Lecture 9 - How to Raise Money (Marc Andreessen, Ron Conway, Parker Conrad)

Um, but I want to start with a question for Mark and Ron, which is by far the number one question. Probably be a link answer: what do you guys decide to invest in—a founder or a company?

Neither of you: no, no, no, no, you first.

Um, well, we have a slide on that. We have an app for that. Bring—um, Mark can start while we try to get your slide up.

Okay, bring it, guys. So, say the question again.

What makes you decide to invest in a founder or a company?

So, what makes us invest in a company is based on a whole bunch of characteristics. I've been doing this since 1994, right before Mark got out of the University of Illinois. So SV Angel and its entities have invested in over 700 companies. To invest in 700 companies, that means we've physically talked to thousands of entrepreneurs.

There's a whole bunch of things that just go through my head when I meet an entrepreneur, and I'm just going to talk about what some of those are. Um, literally while you're talking to me in the first minute, I'm saying: is this person a leader? You know, is this person rifle-focused and obsessed by the product? Um, I'm hoping—'cause usually the first question I ask is what inspired you to invent this product. I'm hoping that it's based on a personal problem that that founder had and this product is the solution to that personal problem.

Um, then I'm looking for communication skills because if you're going to be a leader and hire a team, assuming your product is successful, you've got to be a really good communic— and you have to be a born leader. Um, now some of that you might have to learn, those traits of leadership, but you better take charge and be able to be a leader.

Uh, I'll switch back to the slide, but let's let Mark—

Yeah, I agree with all that, I guess, and there's a lot of detail to this question that we could talk about. Um, and we maybe even a little bit different than Ron, and that where we are different than Ron, that we actually invest across stages. So we invest at the seed stage, venture stage, growth stage, um, and then we invest in a variety of different business models—consumer, enterprise, and a bunch of other variations.

So there are kind of fine-grained answers, you know, that we could get into if there are specific questions. Um, two general concepts that I would share.

Um, so one is the venture capital business is 100% a game of outliers; it's extreme exceptions. Uh, right? So the conventional statistics are on the order of 4,000 venture fundable companies a year that want to raise venture capital. Uh, about, you know, about 200 of those will get funded by what's considered a top-tier VC.

Um, about 15 of those will someday get to $100 million in revenue. Um, and those 15 from that year will generate something on the order of 97% of all the returns for the entire category venture capital in that year. Um, and so venture capital is such an extreme feast or famine business; you're either in one of the 15 or you're not, or you're in one of the 200 or you're not.

Um, and so the big thing that you're just looking for, no matter, you know, which sort of particular kind of criteria we talk about, they all have the characteristic of you're looking for the extreme outlier. Um, the other thing I'd highlight that we think about a lot internally is we have this concept: invest in strength versus lack of weakness.

Um, and at first that sounds obvious, but it's actually fairly subtle, which is sort of the default way to do venture capital is to kind of check boxes, right? So, you know, really good founder, really good idea, you know, really good product, uh, really good initial customers—check, check, check, check. Okay, this is reasonable; I'll put money in it.

Um, but what you find with those sort of checkbox deals—and they get done all the time—but what you find is they often don't have something that really makes them really remarkable and special. Right? They don't have an extreme strength that makes them an outlier.

On the other side of that, the companies that have the really extreme strengths often have serious flaws. Um, and so, uh, so one of the cautionary lessons of venture capital is if you don't invest in the basis of serious flaws, you don't invest in most of the big winners.

And we could go through example after example after example of that, uh, but that would have ruled out almost all the big winners over time. Um, and so at least what we aspire to do is to invest in the startups that have a really, really extreme strength along an important dimension and then be willing to tolerate some other, uh, you know, set of weaknesses.

Ron, we got your slide up.

Okay, I don't want to over dwell on the slide, but, um, when you first meet an investor, you've got to be able to say in one compelling sentence what your product does, so that the investor that you're talking to immediately can picture the product in their own mind. Probably 25% of the entrepreneurs I talked to today still, after the first sentence, I don't know what they do.

And as I get older and less patient, I say, back up—I don't even know what you do yet. Um, but so try and get that perfect.

And then I want to skip to the second column: you have to be decisive. The only way to make progress is to make decisions. Uh, procrastination is the devil in startups, so no matter what you do, you've got to keep that ship moving. If it's decisions to hire, decisions to fire, you got to make those quickly. It's all about building a great team.

Once you have a great product, then it's all about execution and building a great team.

Parker, could you talk about your seed round and how that went and what you wish you had done differently as a founder raising money?

Sure. So, um, um, actually I think my seed round—most of the stuff with my current company felt like, uh, from a fundraising perspective, felt like it came together relatively quickly.

Um, but actually one of the experiences that I had—I started a company before this that I was at for about six years, and my co-founder and I pitched, um, almost every VC firm in Silicon Valley. I mean, we literally went to like 60 different firms, and they all told us no.

And we were constantly trying to figure out, you know, how do we adjust our pitch, and how should we do the slides differently, and how do we tweak the story, and that sort of thing. And at one point, there was this sort of key insight that, um, someone gave me when I was pitching—actually someone at Coastal Ventures.

