1. “Be really, really careful who you pick as a co-founder”
2. “Valuation is not everything”
3. “Look for advisors and investors who commit to you early on”

It is as diverse as the startup world: Some companies have commitments and are “oversubscribed” within hours, others have to work hard to ultimately succeed in raising funds (let’s not forget that fundraising success does not mean business success), and others end up selling the company in the process.

Part of our mentoring program at AngelPad involves working with founders throughout their fundraising process and we ask our founders to closely keep track of their fundraising meetings as well as submit a survey back to us. The 13 AngelPad companies of the Winter 2011 session had over 350 meetings with VCs, Micro VC and Angels. On average they met with 27 investors  each – the range being 11 to 48.

Most of the meetings were with VCs (171), followed by Angels (140) and Micro VCs (46).  Broken down per company that is on average 13.1 VC meetings, 10.7 Angel meetings and 3.5 Micro VCs meetings.

The vast majority of companies succeeded in raising funds, many have not announced it yet though (so far of the AngelPad Winter 2011 session, only Coverhound, Shopobot, Crittercism and Astrid made announcements). Hopscotch was acquired.

Based on this experience, here is my take on the fundraising climate of the last quarter:

1. Seed is the new A: Rounds are larger, caps are higher – this should not be a surprise to anyone. However, to assume that every company is priced at 5M or more is a mistake. Many investors – especially angels – have dropped out of the market assuming the caps are out of their reach and that it is harder to make money. Very few angel investors are active in rounds north of $5M. It is however important for founders to be aware of the effects of a high cap in a seed round.
   

   Tweet“Seed is the new A: Rounds are larger, caps are higher”

2. VCs invest earlier: Most VCs are active at seed stage. Almost 50% of all AngelPad Winter 2011 fundraising meetings were with VCs, so anyone who says VCs are not investing at seed stage is not up to date. The majority of rounds in AngelPad companies have at least two VCs involved. This creates a unique challenge: VCs do not operate like angels and Micro VCs, they have a partnership process that takes time and effort. The average fundraising time has been considerably longer in rounds with multiple VCs.  Even the firms who claim that any partner can invest $ xxx without the partnership are slower to commit than angels and Micro VCs. One notable exception was Google Ventures – making offers to several AngelPad companies within 24 hours of demo day.
   

   Tweet
   “The average fundraising time has been considerably longer in rounds with multiple VCs”

3. Caped Notes are the standard: Convertible Notes with Cap are still the most common funding form. They are easy, inexpensive and close faster.  However, many important questions regarding valuation, board composition and stock preferences are pushed into the future.  Priced rounds are becoming more popular again mostly because of tax incentives.  Most funds prefer priced rounds but “are ok with convertible notes”.  Founders almost always prefer convertible notes.
   

   Tweet
   “Founders almost always prefer convertible notes”

4. Four Demo Days swamp every calendar. The large number of startups fundraising at the same time is adding complexity to the fundraising calendar. Demo days at AngelPad, 500 Startups,  YCombinator and Techstars NY, produced more than 100 companies fundraising at exactly the same time last April.  Founders who are not part of an incubator should try to navigate the demo day calendar and raise funds during “off-time” (YC’s demo day is on August 24th – from that day on startups compete with 64 well-prepared startups for meetings. AngelPad’s fall demo day is in late October).
   

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   Founders who are not part of an incubator should navigate around demo days and raise funds during “off-time”

5. AngelList is here to stay: AngelList has replaced the “executive summary”. Six months ago most of the investors on AngelList were Angels. This has dramatically changed. Almost every firm has a few partners or associates on AngelList and frequently use it to make introduction to other investors. AngelList has become so prominent that it is now common practice for startups to add a link to Angel.co to their company profile. AngelList  is also helping to introduce startups to lesser known and non-Silicon Valley firms in a scalable manner.
   

   Tweet a Quote
   AngelList has replaced the traditional executive summary for startups

One interesting side effect of high valuations and increased VC involvement is that traction and business fundamentals are “en-vogue” again. In 2010, one could raise money with little more than a demo and good credentials – those days are over.  Companies have to show strong traction and a clear path to revenue, especially consumer-centric ones. In my experience, “idea-stage” fundraising is at a complete standstill. With seed rounds north of $6M, most investors’ appetite for experimenting and “believing in a team” is pretty limited and suddenly we’re back to the healthy business basics of building something people want and will pay for.

(This post was origanally published at Vator.tv)

Incubator 2.0, is really in large part a [a reflection of the] failure of engineering and business schools to actually teach people how to start companies and to actually teach MBAs how you really do start companies. Nobody writes a business plan anymore, no one does a five-year forecast.

