Finance Geek

With the Dow nearing 12,000, many would like you to believe it’s a stock-pickers market. But, if you ask Reuters market editor David Gaffen, he’d disagree.

Gaffen is the author of the new book for which the title says it all, “Never

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Chinese indices were higher in overnight trading, while the Nikkei was down. Major European indices are higher this morning, with U.S. futures also trading higher ahead of the open.

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Ninth in a series of weekly posts by myself and Nicholas Lovell of Gamesbrief which answer the fifty questions you should ask before raising venture capital.  We expect the series to run for a year after which we will collate the posts into a book.  You can find the rationale behind the series here, and the list of questions here.  We welcome your comments on any and every aspect of what we are doing.

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Up to now my posts in this series have largely dealt with the structure of the VC industry, the background if you like.  Now that the the fundamentals are explained I can turn to the more practical aspects of what it is like for entrepreneurs to deal with venture capitalists, starting with the question ‘How long will it take my company to raise venture capital?’.

The simple answer is that 6-9 months is a prudent amount of time to allow for raising money, although there is significant variation between companies (and over time).  My advice would be to allow more time than you think you need and to be honest with yourself about the extent to which you can hope to be faster than average.

Many companies that set out to raise venture capital fail in their endeavours, but usually only after trying for a year or more, but excluding these companies from the sample I would guess that the median time for a successful fundraising in Europe at the moment is probably around six months.  That means for the average company it is prudent to allow nine months from deciding to formally start raising money to the point when the cash is needed.  (I doubt there are any statistics on this as they would be very difficult to compile because startups that are planning on raising money at any point in their future should maintain an active dialogue with VCs at all times and there is unlikely to be a clear start point to a fund raising process.)

Nine months probably sounds like an awfully long time, certainly that is the feedback we get when we pass this message onto the CEOs in our portfolio, but it pays to be prudent.  Raising money in a hurry against a hard deadline (e.g. cash runs out) is a demoralising process that is unlikely to end with a happy result.  Investors can sense desperation, and it is not attractive.

You will have heard stories about companies raising money much faster than nine months, perhaps most famously Clickmango’s record of eight days to secure £3m back in the heady days of 1999, but that is very much the exception rather than the rule.  As I’ve said above the prudent course of action is to allow nine months, however, if your business/fundraising process has any of the following characteristics you might be able to get away with less (which will allow you more time to build value and get a higher valuation):

• company and founders already well known to VCs – this is the biggest lever available to management
• company performance is stellar on key metrics (typically either revenue or traffic growth)
• market and/or sector is hot

A realistic assessment of these factors is critical and the vast majority of mistakes I’ve seen have been to err on the side of optimism rather than pessimism.  Most VCs have closed deals far quicker than 6-9 months and in early discussions will quote their fastest times to you, on the assumption that the company and market will be hot and they will have to move as quickly as they can – be aware that they are talking the fastest likely time rather than the average (note there is no dishonesty here – in the early stages of discussions excitement is typically high on both sides and everyone is operating on the assumption that the deal is hot).  Remember that for VCs a quick decision is almost always a less thorough one. Clickmango didn’t turn out well.

If you are lucky enough to have a super-hot company then you might manage to raise money in 2-3 months.  My recent record is 83 days from first meeting to cash in the bank and I think other VCs in London have done the odd deal a little more quickly than that.

The deal process has two parts, pre-termsheet and post-termsheet.  The post termsheet part should largely be for legals and confirmatory due diligence which shouldn’t take more than 1-2 months.  The process of getting to termsheet can be much longer, as it involves writing an investor presentation, contacting VCs, getting them interested in a meeting, scheduling the meeting, and then scheduling follow ups, and building excitement and momentum within the VC fund.  Each of these stages can take weeks.

Next time I will answer the question ‘What can I do to control the timetable/reduce the time it takes to raise venture capital?’.

