How to Raise Investment Capital – According to VC Jeff Clavier

Jeff Clavier was the first tech investor I ever met; he was introduced to me years ago by some hip engineers in a bar as “one of the few cool VCs.” Years later Clavier’s name now comes up all the time when one of his portfolio companies finds success; his exits include Mint, Tapulous, and UserPlane, other investments include Mashery (a ReadWriteWeb sponsor), Rapleaf, Fitbit, bitly, GroupOn, Twitter and many more.

Clavier spoke last week at the International Startup Festival in Montreal on the topic of raising money – with a special emphasis on the numbers that a startup should keep an eye on. My notes from his very informative presentation are below.

Clavier began his presentation at the beginning of a company’s lifecycle, asking how many co-founders a startup ought to have. He says that one is too lonely, two is good and three is a great number if they can combine their skills to cover design, development and distribution.

How to Hack the Investment World

Money man and pundit Paul Kedrosky also spoke at the International Startup Festival and offered humorous, blunt advice about how to get what you want from investors and investment bankers.

If you like this kind of advice, check out my coverage of a talk by Paul Palmieri, Co-Founder and CEO of mobile advertising service Millennial Media, titled “Investing in Your Influencers.

Kedrosky:

“In the 90’s I was an analyst through all this [tech investment and IPO] madness. An investment banker sees it as a serial kill, conquest, get the fee and move on. For 10 years there have been no gazelles to take down. Think about when LinkedIn went public. The conversation at investment banks was ‘why don’t we have one of those?’

“These people are like shopkeepers trying to stock their shelves with goods they can sell to other people. They want to stock their shelves and they have nothing. You in this room are the inventory. Think about it that way, filling up their shelves with product.

“Your job is to look like one of the 6 companies that will go public. Here’s what I do that looks like those other guys so you can feel safe putting me on your shelf. You want to build your own IPO and exit.

“The hardest way to win is to be objectively best. Better ways to win are by having more mindshare, or making the most noise, so you don’t have to suffer through becoming objectively best. I see it a lot among Canadian companies in particular trying to do that. The market just isn’t that efficient to truly determine the best.

“Part of the job of building a company in this marketplace is getting outside of being objectively best. You need to get people who you don’t pay talking about you.

“People are telling you that most startups die? That’s true but when people say only 6% of the VC backed companies in US go public, they neglect that durring these types of periods a higher percentage of companies than otherwise find attractive exits. Sometimes it dips to 1 or 2 % and sometimes it jumps to 25%. This particular period is the kind of period you’re most likely to find an exit.

“A lot of smart guys are going to go on and on for 3 or 4 years worrying that it’s a bubble, then when they see it doesn’t pop – that’s when they’ll jump in with the kind of enthusiasm that will take it over the top and pop the bubble. But screw the cynics – we’re at the very, very beginning of all this and you and I know it.”

You can also follow Kedrosky on Twitter.

Are all co-founders equal, Clavier asked? He believes that equity need not be distributed equally, as long as everyone involved is happy with their arrangement. And as long as founders don’t have an argument about equity shares in front of the investors they are pitching. (“Don’t laugh,” he said when the room laughed, “it happens.”)

How does Clavier evaluate the startups that are pitching him? He says that he uses a “three ass rule.” “I look for a smart ass team, building a kick ass product, in a big ass market,” he said. Not all the asses are of the same importance to him, however. The factors are weighted and Clavier says the most important thing by far is how strong, passionate and relevant the team is going to be. Each of those factors are treated as go/no-go conditions.

The size of the target market is a gut test, he said, for whether whatever market the company is building for is interesting enough. Every company has a forecast for how it will get to an arbitrary $100 million in revenue and they all hit it on year five. What’s interesting is the assumptions that go into that vision of scaling.

Clavier recommends the book Do More Faster: Techstars Lessons to Accelerate Your Startup.

The stages of funding

Clavier articulates his understanding of the stages of fundraising thusly.

The first stage is bootstrapping, where you raise between $50k and $100k and you try to make that money last as long as you can. For this Clavier says you should expect to give up 5% to 10% ownership of your company.

The next stage is seed funding, and you should raise $500k-$1.5m with a run rate of 12 to 18 months: 6 months of development and then 12 months of distribution. At this stage, the founders pay for the dilution of the shares and the funders will take 20 to 25% of the company.

Series A comes after that and should be (presumably for web app businesses) $3m to $5m that will last for the next two years. That will come at the cost of another 20 to 25% of the company.

How much traction needs to be built up before raising seed funding? Clavier says this much:

  • alpha release of product/service potential funders can touch

  • feedback from early users/customers (qualitative and quantitative) that’s meaningful and in the target demographic

  • key metrics or a dashboard showing how you’ve made progress in whatever the key metrics for your business are

  • Unit economics to look at are comparable companies, the lifetime value of a customer, revenue per active daily user, rough acquisition costs per channel (search engine marketing, Facebook campaigns, pay per install). You can test all those things, pay $500 on a Facebook campaign or Google advertising.

Clavier says you should have 10 to 12 slides in the deck you pitch funders with, with 0 to 10 backup slides if you need them and be ready to go either linear or to jump back and forth. Do not read from your slides, engage with the person being pitched. VCs need to figure out the people side of the company and raising money is a sales job.

Which problem are you solving in the market? Why are you the people to solve it?

How many seed investors should you take money from? Typically 5 to 15, with a strong lead investor with relevant expertise, passion, time to work with you and a great rolodex. Additionally, one to three unconventional venture capitalists, one traditional venture capitalist if you want and then some helpful angels. You should do your own due diligence on the investors.

You should do your homework and not pitch investors who have competing companies in their portfolios. Have references ready to say nice things about you when investors call them.

It will take on average 3 months from the start of fundraising to the finish, sometimes it takes more. Always use a lawyer to take care of all the complications. A stupid mistake made early could cost you millions of dollars down the road.

Make sure you do a lot of cohort analysis. You do not understand your business if you don’t understand your cohorts. (People you have things in common with, including your supporters.)

Photo of Clavier by Joi Ito. Disclosure: The city of Montreal paid for me to fly to and stay in Canada in order to report on the Startup Festival. The incredible food I ate while I was there was on my own tab, though. And it sure was incredible.

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