Of course raising money is part of the life cycle of a company, but it’s much more about being part of an environment where other smart people operate, they tackle big problems, they challenge each others’ assumptions, and having access to all these mentors who are going to help you through the process. When you have smart people with good ideas and big visions, the money comes.

Starting a technology company is not about making all the right decisions, it’s about making more right decisions than wrong decisions, and realizing them very early on and doing it very fast over and over and over again.

Read what resonated most with me:

“It is not a show where everyone listens and claps at the end [...] if there is no engagement it is probably not going so well”.

If a meeting is only a monolog, it is a very bad sign – no matter if it is a pitch, an interview or a date. I invest in people and companies because I am excited about what they are doing. If I don’t interrupt, throw out ideas, ask questions or make comments, I am probably not that excited.

“It is very telling when someone does not know an answer to a question [and] their reaction to that [...] they kinda stop and you see them thinking …”

I classify answers to “not having an answer” in three categories:

1. The BS answer: “Oh yes, bla bla blah” (fast paced)…- basically a way to talk out of the question hoping than no one notices the “canned-no-thoughts” BS answer.
2. The politician answer: -annoying pause- ” Hmm, that is an interesting question, it reminds me of  bla bla bla …” –  a way to not answer the question by answering a different question.
3. The stop & think answer: -thoughtful pause- “I have not thought of that, maybe we could …” (followed by a thoughtful insight or smart observation).

So how to answer a question that you haven’t thought of before:

• Take a moment (a moment, not 2 hours) and think before answering.
• Don’t worry about showing that you’re thinking as you speak.
• Help me understand your thinking process. Sometimes it is more valuable than the outcome.
• Don’t hesitate to re-formulate or start over if you realize there is a “better answer”.
• Be honest: it’s best to admit you don’t have a clue about the answer than making up something for the sake of it (just don’t let that happen to often).

I am looking for founders who have thought through most things, done their research (market, competition) and considered alternatives. But above all, I am looking for founders who can think outside the box and have the ability to think quickly under pressure and in stressful situations.   How someone reacts to an unexpected question is very telling.

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I just invested in SetJam. I did not know about them this morning and it only took 2 hours and 52 minutes from the first introduction to funding SetJam!
Find out why and learn how you can deal with angel investors:

• Saturday 9.18 am – David Rose asks me if I’d be interested in SetJam with /cc Ryan the founder
• Saturday 9.40 am – I email Ryan asking to talk by phone
• Saturday 10.35 am – I call Ryan (while on the playground with my son – bad daddy!) and we talked for 45 minutes. At the end of the conversation I tell him that I am 90% likely to invest
• Saturday 12.10 pm – I email Ryan & David telling them I am in and will send paperwork on Monday

So, what happened you wonder …. How do some companies get investors to fund them in less than three hours. Here are my thoughts on SetJam:

The market:
Just a few days ago a I tweeted about the “TV war” and how a lot of startups are going to benefit when big players get into a fight (Apple TV, Google TV, Yahoo TV, Netflix, Amazon, Blockbuster). I like companies that throw themselves into the ring when it gets hot. Startups are faster, more versatile, and usually have less “competitive issues” than the big players. There is a high chance startups fail, but if they succeed, they win big. SetJam is smack-middle in the “How are we going to consume TV in a few years” space.

The product:
I worked at Google for seven years and most of my technology-opinions have been formed or validated there. I like products that aggregate content *and* add value in the process. I like products that enhance the user experience of things we already do online. And I like products that seek to have users spend minimal time on their site: a value-add aggregator should always seek to send visitors back to the original content. SetJam does exactly that.

The people:
I only talked to Ryan the CEO. He is smart and has business acumen, he has good “online instincts” and integrity. How can I tell? Well, I interviewed hundreds of people while at Google and one develops a sense for asking the right questions to find out. It also helped I respect the person who introduced him (David Rose). Ryan has worked for David for five years.

Peer validation:
If I am wrong with all of my instincts, assumptions and hopes, I am not alone. Some 20 other angel investors, including four of my fellow Xooglers in NYC,  have invested in the company. With that many great people giving advice, making intros, interviewing key-hires, testing the product, there is a much higher chance that the company succeeds.

The deal:
No one ever talks about this, but it is an important part of the decision to invest in a company. What are the terms of the deal? Obviously I won’t disclose the terms but they are fair. The founding team understands the value of early investors and does not just want their money. I appreciate that.

The document:
Another important fact was that all of the documents were well prepared and easily accessible. David gave me access to his “deal room” on Angelsoft (think salesforce for angel investors) and I could quickly understand what they do, what their plans are, and what traction they already gained.
Within Angelsoft I could also read the conversations other investors had with Ryan and see who else was investing. Using Angelsoft made the process of funding SetJam much easier and faster.

