VC List

Rupert Hart is the author of “CrowdFund Your StartUp!: Raising Venture Capital using New CrowdFunding Techniques,” the #1 in books on Amazon for crowdfunding for the last year.

Yes, we all want to know: Is it legal, and what can entrepreneurs do right now? Sadly, Equity crowdfunding, as per the JOBS Act, remains in a confused state. The best opinion I can get is that it would be unwise or illegal to engage in the three main practices in the JOBS Act until the SEC weighs in on crowdfunding. My guess is that by September 2013 they will allow some aspects, not all. But there are some things you can do now. Read on below.

Equity crowdfunding, as you know, is the term used for using crowdfunding to raise venture capital for a company by selling shares. The JOBS Act, incorporating the CrowdFunding Act, was signed into Law in April 2012. It promises an entirely modern way of doing things, and several countries like the UK and Sweden have already been doing this for some years.  Equity Crowdfunding allows entrepreneurs to get funded when they might not otherwise, and it democratizes investing by allowing investors to get into deals normally only available to wealthy investors.

While it is law, the problem is the SEC, which has been tasked by Congress to put meat on the flesh of the bones of their Act and implement it but which is running late. The SEC has always been very concerned with protecting “widows and orphans” and crowdfunding gives them headaches about investor protection. The main legal restriction is the 1933 Act, enacted after the Great Crash.

The three major innovations promised in the JOBS Act are: a. Entrepreneurs can now tell people about your company and its fundraising (seems amazing that they haven’t been able to since 1933!), b. companies can now sell shares to non-accredited (i.e. not just high net worth) investors, c. firms can have over 500 investors (at $2000 you can reach $1m really quickly). The JOBS Act has the caveat of a maximum $1m raised per year, and also offers reduced reporting requirements.

Let’s take a look at the main likely sticking points:

1. Entrepreneur’s ability to market the deal. The JOBS Act would allow you to tell anyone you meet, without a broker present and without checking out their net worth and income, and send them to a website for financial details. It also allows general solicitation, that is, announcing on the internet that you have a company for funding then sending them to a website for more details. I bet these two parts will be a sticking point and will be watered down if offered at all.
2. Reduced net worth or net income requirements. The JOBS Act no longer limits investors to a net worth over $1m and a high salary. I would be willing to bet the SEC will allow this. It won’t stop the speculators who believe this is the next best thing and will register under their grandmother’s name, however.
3. Over 500 investors. With small amounts at stake, I bet the SEC would allow this.

More recently, in my opinion many people have read too much into the well-known no-action letters from the SEC received by FundersClub and AngelList, which they believe heralds a relaxed attitude from the SEC towards equity crowdfunding. But, as far as I can tell, these companies are still within the existing law in that they are promoting to accredited investors and not to the general public. The letters are easily available on the web and you can decide for yourself.

So what you can do in the meantime? Here are 5 suggestions:

1. Get a licensed broker. You should sign up a licensed broker.
2. Get a level 7 and a level 63 license; for about $500 and a few weekends work you will avoid upsetting the SEC and you will avoid making big errors.
3. Get legal advice. This is not your usual KickStarter deal, baby!
4. Consider existing financing alternatives: conventional crowdfunding for rewards or selling shares to accredited investors using a Private Placement Memorandum for the time being.
5. Do not relax your reporting.
6. Prepare for equity crowdfunding. You can still motivate your fan base and keep them whipped up.

Equity CrowdFunding has the potential to forever change the landscape for startup financing; let’s hope the new SEC Commissioner, Mary-Jo White (“you don’t mess with Mary-Jo”) will be able to make progress soon!

Legalese. The Author accepts no liability for the views expressed in this article. You are advise to take legal advice about your specific situation.

Over the years I have had to review and give feedback on Powerpoint presentations prepared for startups to use when they are pitching to Angel Investors and VC Firms.  There are some common rookie mistakes that I see which are a sure-fire way not to get a second meeting that can lead a startup to get funded. Great ideas are everywhere, however a great idea that is well thought out and a well prepared presentation can lead to funding. By taking the following tips, you can mold your presentation to be an asset rather than hinder your funding process.

15 slides or less
Avoid lengthy presentations that leave investors bored. You want it to be short enough to have time for questions and answers.  15 slides or less for a one hour meeting is ideal.

“That is a cool idea” won’t cut it; don’t just talk about the idea
A presentation needs to show your idea, the nature and size of their market for the problem that your idea will solve, how the idea will be executed, competitors, who will be involved, how qualified are they to be involved, how much will it cost, and how much profit potential your idea has.

Be clear on explaining the potential
VCs will be much more willing to help finance a company if there are clear goals with defined milestones, and a breakdown of where the growth potential is.

Don’t look too good to be true
Avoid unrealistic figures. VCs have seen it all. The last thing they are going to invest in is a company that doesn’t show realistic conservative figures and doesn’t line up with targeted industry growth potential.

