Founders Gary Swart and Stephen Pieraldi presided over the Venture Capital and Seed Financing Workshop at GigaOM’s recent Structure 08 conference . This week, the pair sat down with Found|READ to share additional lessons from their careers in fundraising.
Swart is CEO of oDesk, a staffing platform that lets companies hire and manage their global talent virtually. Previously he co-founded Intellibank, which he described as “an ill-fated XRM startup that taught me many lessons, most significantly the importance of focus and product-market fit.” oDesk was seed-funded by its founders and angel Ron Conway. Since Swart joined in 2005, oDesk has raised $29 million in three venture capital rounds.
Stephen Pieraldi is the founder of Iforem, which offers e-escrow services so companies can store their digital assets, in perpetuity. This is his second stint as a founder, and his seventh startup overall. Iforem was seed-funded with $2 million by Gabriel Venture Partners, where Pieraldi is an EIR.
F|R: What are the strengths and weaknesses of angel vs. VC vs. bootstrapping?
Swart: It depends on what kind of a business you want to build. Entrepreneurs must fund appropriately for that outcome. If you want to build an enduring business and expect that the market opportunity is large, then you should take VC, and take enough capital in each round to get you to the next milestone and a higher valuation. But if you are focused on maximizing your own IRR and think that a quick exit to a strategic partner is a more likely outcome, then taking VC money is risky because you may price yourself out of some exit options by taking too much money early in the process. In this instance, bootstrapping is a good option, as long as you can execute and grow quickly.
Pieraldi: Size your opportunity and stage it for any investment. If you don’t need cash, don’t take any funding. That is unless you think your idea is so large no one person can fund it. People need to pick what they want to do and size the funding to that need. In short, if a person takes too much money for a small idea, the value is low; if they take too little for a big idea, then they will be passed up by others who also see the opportunity and get better funding.
F|R: Gary, can you share a mistake you’ve made in a past round or a slip-up in pitch meeting that others founders should avoid?
Swart: There are too many to list! Number one, don’t focus solely on valuation. Selecting the right partner from the right firm is just as important. Number two, don’t do it yourself. Spend money on a competent attorney with experience to look at the terms. We made mistakes on liquidation preferences at Intellibank that came back to haunt us when we were trying to raise our B round. And number three, don’t oversell your opportunity. Double the amount of time you think it will take to accomplish your goal and halve your expected results. Things always take longer than you think, and VCs know this, too.
F|R: Stephen, how has your strategy for raising money changed with your experience?
Pieraldi: It always changes. I close a round based on the needs of the company and that is always different in each market. You have to be able to show that your idea and product or service can reach the market of the day. There are phases when people grow businesses on funding, but never think of revenue. While that may work, the better business models should find a way to be long-lasting and stable. In the end, venture funding is not intended for mom-and-pop business plans. It is meant to produce value for investors at better than market rates.
F|R: Can you identify a term sheet trap that founders should avoid?
Swart: Bad terms in early rounds will always come back to haunt you. Do yourself a favor and avoid certain terms up front, even if it means a lower valuation. Like liquidation preferences. It will pay off down the road.
Pieraldi: Terms that lock in early investors in a structural way, or have, in effect, veto rights, is a death blow to a founder. Anti-dilution clauses are killers, too. Don’t go for money when you’re hungry. VCs will know and take you for a ride.
F|R: Does cloud computing create any special needs or conditions for startup funding?
Pieraldi: The market for cloud computing and “free” services is changing everything, with a new level of speed, development and lower-cost production. That is not a secret, and drives valuation and funding. The upside is the ability to do more for less. Sometimes it is a negative in that you are expected to do more, for a high valuation, on less funding. The risk is undershooting the opportunity against a more nimble or better-funded competitor.