Um, and um, this VC said, "Guys, you know," he was looking for some very particular kind of analysis that we didn't have on hand. And he was like, "Guys, you don't get it." He was like, "You know, if you guys were the Twitter guys, you guys could come in and you could just be like—and like, you know, put whatever up here—and like we would invest in you. But like, you guys aren't the Twitter guys. So you need to make this really easy and have like all this stuff ready for us and all this kind of stuff."

And I took like the exactly opposite lesson of what he, I think, wanted me to take away from that, which was like geez, like I should really just figure out a way to be the Twitter guys. And like that's the way to do this.

Um, and so, so actually, like one of the reasons I started my current company, or one of the things I found very attractive about Zenefits, is as I was, as I was thinking about it, it seemed like a business I was so frustrated from this experience of having tried, you know, for like two years to raise money from VCs and had sort of decided like to hell that you can't count on there being capital available to you.

Um, and so this—the business that I started seemed like one that like, like, actually just maybe I could do it without raising money at all. Like there might be a path to kind of, you know, there was enough cash flow; it seemed compelling enough that I could like do that.

And it turns out that those are exactly the kinds of businesses that investors love to invest in. Um, and it made it incredibly easy.

Um, so I actually think like, I mean, Sam was very kind and said I was an expert in fundraising. The reality is I don't actually even think I'm very good at fundraising. Um, it's probably something I'm like less good at than, than, you know, sort of other parts of my job.

Um, but I think if you can, if you can build a business that's, you know, where everything's like moving in the right direction, if you can like be the Twitter guys, like nothing else matters. And if you can't, like, you know, be the Twitter guys, it's very hard for anything else to make a difference, um, for things to kind of come together for you.

Why did that VC say be like the Twitter guys when the fail whale dominated the site for two years? It kept growing anyway ‘cause it worked.

Yeah, the other point I want to make is bootstrap as long as you possibly can. I met with one of the best founders in tech who's starting a new company, and I said to her, "Well, when are you going to raise money?" She said, "I might not." And I go, "That is awesome! You'll never forget the bootstrap."

So, I was actually going to close on this, but I'm just going to accelerate it because Parker, I think just gave you the most important thing you'll ever hear, which is what I was also going to say—uh, which is, so the number one piece of advice that I've ever read and that I tell people, um, on these kinds of topics is always, uh, it's from the comedian Steve Martin, who I think is an absolute genius, uh, wrote a great book on his startup career, which obviously was very successful.

The book's called "Born Standing Up," and he literally—it's a short little book, and it describes how he became Steve Martin. And the heart of the book is he says, you know, what's the key to success? He says, "The key to success is be so good they can't ignore you."

Um, right? And so, in a sense, like all this—we're going to have this entire conversation, and I'm sure we'll keep having it about how to raise money, but in a sense, it's all kind of beside the point.

Um, because if you do what Parker's done and you build a business that is going to be a gigantic success, then investors are throwing money at you.

Um, and if you come in, you know, with a theory and a plan and no data, um, and you're just one of, you know, the next thousand, um, it's going to be far, far harder to raise money.

Um, the other—so that's the positive way to put it. It's kind of be so good they can't ignore you. In other words, you're almost always better off making your business better than you are making your pitch better.

Um, the other thing—the—that's the positive way of looking at it. The negative way of looking at it, of the cautionary lesson, is that, um—and this gets me in trouble every single time I say it, but I'm on a ton of flu medication, so I'm going to go ahead and just let it rip—um, raising venture capital is the easiest thing a startup founder is ever going to do.

Um, as compared to recruiting, right? As compared to recruiting engineers in particular, is as compared to recruiting engineer number 20, um, is far harder than raising venture capital.

Um, selling to enterprise customers is harder. Um, getting viral growth going on a consumer business is harder. Getting advertising revenue is harder.

Um, almost everything you'll ever do is harder than raising venture capital. And so I think Parker is exactly right: if you get in a situation in which raising the money is hard, um, it's probably not hard compared to all the other stuff that's about to follow.

Um, and it's very important to bear that in mind. Um, you know, it's often said raising money is not actually a success; it's not actually a milestone, uh, for a company. And I think that's true, and I think that's the underlying reason.

Um, it just puts you in a position to be able to do all the other harder things related to that.

Um, what do you guys wish founders did differently when raising money? Um, and specifically Mark, you know, you mentioned this relationship between money and how that applies here, so maybe we could start with that.

Yeah, so the single biggest thing that people are just missing, um, and I think it's all of our faults; we're all not talking about it enough. Um, but I think the single biggest thing entrepreneurs are missing, both on fundraising and how they run their companies, is the relationship between risk and cash.

Um, so the relationship between risk and raising cash, and then the relationship with risk and spending cash. Um, so I've always been a fan of something that Andy Rachleff taught me years ago, which he called the onion theory of risk.

Um, which basically is you can think about a startup like on day one. Um, it's having every conceivable kind of risk right, and you can basically just make a list of the risks. And so you've got, you know, founding team risk—you know, are the founders going to be able to work together? Do you have the right founders? You're going to have product risk—you know, can you build a product?

You'll have technical risk, right? Which is maybe you need a machine learning breakthrough or something to make it work, or you're going to be able to do that. Um, you'll have, you know, launch risk; will the launch go well?

