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Demystifying the VC term sheet: Redemption rights July 28, 2011

Posted by Ian Cheng in Funding.
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Scott Edward Walker

For the past few months, I’ve been exploring some of the more confusing terminology in VC term sheets. In my last post, I discussed conversion provisions, which address the right (or obligation) of the investors to convert their shares of preferred stock into shares of common stock. Today, I examine redemption rights of the investors.

What are redemption rights? A redemption right is another feature of preferred stock. It lets investors require the company to repurchase their shares after a specified period of time. In essence, it’s a “put” right – that is, the investors may elect to put their shares back to the company. As a practical matter, however, redemption rights are rarely exercised and, according to Fenwick & West’s recent VC survey, only 20 percent of the Bay area deals during the first quarter of included such rights.

Redemption rights are principally designed to protect investors from a situation where, after a period of time, their portfolio company is just moving “sideways” and, accordingly, is not an attractive acquisition target or IPO candidate. Investors are thus given the opportunity to exit their investment by exercising their redemption rights – which is particularly important because venture capital funds have limited lives (typically 10 years).

The problem, of course, is that a so-called “walking dead” company rarely has the cash to buy-back the investors’ shares. Moreover, there are significant restrictions under applicable State law regarding redemptions if the company does not have the legally available capital.

What does a redemption rights provision look like? A redemption rights provision will typically look like this in the term sheet:

“Unless prohibited by [Delaware] law governing distributions to stockholders, the Series A Preferred shall be redeemable at the option of holders of at least [__ ]% of the Series A Preferred commencing any time after the [fifth] anniversary of the Closing, at a price equal to the Original Purchase Price [plus all accrued but unpaid dividends]. Redemption shall occur in [three] equal annual portions. Upon a redemption request from the holders of the required percentage of the Series A Preferred, all Series A Preferred shares shall be redeemed [(except for any Series A holders who affirmatively opt-out)].”

What are the key issues for founders? There are several issues founders should focus on in connection with redemption rights. First, founders should push back to knock them out entirely because, as noted above, they are not the norm and rarely implemented.

If the investors insist on redemption rights, only agree if those rights cannot be exercised until at least five years after the closing. Founders should also try to limit the redemption price to an amount that is equal to the investment — and push back hard on any cumulative dividends.

Investors will sometimes try to add enforcement provisions to give their redemption rights some teeth. For example, the investors may require that if the company defaults (cannot pay the redemption price in cash), then the investors will have the right to elect a majority of the Board of Directors until the redemption price is paid in full and/or the Company will be required to pay the redemption price via the issuance of promissory notes. Again, the founders should push back hard.

Finally, founders should watch-out for unusual redemption rights, such as a “MAC” redemption, which gives investors the right to redeem their shares if the company “experiences a material adverse change to its business, operations, financial position or prospects.” This is a non-starter.

(Missed previous installments in this ongoing series? Click to learn more about the following issues:)
price-based anti-dilution provisions
exploding term sheets and no shop provisions
liquidation preferences
stock options
Board control
protective provisions
drag-along rights
pay to play provisions
conversion rights

Startup owners: Got a legal question about your business? Submit it in the comments below or email Scott directly. It could end up in an upcoming “Ask the Attorney” column.

European VC Needs Revolution, Not Evolution July 18, 2011

Posted by Ian Cheng in Funding.
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Fred Destin

My motion is simple: the European venture capital industry deserves a B- at best, and is unlikely as a whole to capitalize on the opportunities presented.

It is generally very average, sometimes downright ugly and only sporadically brilliant. Rather than go macro, I am going to go micro and focus on the quality of our ecosystem at a grassroots level to illustrate this statement.

Entrepreneurs are pissed off

Great entrepreneurs talk amongst themselves about their experience with venture capitalists, and I never miss an occasion to listen hard. Unfortunately, the feedback is almost universally negative; entrepreneurs typically have had a bad experience with Euro VC’s and are generally wary of taking their money.

There are usually three types of issues at work:

• Too many VC’s look at everything though the lens of the budget and are unable to go deep on product, tech or strategy. A few examples: the CEO of a social gaming startup laments the fact that none of his five investors uses twitter or facebook and none has ever tried one of his games, yet the success of his companies relies entirely on gameplay and social distribution. A senior VC tells the CEO of a company in an insanely fast moving segment: “I am not here to talk strategy, and no one else around this table has any clue about strategy, I am here to check what you do with my money every month”.

