In Part 2, Jeff gives advice on what entrepreneurs should and shouldn’t do when pitching their ideas to VC’s and what are the most commonly used.

SEAN: I think you go into something like 40 pages on the pitch itself, and this, kind of, just hits home for me because I… you said in one of the beginning chapters that very few entrepreneurs do it well and almost all of them hate it. Right? And I think that the same can be said for sales. I find that having spent the last five years in the [Silicon] Valley, I find it really surprising being around tons of Stanford people who are just incredibly smart entrepreneurs, technically incredibly savvy, but who either just don’t understand sales or understand that, you know, that there’s a sales process, or have any kind of desire to understand it. Yet, they’re trying to run, you know, a big company. [chuckles]

JEFF: Right.

SEAN: So, in the context of how to pitch for money what are the take-aways from, you know, from your content of your book?

JEFF: I think a couple of things: one is that VC’s blink and in the first ten to fifteen minutes they make a decision about whether they  want to invest the next 30 to 45 minutes.

SEAN: Yep, yeah.

JEFF: So you have to establish credibility in those ten to fifteen minutes.

SEAN: Absolutely.

JEFF: Why are you uniquely able to be effective in pursuing this business?   What’s your unfair advantage in pursuing this? Why can’t five people in the Silicon Valley, five people at Harvard, five people in India do that exact same thing? And then have that sort of summary review but also the depth. I tell a little bit of the story of when I was an entrepreneur pitching [INAUDIBLE], and how mortified I was when pitching the full Kleiner partnership  — and we eventually did get the funding from Kleiner — but John, in particular, was pushing me on the financial model and going five levels deep in his questioning  and I was not fully prepared and I stumbled and my co-founder stumbled and we sort of muscled our way through it. But I, afterward sort of, vowed never to be as unprepared as I was heading into that meeting, that I would know every cell on every spreadsheet that I would show at so many levels so that you would never look unprepared. And I think that’s critical for the entrepreneur.

SEAN: Yeah, absolutely.  So preparedness is huge obviously, and understanding your own business model and business plan and probably anticipating as many hard questions as you can and getting other people to ask them first.

JEFF: Yeah, one of my partners like to say, “when you have risks and flaws, don’t hide them, feature them.”  I think the thing that most impresses VC’s is when the entrepreneur says, “here are the risks in the business and here’s my plan to mitigate those risks.” You know, just be very direct and honest. When entrepreneurs, sort of,  don’t talk  about the risks, it forces the VC to pull them out and identify them, and then the VC thinks, “well…”

SEAN: …he doesn’t even know…

JEFF: …Yeah! Maybe they don’t even know, and if they don’t know the one I just thought of, what are the three others that I didn’t think of that they don’t know?  I talk about Christoph Westphal pitching John Henry, the owner of the Red Sox, on Sirtris, and he says to John Henry…

SEAN: So the term-sheet is pretty tricky, right?

JEFF: Yeah.

SEAN: There’s  are good sites now like TheFunded.com with lots of sample term-sheets on them and probably more information than there ever has been from entrepreneurs about what to watch out for. But what would you think  are the main… it’s probably hard for you as a VC to say honestly, like, “these are the things you don’t want to sign off on,” because then someone will come to you and use it against you . Right?

JEFF: You know,  it’s funny, I did this in…I did  a whole chapter on term-sheet terms and negotiations. And one phrase that I use, which is very common, is that in many partnerships when entrepreneurs push on price, the partnership says, ” hey, if you loved the deal at 7M pre, you’ll love the deal at 9M pre.”  I mean, if it’s going to be a great success, it get lost in the noise.  So I get teased a little bit by entrepreneurs who throw that back at me.  But, no, I try to be very transparent in revealing all of the elements of control, and all of the tricks that VC’s can play on control, all the elements of price and all the tricks and knobs that you’ve got to worry about on price.

[END]

I caught up with Jeff Bussgang at TechCrunch Disrupt a few weeks and interviewed him about his new book Mastering the VC Game. I will post the interview in two parts. In Part 1, Jeff talks about the genesis of the book, his background as founder of UPromise,  how he made it over to the ” Dark Side” of VC, and how and when entrepreneurs should approach VC’s.

SEAN: Ok. So we’re here with Jeff Bussgang. Did I say that right?

JEFF: You did.

SEAN: …from Flybridge Capital Partners, but more importantly the author of the newly debuted book “Mastering the VC Game.” So  Jeff, thanks for taking the time.

JEFF: Yeah, I’m glad to be here.

