Case Studies Posts

Summary: Raise as much money as possible. With these caveats: (1) maintain control at any cost, (2) monitor your liquidation preference, and (3) act like you don’t have a lot of money. Also understand that if you do raise a lot of money, you will have to (1) “go big or go home” and (2) make a lot of progress if you ever want to raise money again. Alternatively, if you would rather maintain your exit options, at least raise enough money to run two experiments.

How much money should you raise? As much as possible—with some caveats. But hey! don’t take our word for it.

Two investors’ opinions.

kleiner.jpgEugene Kleiner, Founder of Kleiner Perkins:

“When the money is available, take it.”

janeway.jpgWilliam Janeway, Managing Director of Warburg Pincus:

“Failure to execute operationally is not the only source of risk; every venture is also subject to volatility in the price and availability of capital due to the volatility of the stock market. After the collapse of the Internet Bubble, many promising companies foundered because their funding dried up.

“By contrast, our biggest successes at Warburg Pincus (VERITAS, BEA) have come from inverting the normal venture funding model, with the visionary investor as company co-founder… And we have supported the multi-year process of building a sustainable business by underwriting all of the capital needed to reach positive cash flow, thereby not only enabling management to focus full-time on the business but also insuring against the risks generated by a volatile stock market…

“In the post-Bubble world, long-term financial commitments are required to fund the ventures that will fulfill the long-term technological vision and implement the long-term commercial promise of the Internet Age.”

Two founders’ opinions.

ramsay.jpgMike Ramsay, Founder and CEO of Tivo:

“One of the reasons that TiVO is thriving today is that we were well-capitalized. We were able to power our way through the downturn—that early 2000 period when [our competitor] Replay went away. We were capitalized enough that we knew we could ride through it. While we had to make a few adjustments at the company, there was never a question that we were going to survive. We knew we were going to survive.”

andreessen.jpgMarc Andreessen, inventor of the bendy-straw:

“So how much money should I raise?

“In general, as much as you can.

“Without giving away control of your company, and without being insane.

“Entrepreneurs who try to play it too aggressive and hold back on raising money when they can because they think they can raise it later occasionally do very well, but are gambling their whole company on that strategy in addition to all the normal startup risks.

“Suppose you raise a lot of money and you do really well. You’ll be really happy and make a lot of money, even if you don’t make quite as much money as if you had rolled the dice and raised less money up front.

“Suppose you don’t raise a lot of money when you can and it backfires. You lose your company, and you’ll be really, really sad.

“Is it really worth that risk?

“…Taking these factors into account, though, in a normal scenario, raising more money rather than less usually makes sense, since you are buying yourself insurance against both internal and external potential bad events — and that is more important than worrying too much about dilution or liquidation preference.”

Make sure you read Marc’s full article for his caveats: How much funding is too little? Too much?

Guidelines to consider no matter how much you raise.

No matter how much money you raise,

  1. Maintain control at any cost.
  2. Monitor your total liquidation preference and avoid liquidation preferences above 1x non-participating. You will have to sell the company for at least the liquidation preference before the common stockholders see a penny.
  3. Raise enough money to run more than one experiment. Some companies need 12 months of runway to do two or more experiments, others might need 24 months. Seed stage companies that can’t raise enough money to run more than one experiment should keep their burn down to extend their runway.
  4. Act like you don’t have money.

Guidelines to consider if you do raise a lot of money.

If you do raise a lot money,

  1. Understand that your investors will have very high expectations. You have will have to “go big or go home”.
  2. You will have to make a lot of progress with this round if the company ever wants to raise money again.

Alternatively, if you would rather keep your liquidation preference low and maintain your exit options, at least raise enough money to run two experiments.

Raise too little money and you may go out of business when you run into trouble. Raise too much money and you may make less (or zero) dough when you exit. Take your pick: disaster vs. dilution.

Image Sources: Marty Katz for The New York Times, SFGate, Wired.

doerr.pngThere is lots of wisdom in John Doerr‘s (Kleiner Perkins) introduction to Inside Intuit (emphasis added):

“Inside Intuit is a tale of missionaries, not mercenaries. It’s about a founding team that prevails through tenacity, frugality, and an obsession with the customer experience…

“Kleiner Perkins first learned about Intuit in 1985… But when it came to large numbers of households using their home computers to manage their checkbooks, we just couldn’t see it…

Neither [of the founders] had created a new product nor started a company from scratch, let alone single-handedly faced nearly forty competitors. So when Intuit’s flagship product, Quicken, began to take off in the marketplace, my partners and I at Kleiner Perkins… took notice.

