Question: I have a startup concept for a services agency (not a software or online business). I have previously helped launch PR agencies, one of which was subsequently acquired by a national agency. Are there angels/VCs that would be interested in my services concept?
Typically not. While there are some VCs that like services businesses, especially consolidations or rollups of services companies, most VCs aren’t interested in funding services business, especially around PR or marketing.
While there was a rash of VC financings for web agencies in the late 1990’s, when the Internet bubble burst VCs were reminded that these are companies that – at best – end up being valued at 1x revenue based on the underlying economic characteristics of the businesses. This tends not to create risk / return investment dynamics that are interesting for most VCs.
Of course, what VCs fund cycles in and out of favor, so there might be a point in the future where there is a particular type of “next generation services agency” that appeals to so VCs. But for now, most of these companies will have to rely on bootstrapping or angel financings.
It’s Monday and that means – yup – that Fred Wilson (USV) once again claims the VC Post of the Day due to his excellent MBA Mondays series titled Pricing A Follow-On Venture Investment. In it, Fred walks through an example, with real numbers, of how USV thinks about valuing an inside-led round for a company that is doing well.
Historically, many VC firms wouldn’t lead internal rounds at increased valuations except in extraordinary cases. When we started Foundry Group in 2007, we decided that was nonsense. It never made any sense to us why a firm wouldn’t pay a higher price than the last round for a company that it was already an investor in, especially if the companies in the portfolio were relatively capital efficient.
In our case, as in Fred’s, we try to offer a fair price, but expect to get some level of discount since we enable the company to bypass the fundraising process which is often incredibly distracting, time consuming, and often not much fun. Fred does a really nice job of explaining – both qualitatively and quantitatively, how he thinks about this. While our math is somewhat different, it’s super useful to get inside the head of an actual VC as he thinks this through.
Rand Fishkin, the CEO & co-founder of SEOmoz, has an long, thorough, and incredibly detailed blog post up about The $24 Million Moz Almost Raised. Rand does an awesome job of providing extensive details while maintaining confidentiality of the participants.
The story covers the full lifecycle of the VC fundraising process, beginning with Rand and his teams’ discussion about whether or not to raise money. He documents the fundraising dance, including providing lots of juicy email correspondence to underscore his points. He lays out the numbers for his company, the terms for the deal, and his view of when he was negotiating effectively vs. stumbling around.
Ultimately he gets to a signed LOI and that’s where the fun begins (in the section titled “Then Things Got a Little Weird”.) The deal ultimately falls apart and Rand does a nice postmortem where he speculates on what happened. He then wraps it up with how his team responded and what’s next for SEOMoz.
If you are an entrepreneur, go read this post now. It’s probably the best and most detailed description of the VC fundraising process that I’ve read. Well done Rand – on many levels. Even though this particular deal didn’t close, I love your statement at the end:
“What I can say is that this experience makes me and the rest of the Moz team even more inspired and motivated to build an amazing company. We can’t help but feel passion for proving doubters and naysayers wrong. The greatest revenge is to execute like hell, bootstrap all the way, and do what we said we’d do – become Seattle’s next billion-dollar startup, and make the world of marketing a better place.
I know we can do it.”
Entrepreneurs – if there is one post you read today, read this one. And Rand, email me anytime if I can be helpful. Even though you are too late stage for us to invest in, you just earned a bunch of karma points in my book by sharing this experience with all the entrepreneurs in the world.
Jeff has done a nice job building a site that both models a cap table and provides a lot of information to empower entrepreneurs both with educational resources and software tools. In addition to modeling a cap table and ownership of the company, Jeff’s software helps answer questions like “if I sell for $100M, how much money does everyone receive.”
In addition, he’s created a variety of interactive examples that help you understand things like:
- Anti Dilution – Broad-based Weighted Average
- Anti Dilution – Narrow-based Weighted Average
- Anti Dilution – Full Ratchet
The LearnVC site has a bunch of other interactive examples for some of the basics of venture financing including:
To see their product in action, check out their videos.
Don’t compete with Fred Wilson (USV) on Mondays for the best VC Post of the Week. He wins again with Financing Options: Bridge Loans as part of his MBA Mondays series.
Ok – I know it’s not Monday anymore. So you get the best post of Tuesday also, which is from Nic Brisbourne (DFJ Esprit) titled Software patents – a brake on innovation. Another smart person weighing in on how messed up the software patent situation is.
Question: One thing that I think would be incredibly helpful would be to have a spreadsheet showing how a cap sheet evolves under a set of financing rounds with the important variables parameterized so we can play with them.
Having spent the past 15 years trying to come up with the definitive spreadsheet model for all cases, we’ve given up. It’s really hard to create the general case and actually using it is very difficult. So we don’t have a generic one to offer.
However, there are plenty of resources for cap tables on the web. Here are some examples. Use at your own risk – we can’t guarantee the mathematical integrity of any of these.
- Venture Hacks: How To Make A Cap Table
- Mark Suster: Venture Capital Valuation Spreadsheet
- AskVenture.com: Sample Cap Table
- StartupNetwork: Capitalization Table
- ModelSheet: Capitalization Table
There are many others on the web – just search around for “cap table” or “capitalization table”. I expect your favorite lawyer has one also – if he doesn’t, or won’t share it with you, I encourage you to find a new favorite lawyer.
Monday is a tough day to be a VC blogger because you are competing with Fred Wilson’s MBA Mondays series. Fred once again delivers with his post Financing Options: Capital Equipment Loans and Leases. In this post, he talks about ways to finance your capital equipment without using cash from your equity financing, which is usually your most expensive source of capital. Fred isn’t a fan of debt, so this is a well considered piece on when debt can be useful in an early stage startup.
As a runner up, Allen Morgan has a follow up to his blog from last week titled More on “Why Entrepreneurs Should Never Meet With VC’s Unless They’re Formally Pitching”. In it, Allen clarifies his perspective and expands his post from last week titled Why Entrepreneurs Should Never Meet VC’s Unless They’re Formally Pitching.
Remember, unless you trade stocks for a living, don’t watch the Dow this week. There’s nothing you can do about it. And if you watched it obsessively on Friday, here’s what you saw.
Yup – it ended where it started after a handful of wild swings. Pretty exciting, eh? Just think how much anxiety the commentators on CNBC generated talking about it while you were getting some real work done.
Roger Ehrenberg from IA Ventures has today’s VC post of the day titled Financing your start-up. He covers some very relevant ground talking about what he thinks are the key variables an entrepreneur should consider with regard to her financing strategy: (1) Founder objectives and mind-set; (2) Business potential; (3) and Interpersonal dynamics. As with many things in life, Roger states something that we strongly believe: “But at the end of the day, interpersonal dynamics plan a vital role in any financing plan for a business of any size.”