SEAN: So you guys are… tell me a little about the genesis of the book.  So maybe talk a little bit about your background because I think it’s interesting. Your not only a partner at Flybridge, which is a fairly new, relatively new venture capital firm, but also an entrepreneur having founded  U-Promise .

JEFF: Yeah, yeah, especially here in New York because U-Promise manages the college savings plans in the state of New York.  So it’s pretty well-known here. So I was an entrepreneur for a number of years. As you said, co-founder and President of U-Promise and about seven or eight years ago, switched over to the other side and became a venture capitalist. I joined a couple friends who had been investors for my previous companies to help start this venture capital firm. And I started blogging about venture capital and entrepreneurship about five years ago. Through having seen the entrepreneur side of the table, going over to the other side, and sort of learning what happens inside the black box of the world of venture capital, I started writing about it. And after five years of blogging about it, someone said turn that into a book.

SEAN: Absolutely.

JEFF: So I thought that sounded like a pretty fun idea; a new project that would challenge me. So I went out and interviewed a dozen VC’s and a dozen entrepreneurs, wove in a little bit of my own experience as an entrepreneur and as a VC and wrote the book.

SEAN: Yeah. So you talk a little bit about… obviously the whole goal here is to figure out ..for the entrepreneur to figure out how to navigate through that space which is incredibly interesting and challenging at the same time. The first chapter is sort of dedicated to the VC game, right? Tell us the cliff notes; what are the key take-aways from what an entrepreneur needs to know after reading that first chapter or two, the most important things.

JEFF: What I try to do in the first chapters, I profile entrepreneurs who I think are great entrepreneurs to help entrepreneurs understand what makes a great entrepreneur, a successful entrepreneur. So I profile Reid Hoffman.

SEAN: What are the one or two most important things that entrepreneurs should know about the “VC game?”

JEFF: Well, I would say the first thing is don’t ever cold call VC’s.

SEAN: (chuckles)

JEFF: It’s amazing to me how many entrepreneurs still think that they have a chance of raising money and getting funding  with a cold call.

SEAN: Yeah.

JEFF: You know, people like to invest in people they know and people they trust.  So finding what it is to network to VC’s to get warm introductions from people who know you… You know, venture capitalists are highly networked individuals they have a, as a job description, are very open and plugged in and linked in and if you can’t find a way to get to the right venture capitalist then it says it reflects poorly on you as an entrepreneur.

SEAN: Yeah.

JEFF: And then the second thing I would say to folks is really do your homework and research on who you’re approaching and find their “sweet spot” is as an investor. Because if you’re approaching someone who is a later stage investor or somebody who, if you’re looking to raise a million dollars and somebody’s typical investment size is ten million dollars, you’re just not going to get a very good audience.  And, that could be a real act in frustration.

SEAN: Someone once told me about your former point, “when you need a friend, it’s too late to make one.”  [BOTH LAUGH] So one bit of advice I always give to entrepreneurs is, you know, while you don’t need anybody, get to know people really well because then your barriers are down and you can just have a conversation about what you have in common.

JEFF: Right.

SEAN: But, yeah, by the time you need money, it’s way too l ate.

JEFF: It’s too late.

SEAN: Because now everybody’s wall’s up, right?

JEFF: Yeah, the other line that I use is “the best time to raise money is when you don’t need to raise money.”

SEAN: Exactly. Absolutely right. And to your latter point about, you know, I think everyone just takes this spaghetti approach, right? Throw it against the wall and see– you know, just pitch everybody and see what sticks.

JEFF: Right.

SEAN: Well, I think ultimately you waste a lot of time, waste a lot of other people’s time, and you just look like an idiot because you don’t know who your target audience is.

JEFF: Yeah. I mean, I think when an entrepreneur comes in, they’ve done research on the firm, they’ve done’ research on the partner and their history . They just impress you…

SEAN: Yeah.

JEFF: …                  and their odds go up. I mean, it’s a long odds game.  You know, we see, like many other venture capital firms, thousands of businesses every year and we may  only invest in six to ten at Flybridge Captial.

SEAN: Wow.

JEFF: So the odds are one in three hundred, one in four hundred.

SEAN: Wow.

JEFF: And that’s pretty typical. So people really need to think carefully about targeting as much as they can, tailoring as much as they can of their pitch to the individual they’re pitching.

SEAN: Yeah, absolutely. Is there — and I’m sure this is circumstantial — is there a best time and a worst time to raise money? We just talked about the best time is when you don’t need it, right?…

JEFF: Yeah.