…the “bake-off” [that founder Scott Cook] staged to help him choose from an array of eager potential investors really distinguished him from the crowd. More than a dozen venture capitalists vied to get a piece of Intuit. Cook and his team tested each finalist with a new, pressing, real problem: What should Intuit do if Microsoft entered the personal finance market to compete with Quicken?

“…we soon saw that Intuit differed in more ways than merely its approach to venture fund-raising. At the first Intuit board meeting I attended, I was surprised: more than half the meeting took place at Intuit’s tech support center, listening to tech reps answer customers’ product questions and fix their problems. Cook’s uniquely intense focus on happy customers and firsthand customer feedback impresses me to this day…

“Cook has an unusual ability to ask the right questions (which my partner Vinod Khosla insists is more important than getting the right answers; in business, there are often several right answers).

“In 1993, Cook realized before any of the rest of us that Intuit needed a new CEO to help the company reach the next level. How unusual, I thought at the time, for a company founder to know and admit that he might be holding his company back…

“Great CEOs are great teachers… What is unusual about Intuit is that… three leaders are all still actively engaged in building the company. As CEO, [Steve] Bennett has “the last call,” setting the tempo, directing the team. As chairman of the board, [Bill] Campbell [former CEO] holds sway from an off-campus office, advising the team, turning up on campus, and walking the halls. And Cook, as founder and chairman of the executive committee [and former CEO] provokes and celebrates strategy rethinking, inspires innovations, and continues, as ever, to obsess on the customers. As a leadership trio, they are unique in Silicon Valley.

“Not every businessperson aspires to be an institution-builder. Some simply want the freedom to be their own bosses, to achieve financial independence, to call the shots. Others want to solve problems and push the boundaries with their solutions; they work hard to “change the game” by innovating, rethinking, or breaking the rules. And yet, for all their efforts, business to them will always be just that—a game.

“For still others, however, and they’re a rare breed indeed, business is about striving for something more fundamental: to alter and improve their customers’ lives. These people aim to create companies that will transcend their creators, that will remain strong and productive from generation to generation. They aim to build lasting innovation…

I’ve always been awed by entrepreneurs, by how little they have to work with when they start and by how much they sometimes accomplish.

Related: Bill Cambell interviews Danny Shader of Good Technology.

“I kept my day job for over six years while working mornings, nights, and weekends to create Dilbert.”

Scott Adams

[Ed: I enjoyed Tony Wright‘s contrarian article, Half-Assed Startup, when I first read it on his excellent blog. Tony, a founder of RescueTime (Y Combinator), argues that you can start a company while you’re otherwise employed. And he explains how to do it. Tony kindly agreed to re-publish his article on Venture Hacks. Take it away Tony.]

tony-wright.jpgI’ve done two part-time-to-full-time startups. One was acquired by Jobster. The second startup is RescueTime—currently a Y Combinator funded company—cross your fingers.

In the long run, I think Paul Graham has it right in How Not to Die—you can’t half-ass a startup:

“The number one thing not to do is other things. If you find yourself saying a sentence that ends with “but we’re going to keep working on the startup,” you are in big trouble. Bob’s going to grad school, but we’re going to keep working on the startup. We’re moving back to Minnesota, but we’re going to keep working on the startup. We’re taking on some consulting projects, but we’re going to keep working on the startup. You may as well just translate these to “we’re giving up on the startup, but we’re not willing to admit that to ourselves,” because that’s what it means most of the time. A startup is so hard that working on it can’t be preceded by “but.””

In the beginning, however, it’s not always practical to dive in full-time. And when your idea is off-the-wall and easy to prototype, it’s smart to whip something out just to see if it’s as cool as you think it might be—before you take the full-time plunge.

So if you’re too poor or too unsure to do the right thing for your business and dive in full-time, here are a few things that seemed to work for us when we did it part-time:

  1. You need a co-founder and some cheerleaders. If you can’t find two or three friends who are really excited to be beta testers for your product, ponder changing your direction. In a part-time effort, a co-founder is essential to keeping you on-track and working. At some point, you’ll hit a motivation wall… but if you have a partner who is depending on you, you will find a way past that. If you don’t have a partner, you’ll often lose interest and find something else to entertain you.
  2. Pick a day or two per week where you always work, ideally in the same room as your co-founders. Always, no exceptions. We worked one weekday evening and one weekend day. That doesn’t mean we weren’t working other days, but keeping a fixed schedule helps you through the phases of the project that might not be so fun.
  3. Have a boat-burning target. What will it take for everyone to dive in full-time? 5,000 active users? 10,000 uniques a week? Funding? The target should be a shared understanding. You don’t want one founder who is ready to go full-time while the other has reservations. This is easy to gloss over, but you should really nail it down. I’ve lost two co-founders who weren’t ready to dive in full time when I was. It wasn’t fair to them and it wasn’t fair to me.
  4. Pick an idea that is tractable. Every startup is a hypothesis. If your hypothesis is, “we can build a better web-based chat client”, that’s something you could test quickly. If your hypothesis is “we can build a car that runs on lemonade”, that’s just not going to work as a part-time effort. The scarcity of available time should force you to distill the idea to the absolute minimum that is necessary to test the hypothesis. No extraneous features!
  5. Understand that your first version is probably going to suck. Read David Rusenko’s article, The importance of launching early and staying alive—David is a founder of Weebly (Y Combinator). It’s a long road. My second startup was a ridiculous fluke—it was acquired after 2 months. 99% of overnight successes were slogging in the muck for 5 years before the night in question. Be prepared for a long journey and be surprised if your startup is an immediate hit. So with your first version, look for the tiny little flicker than you might be onto something. And use it to motivate you to make it better. Every week, make it better than last week and see if that flicker of light can be fanned into a tiny flame.
  6. If you’re going to screw off at work (everyone does), spend it getting smarter about the stuff you don’t know. If you’re a coder, read a few design or usability blogs. Read up on what motivates angel investors. Research competitors and write down what they do well. Get brilliant at SEO (it’s not hard). Write a lot more (blogging helps). Think about virality and research the heck out of it. That said, be aware of the fuzzy line between using your cool-down time at work for your startup and stealing time or resources from your employer. If you’re paid to do a job, you need to do it.
  7. Be sure you own your startup. I’ve had the fortune of working in companies where there was very clear ownership of “after hours” work. If ownership of your personal intellectual property is not clear, do not rely on the good will of your employer. Greed can do funny things to people, even if they were initially big supporters of your startup. (Thanks to Ivan from TipJoy for this final suggestion.)

In short, you want to prove whatever you need to prove as quickly as possible, so you can dive in full-time. Near as I can tell, there are plenty of startups that have started as “hobbies”, but you need to take it out of that phase as soon as you can. There is nothing that drives a team forward like the fear of public failure, debt, and starvation. Leap off the cliff and start building the airplane on the way down—you might be surprised with what you can pull off.

“Trust, but verify.”

Ronald Reagan

Summary: Investors trust the entrepreneurs they back. But they verify their expectations with contracts and control. You should do the same—with the same tools investors use: contracts and control.

Why do investors want to control their investments through board seats and protective provisions? Shouldn’t they just give entrepreneurs bags of money and trust them to do the right thing?

David Hornik has the answer in Venture Capital in China:

“One investor with whom I met on my [China] trip described a recent situation in which he funded an entrepreneur, only to have that entrepreneur turn around and leave for business school months later. The entrepreneur assured the investor that he would be better situated to make the business a success after the two years of school. The investor had no recourse as his money left the country with the entrepreneur.

“In another instance, an investor backed an entrepreneur in a business that thereafter appeared to be failing. However, a couple years later when the same company started thriving, the entrepreneur informed the investor that it was not the company he had backed. The investor was incredulous. He told the entrepreneur that it was the very same company with the same team and even the same name. The entrepreneur assured the investor that it was, in fact, a different company and that he had not invested in this successful company, his investment was in the previous failed venture. Despite the obvious deception, the investor told me that he again had no legal recourse.

“…the legal structures needed to support a vibrant startup economy [in China] are, at best, embryonic. Neither entrepreneurs nor investors are particularly well protected by the Chinese legal system.”

Investors trust, but verify.

Investors trust the entrepreneurs they back. They wouldn’t invest if they didn’t. Their trust is an expectation that entrepreneurs will:

  1. Do what they say they’re going to do in anticipated situations.
  2. Consider the investor’s interests in unanticipated situations.

Investors have been playing this game long enough to anticipate certain situations. So they use contracts and courts to enforce their expectations in those situations:

Investors trust entrepreneurs to stay at the company for 4 years, and they verify it with a vesting schedule.

Investors trust entrepreneurs to pay the investors first when the company exits, and they verify it with a liquidation preference.

Investors trust entrepreneurs to consider their interests in an acquisition, and they verify it with protective provisions and board seats.

Investors have been playing this game long enough to also know that you can’t anticipate every situation. So they use control to dispose the company towards the investor’s interests in unanticipated situations.

Verify your expectations.

China doesn’t seem to have a legal system that lets investors and entrepreneurs verify their expectations. They have trust, but no verification.

But U.S. investors can trust and verify. And you should do the same—with the same tools investors use: contracts and control.

If you trust your investors to let you stick around long enough to vest all your shares, accelerate your vesting upon termination.