• There’s very little empathy with the management team and in the end boards become threatening or cumbersome reporting environments which are formulaic and useless instead of being a work session where the future of the company is being discussed and honed in a collaborative manner. I wrote a long evidence-based post about this a while back entitled “the Arrogant VC” if you want more depth.

• Too many VC’s are, simply put, afraid of failure. It makes it very difficult for the entrepreneur to discuss openly when the model is struggling and a significant pivot or strategy shift is required. I have been involved with one company a while back where the lead VC response to a fundamental go-to-market and single customer dependency issue was to review every line of spending at every board, one-by-one. Including travel, IT, and so on. Unfortunately, I am neither kidding nor exaggerating. I also had a case with Zoopla where in the early days we used to run ourselves lean on fast iteration 3-months budgets and roadmaps. We were raising money and had few alternatives, and ended up with one investor insisting on a 2-year budget being appended to the legal docs. In the end, Alex and I had the appetite for neither building that budget nor dealing with that investor and turned them off, even though that meant we had to fund Zoopla internally: the incoming VC was just barking up the wrong tree, asking for security and comfort where they could be none, since the numbers were clearly not worth the paper they were written on. I have written on the need to embrace ignorance before, though now of course you could think of that as being Lean.

In general, VC’s are not considered evil by euro entrepreneurs; they’re just the least-worst form of capital, perceived to be a necessary burden that comes with reporting obligations, oversight and very little value-add. It is too rare to hear an entrepreneur praise a VC he’s worked with for great help and insight, even though this is a common occurrence stateside.

I could of course write a companion post about how many Euro entrepreneurs need to toughen up, stop looking at VC as the root of all their failings, and generally think more ambitiously too, but that will be for another day. And on balance, I have to say I find the VC ecosystem is letting even our best hopes down too often, and that’s that.

Limited Partners are pissed off

The reason why I think we’re well past the complacency stage is that the situation within the LP community (“Limited Partners” or LP’s are the institutions who give money to venture capitalists) are even more dispirited than the entrepreneurs are. Seriously. Many top tier LP’s have written off Europe and don’t even have a “Europe venture allocation” anymore. Those that do are either focused on their top 5 funds list or are looking for (very few) emerging managers. All of them are concentrating money in the hands of fewer managers.

Why do you think every national venture capital association is reviving the debate around the “funding gap” and the need for the government or the EIF to get involved? Solace lies close to home and thanks to a network of government agencies, local banks and funds and so on many funds are managing to stay alive. The point is, we’ve managed to piss off our funding base, or at the very least make them extremely wary of backing us.

What’s wrong with us?

What I stated before is based on tens of conversations with investors and entrepreneurs. What I am going to be stating now is my personal opinion of what we do wrong, my diagnosis of why, on average, we suck.

• For some, wrong incentives: there are too many guys out there who have no incentive to either lose or make real money. To them being a venture capitalist is a job. Allow me for a second to paint a different picture of that VC you were very impressed by at the cocktail drinks. He talked a good talk but he’s actually employed by a regional financial institution that gives him money to invest every year. He does not make that much, he enjoys the perks and the feeling of importance and the Beamer but he really has no incentive to do things that are too great, rather make sure he doesn’t drop the ball on any of his investments. He really enjoys when his boss tells him he negotiated great, harsh terms. He’ll never go against his partnership for a company he believes in but that’s in serious trouble. He does not invest in his own fund, or very little. He does not really care that much as long as you get him cash back, because that’s probably enough for him to survive inside his organisation.

• For too many, wrong DNA: following up on the above, I am convinced that many folks involved in Euro VC are just in the wrong industry. They’re not entrepreneur champions and they never will be. They’re not risk takers, willing to embrace failure as the unavoidable counterpoint of attempting to be great. This is partly why I think we need new entrants, a revolution rather than an evolution, as so much of what we have currently is just wrong and non fixable. One company I was involved with was on the wrong track, because the investment thesis was turning out to be flawed. I remember the reaction of my co-investors to what was obviously an extremely hard to solve product/market fit problem, and here is what they told the CEO: “fight for as many years as you need to bring us money back, any money back”. A perverted form of “earn your stripes by salvaging a wreck” that was going to cost the CEO years and not allow a talented guy to move on to the next project. I resigned from the board after we hired a banker and told the CEO to take 12 months to try and sell and otherwise do an orderly shut down. The company somehow survived two more years after that but failed anyway; I bet the CEO did not get as much as a thank you for trying.