So, what can you take away from my experience when you are fundraising? (obviously, pre-requisite should be for you to have a great product, an outstanding team and traction)

• Choose early angels wisely. The first few investors in a round will be your champions and will provide peer validation for other angels.
• Structure the investment properly to attract good investors. The deal has to be appealing.
• Be available: Ryan responded within minutes (on a Saturday morning)
• Be organized. Ryan emailed me all documents immediately after we hung up.

It’s important to point out that such a turnaround is highly unusual, even for me. It is more common to take weeks, sometimes months before investing in a company.

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So, how do you become part of the Silicon Valley in-crowd?
First, there really is no such clique and if there is, it is incredibly transient.
Second, Silicon Valley is not an oligarchy, but rather a meritocracy!
And third, if you are smart, capable, intelligent, driven and socially not totally awkward, you can be part of the SV “in-crowd”.

Now, if you think you can email John Doerr, Paul Graham or Larry and get a meeting, think again. It is the equivalent of going to DC and trying to meet with Barack – it ain’t going to happen!
This post is about introductions to important people, but not the “Dignitaries of SV” .

Let’s get to it, how are you going to get quality introductions in silicon valley and become part of the in-crowd? Let’s assume you are planning to visit SV to meet with people for ideas/partnerships/funding/etc.

1. FIND 10 people you want to meet

• why do you want to meet this person?
• what do you want to convey/get/accomplish?
• why would this person want to meet with you?

Most people do not put enough work in this list. e.g. if you think you want to meet @ev or @biz from twitter b/c you have a location based twitter/[random api] mashup, you did not do your homework. Twitter recently bought GeoAPI, so guess what, those guys are a much better fit for you. I can not stress this enough: DO YOUR HOMEWORK FIRST!

2. FOLLOW them on twitter, FF, Plancast, Buzz or anywhere else you can (avoid facebook & linkedin for now, most people do not accept random followers there and it looks a bit desperate IMHO).

3. ENGAGE them on their favorite platform. RT their post, comment on buzz conversations, @reply on twitter, comment on blog posts. You know, the general “nice-stuff” one can do online.  Paul Graham once told me that he checks comments on HackerNews for people applying to YCombinator.

4. ADDRESS  them directly. This is a subtle addition to “3. Engage”. Now you actually are starting to have some kind of conversation.  e.g. I recently had someone email me about broken links on my site – that was helpful – we started to talk. Nothing big just a “snippet-conversation” that can be built on later. Obviously better if you have something meaningful to say.

4b. (extra credit) DO something for them. e.g. if you want to get Dave McClure‘s attention, do something forstartupvisa (his current pet project).

5. CONTACT them for a specific purpose. Write a good introduction email.

• everybody is busy! give them at least a few weeks advanced notice
• once they agree to meet you: offer a few dates/time/locations
• check their public calendars (e.g. plancast.com) to see where they are

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A few more random thoughts:

• try to meet important people early in the morning (a lot less likely to get canceled)
• try not to have lunch meeting – if you do, don’t eat (even if you are starving, smart to actually eat beforehand) who can eat, talk and listen at the same time?

• ask if they can think of anyone you should be meeting with
• confirm every meeting a day prior
• be on time. And by the way SF to Mountain View is not a 45 minute ride, it can be well over an hour
• leave room in your schedule. People will likely introduce you to others if they like you/your product or idea
• go to a few tech meetups while you are here
• check the startup digest for mixers
• consider contacting the venturehacks powerbrokers (they love to intro good people)

If you plan your trip well, you will feel like you are part of the in-crowd, I promise. If not, you did not do your homework and find the right people to meet. So start with your “dream list” of people to meet. And keep in mind: you are not asking for favors: Everyone is always looking for great people!

• soon-to-be founders look for co-founders
• founders look for good people to hire (and co-founders)
• journalists look for good stories
• angel investors look for the next big thing and potential advisory board seats
• VCs look for fast growing companies and merger/acquisition/partnership opportunities
• anyone is looking for good tech-geek conversation

If you want a meeting with me, start by (3) follow me (4)engage me, or (heck, I am not that important) just  send me a message @thomask or email (thomask AT Gmail).

Good luck! p.s. If you like this post, subscribe to my email list or rss feed via feedburner.I publish about 2 posts like this per month. Was this useful? please retweet it. Thanks!

Here is the “cold-email” (as in cold-call) format that I find most useful when being approached. I use this format myself if I can’t get an introduction. The example in italics is an imaginary email.

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