GDC08: Raising Venture Financing for your Startup


Speaker: Susan Wu, Charles River Ventures + panellists, see below for details

EDIT: just finished an editing round; I’m about 2/3 through cleaning this up. That’s why it all goes a bit funky towards the end. I promise I’ll clean up the rest of it ASAP…

Excellent panel, probably the most informative one I’ve been to at GDC (I usually find they wander too much and have too little concrete info. Nabeel, if you read this, I’m not counting your moderated session as a panel ;))

Lots of great info for anyone looking to make a games industry startup. It wasn’t made into a theme deliberately, but I noted a thread throughout that VC’s will very happily pay for games companies, BUT on the flip-side they’re only looking at games companies that have a lot more than just a single product, that have a future. As they said, they’re looking at minimum for a business that could realistically eventually grow to making $100 million a year in revenue – anything less, and you shouldn’t be going for VC money.

I’ve got a bunch of other comments, but I’m so exhausted at this point I can’t write them up now. I’ll come back to this post and edit or comment on it later. Perhaps next week, or next month – when I’ve recovered from the conference. But I wanted to get initial draft up now…

Personal backgrounds

Matt Mihaly

Background is periphery of games industry, text muds at IRE. Started sparkmeida couple of years ago and spun off as separate company when we realised we needed more money than we thought. Raised 4 million, which was a shock as I’ve never done more than freinds and family before

Jason Hable

I spent 6 years at crescendo ventures, one of the backers of ARea. recovering VC, I’ve been clean for 5 months. HAven’t spent time raising money for areas, but was on the other side of the table for years.

Emily Greer

Not games at all, I was direct marketing and ecommerce. My brother decided that kongregate would be more fun than selling thngs. Raised angel about $1 – $1.2 million closed march 2007. $5 million series B that closed in august.

Nabeel Hyatt

this is my 5th startup, all different industries, all about consumers and entertainment and media. Done every kind of startup experience. Did garage and grew it. Did one in 2001, no-one would give us money, went to VCs 18 times before someone gave us money, went a year with no salary. Conduit was a very fast and quick process this time. Came into it from a resident entrepreneur position at [something].

Q: matt – why was the process painful?

When we started raising capital we were warned it was a fulltime job. In fact it was 3 full time jobs. Spent every waking moment refining documents, having 8 or 9 meetings with each single firm, and god knows how many firms. And everyone we met wanted to see something new, wanted a tweak in one area, a new kind of spreadsheet somewhere else, all before they’re willing to take it to their board.

I’m sure there’s a way to be easy, but I think the main thing is if my expectations had been more realistic.

Q: What advice would you give yourself with hindsight?

I tried to be quite open with the VCs, but I don’t think I was open enough. Had two deals om the table at the end, turned out that I hadn’t been clear enough with the term sheet and pushing back and saying that certain terms were just unaccepatable. I was afraid that I couldn’t push back.

Now I realise that once they’re interested, you have to beat them off with a stick, so I should have pushed back harder.

Q: Nabeel – ditto?

Biggest advice I always give is that pretty much every analogy you have to dating applies.

Play hard to get – having more than one person interested in you – faking it if you only have one person interested – they all work.

You’ll know if people are really interested, they’ll be completely on top of you.

(Susan: once we’re in the third meeting, then we’re really committed. Jason is no longer a VC, so he can tell the secrets.)

Flip side is that there are VCs who keep you going 9 times, but they’re just stringing along. Entrepreneurs like that you have 2 or 3 vcs their talking to, but if they’ve had 5 or 6 meetings each and aren’t jumping you, then they’re not real.

(Jason: VC’s are notoriously bad at not saying no, but saying maybe: “why don’t you go look at market X for a month and come back and tell me about it”. They’re keeping their options open. I wouldn’t necessarily say it’s the third meeting, I’d say it’s like that with the company you really like. You know it’s there when you have more than one key person in the meeting, more than just the associate, etc.)

Q: Matt how did you find it coming to VC from a cold start? (the others had good VC contacts already)

(Susan: VCs trust you much more if you get introduced by a meaningful partnership we receive thousands and thousands of approaches a month, so we have to filter.)

1st – anyone who says they’re open to cold calls is full of shit. Sequoia says it on their website, but it is absolutely not true.

A couple of VC firms had got in touch with me, but really I looked at who was attending GDC and the virtual goods conference that Susan put on last year. We tried to figure out which firms were interested in the market we were trying to hit.

Q: give me numbers. Say, you should initially mail 10 firms?