If you trust your investors to let the board make the call on acquisition offers, automatically suspend protective provisions when the offer is big enough (e.g. a 3x return).

If you trust your investors to let the founders run the company, control the board.

Writing a contract doesn’t mean you don’t trust the other guy. It just means you want to document and verify your trust.


Don Valentine from Sequoia Capital and Cisco’s founders, Len Bosack and Sandy Lerner, discuss Len and Sandy’s termination in this rare video: (Update: Google took the video down. Thank you universe. There are still some choice quotes below. If anyone has a copy of the video online or a transcript, please email us at


We don’t know the actual facts of the matter and we don’t care who is “right”. The lesson here is that, right or wrong, you don’t want to look back and feel the way Len and Sandy do (except for the many millions they made).

There is no such thing as a “bad” deal as long as you understand the deal’s pros, cons, and possible outcomes. But Len and Sandy, by their own admission, did not. We’ll discuss how to avoid Len and Sandy’s fate in an upcoming hack. Knowledge is power.

Some interesting quotes from the video:

“Len and I were not [savvy].” – Sandy Lerner video→

“I would strongly advise anybody watching this program not to do [what we did]… get your own [personal] lawyer.” – Sandy Lerner

“One day… seven vice-presidents of Cisco Systems showed up in my office… the outcome of which was a very simple alternative: either I relented and allowed the president to fire Sandy Lerner or they, all seven, would quit.” – Don Valentine

“[Sandy and Len] urgently sold their shares in Cisco at a time when the valuation of the company was a mere $1B.” – Don Valentine

mug_skrenta_s.jpgRich Skrenta, a founder of Topix and the Open Directory Project, recently wrote about Spice Girls VC:

“So one day a few years ago I’m sitting in a VC’s office having a chat. I had a few ideas rattling around in my head but the VC had his eyes on a then-current space which was hot. He tossed a business plan for one of the leading startups into my lap.

“Where’d you get this?” I asked.

“They gave it to me.” [A commenter suggests never sending decks to investors. At least write “Proprietary and confidential. Do not distribute,” on any collateral you send investors. And ask any recipients, in writing, via email, to kindly not distribute the deck outside their firm.]

“He went on to talk about how he wanted to launch a company into the space as well, and I’d be a great VP Engineering. He said he knew a guy with some technology who could be CTO, had a VP Marketing in mind, and then we’d just need a world class CEO to round out the band.

“I formed a theory that the process of seeking VC ended up calling your own competitors into existence. You’ll meet with many more VCs than the 1-2 who end up funding you. But after seeing a company or two get funded in your space, the VCs who passed or weren’t able to get in decide they want to have a bet in the space too. Fortunately they have the benefit of having heard your pitch and the opportunity to personally grill you at length on your approach. [Compare to Farbood’s thoughts on the benefits of meeting VCs.]

“But doing the Spice Girls or N’ Sync thing to put a startup together can be tricky. Startup founders can be so cranky/eccentric.”

Rich Skrenta’s blog is great (a few classics: 1, 2, 3). I would personally guess that the main source of startup competitors is market readiness, not Spice Girls startups.

grockit2.pngBrian Norgard (Newroo founder and Venture Hacks investor) recently interviewed my brother, Farbood Nivi, about his experience raising money for Grockit from Benchmark et al:

Brian: Tell me about the funding process.

Farbood: I think raising money is great fun. The bottom line is that the money has to be spent. VCs are not in the business of holding their Limited Partner’s investment in a 5% security. They have to spend the money on startups. So, either your startup gets the money or someone else’s startup gets the money.

No VC has a perfect track record, nor do they pretend to. So, (1) either your idea or business sucks and the VCs knows it (despite their imperfect record, they are not bad at telling) or (2) you suck at explaining it. There is literally more money to invest than the world’s VCs know what to do with.

Getting a meeting is another issue.

What did you learn from raising your Series A?

I learned that a disproportionately large percentage of VCs, relative to most populations I’ve encountered, are extremely smart, gregarious, easy to get along with, excited, positive and insightful. I’m usually surprised when I meet one that isn’t.

This makes financings a far more positive experience than they would otherwise be and, just as importantly, makes the time and energy spent in meeting with them worthwhile in and of itself.

I also learned that, amazingly enough, of time, money and great people, time and great people are more scarce.

Any parting bits for entrepreneurs out there?

Make sure your deck is great not good.

Read the rest of the interview where Brian and Farbood discuss Grockit and the massively under-served education market.

How many similarities can you find between hacking fund-raising and hacking a car purchase? Watch this video:

The best answer gets a coveted Venture Hacks mug.

(Via Lifehacker.)