializes in initial public offerings (IPOs) — you can use an IPO attorney in a few years, when your company reaches that stage. Nor should you use your brother’s college roommate who does a lot of divorce law, or your general business lawyer, even though you’ve been happy with his performance thus far. You must choose an experienced securities attorney; too much is riding on this deal to do otherwise. Try to find an attorney who has represented entrepreneurs working with the specific investors you are talking to. The attorney will have some idea about what kind of terms to expect and what working with that investor will be like, both through the negotiation process and later when the venture capitalist is a director on your company’s board.

Article / Updated 03-26-2016

As you prepare your company for investment, be aware that venture capitalists scrutinize all aspects of your company. You do not have to be strong in all ten aspects in order to be ready for investment, but you should strive to develop each point as your company develops. Pay particular attention to these ten areas: People: The most important element of your company is the team. Make sure your team is made up of people who can grow your company. Don’t forget that your team consists of more than just the people on your payroll. Advisors, mentors, and board members are part of the team, too. Partnerships: Aside from the team, your partnerships with other businesses are the next most important thing. Create strategic partnerships with other companies, with the common goal being to increase revenue. Package: When you sell stock, you are selling a piece of your company. When you pitch your deal to investors, be sure that you’re discussing the whole package and that you aren’t over-focusing on the product. Plan: When you expect to work with investors, you need to create an extensive plan for your company. You don’t have to follow the plan exactly, but you do need to refer to the plan, change the plan, and iterate your company’s path as you go. Pro forma: A pro forma is a detailed prediction of revenues and expenditures for your company. When you pitch to investors, you are not selling your product; you are actually selling the prediction of profits — your pro forma. Product: Although you don’t need to have a finished product to talk with investors, the closer you are to selling your product, the better off you are. Promotion strategy: To sell your product, you have to connect with the people or companies who will buy it. How will you get your product into the world? Provide specifics. Paying customers: Customers who pay for your product offer direct proof that you have a viable product. Record the information about your early sales and use it to understand and serve your customer better. Proof: Proof of future success is impossible to show, but the more risks (or milestones) that you overcome, the more likely you are to convince an venture capital investor that your company has what it takes to succeed. Pitch deck: You have to communicate your business to investors in a short amount of time, so make sure that your pitch deck (a PowerPoint file with information about your company, product, and deal) contains all the key points and is clear; otherwise, you can lose credibility fast. You really do only get one chance to make a good first impression.

Article / Updated 03-26-2016

When you are pitching your company to venture capitalists, how you dress can make or break your chances. The accepted style is different in different areas of the country — sometimes from city to city — and it may be specific to the type of company you’re representing, as well as the industry. Boulder, Colorado, for example, has a culture built around young software start-ups. Founders are expected to wear jeans and cotton T-shirts or hoodies with the company’s logo emblazoned across the chest. The idea is that founders are walking billboards for their companies. When founders and investors mingle in funding networking events, this dress code makes clear who the funders are and who the founders are. Founders who ignore this system and wear suits instead of logo T-shirts run the risk of being overlooked by investors, first because they look like investors instead of founders, and second, because investors may believe that the founders are bad at marketing their products, given that they aren’t wearing their own logos. Only 30 miles south of Boulder, the situation is different. In Denver, Colorado, the culture is older and less concentrated in young technology start-ups. Here, founders are expected to dress more formally. A founder in a T-shirt and sneakers would be taken less seriously in Denver than in Boulder. Instead, suit jackets and button-up shirts, but no ties, are the thing. The same is true for San Francisco and Los Angeles. East coast events are more formal: In New York City, for example, you want to stick with a well-fitting but non-flashy suit and tie. When you’re seeking venture capital — or investment from any source — your aim is to match the other successful people around you. An easy way to show that you fit in is by dressing for the part. After all, you want to be remembered for your great investment deal, not for your outfit.