I think we contacted 18 or 19, maybe half through people we knew, half were cold-calls. Most of the cold-calls didn’t work.

We got two meetings just from me posting on their blogs. At least that way they had heard my name before they heard from me. That’s a step above just a random pitch. Anything you can do to make them hear of you is great.

(Emily: Jim wasn’t really an insider. But what he did was to call up every single person he’d ever worked with even 15 years ago, everyone he knew who had done anything with startups.

At conferences, he went to every session and asked the difficult question at the end, and gave his name and company out loud when he did it.)

(Nabeel: instead of using pre-existing VC connections, I went through a process like Jim’s – I narrowed it down to a set of firms interested in that business area. I know a lot of lawyers who think they can refer you in to VC but they can’t)

(Susan: actually there are a couple of lawyers who ARE very trusted, there’s a few that I take very seriously, but you have to find the right ones.)

(Nabeel: Well, find the people they’ve already backed, speak to the entrepreneurs first, get their trust, and their support. To the VC, the opinion of their backed entrepreneurs is the most important to them.)

(Jason: your process starts 6 months before you actually need the money. Worst thing is to pitch them when you’re not ready. Better to go through the process of introducing yourself and making warm connections.)

(Matt: pick some companies you don’t want money from, use them to pick holes in your pitch. Very helpful practice for us before we hit the firm we did care about.)

Q: Nabeel’s advice is very good. Go through the entrepreneurs. They are also interested in you personally – could be a potential hire, could be a potential partner – so they have a good judgement and a vested interest in evaluating you. So that’s the process for foot in door – so whats the process for courtship? How honest are you?


At CRV people email us, send us a 1-page exec summary. Sometimes we get 30 page powerpoint presentations. I think the 1 pager is a good way of showing your ability to condense. After that we decide “Is this exciting enough to take it to a first meeting?”, with 1 or 2 partners. Then we have a second meeting with a few more partners. Finally we go to an all-partners meeting, usually on a Monday for some reason at most VCs. At the end of that meeting, they can give you a final yes or no. Meetings 1 to 3 are negotiating, so that by meeting 3 most of the structure and values are MOSTLY worked out, if not completely.


Of the four firms we ended up with, some behaved like Susan said, 3 or 4 meetingds process. One of them, one of the final ones, was 8 or 9 meetings – there the person initially meeting us was refining our pitch throughout.

It took a lot of time with him but it was well worth it.


For each firm it is different in terms of meetings, but I think with some firms there’s a lot more intermediary meetings, but there are always those 3 key meetings.

It’s about fitting your presentation, your pitch, into the format that that organization wants to hear. You need to make sure you are getting PROGRESS, tangibly more and more people coming to the meetings, and you’ve got to be constantly pushing your associate to take it forwards, what do they need next, when will more people get involved, when is the next major meeting, what do you need to do in time for it, etc


For us it was mostly the words you say over the powerpoint, when we figured that out, we went suddenly to the final partner meeting. Also having the demo helped enormously.


If you walk in and are reliant on just the presentation, if you switch the lights off and just talk through it, then you’ve already lost.

You’re trying to get them sold by looking them in the eyes and convincing them, and you should keep that going as long as possible before being forced to go to the antiseptic part with just powerpoints and presenting.


Basically everyone on this platform all do the same exactly: you’re all in the casual mmo area. You’re all doing it differently, and your core team memebers are very different from company to company. I bring this up is because ideas really aren’t exciting, they’re worthless. What’s really exciting is some team is very passionate and has some insight about how to implement that vision


That’s definitely true. Having a good team that’s going to be able to navigate around the big ups and downs in the industry, all the unpredictable changes in competitors and market conditions, and yet still steer towards the final vision, that’s really essential.


As Nabeel says – it’s a dating process. These are people you’re going to have a relationship for many years.


Tere are plenty of people with personality quirks who get funded, in fact I’d say being a bit of a dick in certain ways actually makes you more likely to be a successful enterpreneur.

The right traits are: Passion, integrity, leadership, insight, and devotion.

People who – even if they dont raise money – are going to keep trying until they succeed at the business.


Yes, all those things plus: self-awareness. Being able to notice your weaknesses and then bring in people to fill up those things.

e.g. worst thing is a SEo who thinks they’re brilliant at marketing and theyre going to do it so never brings someone in to do it.

Q: What about terms? People think its valuation-focussed, but it isn’t…

[Adam: tersm as in “term sheet”, i.e. the details of the funding contract – how much money, for how much percentage of company, and what other contractual clauses etc]


A lot of VCs would say “Don’t worry about valuation, take a lower valuation, it doesn’t matter”. I dont buy that.

