I sat down recently with venture capital lawyer, Jeremy D. Glaser, who struck my attention in a previous interview on the topic of fundraising for early stage ventures. His answers gave more substance and insight than the majority of fundraising advice I had seen around the web, and I instantly knew that I had to interview him to share these insights with startup founders.
Jeremy Glaser is the co-chair of the Venture Capital & Emerging Companies Practice of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., and was recently named the Best Lawyers® 2016 Venture Capital Law "Lawyer of the Year" in San Diego. In the following interview, Jeremy gives startup founders many valuable insights into the world of fundraising from his 30 years of experience representing hundreds of technology-based ventures in a variety of industries.
Nina: "Can you talk a little about your background, and how you got involved in working with early stage companies and entrepreneurs?"
Jeremy: "I've always been intrigued by entrepreneurs and technologies. Back in the early 80's I was a very early user of computer technologies, and I ran a business while I attended Harvard law school, and ended up selling that business when I graduated. I laugh thinking back, I had an Apple IIe (if anyone remembers those), a daisy wheel printer, floppy disks, and all of that ancient stuff. I moved to California right after this in 1985, and spent 11 years in Orange County working with all kinds of companies including computer technology, hardware, software, biotech, medical device, and healthcare services. In 1996, I moved to San Diego where I have been since, and I continue to focus on the same niche. I've always represented VC funds, as well as the companies they fund. I have facilitated many mergers, acquisitions, IPOs, and follow on offerings, helping companies sell themselves or buy other companies."
Nina: "In your experience, when is the best time for an early stage startup to raise capital that has been bootstrapping its operations?"
Jeremy: "I always start by telling clients, the best way to raise money is with revenue. Revenue is great because it doesn't cost you equity, and you get to own more of the company. The reality is, most companies (particularly in more advanced technology) require raising outside capital to grow. So if you want to be the next Uber or Airbnb, the best advice I can give a founder is to raise capital when it's available.
Markets are funny. Capital is not always readily available, and markets are not always willing to fund early stage companies. This can lead to many other questions with the same type of answer. When is the best time to sell? When you have a buyer. When is the best time to go public? When the IPO market is strong. When is the best time to take venture or angel money? When it's there!
In just about every fundraising I've ever been involved in, the founder has told me they will only need X amount of money to get to break even. Unfortunately that is almost never what happens, and they've generally always needed to raise more capital. Don't get held up on if you are raising money to early, because you are going to need it for a variety of reasons that you are never going to anticipate."
Nina: "Many founders are considering hiring what are often called "intermediaries" to help them with their fundraising. Can you explain what they do, if you think this is a good way to go about fundraising, and how to find someone legitimate?"
Jeremy: "When I think "intermediary" I am generally thinking investment banking firms or consultants. While I wish I could give founders the easy answer and say "Yes, there is someone you can offload your fundraising to," this is unfortunately just not true. Over the 30 years of working with hundreds of early stage companies on fundraising, I can tell you that it's rare an intermediary is at all helpful in raising money. The reality is, fundraising for early stage companies (those who need that initial half to one million dollars) has very few "intermediaries" that can help you at that stage.
The bottom line is that you have to be prepared, and it's going to be a tough and long process. You will send out hundreds of communications to angel investors and VCs, and if you are lucky you will get 10 meetings. If you're really lucky, those meetings will result in 2 or 3 interested investors. It is going to take a lot of time, and there isn't a good way to offload it to anyone else because you have to do it. Investors want to see you, and find out if you are a backable CEO. The reality is it's just going to take rolling up your sleeves and doing it yourself.
Let's reframe the question to ask, "Are there people who can help you in the fundraising process and make you more effective?" Then my answer would be yes, absolutely! A good lawyer can absolutely help you identify things like if your executive summary written correctly, is your powerpoint going to be effective, or who the right angels and funds are to contact. There are also some consultants out there who can help, and in my experience the best consultants for early stage companies are not investment bankers, but instead are ex-CFO's or ex-founders of venture-backed companies who are providing consulting services."
Nina: "In your experience with angels and venture capitalists, what makes them decide to invest in one company versus another?"
Jeremy: "I've talked to many VCs over the years, read things they've written, and watched what they invest in. I've consistently seen 3 things that almost every VC will look for when they are deciding whether or not to invest in an early stage company.
- They want to see a really big idea, that will change something in a significant way.
If you have those three things, you are going to have angels and VCs knocking on your door. I always sit down with entrepreneurs and tell them to answer these three questions within the first paragraph of the executive summary. VCs are busy and will not read beyond that first paragraph if you don't.