Article / Updated 03-26-2016

Husband/wife, father/daughter, or other family member teams can be particularly challenging for venture capitalists. How likely is it that the best choice for a CFO (Chief Financial Officer) and CMO (Chief Marketing Officer) happened to fall in love and get married? It’s more likely that one half of the couple is a weak link. Another concern is that you’ll have more trouble working out differences because your relationship is more than business. Although you may be confident that your relationship is secure and that you two work together very well and can keep the boardroom and the bedroom separate, the venture capitalist won’t be so sure. Following are the challenges facing the husband/wife or other family member combination model: Letting the team/family member go: Family teams are often formed out of convenience and availability (and perhaps the availability of free labor). Although one may be a rock star, the other may not be the best person for the job. Just because someone is a great bookkeeper and capable of doing the accounting doesn't mean that he would make a good CFO. How do you deal with letting him go when the time comes? How do you deal with compensation? What if he argues that he can grow with the job? These scenarios are all turn-offs to investors. Personal conflicts putting extra stress on the business: Professional couples can usually avoid boardroom and bedroom conflicts, but with so many other risks at play when scaling up a rapidly growing start-up company, venture capital investors don’t want to have to take an additional bet on whether your marriage will stay intact. When personal conflicts come into the business, everyone suffers. Despite these challenges, having a husband/wife or other family team may make sense. In fact, many good companies exist that have been very successful with this model. However, when family members are part of the founding team, be aware that disclosure is important. You may not need to disclose relationships in the first meeting, but they should be absolutely clear from the second meeting on. Don’t wait until you’re weeks into due diligence to share these important relationships with your investors. To you, they may not be a big deal, but the relationships and how and when you reveal them are a big deal to the venture capitalist.

Article / Updated 03-26-2016

When you pitch your deal to a room full of investors, you must ensure that everyone can easily hear you. For that reason, microphones are critically important in large or noisy rooms. To work well, these highly specialized pieces of equipment need to be used properly. When pitching to investors, the handheld mike is most common, but you may come across a lavalier or a podium mike. The conference call phone is like a microphone, but it doesn’t amplify your voice in the room; it amplifies your voice to those on the phone call. The key thing to know when using a microphone is that, to project sound properly, you must hold the microphone the right distance away from the source of the sound. Unfortunately, that distance depends on the style of microphone you use. Here are some sound-equipment options for your pitch to investors: Handheld (wireless or wired): A mike in the traditional shape. The wireless version has batteries and no wire; the wired version has no batteries and is wired to the speaker. Hold this microphone about 6 inches from the source of the sound; 2 inches is too close, and 1 foot is too far. Lavalier: A small microphone with clip to attach the mike to your clothing, a wire, and a control box small enough to fit in your pocket. It’s great for hands-free use. Center the microphone about 8 inches below your chin. Conference call phone: Often black or grey, sometimes has a dial pad, and is shaped like a starfish or something you’d see on the starship Enterprise. This device is multi-directional and can usually pick up voices at distances of up to 5 feet away. Podium microphone: This microphone is attached to the podium. Point it directly at your mouth. You get the best results when the sound source is 7 to 9 inches away from the mike. Headset: A mike with one wire that extends from ear to ear over the top of your head and another wire that extends the microphone to the mouth. Madonna made these famous in her Vogue era. Table integrated: Often hard to see, maybe a little bump, a blinking light, or a mesh hole in the table. One is placed in front of each seat.

Article / Updated 03-26-2016

Some companies move quickly through the process of raising capital for their business ventures, and some take a long time to close the deal. The speedy fundraisers tend to be proactive about meeting investors, and when they find the right investor, they are swift about getting them involved. Know what you want: The most powerful thing that you can do to make your investor pitch clearer and to help your negotiations go more smoothly is to know what you and your team want for your company. After you have worked out your immediate and future goals and the direction of your company, your message to the world will be focused and concrete. Investors love to deal with people who know what they want. When founders have not yet settled major decisions, the investors can’t be sure exactly what kind of a company they’re working with, and this uncertainty can delay — or kill — the deal. Create a draft term sheet: Founders who create a term sheet are able to discuss terms immediately when an investor inquires. Negotiations are easier, too, when you have a document to start from. A draft term sheet should include statements reminding readers than all terms are negotiable (or which terms are negotiable if some are not). Secure a lead investor: Getting an investor interested is always easier if you already have an investor by your side. If you’re seeking seed round capital, your goal is to find the first investor who can act as a lead and help shop your deal around to other investors. If you’re looking for Series A round venture capital funding, ask your previous investors to help you on your fundraising campaign. After you’re connected to one investor, your likelihood of meeting more is high. Past investors are often willing to participate in future rounds. If you have investors from an earlier round, invite them to lead the round financially. Launch a strategic campaign: In addition to having your deal structured and all your documents in place, you need to simultaneously launch a campaign that employs both face-to-face and online channels to get — and keep — potential investors interested. Through your face-to-face channels you generate buzz about your company in a very natural way — through social and business relationships. By posting your company on any of the online angel investment platforms like AngelList or Gust, you can generate interest beyond your network. Meet new people: According to a whole lot of science on the subject of social networks, certain people have more influence than others, not because they are in charge but because they are connected to a larger variety of people than anyone else. The best way to get out of your own social fishbowl and meet new people is through the connectors (people who stay in touch with large numbers of people) and the bridges (people who connect unrelated groups of people) in your own network. As you network and make connections, create a database of all the people you meet. Add them to a mailing list (use a free mailing list software product; you can find one at MailChimp). Use the mailing list to send important information about your company to interested investors and those who’ve shown some kind of interest in the past. Include information about your company progress. You can also request help with certain things like new connections or vendor choices. Be visible: You have a ton of work to do because you are trying to run your business and fundraise at the same time, but you don’t have the luxury of staying in. You need to have a public face when you are actively fundraising. Your deal will stay fresh in people’s minds if you are visible in groups where investors will be present at least every other week. Remember to always have good news to share. Be careful of the overshopped deal effect, however. Some entrepreneurs shop their deal all over town for a year or two without success. If they haven’t made progress and they are selling the same deal after that long, investors start avoiding them. If you haven’t gotten any leads after three months, head back to your office, rethink your deal, and focus your attention on making progress.