[Adam: there was a short explanation here of Participitaing Preference, and wrangling over whether it was the VC’s double-dipping or not, i.e. getting extra shares in the company for free, as a lot of people assume when they first see it in the term sheet]

(Nabeel: the fact is it’s probably not the last round of money you’re going to raise in the company, and through a series of rounds, valuations tend to even out in the end to what they should be. The valuation resets itself as you hit or miss expectations.

Once you add any clause at one round for one investor, there’s no way any subsequent investor will go without it. So you should of course optimize the earliest round, but to perfectly frank I consider raising moeny to be a major distraction from what I’m trying to do, which is to start a business, so in some sense it doesnt matter, dont worry to much.)

VC wanted us to de-invest some of the money that the founders had put in, to make us better invested [Adam: i.e. take away their shares and then grant them back slowly over time so that they couldn’t just cash out]. To me the risk of losing shares I had already paid for in cash was extremely noxious.

Jason – thats one clause that shocks new entrepreneurs, but it’s necessary that you don’t get your shares immediately, but the exact terms of that one are negotiable (some things are not).

Q: whats negotiable?


There’s usually some anti-dilution, that’s got to be there, but the actual value can be negotiated.

Founders vesting-rate is another one thats in there, but actual rates negotiable.

A lot of it is market-driven. Based on how much capital is out there, some clauses will get removed if you push back. Important that you have a good attorney, you need someone on your side who can argue against the VC’s professional deal-makers and have the oversight to know what all the other deals this quarter have been, because they’ve been brokering them for other companies, so they know what’s reasonable for current market conditions.

Q: how much should you give away at first and second rounds of financing?


Things haven’t changed since I joined a VC in 2001. It’s really because most projects are much more capital-based than they were. The rule of thumb has been to sell 50% in Series A – but Series A rounds now are worth only $2-$3 million, so that’s far too much (to give away).

Susan: I think now VC firms want 25-30% at Series A. It’s not arbitrary – it’s part of the VC business model

[Adam: Susan originally tried to say 25-35, the rest of the panel said quite firmly that VC’s will definitely take 20%. Can’t blame a VC for trying ;)]

Nabeel: just to put a final point on it, it’s an industry, and most of the standards that have been setup are because the whole industry is moving that way, and I’ve seen entrepreneurs try to fight it. A lot of VC’s blogs let you see the patterns and standards in VC at the moment, and not fight it – Brad Feld, Fred Wilson, VentureHacks

Q: there are of course non-venture sources of money: angels who will take smaller stakes of 5-10%, there are also publishers who will pay you an advance. What about those?


We were close to taking early VC as Convertible Debt, it was looking great for delaying some of the valuation stuff until later in the day [Adam: i.e. until a later round of funding]. But we realised there was a lot of strangeness in how the valuation will end up, very complex to predict how it would go, and in the meantime we met Reid Hoffman (a PayPal Director, and the founder of LinkedIn), and we decided to take a deal with him for a lower valuation than we could have gotten, but what we really wanted was his advice and his help.

With the convertible debt, until it was converted, we couldn’t be sure of the alignment of the interests of the VC and of our own [Adam: because until it converts, they’re not really bought-in in quite the same way – the flip side of the benefit Emily mentioned of “delaying” some of the negotiations], but with Reid there was certainty of the alignment of our interests straight away, that straight away and from then on, he only wanted us to succeed.

Q: how many angel investors did you have?

emily: 12 angels

susan: angels generally don’t re-invest in the next round, whereas a venture firm in your sereies A is most likely to back you on into hte next round, they commit to being reinvesting in for the lifecucle of your company. So angels won’t be around fr you long term, but they do help a lot at the start.

emily: they made our second funding process very effective very fast. We probably did not so well in first round, but thanks to angels we compensated for it in second round, as nabeel said it evens out in the longterm.

nabeel: its really realy hard to raise money outside of the valley

susan: if you are starting a company, start it here. If you’ve already staretd it, you should move it here

nabeel: i totally disagree. We thought Boston was the best place for our company, so that lost us a lot of possibilities from angel funding. Angels don’t just come in alone, they need fellow investors, so without that ecostystem of other angels it is much harder. It doesnt work in a lot of the USA.

q: what are the critical mistakes that other startups make in their fundraisingn process?


most companies I met with shouldnt’ have been trygint to take venture moeny. you need to hink about what your dream is, what your goal is. Be sure that it’s large enough, the market is large enoguh, that you can have a really large exit in 4 to 7 years.