A really great insight the entrepreneurs I've worked with over the years always appreciate and I believe is worth asking is, "How do you know what business somebody is in?" They usually look at me and ask, "What do you mean?" I respond saying that somebody is in the business of doing whatever they do most of the time. I then ask them what business they think VCs are in based on that definition. They always reply "VCs are in the business of investing money into companies." Then I will say "No, that is not the business they are in."
VCs are in the business of saying NO to investments, and do this every single day, multiple times per day. This means that the name of the game is to figure out what it is they say no to, and get yourself out of the no pile where everyone else ends up."
Nina: "I was highly intrigued when I heard you say on a previous interview that founders need to "stop focusing on valuation, and start focusing on getting term sheets". Can you dig further into this?"
Jeremy: "I have a lot of examples over the course of my career where I have seen companies turn away VC dollars, because they didn't think the valuation was appropriate, or they thought the VC was being greedy. Of these companies, I can't think of any exception where any of those companies actually lasted. When business got tough, they didn't have the capital to move forward, and in retrospect they would have had something worth a lot more if they had taken the money.
One of my favorite quotes I unfortunately can't take credit for is by a very successful entrepreneur who built a very large software company years ago. He had made a lot of money, and began investing in new companies, and when he was asked what he looked for when making an investment he responded with the following statement. "I have one question I ask all founders of companies that determines whether I invest or not. The question is "Would you rather be CEO or be rich?".
His answer struck me as incredibly insightful, because if your goal is to be CEO, it means you want to be in control. Wanting to be in charge means you are not focusing on the right thing. When you want to be rich you are focusing on making yourself, your employees, and your investors money, and in turn, focusing on the right things. This circles back to valuation. Why do people worry about valuation? Because they are worried they are going to lose control or the VC will take control. The reality is, if you are successful and you build a good business the valuation will take care of itself. I'd rather own 10% of something worth a billion dollars, than 100% of something worth one million dollars any day of week."
Nina: "Can you talk about how Seed funding became the new Series A and the implications of this?"
Jeremy: "Looking at the fundraising world after 2001, and then certainly after 2008, funding had dried up, exits were taking much longer, and VCs were realizing there was a lot of risk in early stage companies, because those investments needed a lot more capital to continue to grow and ended up getting diluted terribly by significant future capital needs. This led to a movement of the professional VC funds away from early stage investing and toward later stage investing. You see it today, where the majority of investors get excited about investing in later stage companies like the next big round in Uber or Airbnb.
There is almost an unending amount of money for these later stage companies who have proven that the dogs are eating the dog food, and are raising additional money to expand, grow awareness, etc. This movement created a large gap in early stage investment and opened an opportunity for angels, super angels, and angel groups to step in and fund the earlier capital needs. So to break this down simply: The market changed and created a gap. The gap was filled by angels, which became what we call Seed capital. Because of this, Series A has now become what used to be Series B, which means companies raising Series A now need to show they have customers and growing revenues to successfully raise this type of funding."
Nina: "Everyone seems to talk about the best ways to pitch an investor, but not about what to do afterwards. What is the best way to follow up with an investor?"
Jeremy: "Before we talk about how to properly follow up, we need to make sure that you made the initial contact with a VC the right way. VCs are inundated with opportunities, which means their inbox is always full. To clear their inbox, they take out emails from people they don't know, or companies they haven't heard of. So if you send a cold email, it dramatically reduces any chance of them reading your document, let alone responding to any of your follow up emails. To avoid this, find a contact to send your executive summary for you, this way you will receive a response and not have to worry about the follow up.
I've developed a process over 30 years that I've proven to work, and reflects the truth that the fundraising process is not dissimilar to a product development or marketing development process. Instead of sending out my clients executive summary to 100 investors, we first leak it out to 5 funds we have a great relationship with, who will give substantial feedback. Then we take that feedback, make tweaks, and then send it out to another 5 or 10 funds to get a little more feedback. Then after two rounds of revisions we send out the summary to a much broader audience."
Nina: "My last question is one I've seen asked over and over again. In your experience, how does a founder pick the right investor for their business?"
Jeremy: "People realize investors will do a lot of due diligence on a company, yet companies rarely do the same thing back on their investor. There is a lot of public information about VC funds out there on the web. With private investors, you should be asking them for references, speak to companies they have invested in, and Google them! These are people who can have a positive or negative effect on your company and it's just crazy how many people do not Google their investor prior to accepting funding. Another good rule of thumb is that if the investor makes the investing process difficult (raising last minute issues, problems pinning them down on valuation, etc) don't expect it's going to be any better when they are an investor. In these cases my recommendation is to walk away. You will thank yourself later."