So a bright young entrepreneur walked into my office the other day. Interesting market. Has assembled a team. Built a product. Has significant user traction. And revenue.
He was looking to raise $400k with a pre-money valuation of about $1.6 million. Seemed reasonable to me. Asked me if I wanted to see his PPM. Uhh, not really.
A PPM is a private placement memorandum. And in my opinion they should never be used by an early technology startup to raise funds. There are three reasons for this.
One is that they are costly. Just for the sake of discussion it is going to cost somewhere between $10,000 and $20,000 to get a real attorney to create a PPM. An argument could be made that the cost will be paid for out of the investment but investors rarely pay the attorney fees for a startup raising money. More often than not it is the other way around. The startup pays the investors' attorney fees.
Two, and perhaps much more importantly, generally speaking sophisticated technology startup investors do not invest in startups that have created PPMs. Angels and VCs tend to like to negotiate their own terms and have the round written on their own paper. When the startup has a PPM with checks already in it becomes too difficult if not impossible to get the types of terms they want in order to invest. Bill Payne has a nice post explaining the problem with private placement memorandums.
Three, sophisticated technology investors don't think entrepreneurs that have created PPMs are very sophisticated.
In all my time coaching entrepreneurs on raising money I can not recall one doing so via a PPM. They cost money and scare away smart investors. Just say no.