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Economy: Did the hundreds of billions spent to stimulate the economy do the job? And where did all that money go, anyway? A new report crunches the data and finds answers that are devastating for stimulus backers.
Done by Stanford University economists John Cogan and John Taylor and published in Commentary Magazine, the report is blunt in its assessment of President Obama’s Keynesian stimulus package: “There was little if any net stimulus.”
Worse, say the authors, the White House with its bevy of hip Keynesian-leaning economists should have known it wouldn’t work….

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The future of the housing finance system will confront the new Congress. In particular, what should be done with Fannie Mae and Freddie Mac, or what should replace them? Like General Motors and Chrysler, these Government-Sponsored Enterprises, and the entire housing finance system along with them, have become wards of the federal government; unlike the auto companies, there have not yet been any serious efforts to determine what comes next.Considering that the world financial crisis began with the startling collapse of Fannie Mae and Freddie Mac in July 2008, this is a remarkable omission by…

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Ongo launched Tuesday on the theory that there are lots of unsatisfied news junkies who will plunk down $7 a month for an online newspaper culled from some other online newspapers, minus the ads, and who don’t mind being nickel-and-dimed to increase the gene pool of available news sources.

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If the press reports are to be believed, President Obama is going to focus largely on the U.S. economy in tonight’s State of the Union address. While that’s certainly understandable and probably political savvy, George Friedman, CEO of STRATFOR worries th

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Near panic in the market for municipal bonds has prompted talk of a coming Armageddon in state and local finance, with predictions of major bankruptcies and even a proposal to allow states, whose debt has been a safe haven for many investors for decades, to seek the protection of Chapter 9.
But the real losers in this game will not be traditional muni investors. That’s because most big municipal issuers in America, despite their budget woes, do not face an imminent liquidity crisis of the sort that is likely to prompt massive defaults. Instead, these issuers have built up significant…

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The FCC’s new internet openness rules, passed just before Christmas, are already facing their second legal challenge. This one comes from MetroPCS, the nation’s fifth largest wireless carrier, which has already been accused of violating the new rules.

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‘The Social Network,’ the fictionalized film about Facebook origins at Harvard, has received eight Oscar nominations, including Best Picture and Best Actor for Jesse Eisenberg’s portrayal of Mark Zuckerberg.

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Google officially announces the $20 option that lets you “port” your current number to Google Voice. Here’s Google’s blog post.

Join the conversation about this story »

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Nearly 3 years since Bear Stearns collapsed into the arms of JP Morgan Chase, setting off the financial crisis that climaxed with the bankruptcy of Lehman Brothers, we may finally see perp walks for those responsible of wrongdoing.The Financial Crisis Inq

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The drama surrounding tonight’s State of the Union address will stem as much from the theatrics as from the content of the lengthy speech. After all, most of the substance tends to get leaked early. How will the prospect of Democrats and Republicans

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Stocks fell early Tuesday amid a mixed batch of earnings reports and another drop in the S&P Case-Shiller Index. Meanwhile, global markets, including commodities, were roiled by renewed concerns about Europe following a much weaker-than-expected U.K.

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Q&A sites are hot right now! Yesterday I wrote about Quora’s challenges and then today I find a great piece on Techmeme from Joel Spolsky, CEO of Stack Overflow.  Stack Overflow is one of 33 Q&A sites operated by StackExchange, and the interesting thing about that is that their model is to create multiple niche sites instead of housing all the niches under one roof (the Quora model).

Overall, Stack Overflow had a very successful 2010, with uniques up 131% to 16m per month, high answer rates and a host of new niche sites launched.  They have even set up a site/process called Area51 which governs the launch of new sites.  The original Stack Overflow site for programmers is still the grand daddy of them all, and at 1.3m questions and 1.3m visits per day it is 10x the next biggest site.

Everyone (including me) is wondering how (and whether) Quora will maintain its allure as it scales.  The nice thing about the Stack Overflow model of multiple niche sites is that the same level of scale isn’t necessary.  New sites can be launched instead of growing traffic on existing sites, which is a clever way of not getting caught up in the tension between volume and quality.

Multiple niche sites matches more naturally onto the way we organise our lives as well.  Our different offline interest communities happen in different places rather than being housed under one roof, which makes it easier to dip in and out as our interest level varies over time.

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