8200 EISP - Meet the Investors

Yesterday I attended a “Meet the investors” meetup in Tel-Aviv. The meeting was held at a bar (which was nice). The meetup followed a non-conventional format, where the investors gave a short introduction about themselves and the answered some warm-up questions from Facebook and then opened the floor to questions from the crowd.

I wanted to share my impressions and thoughts about their viewpoints and how that differed from the crowd’s expectations.

Background

the 8200 accelerator had over 120 startups to date, out of which over 90 are still active. All of the investment group represented by the speaker invest in a pre-seed to growth stages startups.


Itzik Parnaps, Battery Ventures


Eran Barkat, BRM Group


David Gussarsky, Lightspeed Venture Partners


Battery Ventures are a VC
BRM Group are a family office
Lightspeed Venture Partners are a global VC

Q&A Session

I took notes during the meeting, and I am bringing the investors answer after some rewording of both questions and answers

How should a startup interpret the VC’s response? how can it tell if there is excitement behind the polite facade?

  • If the next meeting is not set up immediately (or the next day), then there is little interest from the VC
  • You should ask the VC is there is something there. Ask how the process sounds like, get their buy-in
  • Statistics: investment go to about 0.5-1% of VC meetings
  • Sometimes a good feedback is not given, you should ask anyway
  • Most people don’t ask for feedback (less than 5% of startups ask for feedback), they usually don’t give HR (personality based) feedback - you need to read between the lines
  • Be careful not to go into discussion about the feedback with the investors

What do you think of equity crowdfunding?

  • Investors don’t believe that “crowd” is smarter than the investors, and they don’t think it says much about the company. Was there customer interest? Revenue?
  • This is probably not a good way to build a startup. The investors care about the potential of the venture, but is the cap table structure coherent? (who gets the shares in a crowd funding), what do you do when you need further investment?
  • Startup seed money is not expected to take care of the entire structure
  • Angel => VC => growth VC. The problem with crowdfunding is that there are no continued investments (and this is comparable to a seed investment)

Foreign investors, what do they look like, what do they do?

  • We shouldn’t judge the investor by the plane he landed on. It is recommended to have a shared background, investment is a close relationship for years to come.
  • Make sure that the money you raise fits the business model for the VC
  • VCs make ˜30 reference calls on the founders
  • Make sure that you know the VC before you approach them
  • Make background checks on the investors, understand their investment models
  • Try to find reputable partners in investors (Smart Money vs. Dumb Money)

Would the investors think of validating the value without customers?

  • Predetermine the KPI, make sure that the experiments reflect the value before approaching the VC
    ==Personal note: the body language clearly reflected that raising money without results, traction etc. will be extremely hard.==
  • If an investor knows that you have term sheets, it creates pressure
  • Moovit had an idea, they had a mockup and some research. Because they had a relationship with the entrepreneur they sat and went through the research before there was anything except an idea. This was an extreme case.
  • VCs wants validation, traction before there is interest
  • If a VC won’t continue investing money in later rounds – you will not be able to raise more money, as this is a large red flag.
  • If marketing is your plan to push for customers, look at your KPI and find a different path.
  • Investors/angels expect “skin in the game”. On the other hand, you should be careful not to leave your job before you know you have something in your hand.
  • If you don’t leave your job how do you expect someone else to invest

There was a mixed message from the panel here, the main point was that before there is something tangible, you shouldn’t give up on your day job. Most startups require a long time to raise money.

What are the main reasons for failure, in teams you believed in

  • Product/market fit is a major risk
  • Not enough perseverance by founders, they needed more energy and drive
  • Most mistakes are around timing, early timing is worse
  • Execution is another issue – founders are convinced that they need to be the best managers in the world. VCs expect that you will be creative, energetic. VCs can help to bring in good managers – this is often an issue, mainly due to an ego.
  • The worst mistake are startups that fail to fulfill their potential

How much should we trade equity for money? Are there good templates for term sheets?

  • No one has control of the company – there is no control to lose
  • There is no template for term-sheets, you need to structure and roadmap your money raising rounds. Make sure you milestones are aligned with KPI and raising money
  • There is a term-sheet template on the BRM website. This is an unusually founder friendly term-sheet, expect worse terms in reality
  • Rule of thumb – for 1,000,000$ investment expect to give up 25-40% equity. 33% is the median.
  • Would the money you raised get to the next KPI? Would you raise again? think about this ahead of time.
  • Realistically 5-7% equity is left for the founders on exit
  • Try to raise more money for the same percentage in the early stages
  • Most likely that “losing control” is a non-issue
  • Protect yourself against founders that don’t do the work
  • Convertible loans – not really an investment tool.

Do you prefer a single or multiple founders?

  • A lot of exceptions
  • Make sure you have all the elements of success. You need different skill sets – we look for a group that can carry the entire weight
  • Single is not good, you can get stuck without a founder if he leaves
  • The best number is three, from different disciplines (don’t forget about ESOP for future hires)
  • After 3 rounds of 50% you are left with ˜12% for all founders
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Guy Barnhart-Magen
Cyber Consultant, BSidesTLV Chairman

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