• Lack of depth: I cannot count the number of times I have heard entrepreneurs lament the fact that they cannot go into any level of detail on product or tech. Of course we have grandiose exceptions (most of the hardware investors in the UK would qualify) but boy, I have certainly witnessed first hand my share of shallow commentary. It’s extremely difficult to be subtle about say, pricing levels and go-to-market strategy where you have no real insights into the underlying products you are selling. Funny anecdote: this other VC sits next to me at dinner and comments on a product the CEO is demo’ing: “neat, is that from google ?”. CEO responds: “huh no, we’ve had it for two years”. No comment.

• Lack of accessibility: ever wondered why every single deal seems to come with a banker attached these days? Again, ask the entrepreneurs. The pain and friction in running a European fundraising process is such that hiring a fundraising agent is considered not only prudent but also necessary. Too many VC’s are hard to get to, non-responsive, too slow. Again there are glorious exceptions of course: Errol at Wonga had at least 4 term-sheets on the table in a matter of a few weeks from starting to fundraise for his series B, and that’s before they took off. But this is where the delta with the Americans is so huge. When Shafqat at Newscred got sponsored onto Angellist, his endless and soul-sucking European fundraising process turned into a 2 week whirlwind of investor interest and a brisk move to New York.

• Still treating legal terms as an upside mechanism: I could go on for hours here. Yes, major progress has been made, including with the Seedsummit terms that Seedcamp, Tina Baker and co. designed. But whereas legals should really be considered an insurance policy against bad behaviour, they are often used as a way to juice returns, applying what are mostly private equity techniques to young companies that should really be free to iterate fast in search of the perfect way to scale. For example:

– taking founder shares into escrow and having confusing good / leaver bad leaver language inserted (Yee Lee comes to mind more often that you’d think !), or severely restricting exercise periods for employee options.

– putting performance ratchets in place for a Series A or B company that only have a few million in revenues (including EBIT targets, as if you could know at that stage whether you should be gunning for profitability or growth ?)

– Participating preferred of course, which although they are a legitimate way to trade-off price/returns profiles when you “get” finance, are rarely well understood by founders … with VC’s obligingly leaving them in the dark

– And of course full ratchet and multiple liquidation preferences, which are not yet a thing of the past. The equivalent of the Iron Maiden for entrepreneurs I suppose, delivered at a VC shop near you.

Who are you again ?

I may piss some people off coming for a first guest post on TC with a broad brush critique of the venture community. Yes, I am a Belgian who recently deserted Europe, and whose fund was a good example of raising too much in 2000 and trying to expand too far, and I am far from perfect. Yes, I have pulled from a deal after a signed term-sheet once (sorry G), yes I failed to tell an entrepreneur for weeks I was not investing in him even though I was pursuing a business in the same field (sorry R), and yes I have been involved in two founders being removed from the post of CEO, though both times I fought hard to make them successful first.

If you come out of reading this thinking I’m a lesson giver who’s left the building, you’re missing the point. If we want to fix ourselves, we first need a harsh and intellectually honest look at how we are operating, and what our key constituents think of us. You cannot fix what you do not accept is broken.

I have frankly seen my share of odd or bad behavior directly. Whilst the blackberry obsessed distracted board member with the gorgeous soft leather daybag is by no means a European invention, we’ve added our own garden variety of venture gnome that only wakes up for the last ten minutes of the board when the monthly financials are being reviewed.

The Times They Are A-changin’

The good news is of course that our ecosystem is changing fast (and has been improving since the dawn of venture). We know strong ecosystems take time and consistency to build, and we have more and more of the ingredients coming into place:

First and foremost are great entrepreneurs building awesome successes. Skype transformed Estonia (ASI, ERPLY, Grabcad and many others), gave us a great new VC firm (Atomico) and a bunch of awesome offshoots (Spotify). And we have many more brewing, such as Wonga, Soundcloud, Gameforge etc. Every success spawns smart angels, repeat entrepreneurs, and more importantly a sense of confidence.