SEAN: … which is a kind of unusual position to be in as an entrepreneur. [chuckles]

JEFF: You know it’s funny I talk a little bit about this in the book and in a blog post I did recently in my blog “Seeing Both Sides,” which is a blog on the industry. And you know there’s a myth out there that VC’s take the summer off…

SEAN: Yes, yes.

JEFF: …and I looked at the data and, at least at Flybridge, we’ve done… looked through the deals by month over our seven or eight years of history, and we’ve done more deals in August than any other month.

SEAN: Wow.

I interviewed General Partner at Flybridge Capital Partners and author of Mastering The VC Game Jeff Bussgang at TechCrunch Disrupt two weeks ago. I will be posting that interview in a few installments later this week. In the meantime, enjoy my review of the book below.

Mastering The VC Game couldn’t have been more timely or insightful for me. Having launched web-based software company SalesCrunch eight weeks ago, we are knee deep in building the product and raising money. We learned alot despite having raised $33M in my last company from prominent VC’s like Sequoia and Accel.

Being a sales guy at heart, I especially enjoyed “The Pitch” chapter. I have always been astounded how few technology entrepreneurs in Silicon Valley, New York or Boston understand or respect the sales process, which is exactly what raising money is. I have seen entrepreneurs with advanced degrees in quantum physics from Stanford and Harvard look like a deer in headlights when it comes to the sales process. As author Jeff Bussgang points out at the beginning of the chapter “many entrepreneurs are not naturally very good at this process, and many actively hate it.”…..”For the entrepreneur, it [the pitch] is the most critical salient expression of their business and confidence.”

I read “The Pitch” chapter two days before a VC meeting last week and made a few adjustments to our pitch as a result. The biggest change we made was to put in writing a list of potential risks to the business and what we were doing to mitigate those risks. We added this as a page in our business plan and a slide in our presentation. It seems counter-intuitive to show potential investors all your business’s potential weaknesses, but as Jeff points out it’s just the opposite. Before detailing the risks we always felt we were dancing around the elephant on the table or waiting for someone to raise them before we addressed them. But that always put us on the defensive and probably made investors question if we were aware of the risks at all. Acknowledging the risks and explaining how we were managing them had several positive results:

• it showed that we were not only aware of them, but thought alot about how to turn them to our advantage.
• it dispelled any fear that we might be blindsided by them or other risks down the road
• best of all, it put the risks on the table in neutral territory where we could have an intelligent conversation with investors about them together like a team. That resulted in more ideas how to avoid the risks or even turn them into competitive advantages and barriers to entry.

I really liked that Jeff profiled entrepreneurs from different fields to show how this process is pretty much the same across industries. I met one of those entrepreneurs, Dave Balter, right before he started raising money for BzzAgent. I introduced him to a friend who became a client and one of the references for General Catalyst Partners during the investment phase, so I was aware how weary Dave was of raising money. It was great case study to use for the book and I was glad to hear it ended well for Dave. A good friend of mine from business school worked for Gail Goodman at Constant Contact for eight of the ten years profiled in the book. Another great case study, as Gail built that company and raised money against all odds as the economy was failing down around her in the early 2000’s. I remember hearing first hand about the down-round and founder ejection discussed in the book and I can tell you it wasn’t a pretty time for the company. But its inspiring and educational to read how it all played out and how perseverance really does win the day.

The “When The Dog Catches The Bus” chapter about the fine print in venture capital term sheets should make any entrepreneur question the sanity of raising venture capital at all. If you ever heard Jason Fried at 37 Signals rant about all the reasons not to raise money from VC’s and wondered why, this chapter will help you understand. But as Jeff’s points out, the worst of the terms only get triggered when the entrepreneurs are not living up to their promises. Jeff helps you understand the logic behind each of the typical terms, how to navigate the terms and suggests doing so armed with a good lawyer. If nothing else, after reading this book you cannot claim ignorance. If you follow Jeff’s advice and negotiate the best terms possible, set ambitious but realistic expectations and meet or exceed them, you have nothing to worry about. If you don’t, well the VC’s go into preserving the principle mode, which is their job. If you put yourself in the place of one of the limited partners who invests her hard earned money into a VC fund, you would expect nothing less than the kinds of provisions VC’s use in their contracts to keep your money safe.

Happy reading. Thanks to author Jeff Bussgang for bridging the VC/Entrepreneur divide and helping increase the odds that us entrepreneurs realize our dreams and change the world.