VC Funding 101

My name is Paul Holland. I'm a General Partner with Foundation Capital. I'm here today to talk to you about Venture funding 101. Often we get asked, "how can I get my start-up funded?" Well let me walk you through the process of what it is we do and then try to take you out the other end to see how it is it might fit within your desires to get your start-up funded.

One of the places that we tend to see many of our leads come from are our portfolio companies. Our existing companies that we've already funded, we already have a very strong belief in their tastes and preferences. They refer people over to us and then we take the time to meet with them and find out what they've got. So we might see, well, let's say 250 companies a year that might come to us through that source.

From there, other venture capital firms. We often syndicate most of our projects, which means that we do half the project, they do half the project, we each put in half the funding and split the equity and so forth. And so we might see, let's call it 150 projects a year that will come as referrals from other venture firms and we refer other projects to them, too.

Job candidates-one of our major part of where we spend our time are recruiting executives for our portfolio companies. In the course of doing that, we might find a really compelling executive and sadly for us, they might not choose to go to work for our company, and then we find out where they went to work and we decide maybe that's a good company to fund, because a high quality person often makes really good choices there. So maybe a couple hundred a year that we'll see from that.

And then angel investors. That's a very important source for us of leads in terms of new projects that we'll fund, and we have a great pool of people that we've worked with in the past and they'll probably get us 150 or so leads.

And then finally, entrepreneur in residence, so EIR. What we'll do here is we'll take a very talented entrepreneur, often someone we've worked with in the past or maybe funded in the past. We'll bring them in and we'll work in our offices for six months and incubate an idea. So these fellows, between the people they know who are also entrepreneurs and the work that they're doing, they might surface a couple hundred leads or so for us each year.

So roughly speaking that gets us to about a thousand of these raw leads coming in. And then that's when the funnel process begins to start. So then we start to push these through here and then we'll go to work. And so for us, that means maybe out of that initial thousand, we'll take, say, 600 meetings. So we'll do the first meeting, and then to go from say the first meeting to what we would call our screening process then that's going to cut out about half of that number.

So what happened here? Well, either we found out that the idea wasn't as compelling as we might have thought when we got the initial referral, or the market size isn't big enough or the technology is not compelling enough, it's an IT company. Or potentially the team isn't strong enough to get through our process.

So we'll go down into the screening process and then from there decide after doing a bit more work, we'll take second meetings with maybe 150 of those thousand companies. And then from that second meeting point, if we get excited about the company, we'll push it into what we call the due diligence process.

So due diligence, as many of you know, is when we start to call your customers or we introduce you to potential customers. We start doing reference checks. We start looking at your technology. We might bring in five or six of our VPs in engineering in our existing company and have them come spend some time with you so we can understand what your technology looks like when we really look under the hood.

From there now we're getting down to the meat of the matter here, and now we're at the partner meeting level, which means that when all of us are together in our process we have to be all together and each of us has to see a company before we fund it. That's very common across the venture industry, and you know you're making real progress if you're in front of all the partners in a firm.

From that we might do 40 or 50 of those a year, and then we'll invest in about ten of those companies. So that gives you a sense of kind of how the funnel works and how to walk through the process at a mechanical level.

Now let's take a look at what are the attributes that we're looking for, sort of what's the right stuff here in terms of a start-up. So the major element here we're looking for, the first thing that you've got to satisfy is going to be the market size. And, there's a couple reasons for that. One, for us to get the kind of return we need and the kind of return we want that we want for you as an entrepreneur, you need to be going after a very large addressable market. And the other thing is that why this has to be the first thing in terms of going through the process is we can't do anything about this. If you've chosen a market that turns out to be too small, we can't move mountains. So we can't do a whole lot to change that.

The second thing that we're looking for here is going to be the technology, the strength of the technology. And as I mentioned before, we have a lot of different ways that we can vet the technology and decide whether or not we think you have something very unique. Do you have barriers to entry, whatever it might happen to be.

So taking a slight aside here, talk about an example, we funded a company, gosh, now ten years ago called Atheros Communications. Atheros was literally a research project out of the labs at Stanford University. We took the professor and her team and we put them in our offices and incubated that company. That company later went on to pioneer the area of Wi-Fi communications and many of the PCs that we have today have their chip sets inside of them. Very successful company later went on to go public.

And then finally the people, how strong are the people, how passionate are they, have they had some success in the past, do they know what the movie looks like as it were. So market size, technology, people. Once you get through that, then come down the bottom, make it out, then you've got a great chance of being funded.