Identify your potential rivals
If anyone pitches a company to me and says “We have no competitors” I immediately become skeptical. Like many investors I see that they are not business savvy and not worth investing in. Every company has a competitor. Make a table in your slide that lists the major and potential competitors and how they compare to your company.

Don’t lie about your credentials and your staff’s credentials
Do not overstate your background information. VCs do their due diligence if they are going to invest, and they have the skills of a professional poker player having developed a highly tuned sense of when someone is bluffing. You would not want a lie that seemed good at the time to be the deciding factor in why you did not get funded.

Avoid entrepreneur clichés
Too many entrepreneurs try to say in different ways “all we have to do is capture 1 percent of the market” in order to be a success. Too many entrepreneurs foolishly assume that such a milestone is easy to achieve. In truth, the vast majority of companies never gain 1 percent or more of their total marketplace. VCs like to see researched figures

Be prepared to be interrupted and be ready to answer
When preparing your presentation and power point slides, be ready to be interrupted.  VCs likely will have questions that interrupt your presentation. Do not rush to answer them quickly or avoid them altogether to continue back to your rehearsed pitch. This is where VCs really see if you are knowledgeable, have thought out every aspect about your company, have realistic growth potential, and truly understand your target market. This is when a VC starts to grasp the risk and reward of investing in your company.

Neat and clean
Keep your presentation material neat and clean, not cluttered, easily viewable from a distance, and free of spelling or grammar mistakes. Your first impression needs to be tight.

By taking these tips, you can mold your presentation to be an asset rather than hinder your funding process.

Recently I asked seven long time Venture Capitalist and founders of successful startups from Silicon Valley and San Francisco area whom I am friends with, “What advice would you give people who are not from Silicon Valley, but are traveling to Silicon Valley / San Francisco Bay Area to pitch to VCs?”

The question was sparked after watching some episodes of Bravo’s Startup Silicon Valley where they glorified Silicon Valley startups and obtaining VC funding. I could not resist watching a few episodes because I wanted to see how Hollywood would portray Silicon Valley startup life, since I understood startups and the various way of funding them.

The show, produced by Randi Zuckerberg the sister of Mark Zuckerberg who founded Facebook, made me predict a new breed of young kids with big dreams, moving to Silicon Valley with little idea of what it truly takes to get a startup off the ground or the drawbacks of seeking venture capital funding.

However, I founded this site not to burst the bubble of enthusiastic entrepreneurs nut to educate them on the fundamentals of having successful startups. Coming ill-prepared to pitch VCs not only wastes your time but the VC’s time as well.

Below is the answers I received from the VCs and founders. Out of respect to their privacy we have not published their names.

What advice would you give people who are not from Silicon Valley, but are traveling to Silicon Valley / San Francisco Bay Area to pitch to Vcs?

“Get introductions first before cold contacting VCs. If you don’t have a stein industry reputation known to your investors, then make sure the business has traction or very strong IP.” 

“Be ready for tough questions. Prepare the 5 Whys.”
The 5 Whys is a powerful tool for engineers or technically-savvy individuals to help get to the true causes of problems and used in business to see how much value an idea has and what is the best way to address it.

“Make your first visit NOT planning on pitching.  Make your visit when you do not need money, and make appointments to get advice. Make a follow-up appointment for 6 months later to those that gave you good advice and see if the relationship develops.”

“Unless you have a start-up that requires a great deal of capital to get the business off the ground right from the start, stay home and go to the internet instead and use all the available services there including crowd funding.  Crowd funding is a great way to test your product or service in the first place to see if there is any market interest.  If there is then you’ll get funding right there, and then it is just about promoting it online through social media.  The renaissance of the innovator that is occurring today is cutting out the middlemen between the entrepreneur innovator and the market.  Now we have all the technology we need online to replace all those middlemen.  Because of this, products and services are only becoming cheaper and more accessible to the broader global market.  You can sell your stuff through Amazon, eBay, Google and tons of other sites.  I haven’t looked, but I bet you can go to a one stop shop and get all the services you need for your business.  Although I recommend doing the legwork yourself and find the services that best fit your business.  The war cry is; “Start selling yesterday!”  You can go make a prototype and demonstrate it in 3-5 minute video and put it up on Kickstarter and see if there is any interest before you go do anything else.  That’s how easy it is now!  So go be disruptive innovator entrepreneurs!”

“1.  Secure a local address, 2.  Secure a local partnership, 3.  Demonstrate skin in the game, 4.  Demonstrate proofs of concept.” 

“If you are truly engaged in your venture and your field, you will have friends and peers who will have pitched successfully to VC in Silicon Valley. Who are your potential customers? Your suppliers? Your complimentors?  Search and find them and get their personal advice. If you know them, you will get a much better, personalized set of advice than you will from a general top ten list of suggestions.

You might even be so bold as to ask the VC you are pitching to who has given them a great pitch recently and ask for an introduction so you get make the best of your pitch time.”

“If you can do it, try the teleconference route and sound out your plan with the investment associates (not partners) at one or two VC firms. Once you are confident that there will be a good reception, make the trip – till then, keep improving your value proposition. “