We’ve always had some strong VC’s (a minority in my book), we’ve had one homegrown tier I brand name with Index Ventures, a bunch of strong ones in the making often with a US heritage (Accel, Balderton, Northzone, Wellington etc), a number of exciting emerging managers (Mangrove, ISAI Notion, Passion etc, see Rise of The SuperAngel), at least one super-optionality fund (Kima) and, finally, initiatives that are truly focused on technical founders (Seedcamp, hackfwd etc)

A Revolution in mindset required, still

Whilst change is happening, I am still thinking we need a bit more of a revolution than Jos’ more gentle evolution. I would not want to suggest all VC’s are dinosaurs like my anything-but-boring friend Dave McClure, but I do hope the LP community funds the VC marsupials selectively and aggressively stops funding the VC dinosaurs.

It’s OK to shrink ourselves back to health … and we do NOT need some mis-allocated Government money introducing bias into VC selection. The government should focus on giving tax breaks to angels and lowering operating costs and red tape for startups.

On the current model, European VC’s too often think of a “deal” as an agreement with an entrepreneur about hitting a set number of milestones and financial objectives, i.e. what they perfectly rationally think of as “building a business”.

Whilst it sounds reasonable, are you more excited about doing the above or “backing exceptional people to go do exceptional things” even if that means investing with a much higher level of risk and accepting a very uncertain path to success?

If we want to avoid seeing too many of our entrepreneurs sucked by the Valley Vortex or funded by travelling Yankee fans, we better get our act together and improve the quality of our offering to the best entrepreneurs out there. They’re a finite population! Yes, the US market may be frothy and delusional, but let’s not take that as a comfortable excuse to not raise our game yet again. Onward.

如何做创业项目的陈述和展示 July 18, 2011

Posted by Ian Cheng in Funding.
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Gary Yang

从产生一个好想法,到成为一门好生意,一直到成就一家好公司,这其间必不可少的一件事情,就是你要到处去宣讲、陈述,或者说是推介。作为创业者,你要日复一日地向人们陈述宣讲,由于讲的很多,有时你可能都忘记了自己在推介:挑剔的投资者、热心的业内前辈、爱说话的网友粉丝、前来打探消息的媒体、办理执照要讨好的主管部门、不请自来的顾问、亦敌亦友的同行、为你兴奋又担心的朋友家人、租用办公室的房东 … … 甚至包括劝你早点回家休息的清洁工阿姨,你都会跟他们说你在做的是怎么样一件事情。
















其实我们在陈述演示的准备阶段,就应该自问:是不是由于太喜爱自己的项目 ── 这个自己的“亲骨肉”,而一头扎进了细节里去了?说的最多最细的部分,是不是仅仅因为自己对它最熟悉最热爱?





•销售演示 (Sales presentation)
•向投资演示 (Investor presentation)






如果投资者用浅白的语言来解释项目的时候,比如,他说:“你的项目本质上就是… …嘛!” 听起来项目好像“被贬低”了。如果是这样,我们应该检查一下,是不是在描述项目的时候“用词过猛”了。




















我常常问那些准备去提案、投标、做项目陈述的人:“我们把所有资料寄送给客户就行了,为什么客户一定要见见我们?” 这是个好问题,因为你只有理解了客户要见你的原因,你才知道如何去做有针对性的准备。





就像Gerald M. Weinberg说的那样:





The ABCs of Starting an Investor Pitch Meeting – Always Be Credible July 14, 2011

Posted by Ian Cheng in Funding.
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Jeff Bussgang

Malcolm Gladwell made famous the natural human reaction of judging other people in the first few minutes of an encounter with his book, Blink. Like many other business people, VCs and angel investors (“investors” going forward) blink and judge entrepreneurs very quickly in the first few minutes of an interaction. That’s why the way an entrepreneur starts an investor pitch meeting is a key determinant of their success in that meeting. Those first 10-15 minutes, where the entrepreneur presents themselves before they even present the idea, are very critical in establishing credibility and the right to continue to pitch to an engaged audience.