You'll have, you know, market acceptance risk; you'll have revenue risk—a big risk you get into in a lot of businesses that have a salesforce is can you actually sell the product enough money to actually pay for the cost of sale? So you have cost of sale risk.

Um, if you're a consumer product, you'll have viral growth risk; will you get the thing of viral growth? And so a startup at the very beginning is basically just this long list of risks, right?

And then the way that I always think about running a startup is also the way I think about raising money, which is it's a process of peeling away layers of risk as you go, right? And so you raise seed money in order to peel away the first two or three risks, right? The founding team risk, the product risk, maybe the initial launch risk.

You raise the A round to peel away the next level of product risk. Maybe you peel away some recruiting risk because you get your full engineering team built.

Maybe you peel away some customer risk because you get your first five beta customers, right? And so basically the way to think about it is you're peeling away risk as you go. You're peeling away risk by achieving milestones, and then as you achieve milestones, you're both making progress in your business and you're justifying raising more capital, right?

And so you come in and you pitch somebody like us and you say you're raising a B—you know, the best way to do that with us is you say, "Okay, I raised the seed round, I achieved these milestones, I eliminated these risks. I raised the A round, I achieved these milestones, I eliminated these risks.

Now I'm going to raise a B round; here are my milestones, here are my risks." And then by the time I go to raise a seed round, here's the state that I'll be in.

And then you calibrate the amount of money that you raise and spend to the risks that you're pulling out of the business.

And I go through all this—in a sense, this sounds kind of obvious—but I go through all this because it's a systematic way to think about how the money gets raised and deployed as compared to so much of what's happening, especially these days, which is just, "Oh my God, let me go raise as much money as I can! Let me go build the fancy offices! Let me go hire as many people as I can and just kind of hope for the best."

Uh, I'm going to be tactical for sure: don't ask people to sign an NDA. Um, we rarely get asked anymore because most founders have figured out that if you ask somebody for an NDA at the front end of the relationship, you're basically saying I don't trust you.

So the relationship between investors and founders involves lots of trust. Um, the biggest mistake that I see by far is not getting things in writing. Um, you know, my advice on the fundraising process is do it as quickly and efficiently as you possibly can—don't obsess over it.

For some reason, founders get their ego involved in fundraising where it's a personal victory. It is the tiniest step on the way, as Mark said, and it's the most fundamental: hurry up and get it over with.

But in the process, when somebody makes a commitment to you, you get in your car and you type an email to them that confirms what they just said to you because investors have a lot of—investors have very short memories, and they forget that they committed to you, that they were going to finance, or they forget what the valuation was that they were going to find a co-investor.

You can get rid of all that controversy just by putting it in writing. And when they try and get out of it, you just resend the email and say, "Excuse me." Um, and hopefully, they've replied to that email anyway, so get it in writing.

Um, in meetings, take notes and follow up on what's important.

I want to talk a little bit more about tactics here. Um, just how does the process go? Can people email you guys directly? Do they need to get an introduction? How many meetings does it take for you to make a decision? How do you figure out what the right terms are? When can a founder ask you for a check?

You want to—that was about—

That was like six questions, a lot of things.

Yeah, okay, good.

It's the process. Why don't you describe—why don't you describe seed and then I'll describe.

Yeah, so, SV Angel invests in seed stage startups, so we like to be the very first investor. We normally invest today in a round that's a million to two million.

Uh, it used to only be a million. So if we invest 250K, that means there's five or six other investors in that syndicate.

Um, SV Angel has now a staff of 13 people. I do no due diligence anymore. I am not a picker anymore. I just help on major projects for the portfolio companies that are starting to mature, but we have a whole team that processes.

We at SV Angel end up investing in one company for every 30 that we look at, and we end up investing at about one a week. Uh, think what's interesting is we don't really take anything over the transom.

Uh, our network is so huge now that we basically just take leads from our own network. Uh, we evaluate the opportunity, uh, which means you have to send in a really great short executive summary, and if we like that, we actually vote—although I'm not in this meeting anymore—but the group actually votes on do we make a phone call.

That's how important time is in this process. And if enough of the team at SV thinks it's interesting, then they appoint a person to make a phone call to that founder—usually somebody on our team who has domain experience. If the phone call goes well, Bingo, we want to meet you.

If SV Angel asks you for a meeting, we are well on our way to investing. If that meeting goes well, uh, we'll do some background checks, um, backdoor background checks, uh, get a good feeling about the company, the market that they're going after, uh, and then make the commitment to invest and then start helping get other value-add investors to be part of the syndicate because if we're going to have an equal workload, we want the other investors in this company to be great angel investors as well.

So I'll talk a little bit about the venture stage, kind of the Series A stage, you know, that follows.

Um, so to start with, I think it's fair to say at this point that all the top-tier venture capitalists pretty much only invest in two kinds of companies at the Series A stage. One is if they have previously raised a seed round.

Um, and so it's almost always the case when we're doing a series investment that the company has a million or two million dollars of seed financing, you know, from Ron and folks that he likes to work with.

Um, almost always, by the way, Ron, just to be clear, and folks he likes to work with.

