How to Raise Money with Marc Andreessen, Ron Conway, and Parker Conrad (HtSaS 2014: 9)

Investment Criteria and Philosophy

• Core Attributes: Investors prioritize founders who are leaders, product-obsessed, and possess strong communication skills; specifically, they look for founders who solved a personal problem with their product.
• Outlier Focus: Venture capital is a "game of outliers" where roughly 15 companies per year (from ~4,000 fundable) generate 97% of category returns; investors seek extreme strengths rather than a checklist of "no weaknesses."
• Strength vs. Weakness: The standard model is to invest in companies with extreme strengths even if they possess serious flaws, as strict adherence to avoiding flaws would exclude most major winners.
• Clarity of Pitch: Founders must be able to explain their product's value proposition in one compelling sentence within the first minute of a meeting.
• Decision Speed: Procrastination is identified as a critical failure point; successful leaders must make decisive, rapid hiring and firing decisions.

Fundraising Strategy and Trends

• Bootstrap Viability: Founders who build revenue-generating businesses and delay fundraising often become more attractive to investors; capital is not a prerequisite for success if the business model supports it.
• "Be So Good They Can't Ignore You": Success in raising capital is secondary to building a successful business; if a company demonstrates massive traction, fundraising becomes trivial compared to the difficulty of recruiting or sales.
• Raising Money vs. Operations: Raising capital is the easiest hurdle for a startup; the significantly harder challenges include recruiting engineers, selling to enterprise customers, and achieving viral growth.
• Risk/Cash Relationship: Founders should view funding as a mechanism to "peel away" layers of risk (e.g., product, team, market) by achieving specific milestones, rather than raising maximum capital to spend on office space or hiring.
• Communication Norms: Asking for a Non-Disclosure Agreement (NDA) at the initial stage signals distrust and is discouraged; all commitments must be confirmed in writing to avoid memory lapses.

SV Angel and Venture Stage Processes

• SV Angel Workflow: The firm receives thousands of referrals, requiring a short executive summary; if selected, the internal team votes on making a phone call, with a one-in-thirty investment rate.
• Seed Investment Size: SV Angel typically leads or participates in seed rounds of $1M to $2M; historically $1M, but syndicates often include multiple other investors if the initial check is smaller (e.g., $250k).
• Series A Prerequisites: Top-tier VCs almost exclusively invest in Series A companies that have already secured a seed round ($1M-$2M); exceptions are rare and usually reserved for repeat successful founders.
• Investment Frequency: With a staff of 13, SV Angel can effectively manage approximately one investment per week; increasing deal volume without adding staff reduces the ability to provide value.
• Conflict Policy: The firm generally avoids investing in companies with direct conflicts; conflicts are disclosed to both parties, and the relationship is predicated on trust.

Terms, Valuation, and Cap Table Management

• Seed Valuation Thresholds: Investors perceive a "magic threshold" around a $9M cap; attempting to raise above this (e.g., $12M-$15M) often fails, while hitting the lower threshold can create infinite demand.
• Dilution Limits: Founders should sell 10-15% of the company in seed rounds and 20-30% in Series A; dilution exceeding 40% in early rounds can demotivate the team and destroy the cap table for future rounds.
• Investor Selection: Picking the right seed investor is critical as they facilitate future introductions; a high-quality introduction from a trusted investor is more valuable than a higher valuation.
• Avoiding Bad Investors: Founders should avoid investors lacking domain expertise, a strong Rolodex for introductions, or those motivated solely by profit rather than partnership.
• The "Marriage" Analogy: Choosing an investor is likened to marriage, as the relationship lasts 10-20 years; founders should prioritize mutual respect, ethics, and the investor's ability to support the team through crises over minor valuation differences.

Notable Investments and Lessons Learned

• Google (1999): An early investment made via a referral from Stanford professor David Cheriton; the founders (Larry Page and Sergey Brin) required an OEM deal with Yahoo to secure the investment.
• Airbnb (2011): An initial miss at the seed stage, followed by a growth round investment at a $1B valuation; success was attributed to the founders' exceptional maturity and the fact that all three founders were of equal caliber.
• Cap Table Failures: SV Angel passed on a company with 80% ownership held by early investors, noting that such dilution would inevitably demotivate the founding team.

Board Structure and Governance

• Board Dynamics: Formal board votes are extremely rare; power dynamics are primarily driven by protective covenants in financing agreements rather than board composition.
• Control Dynamics: Founders retain control when the company is successful; when funding is needed during a downturn, investors gain leverage to renegotiate terms regardless of prior protections.
• Public Company Context: Even in public companies, board votes rarely happen; decisions are typically made through consensus and negotiation rather than formal voting procedures.

Constraints on Venture Capital

• Opportunity Cost: The primary constraint on VC firms is not capital, but opportunity cost and limited board slots (approx. 10-12 per General Partner); every investment forecloses the ability to invest in competitors or other opportunities.
• Conflict Management: Investing in one company blocks investment in its direct competitors; VCs must carefully manage their portfolio to avoid being locked out of a category by a non-winner.
• Pre-MVP Investing: Investments in pre-product companies rely almost exclusively on the founder's prior track record or the strength of the team, as product ideas frequently morph before execution.