Yet, it is amazing to me how few entrepreneurs start investor meetings crisply and confidently. The formula for the start of the meeting is almost always the same – you are trying to answer the simple question on the mind of the investors: who are you and why are you here? But when asked to review their backgrounds, entrepreneurs often fumble through incoherently, or ramble on tangents that aren’t relevant to the situation.

So, how should you start an investor meeting? It’s as simple as ABC: Always Be Credible. Investors are looking for credibility – can we trust that you have a uniquely good idea or insight, are you capable of executing on it, and are you the real deal or full of bluster and BS?

When you talk to investors and ask about this opening gambit from entrepreneurs, you hear a consistent pattern about why they like a certain entrepreneur they’ve invested in. When you distill the inputs into a coherent pattern, here are the top three things you typically hear entrepreneurs should do:

•Be genuine and personable – Let your personality show, professionally of course. At some point in the introduction, say something that makes you smile, which will make those around you smile. If you don’t engage your audience, they’ll jump to their Blackberries. For example, ZestCash CEO/co-founder Douglas Merrill is a charming character and, even putting aside the shoulder-length hair and tattoos, you can’t help smile when he introduces his background (raised dyslexic in Arkansas, followed an unlikely path of earning a Princeton PhD, leading Google engineering and IPO in his role as CIO for 5 years, and now has developed a vision to transform short-term consumer credit by blending online data with traditional underwriting techniques).

•Be crisp and on point – The most compelling background speeches are crisp, straightforward and very demonstrate relevant links to the opportunity at hand. For example, SaveWave CEO/co-founder Dave Rochon gave the following brief narrative when pitching investors: “I worked at Catalina Marketing for 10 years in sales and launched their Internet couponing business, then joined Upromise the year it was founded and built the grocery business for 10 years, serving for three years as president after the acquisition by Sallie Mae. I now want to transform the online and mobile grocery coupon business.” Dave’s Series A round was way over-subscribed by folks like First Round, Ron Conway, Roger Ehrenberg, Founder Collective and I think it’s in no small part because his background and delivery were so crisp and relevant.

•Keep it short. I find that the more impressive the entrepreneur, the shorter the introduction. The worst situation – 20 minutes into the presentation, the entrepreneur is still bragging about some random product they launched in a completely irrelevant industry sector. The VCs are already hitting their Blackberries and wondering how they can end the meeting gracefully. And you run out of time to actually pitch the big idea. Meandering introductions are the death of a pitch.

And here are the top three things to avoid:

•Do not exaggerate. Assume that everything you say will be thoroughly checked out in due diligence. If you claim credit for a company where you played a small role, it is bad form. I recently called the CEO of a company that an entrepreneur bragged they had led during the pitch. When the CEO told me they were a minor player and left after a brief two years, I stopped spending any more time evaluating the opportunity. Remember, investors are professional BS detectors. Err on the side of underselling your background because the BS alarm bells may ring in the first few minutes of introduction and spoil the rest of the presentation.

•There’s no “I” in team. When entrepreneurs talk about themselves in grandiose terms in their introductions, it’s usually a sign of egotism. When entrepreneurs talk about the teams they built and the smart people that somehow they were able to convince to join them in their cause, it’s a sign of great leadership. Guess which of these two profiles investors are more attracted to?

•Don’t name drop. Some investors are notorious name droppers, so this is a bit of the pot calling the kettle black, but investors get very turned off when the entrepreneurs name drop in their introductions. We don’t need to hear every famous person you’ve met or pitched or worked with. Establishing a few common points of contact is a good thing. Acting like you are best friends with folks who wouldn’t recognize you if you bumped into them in the grocery store on a Sunday afternoon is not recommended.

Remember, be credible, humble and specific and you’ll do fine. Take the 5-10 minutes time to establish that initial credibility, and then move on. Investors like to back great people, so spend as much time thinking about how to present yourself in a compelling fashion as you would your idea.

创业企业应寻找能提供附加值的风投 July 11, 2011

Posted by Ian Cheng in Funding.
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VC/PE追捧清洁技术 中国市场备受关注 July 1, 2011

Posted by Ian Cheng in Funding.
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