Um, so first, either they have a seed round. So if you're going to raise Series A, the first thing to do is raise seed, because that's generally the way the progression works at this point.

Um, every once in a while, we'll go straight to A on a company that hasn't raised a seed round. Really, the only times, though, that that happens are when it's a founder who has been a successful founder in the past and is almost certainly somebody we've worked with in the past.

Um, so we actually—we haven't announced, but we just—we just did one of these; we'll announce in a few weeks. Um, where it's a founder who I was an angel investor—actually, I think Ron was also—in the team's company in like 2006.

Um, and then the company did its thing and then ultimately was acquired by another big company. Um, and then that team now was starting their new thing, so in that case, we're just going to jump it straight to an A because they're so well-known and they have a plan all lined up for it.

But you know, that's the exception. It's almost always preceded, um, by a seed round. Um, the other thing is, uh, yeah, I guess I mentioned this already, but we get—similar to what Ron said—we get 2,000 referrals a year through our referral network.

Um, a very large percentage of those are referrals through the seed investors, and so by far the best way to get to the best introductions to the A-stage venture firms is to be able to— is to work through the seed investors or to be a or to work through something like Y Combinator.

Uh, speaking about terms, um, what—what terms should founders care most about and how should founders negotiate? Maybe Parker, we can start with you on this one.

Sure! Well, I think, um, probably precisely because of what Mark said, the most important thing at the seed stage is pick the right seed investors because, um, they're going to sort of lay the foundation for future fundraising events.

You know, they're going to make the right introductions, and I think there's an enormous difference in the quality of an introduction. So if you can get a really good introduction from someone who a venture capitalist really trusts and respects, um, you know, the likelihood that that's going to go well is so much higher than sort of like a, you know, a much, kind of a much more lukewarm introduction from someone they don't know as well.

Um, so at the seed stage, probably the best thing you can do is find the right investors. Um, and then, um, how does a founder know who the right investors are?

Well, I think it's really hard. I mean, so one of the best ways—I mean, you know, not to give a plug for YC, but, um, you know, YC does a very good job of telling you exactly who they think those people are.

Um, and, um, and can really direct you towards—and actually, I have found it to be, like, pretty accurate in terms of, like, who you guys said were going to be the best people; like they ended up being the most helpful, um, as we were raising subsequent rounds, sort of, you know, really provided the best introductions.

And the people who maybe I thought were, you know, seemed okay but were not, you know, like we're not as sort of highly rated by YC, like they that ended up being the case that they were kind of like real duds in the seed round.

Someday we're going to publish our list of these people. Oh my God, there are going to be a lot of upset people.

So how do you think about negotiation? How do you figure out what the right valuation is for a company? What other terms?

Well, so I started out—I mean, like when I was raising my seed round, I really didn't know and I mean we had conversations about this. I probably started a little too high on the valuation side. Um, and the—so as you guys know, like Y Combinator sort of culminates in this thing called demo day where, um, you get sort of all of these investors at once who are looking at the company.

Um, and I started out, um, trying to raise money at like a 12 or a $15 million cap. Um, which is like not quite the same thing as a valuation but, but sort of roughly equivalent. Um, and everyone was like, "That's crazy! You know that's completely nuts! You're like too big for your britches! Like that that's completely just wouldn't work!"

And so I ended up sort of walking it down a little bit, and within sort of the space of a couple days said, "Okay, well I'm going to raise it nine," and then suddenly, for whatever reason, that had sort of hit some magical threshold at the seed stage that it was below 10. That it seemed like there was like almost infinite demand for the round at a—at a $9 million cap!

So no one would pay 12, but at a $9 million cap, um, it felt like I probably could have raised like $10 million.

Um, and the round came together, um, you know, in roughly about a week, um, at that point once I kind of hit that threshold.

And so there seem to be—and they probably fluctuate over time—but there seem to be these sort of like thresholds, particularly for seed stage companies that—that that investors will think of as like this is what, you know, like above this level is like crazy; like doesn't matter.

And there's sort of like a rough kind of range that, um, that people are willing to pay. And so you just kind of like—you have to just kind of figure out what that is. Um, get the money that you need; don't raise any more than you need, and just kind of get it done.

And, uh, you know, at the end of the day, like whether you raise it 12 or 9 or like 6, it's not a huge deal, um, for the rest of the company.

Is there a maximum amount of the company you think that founders should sell in their C round and A round, beyond which problems happen?

Any of you feel like that's a better question for you?

Well, gosh, I don't know. I mean, I think, um, on—I mean I don't—I don't know the rules on this stuff. I think, um, the—the tricky thing is, I mean, it seems like there are kind of rough, particularly for like a Series A, um, you're probably going to sell somewhere between, you know, 20% and 30% of the company.

Because, um, you know, below venture capitalists tend to be a lot more ownership-focused than price-focused. Um, so you might find that it's actually sometimes when companies raise really big rounds, it's because, you know, the investor basically said, "Listen, I'm not going to go below 20% ownership, but I'll pay more for it."

Um, and so—and above 30%, probably sort of weird things happen to the cap table; like it gets hard, you know, down the line to sort of, um, you know, for there to be enough room on the cap table for everyone, and so everything seems to come in that range.

Um, so, uh, you know, that that probably just is what it is.

