When to raise money and when to bootstrap – BlueGlass LA

After a tasty lunch featuring mini cannolis and tiramisu cake, we’re back to talk business development with Brian McLachlan (sitting in for the scheduled Mark Suster), Andy Liu, CEO, BuddyTV and Paige Craig, Adrenaline Fueled Angel. You’ve got a business. It needs to grow. How do you make that growth happen though? We’re going to have a discussion panel to figure it out.

Jason Nazar is moderating this discussion. You know what I hate liveblogging? Q&A panels. Hold me.

What kind of businesses have a chance at raising venture capital? (Strawpoll of the audience says this is a key topic for most marketers.)

Brian McLachlan: You’re intending to sell your company at some time, merge with another company or take it public. If you’re in a lifestyle business (services businesses, for example), that’s probably not a good candidate. If you’re planning on creating something larger than yourself, outside funding might be appropriate. [Angel investors = Full time job somewhere else with extra cash to invest. Super-angel = Full time job is lending own money or a seed based investor as a venture capitalist. VC = Sit on your board and help you build your company over a long period of time. Lots of $$$ involved.]

What multiple of your money are you looking for?

Brian: If I’m writing a 3 million dollar check, I want to make five times my money.  That means I have to figure how big they’ll get. Normally VCs take 20-40 percent but it depends on the opportunity. Sequoia only took 10 percent in Google and it worked out for them.

For every ten companies, 30% don’t return. Another 30% only provide moderate returns. You’re banking on one or two out of ten to carry that five to ten-fold return.

Jason spends a moment to point out that if you’re pitching to VCs you have to believe that you’re going to be a billion dollar company in a couple of years. You can’t think small.

Paige’s criteria for investing is a) people he likes and b) ideas that are exciting. He doesn’t necessarily think it’s about profits. He invests 50-100k on average for a deal. If you come to him and say “I can return money in a year or two” he’ll think you’re full of sh*t. He’s not looking for the same kind of multiple that GRP is (for example.)  He looks for passion. The entrepreneur will be going through the darkest days of his life. He better love what he’s doing.

Brian: I’m glad Paige talked about the personal side. That’s part of our approach too.

Andy believes you should take every meeting. If an angel investor walks through the door, talk to them. Take advantage of it. His investment criteria is mostly emotional and about connecting with the entrepreneur.

What metrics did your business have when you came in?

Andy: 150k run rate. Multiple bidders. Simple pitch: as your traffic goes up, your CPM goes up. In the media business, it’s a rush to number one. We’ve proven that we can grow, here’s our plan for how to get to the top and set our own price.  Second round: 4 million visitors. $7 million raised. It was a very different time though, much easier to raise money.

How far does someone need to bootstrap before you’re willing to give them money?

Paige: I tried to raise money and no one believed I could do it. I didn’t think about revenue, though I did think about cash flow since I had to pay my mortgage.  Do what you love.  He likes vision, execution, communication. How are you going to change the world, what’s the method you’re going to use, communicate that.

What are the big mistakes people make when pitching VCs?

Brian: The typical mistake is that you have 45 minutes for the meeting, you need to package 6-7 key elements of the business and time to answer questions. They fail when the story isn’t well-packaged. That doesn’t happen very often. Most people come in and talk about their business and the difference between those who get money and who don’t is how thoughtful and passionate they are.

Andy: I try to meet one entrepreneur a week. I like to ask, “How do you value your business. How long are you planning on raising money?” There’s a sunk cost in raising their business. How come you haven’t quit your current job to do this? You need to believe in it so much you’re willing to take the risk.

Paige: Paying yourself too much (he payed himself lower than the lowest employee only after 18 months without a salary), picking the wrong founders, not picking founders. Pick the right team. Who you work with is a judgment of who you are. Know your valuation.

Andy: Entrepreneurs overvalue valuation and they overvalue control. Move the company forward, focus on building the company.

Paige: Too much detail is a problem. He’s not impressed by charts and graphs detailing the next two years. The biggest mistake is being deceptive in any way. Be genuine and honest. If you tell me your life is clean and pristine, I think you’re full of sh*t.  I like people who are genuine.

Brian: Flipping that question around, what do we like?  One man team, thought he needed money first and then attract team members. He didn’t know a lot of things. They talked to him for a few months then he found the perfect co-founder and did enough research to find the perfect product. They funded him on the next pitch.  Another guy came in, he needed more money in order to get it off the ground. He had a good team but a lousy execution of the concept. They didn’t fund.

Another example: Two guys with perfect backgrounds, 15 screen shots and a very thoughtful presentations. Easy to monetize, problem-solving. Brian wanted to be part of that.

They also like to see a unique focus.

Lightning Round

Would you invest in a business where someone hasn’t put their own money into it?

Andy: Yes.

Paige: Maybe.

(Oh heavens I can’t keep up with this part. They’re going far too fast.)

They all prefer investing in a team to a single founder. They want a strong team.

Q&A

It seems like VCs aren’t taking much risk now. They want a team, they want a finished product.

Brian: Not true. There’s less money out there not but it’s not because we’re more risk averse, it’s that there are fewer of us with less money.

How important is the board?

Paige: The right board is invaluable. Use the right judgment and don’t use too many. Two or three folks who will actually give you time.

Andy: I’m a big fan of the right board. It’s a great way to crystallize what’s going on in the company and gives you a step back. Very useful.

Jason: Raising money is the most serious relationship you’ll get into other than marriage. Don’t take it from the wrong people, people with a different vision. The wrong investors can ruin your business.

Andy: Agrees with that entirely. He had an investor that cost him more in legal fees than they put into the company. Do your due diligence.

Brian: All that means is calling to the companies where they invested money. The ones where it didn’t turn out well. How did it go? How supportive were they?

How important is it to find the right partner in the VC?

Andy: It’s not about Sequoia, it’s about the person. You have to have the right partner in the company.

What do you see as the next big thing?

Paige is interested in mobile and transparency. His investment thesis is online.

Brian: We get themes two ways. There’s stuff like mobile that’s just been growing. The other way is that people will bring ideas in clusters. Online health care, tele-heath care.

[Tony Adam is lurking beside me and jostling my chair.]

Jason: People are investing in you as much as or more than they’re investing in your product. You’re selling yourself. You are your product.  Sell scarcity. If they have all the time in the world to invest, they’ll take that time. The sales process with an investor starts once you raise money, it doesn’t end. Keep up that momentum.

Susan Esparza is former managing editor at Bruce Clay Inc., and has written extensively for clients and internal publications. Along with Bruce Clay, she is co-author of the first edition of Search Engine Optimization All-in-One Desk Reference For Dummies.

See Susan's author page for links to connect on social media.