A lot of people who needed 5 or so million dollars to build what they were after that really they just wanted lifestyle busines. They wanted to run this company. When you take V money the clock starts ticking – you have to move quickly, build quickly, and you are rushing towards a change of control. There is a really good chance you will end up without the control, with not being the CEO. You’re giving up your compay to the VCs, people who will share your aims your goals, but expect to get rid of it from your personal hands.


it really changes the level of pressure. Before we took V money I mostly worried about payroll, I thought the big change woudl be no more worry. In reality it wasn’t “oh we’ve made it now” it just displaced the worry.


I got loads of congrats when we got funding, which was great for 10 mins, but then I thought oh shit now we’ve got the hard part, the real part.

Q: what do you think about europeans? should they come to san francisco?

We only know about the valley.

susan: I think there’s no focus on the EU market, everyone is more than worreid about the USA enough, secondly MAYBE we look at the asian market

nabeel: most of the really successful vw’s didn’t come from the US. Most of these are outside of the US, I’m not sure what causes that, but I’ve seen so many examples that have bootstrapped and grown huge simply because there was no ecosystem so they had to. PLenty of business that did fine without it.

susan: its clear there are successful companies, but it’s 2-3 years down the line for everyone on this panel to even worry about sellling into europe as a market

Q: what pitfalls in business plans and who is looking into interactive entertainment?

susan: me!

matt: business plans probably aren’t read

susan: not true! we read it! Really we’re looking is the market big, is it worth it, is the team right, are you lyaing out a plan that gets you to your milestones, what are your milestones. Raising money gets you to certain milestones, so your plan answers WHY are you doing that, what will you do next when you get there?

We do look at the expectaions, should we question the sanity of the plan, we use it to do a first-pass.

jason: it should be a powerpoint, with a spreadsheet at the end, NOT a word document

nabeel: it should mostly be just an XLspreadsheet that explains the planned numbers, and then maybe a 10-15 powerpoint to summarise it

susan: if you do not think you can come up with a model that gets you from 10 million Vmoeny to 100 million dollars a year revenue, then don’t take VC money.

Q: taing from friends and family, around 100-150k dollars, what about next steps there?

emily: it’s good if it’s OK to then that they lose everything. They have to know they might lose it all, and will your relationship with them be damaged by that?

nabeel: if it keeps the doors open, its’ good. Anything to get the job done. I’ve never seen a VC have a problem with any of that. Emily’s talking about being honest with your investors and friends you don’t want to deceive them. Anything you can do, mortgage your car, absolutely go for it. It shows self belief.

susan: sometimes we look at are there too many people involved. If you have 30 angels, that’s 30 investors who can make life much harder, we encourage people to consolidate to fewer investors.

susan: too much convertible debt is a probelm. Up to 1 million is about the limit.

jason: absolutely. If someone came to me with 3 million convertible debt then I’m going to be questioning it, but 100k is no problem at all.

Q: how to balance time spent working on your product versus time spent raising capital? 3-4 months raising V money could be half of an entire project you’ve lost. and the whole landscape could change in the time you’re trying to raise that quality. Also should you setup stuffjust for one project, and the next series for the overall company itself?


we just dropped teh ball entirely during the fund-raising process. You have to create scarcity, so you have ot hit hte market as fast and hard as possible. Absolutely as quickly as possible.


also gets back to the scale of your project. Whether the potential marktet justifies the amount of money your’e after – if your poroject is too small so that getting funding damages it, you’re looking for too small a thing for it to be worth going for VC omney.


I think it’s good to be able to demonstrate compelling content, and that will make raising your v round a heck of a lot easier, if you can do it.

Q: difference between east and west coast VC’s?
Q: how do you deal with project-based funding, anc conversion from LLC to C-corp?


generally proejcts are not a good way to get money. VCs are not setup to take on title-based risk, we look fro companies who will take on that risk, decrease content risk across a seris of different channels.


product-based financing: this is a perennial topic amongst videogaming companies. How do we possibly fund that way? This is not hte right group to talk to, except that to say they are completey different.

Pretty much entirely avoid the east coast. There’s a couple of execeptions, but ont he whoel. West coast vcs is a little bit more about romance, east is a little bit more aobut numbers and facts. For any competitive deal on west coast if you spend 4 months going over nubmers, you’ve already lost the deal (as a VC), so you have to shoot from the hip and go much faster. OVer east coast, peopel pore over nubmers a lot more because of reduced competition.

One thought on “GDC08: Raising Venture Financing for your Startup

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