Um, in most cases, at, you know, at the seed stage, I mean what I've heard, there doesn't seem to be any magic to it, but it seems like 10% to 15% is what people say.

But that's mostly just what I've heard.

I'm curious, though.

Um, I agree with all that. Um, I think it's important to get the process over with. Um, but I think it's important for the founder to say to themselves in the beginning, at what point does my ownership start to demotivate me?

Um, because if there's like a 40% dilution in an angel round, I've actually said to the founder, "Do you realize you've already doomed yourself? You know you're going to own less than 5% of this company if you're a normal company!"

And so these guidelines are important, the, you know, the 10% to 15%, because if you keep giving away more than that, there's not enough left for you and the team, and you're the ones doing all the work!

We actually—we've seen a series of interesting companies in the last five years that—where they just, we just walk; simply, we won't—we won't bid simply on the basis of their cap table's already destroyed.

Uh, outside investors already own too much. Um, there was a company we really wanted to invest in, um, but the outside investors already owned 80% of it when we talked to them, and it was still a relatively young company; they had just done two early rounds that had just sold too much of the company.

Um, and literally, we were worried and I think accurately so that it was going to be demotivating for the team to have that structure.

One more question before we open up for the audience.

Um, for Ron and for Mark, could you guys both tell the story of the most successful investment you ever made and how that came to happen? Other than Zenefits!

Zenefits? Yeah, other than Zenefits.

Uh, for me, clearly, it was the investment in Google in, uh, 1999. Uh, and we got Google return out of it.

Um, but, uh, funny enough, I met Google through a Stanford professor, David Chien, who's in the School of Engineering. Uh, he's still here; he was actually an angel investor in Google and an investor in our fund.

And kind of the quid pro quo we have with our investors in the fund is you have to tell us, uh, about any interesting company that you see.

And we loved it that David Chien was an investor in our fund because he had access to the computer science department's deal flow.

And we were at this party at Vra's house in a full tuxedo. I hate tuxedos, and if anyone here knows David Chien, because you know for sure he does not like tuxedos, and he was in a tuxedo.

But I went up to him, and we complained about our attire, and then I said, "Hey, what's happening in at Stanford?" And he says, "Well, there's this project called Backrub, uh, and it's search and it's search by PageRank."

And Rel-y. And back in today, PageRank and relevancy—everyone says, "Oh, you know, that's so obvious"—in 1998, that was not obvious that engineers were designing a product based on this thing called PageRank.

And all it was was a simple algorithm that said if a lot of people go to that website and other websites direct them there, there must be something good happening on that website—that was the original algorithm.

Um, and the motivation was relevance. So I said to David, "I have to meet these people." And he said, "You can't meet them till they're ready," which was the following May.

Funny enough, I waited. I called them every month for five months and finally got my audition with Larry and Sergey.

And, um, right away they were very strategic. They said, "We'll let you invest if you can get Sequoia. We don't know Sequoia, but they're investors in Yahoo. And because we're late to market, we want an OEM deal with Yahoo."

And so I earned my way into the investment in Google.

About you?

So I'll tell one on the other side, which is Airbnb, um, which we actually were not early investors in. We were—we did Airbnb as a growth round.

Um, we did the first big growth round in Airbnb, um, at about a billion dollar valuation in 2011.

Um, and I think that will turn out to be—I believe that will turn out to be one of the spectacular growth investments of all time. We'll see, but I think it's going to be.

I think this is really going to be one of the big companies.

Um, so I'll tell that story because it's not a story of pure genius.

Um, it's a—we passed; we didn't even meet with them, I don't think we met with them the first time around, or maybe one of our junior people did—but it was one of these, it's, you know, I said earlier that venture capital is entirely a game of outliers, right?

One of the key things with outliers is the ideas often seem completely nuts up front, um, and so of course the idea of a website where you can have other people stay in your house, um, if you just like made a list of the ideas that are like most nuts, that would be like right there at the top.

Um, um, and then, um, and I have a very nice email from you—

Yeah, good, good. Hopefully, I was very courteous in my stupidity.

Um, well, the second most stupid idea you could possibly think of is a website where you could stay in other people's houses.

Um, and so the Airbnb uniquely combined both of those bad ideas.

Um, so of course it turns out they've unlocked an entirely new way to basically software-ise real estate. They've unlocked this just gigantic network effect. It's a gigantic global phenomenon; it's going to be enormously successful company.

So part of it was just coming to grips with the fact that we had whiffed on our initial analysis of the idea, and that the numbers were clearly proving that we were wrong and the customer behavior, uh, was clearly proving that we were wrong.

Um, so one of our—one of our philosophies at our firm is we're multi-stage; the big reason for that is so we can fix our mistakes, um, and we can pay up to, uh, to get in later when we screw up early.

Um, the other thing I'll highlight though is, uh, the other reason why we pulled the trigger at a high valuation um, when we did was because, um, of our—we had spent time at that point with founders—um, with Brian and with Joe and with Nate—and there's a friend of mine in private equity who has this great line, Egon Der, has this great line.

He says, "When, um—" as people progress through their careers, they get bigger and bigger jobs, and at some point they get the really big job, and it's some—about half people, um, grow into the big job and about the other half people swell into it, uh, right?

