One fine September 15 years ago, Sergey Brin and Larry Page set the bar on how startups should raise money from angel investors and VC funds. They wanted to deal with the VCs on their own terms, so they decided to get angel funding first. We all know how that turned out – They ended up with a million dollars, including $100,000 from Sun Microsystems Co-Founder Andy Bechtolsheim who was so impressed with their idea and the pitch that he wrote out a check to Google Inc. before they got to the details.
Venture funds Sequoia Capital and Kleiner Perkins Caufield & Byers were subsequently given a demonstration of a working search engine instead of a PowerPoint presentation and a business plan, and they each agreed to invest $12.5 million, with Sergey Brin and Larry Page retaining majority control.
Of course, the Google founders had the full weight, connections and infrastructure of Stanford behind them. It’s not that easy for most startups, but it does set an example of what you need to do.
Venture capital funds are leaning more toward growth-stage startups or those involving lower risks. If you are a startup with an unproven idea in need of seed funding, you stand a much better chance now with angel investors. The best part is that you don’t have to be in Silicon Valley or Boston to look for angel investors, although angel investor groups are now just as organized and meticulous as VCs.
Here’s some suggested light reading if you want to have angels watching your back and showing you the ropes as you walk a fine line between buttering up VCs and preventing them from taking over.
The Definitive Guide to Raising Money from Angels, By Bill Payne – This book, in the author’s own words, will “provide you with information on locating solo angels as well as show you where to find a directory of angel organizations. And once you find an angel, what then?” Payne has been on both sides of the table several times, so he knows exactly what process has to be followed, and explains it all in a step-by-step guide filled with all kinds of practical information and contacts.
Raising Venture Capital for the Serious Entrepreneur, by Dermot Berkery – This one is more of a guide to how venture capital firms think, and how to approach funding using stepping stones. It’ll help you with everything from creating a business plan to valuations and term sheet agreements with a VC. It’s choc-a-bloc full of case studies and facts and figures, so you’ll get a lot of reference material when you’re cooking up your own pitch.
Mastering the VC Game, by Jeffrey Bussgang – This is a complete insider’s guide about the world of venture capital funds. You’ll get to read profiles of the top 1,000 decision makers. He’ll tell you how to tell them exactly what they want to hear, and how they value startups so that you know how to negotiate a term sheet. Bussgang is a general partner at Flybridge Capital Partners, and a lecturer at Harvard where he teaches a class on launching technology ventures.
Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist, by Brad Feld and Jason Mendelson – The authors have been involved in hundreds of venture capital deals for more than two decades, and will tell you everything you should know about VC term sheets.
Mendelson is the co-founder and managing director of Foundry Group, a Boulder, CO-based venture capital firm that invests in early stage IT startups. Before that, he was a practicing lawyer, and he’s still the general counsel at Mobius Venture Capital, in addition to being its managing director. This is the guy who’s telling you how to be smarter than your lawyer and venture capitalist. Go figure it out!