Article / Updated 03-26-2016

Talking with venture capital investors about your company is different than having a discussion with potential clients or customers. Investors want to know how you will make money for your company and subsequently for them. To impress these investors, be prepared with sophisticated materials that communicate your company, product, and plans for the future. In short, you have to get across that you are the founder that investors want to work with for the next three to seven years. Your task is to show that your team is capable of driving your company to success through integrity, hard work, and adaptability. You do that by creating a pitch deck. The pitch deck is the visual slide presentation that acts as a backdrop to your oral presentation. When you are presenting your deal in person, the pitch deck should be clean and nearly wordless. After all, the images (typically infographics) serve to reinforce your oral presentation. However, you may not present your deal in person. In that case, a pitch deck can also be a PowerPoint file that you e-mail to investors. For this pitch deck, the slides must be self explanatory. (Yes, plan on creating more than one deck!) All investor pitch decks for early-stage companies should include information about these topics: Company overview and the problem your product or service solves Your business model Your target market and marketing strategy The risks and barriers to entry your company must overcome The size of your industry and your company's growth potential Your team Your exit strategy Your valuation story The ask, when you ask for investment from those in the audience

Article / Updated 03-26-2016

Venture capital is a unique way of getting funding for your company. Because venture investors look for companies that are growing very quickly and can make several times the initial investment for the investors, venture capital isn’t right for every company. Fortunately, growing businesses have plenty of other ways to find funding. Here are just a few of the other ways you can get capital: Debt: Many different kinds of debt are available for growing businesses: business loans, government-backed Small Business Administration (SBA) loans, and factoring loans that are backed by accounts receivable (in these loans, you sell the business’s accounts receivable to a third party at a discount). Friends and family: Your friends and family are watching you create and grow your business. Chances are they are proud of you and want you to succeed. If they have the means, they may be interested in financially supporting your venture. Angel investors: Angel investors are like venture capitalists in that they invest in early-stage companies to get a large return on investment. Unlike venture capitalists, who fund businesses by using other people’s invested money, angels work with their own money. As a result, angels have a lot more freedom to invest in non-standard ventures. Crowdfunding: Crowdfunding is a great way to pre-sell your product before it’s ready to ship to customers. For businesses, crowdfunding doubles as a way to get paid to market your new company or product. Growing organically: When you grow your company organically, you take out only what you need to survive and put the rest of your profits back into the company as an investment. The bigger you can grow your company, the more money it will return to you in the future.

Article / Updated 03-26-2016

It’s very important to figure out the type of company you’re building — a venture company or a lifestyle business — so that you can decide whether you should consider venture capital in your business growth strategies. Sometimes, determining which category you fall into is hard. Even though lifestyle businesses can make annual revenues into the millions, other things, like the type of business and/or the rate of growth, make them unsuitable for venture capital investment. The rate of growth and the ultimate size of the company are good indicators that can help you decide. Characteristics of Venture Companies Characteristics of Lifestyle Businesses Area in which you do business National or global Local or regional Growth rate Very fast (you plan to grow from a brand new company into a nationwide corporation in only a few years) Slow (you plan to open only one new location of your business each year, for example) Nature of business Generally game changing businesses based on new technologies Businesses that sell or deliver traditional or conventional products or services Makes money for Investors, founders, and owners Founders and owners Future plans To be sold to another company or to go public, with founders leaving the business or assuming different roles, based on need and qualifications To be kept in the family for generations or to be sold when the founder/owner retires