And you can kind of tell the difference.

Um, we just were tremendously impressed and are today every time we deal with all three of those guys, uh, how mature they are, how much they’re progressing, um, you know, it’s like they get more and more mature, they get better and better judgment, and they get more and more humble, um, as they grow.

Um, and so that made us feel really good that not just was this business going to grow, but that these were guys who were going to be able to build something and be able to run it in a really good way.

You know, people always ask me, uh, "Why do you think Airbnb is such a great company?" It's funny, we're obsessing over Airbnb, but—and I say to people, "It's because all three founders are as good as the other founder."

That is very rare.

In the case of Google, two founders, one of them is a little better than the other one, but, but hey, he's the CEO. Every company has a CEO.

I think I think we just got the TechCrunch headline: every company has a CEO. Every—every company has a CEO.

Why am I saying this? When you start a company, you have to go find somebody as good or better than you to be the co-founder.

If you do that, your chances of success grow astronomically, and that's why Airbnb became so successful so quickly. The anomaly is Mark Zuckerberg at Facebook.

Yes, he has an awesome team, but, but the Mark Zuckerberg phenomenon where it's mainly one person that is the outlier.

Uh, so when you start a company, you have got to find phenomenal co-founders.

All right, audience questions.

Yes, so obviously the conventional wisdom about why you raise money is because you need it. Um, but the more I get off conventional wisdom, the more I'm starting to hear another story about why you raise money.

And I'm actually hearing founders say it's more to facilitate the big or, in the worst case, to facilitate the aqua, instead of just fizzling out into nothing.

To what extent is that accurate thinking or flawed thinking? Does raising money help you, uh, with an exit or an IPO?

Well, if you pick good investors who have good Rolodexes and domain expertise in what your company does, they're going to add a lot more value than the money. And those are the types of investors you should be looking for.

Oh yeah, so the answer to the question is clearly yes, but also in a sense it doesn't matter.

Um, because you can't plan these things according to the downside.

Um, and so, I mean, that's the scenario you are not—obviously are not hoping for.

Um, and so while the answer is yes, probably that shouldn't enter into the decision-making process too much; it might on—it might enter into which investor to raise money from.

It probably doesn't enter into the whether to raise money question that much. I don't think you intend to start a business just barely capital—you still want to hand up with some.

You guys have any advice about how to deal with that—talk about demotivation and so on? Not everything is like to start some software; it's viral, whatever else—what should founders do for capital?

So this is, um, I would double down on my previous comments on the onion theory of risk and the staging of risk and cash, which is the more capital-intensive the business, the more intense and serious you have to be about exactly what's going to be required to make the business work and what the staging of milestones and risks are.

Um, because in that case, you want to be very precise about lining up, because the risk is so high that it can all go sideways, right?

So like, you want to be very precise about what you're going to accomplish with your A round and what's going to be a successful execution of the A round because if you raise too much money in the A round, that'll seriously screw you up, right, later on down the road.

And the—you know, because you're going to raise the C, D, E rounds, you know, and then the cumulative dilution will get to be too much.

And so you have to be precise on every single round. You have to raise as close to the exact right amount of money as possible, and then you have to be as pure and clean and precise with the investors as you can possibly be about the risks and the milestones.

But this, by the way, is a big thing—this is actually I'm really glad you asked that question. It kind of goes back to what Parker said: look, if you walk in—if you walk into our firm and you've got Twitter, or you've got Pinterest, you've got something and it's just viral growth and it's just on fire and it's just going to go like those are the easy ones.

Like it's just like let's put money in it and let's just feed the beast and off it goes.

Um, but if you walk in and you're like, "I got this really great idea, but it's going to take $300 million staged out over the next five years, probably across five rounds—” you know, it has a potentially very big outcome, but boy, like this is not Twitter; like this is going to be serious heavy lifting, uh, to be able to get there.

Um, we will still do those, but the operational excellence on the part of the team matters a lot more.

Um, and one of the ways that you convey the operational excellence is in the quality of the plan.

Um, and—and so back to the Steve Martin thing: be so good they can't ignore you. The plan should be very precise, and there are ways, if your capital intensive, of borrowing money in addition to venture capital.

Yeah, you can, right? You can kick in a venture debt and then later on lease financing.

But again, that underlines the need for operational excellence because if you're going to raise debt, then you really need to be precise on how you're running the company because it's very easy to trip the covenants on a loan, and it's very easy to lose the company.

Um, and so it’s a—it’s a thread-the-needle process that demands a just sort of a more advanced level of management than sort of, you know, the next Snapchat.

What are some bad signs for investors that you shouldn't work with for your company?

Yeah, this is a good question. How do you know what? What's a sign you should avoid an investor?

Well, it's the inverse of what I said about a good investor. If it's an investor who has no domain expertise in your company, does not have a Rolodex where they can help you with introductions both for business development and in helping you do the intros for Series A, you should not take that person's money, especially if they're in it just to make money, uh, and you can suss those people out, you know, pretty quickly.

Yeah, I would—I'm glad you asked that question—bring up sort of a broader point, which is, um, if—if your company is successful, you know, we're talking about our, you know, I think generally, at least the companies we want to invest, are the ones that want to build big independent franchise companies, so we're talking about a 10 or 15 or 20-year journey.

