VC Funding in a Frothy Market

							     Getting Funded in a
       Frothy Market


Mark Suster

Founder Showcase, June 2011

@msuster
                   Accenture (software dev)

                   BuildOnline (’99)

                   Koral (’05)

                   VP Product Mgmt,
BothSid.es          Salesforce.com
This Week in VC
                   GRP Partners - Largest
                    VC in Southern California
I Hate Funding Discussions in a Frothy Market
We All Know How It Ends
Nobody Wants to Hear it While Music Still Playing
I Might As Well Deal with Elephant in the Room
Of Course There’s a Bubble. Duh.
There is a Separation from Price & Underlying Value

                                         Today’s
                                         Market
$


                                           Historic
                                            Value




                                          Time
People are Paying Growth Prices for Market Risk
Valuation



                                                       Monetization /
                                                      Competition Risk

                                         Growth / Scale
                                             Risk


                           Market Risk



            Product Risk




                                                                   Time
            And This is Pretty Normal Market Behavior
Valuation




     C


     B          Hot Companies
                    / Booms



     A
Seed                            Average Companies
                                      / Busts


                                                    Time
Just Because You Disagree Doesn’t Mean You’re Right
Sure, It Seems to be Localized
But It Does Have a Rippling Effect
 What Does This Mean For You?
 WHOM should you raise from?

 WHAT is the right amount to raise?

 WHEN should you raise?

 HOW can you get it done?

 WHERE is the market heading?
WHOM
  There is no right or wrong
answers. Each type of investor
   has positives & negatives
      1. The Three F’s




(Friends, Family & Fools)
2. Angels
Angels Are Just Fine with a Triple
In Tougher Markets, For Rational Reasons,
 They’re Often First to Run For the Door
3. VCs
VCs Are Expecting Rocket Ships
In For a Penny, In For a Pound
4. Seed Investors (Micro VCs)
In Tough Times They Can’t Save Everybody
There’s No Such Thing as a “Super” Angel


Your Own Money           Somebody Else’s
                             Money
WHAT AMOUNT?
People Are Throwing Money Around These Days
Shoot for 18-24 Months of Runway
Are You On the Local or the Express Train?
Lean vs. Fat?
I Ask You …
 Actually, I Recommend You Go Lean then Fat

                                        Fat
Progress




                                   Keep Options
                                      Open



                                      Time
                Inflection Point
There Aren’t Many Exits > $100 million
WHEN
    Too Many Entrepreneurs Try to Optimize

                                    Company
                                    Progress /
$                                   Valuation




                                     Dilution


                                       Time
When Markets Turn, Progress Might Not = Valuation

                                      Company
                                      Progress
$




                                       Valuation


                                        Time
And Some Good Companies Simply Don’t Get Funded

                                    Company
                                    Progress
$




                  Valuation            Time
So When The Hors D’oeuvres Tray is Passed
               Take Two
And Put One in Your Pocket
Don’t Take the Whole Tray!
HOW TO GET IT DONE
If Raising Angel / Seed, You Need an Anchor
If you show proof the rest usually follow
Don’t Cold Call VCs
In Era of Social Media if You Can’t Get an
 Intro to a VC, Hang Up Your Cleats Now
Intros from Portfolio, Entrepreneurs,
         Lawyers, Angels, etc
VCs want Management, Market Size,
          Money and ….




        Momentum
You Need to Create a Sense of Urgency
And We All Still Act Like We Did in High School
All Too Often FOMO (Fear of Missing Out)
               Drives Deals
Run a Process & Beware of Gym Salesman VCs
  If it doesn’t feel good when you’re
courting, imagine after you’re married
WHERE ARE WE HEADED?
On the Positive Side, Much Has Improved

        2001                   2011

• 100 million online   • Billions online

• Connected at PC in   • Always Connected
  office
                       • PC, Mobile, Tablet,
• Dial up                TV, Game Devices

• Distribution hard    • Broadband

                       • Social distribution
No Crystal Ball, But There are Some Worries
                    • Unemployment

                    • State / City Cutbacks

                    • Housing stock overhang

                    • Stagflation

                    • Political Malaise in DC

                    • Middle East Unrest
The Market is Flowing Right Now
When the Market Turns South, the Whole
  Industry Gets Instantly Constipated
VC Deals (IT) & VC Amount ($bn)
VCs Go Into Triage
Huge Explosion in Early Stage Deals




      • 90% reduction in cost
      • Faster time-to-market
      • Great ability to experiment
But Decreasing Number of Active VCs is a
          Ticking Time Bomb
Or More Like a Brick Wall

     Angel /
      Seed
     Deals




     Active
      VCs
Just Because You Disagree Doesn’t Mean You’re Right
Don’t Believe the Hype
Don’t Drink Your Own Kool Aid
Go Get Yourself Funded
Cuz in the End It’s a Binary Outcome
And When the Party’s Over, The Party’s Over
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