San Diego Tech Founder Chris Hoover was kind enough to produce these fantastic notes on Charles Hudson’s talk from April 23, 2014. Thanks, Chris! (Edited for clarity.)
 
 
 
Charles Hudson (Bay Area VC SoftTech) discussed perspectives on funding and current funding activity. They’re positioned between angels and big VCs.

• SoftTech operates $85m fund.
• Invests in 10-15 deals/year.
• Often look to Sequoia, etc., for future rounds in their portfolio companies.

Investment Trends

2010: typical investment was $250k in $750k round.
2014: invests $750k in $2-5M round (after $150K friends/family/angel round) – more like small series A today
2010: companies raised 4-6M in a Series A
2014: companies raise 8.5M in Series A today
Typical target startups (for SoftTech) have 1-3 founders, larger appetite, focused on bigger ideas.
On the “Series A crunch”: Crunch exists, but not due to lack of money. (There’s lots of money.) More money is going into fewer deals. Pre-Series A seed investment more common today, so more companies seeking Series A. This, coupled with the fact that Series A rounds are bigger, means startups need to be in top 5-10% of companies seeking funds.

How to Pitch VCs

Need a “tight story” first. Articulate your story with brevity, clarity. Show you “get it”.
Brant added, “Precise, concise, entice.”
Funding is a storytelling exercise (paint picture of your market). Also need to show traction (progress, adoption, progress over time), but it’s not all just about the data (metrics, retention). Need story of team, market, why team stands out — cements the company story.
For first time entrepreneurs, it’s tough to get VC $.
Of 55 investments SoftTech has made, only 2 startups didn’t have a prototype in the market (and those 2 had founders with a successful track record). You must be able to show you can execute.
Do you have paying adopters already? Great, but VCs will want to understand why. They’re concerns: Is market too small? More of a service business?
Venture money needs you to be able to say, “We address a big unmet need, let me show you why our first customers are tip of iceberg”
So what makes a market feel “big”? Rather than showing TAM (Total Addressable Market) numbers, be able to demonstrate how you are aligned with macro trends and directionality (growth); your vision is consistent with the tide of technology.
Leverage market tailwinds. VCs are growth junkies.
As a single startup (alone in a new market), it’s hard to change too many things. (Uber tied things together and was the perfect storm at launch in SF).
Many first-movers get bulldozed.

How to raise?

To get in front of VCs: Number one source of deal flow comes from portfolio company referrals. Also, prior business colleagues; some serendipity/randomness (non-networked); Charles goes to many events across different areas. (Other VCs only look in-network).
On moving company to other markets (out of San Diego): If you find hiring, recruiting, fundraising to be limiting, consider it.
Finding a VC is like selling house: just need 1 buyer.
Not good outcome if founders own less than 20% after series A; need founders to have more equity for proper motivation.
Look out for Asymmetry of information during pitch (VCs and founders know different things, e.g., Founder vs VC- based market knowledge).
Bad experience if VC finds skeletons post investment. Will look for thread that would unravel whole story.
Teams:
– Biggest concern is team implosion. What’s depth of connection between founders? Lived together? Known for long time?
– Completeness – i.e, “you might want a hardware person too”
– Solo founders – sometimes works, but more attractive if there’s more people.
Convertible debt vs equity? Don’t generally use debt; since as soon as the principle is at risk, investor demands $ back. But that’s usually the worst time for startup. Prefer to use debt only during larger raise.
Find out where next round coming from before 6 months of cash left. At just 8 weeks cash, situation is very worrisome for all.
Founders that are afraid dilution may have bad perspective (IPO pipe dream could steer them from success).

San Diego Startups

Brant: “Wellness area: feels like we’re at the cusp. But are we pitching it right?” Charles: “Yes, it’s early but promising. Mindfulness and wellness are growing areas; still hard to convince VCs about, but more success stories happening.” His fund invested in Fitbit (2008).
On San Diego as entrepreneurial community: good employee supply (good schools, comp science and engineering). Successful ecosystem of prior investors. Community members that have had success that can angel/mentor; local VCs (could be growing). Place people want to live.
How they choose next markets (locales)? Requires that they have strong local support. Need local mentors so they can trust they can interact with portfolio companies.
Waterloo, Canada = new startup center. Close to NY, lots of ex-RIM programming talent. One exciting company emerges, brings VCs to town to discover others.  Starts ball rolling.
Are we in tech bubble? Usually hits public and pre-IPO companies first. Hiring, living in SF is expensive. If there are IPO failures/falter, it will shake confidence. Some valuations may be too high.
Brant: doesn’t see bubble in San Diego. If only startups founded in SF, that creates a bubble.