You know, 10, 15, 20 years, you may notice is longer than the average American marriage, um, this is significant.

Um, the choice of key investors, in particular investors who are going to be on the board, uh, for a company, I think is just as important as who you get married to, which is extremely important.

Um, these are people you're going to be living with and partnering with and relying on, um, and dealing with in position, you know, in—in conditions of great stress and anxiety for a long period of time.

And the big argument I always make is, um—and I make this all the time—sometimes people believe it, sometimes they don't, which is like if everything just goes great, it kind of doesn't matter who your investors are.

Um, but almost never does everything just go great, right? Even the big successful companies, even the big, you know, Facebook and all these big companies that are now considered very successful, you know, along the way, all kinds of stuff went, you know, hit the fan over and over and over and over again.

Um, and there are any number of stressful board meetings and discussions and late-night meetings with the future of the company at stake where everybody really has to be on the same team and have the same goals and be pulling in the same direction and have a shared understanding and have the right kind of ethics, um, and the right kind of staying power, um, you know, to be able to actually weather the storms that come up.

Um, and one of the things that you'll find that is a big difference between first-time founders versus second-time founders is almost always the second-time founders take that point much more seriously, um, after they've been through it once.

Um, and so it really, really, really matters—I always thought, and I believe that it does— it really matters who your partner is.

It really is like getting married, and it is worth putting the same amount of time—maybe not quite as much time and effort—into picking your spouse, but, um, it is worth spending significant time really understanding who you're about to be partnered with, um, because that's way more important than, you know, did I get another $5 million in the valuation or did, you know, did I get another $2 million in the check.

The marriage analogy is great; I know at SV Angel, uh, our attitude is when we invest in an entrepreneur, we are investing for life, because we want to invest in—if we made the right decision, we're going to invest in every company they start.

And once an entrepreneur, always an entrepreneur. So we—we actually do consider it a marriage.

We're investing for life. One thing that—this is another way of saying what Mark just said—is I always look for in that first meeting, um, do you feel like you respect this person, and do you feel like you have a lot to learn from them?

CU, sometimes you meet with VCs and in the initial meeting, you kind of feel like, man, they're just like slow on the uptake or they don't get it or they don't see it. And sometimes you walk in and they have this like just such an incredible amount of insight into your business that you walk out of there being like, man, I don't even—if these guys didn't invest, that sort of hour that I spent with them was such a great use of my time, I felt like I came out with a much clearer picture of what I need to do and where I need to go.

Um, and that's such a great microcosm of what the next couple years are going to be like.

Um, you know, like don't—if you feel like you would want this person to be really involved in the company even if they didn't have like a checkbook that they brought with them, that's probably a really good sign.

And if not, that's probably a really, really bad sign.

What's on the deal-making activities of angels and VC? What’s the time, money, or the lack of?

Company—what's the constraint on how many companies you guys can invest?

SV Angel's kind of gotten comfortable with one a week. Uh, you certainly can't do more than that; that's a staff of 13.

Um, so it's really the number of companies if you had—if you all worked twice the number of hours, would you invest in twice the number of companies?

Uh, I would advise against that. I would rather just add value—more value to the existing company.

Maybe you could—I'll take the roll question for a second. Um, maybe you could talk a little bit about conflict policy, uh, or not—or not conflict policy.

Well, SV Angel actually does have a written conflict policy.

Um, but most when we end up with a conflict, it's usually because one company has morphed into another space. We don't normally invest in in companies that have a direct conflict.

If we do, we will disclose it to the other company, to both companies. And keep in mind, at our stage, we don't know the company's product strategy anyway; we probably don't know enough to disclose.

But our conflict policy also talks about this really important word, which is trust.

In other words, we're off to a bad start if we don't trust each other.

And with SV Angel, the relationship between the founder and us is based on trust, and if somebody doesn't trust us, then they shouldn't work with us.

Mark, will you invest in competitive companies?

Uh, yeah, so this is actually—so let me go back to the original question; I’ll come back to that.

So the original question is, this is the thing we talk about most often in our firm.

So this is kind of the—the question is at the heart of I think how all venture capital operates, um, which is the question of constraints.

So the big constraint on a top-tier venture capital firm—the big constraint—is the concept of opportunity cost.

Um, so it's the concept that basically everything you do means that there are a whole bunch of other things that you can't do.

Um, and so it's not so much the cost—and we think about this all the time—it's not so much the cost of we invest $5 million in a company and the company goes wrong, and we lose the money. That's not really the loss that we're worried about because the theory is we'll have the winners that'll make up for that, in, in theory.

Um, the cost that we're worried about is every investment we make locks us out of a category, right? And the nature—that's a very complicated topic when you're discussing these things internally in these firms because you only know the companies that already exist, right?

You don't know the companies that haven't even been founded yet.

Right? And God help you had you invested in, you know, an early company that was not going to be the winner, and you were locked out by the time, you know, the winner emerged three years later and you just couldn't make the investment.

So that's one issue: is conflict policy.

Um, the other issue is opportunity cost on the time and bandwidth of the general partners.

Um, and so going back to the concept of adding value, um, you know, we're—fir—typical, typical firm, we're a fairly typical firm of eight general partners. Each general partner can maybe be on 10 to 12 boards in total if they're completely fully loaded.

Um, so it's basically Warren Buffett talks a lot about investing, is you basically want to think about it as a ticket that you have a limited number of holes that you can punch.

And every time you make an investment, you punch the hole. Um, and when you're out of—when you're out of holes to punch, like you're done, you can't make any new investments.

Um, and that's very much how capital operates.

And so, um, the way to think about it is every open board slot that one of our GPS has at any given point in time is an asset of the firm that can be deployed against an opportunity.

But every time we make an investment, it takes the number of slots that we can punch down by one.

So it reduces the ability for the firm to do new deals.

Um, and so every investment we make forecloses not just the competitive set but other deals where we will simply run out of time.

Um, and so—and this is sort of a big thing of like, well, this goes back to what I said earlier: like this company's pretty good. It seems fairly obvious that it's going to raise intrafunding; why didn't you fund it?

Well, on its own, if we had a limited capacity, we probably would have.

Like it—it'll probably make money, but relative to getting blocked out of the competitive set and relative to not having that open board seat for—for an even better opportunity, um, we pass on that basis a lot.

Um, it's pretty widely agreed that that, um, it's easier than ever to build an MVP—to launch—to get traction.

Um, we know that there are seed deals that happen pre-MVP or even pre-launch and pre-raised.

So those instances where you do do a seed company that either doesn't have a product or hasn't launched, um, compressive traction, what do those deals look like and what do you make that judgment based on?

What convinces you to invest with no product and no traction?

Uh, what would convince us—which is what usually convinces us—is the founder and their team themselves, so we invest in people first, not necessarily the product idea.

The product ideas tend to morph a lot, so we will invest in—in the team first. If it's—if it's pre-users, the valuation is going to tend to be correspondingly lower unless one of the founders, you know, has a success track record.

Yeah, for us it's almost always—if there's nothing at the time of investment, then it's almost other than a plan—it's almost always a founder who we've worked with before.

By the way, the other thing worth highlighting is you kind of—in these conversations, in all these conversations, you kind of—the default assumption is we're all starting consumer web companies or consumer mobile companies.

Um, there are, you know, other categories of companies—capital intensive is one that's been brought up—but I'll just say like, for example, enterprise software companies or enterprise these days, SaaS, you know, application companies, or cloud companies, it's much more common that there's no MVP, right?

It's much more common that there are cold starts, um, and it's much more common that they build a product in the AR and there's no point in having an MVP because the customer is not going to buy an MVP.

The customer actually needs the full product when they first start using it.

Um, and so the company actually needs to raise 5 or 10 million dollars to get the first product built.

Um, but in almost all those cases, that's going to be a founder who's done it before.

I think it's time for one more question. Can you talk about the board structure and investor perspective? Can you guys talk about the ideal board structure?

Um, gosh, um, uh, I think, um, so—so in—in our board, um, we're fortunate that we have, um, there's myself and my co-founder and, um, a partner from Andreessen Horowitz.

Um, which, um, I think probably removes the fear, probably creates a little more trust because it sort of removes the fear that like, you know, uh, someone's going to come in and just like fire you arbitrarily because like it's time for a big company CEO kind of thing.

But in most cases, I think if you—if you trust—if you trust the people that you're working with, um, it—it shouldn't really be an issue.

Um, because there are so—there's so few—I mean, things almost never come to like a board vote.

Um, and by the time that they do, it's like something's deeply broken at that point anyway, and—and most of—and most of the—the power that VCs have comes outside of the board structure.

It's protective covenants that are built into the financing round. So it's like you can't, you know, take on debt; you can't sell the company; you can't—there are certain things you can't do without them agreeing to it anyway.

Um, so it's probably like less of a big deal than—than people make it out to be.

What I found sort of is, is that, uh, it seems to me that as a founder, if things are going well at the company, you have sort of unlimited power vis-a-vis your investors; like almost unlimited.

Like, no matter what the board structure is and no matter what the covenants are in the round, like if you say, "Listen, I want to do this and I think this is what we need to do," and even if it's like a good investor or a bad investor, even the bad investors will be like, you know, like let's—let's make it happen.

CU, they want to like ride this rocket ship with you, and when things are going badly, it does not matter what protections you've built into the system for yourself.

Um, like, you know, at the end of the day, like you need to go back to the trough to get more money, and, um, you know, if—if like things aren't going well, like they're going to have all—all of the cards in their hand and they're going to get to renegotiate all the terms and exactly—

They'll change everything.

This is, I think, the fundamental rule of raising money.

Uh, other than never have a down round, is that if things are going well, the founder controls the company. If it needs more money and things are going badly, investors control.

I've been on boards for 20 years, public and private. I have never been in a board vote that mattered.

It's always been—never—never a vote.

Um, many discussions, many controversies, many issues, uh—never a vote.

Um, the decision has always been clear by the end, um, and it's either been unanimous or very close to unanimous.

Um, and so I think it is almost all around the intangibles and almost not all around the details.

Okay, thank you guys very much for coming in today. Pleasure.