VentureArchetypes Blog: Seed Stage Capital

Hacking Angel List

2011-07-13T09:43:00.000-07:00

7 Tips For Raising Startup Capital

AngelList is an amazing thing. No, let me rephrase that-- AngelList is a freakin' phenomenon.

Since launching just over a year ago, 2,250 investors have joined, over 400 startups have raised money, and according to co-founder Naval Ravikant, about 20 new inbound companies per day sign up.

Wow.

In case you’ve been adrift at sea for the past 9 months and have no idea what I’m talking about, AngelList is a hugely-successful online service that matches early stage companies with angel investors. It is similar in concept to a “stock market for startups” where privately held companies post information about their businesses and a filtered list of angels, HNW individuals, and VCs can follow the companies, take intros, and ultimately invest.

I’ve had two portfolio companies “list” on AngelList, and I’ve also started wading in as an investor member. In addition, I have another two startups that are getting ready to raise funding rounds, and AngelList will likely play a very big role in our capital raise strategy. As these startups get ready to make their debut, I thought I’d synthesize a few observations, tips, and suggestions for making the most of this powerful new funding vehicle. To wit:

1. Land a lead investor before going live. This is the best tip I can give, yet the hardest one to achieve. Nonetheless, it’s critical for success, as AngelList is a momentum-driven platform where “hot” deals get hotter, but the unwashed masses (without any existing investors) often stall or are neglected.  This could eventually change, and I do believe Naval and gang are working hard to create a system where any quality startup-- even “raw” companies-- can raise money on the system. But at present, AngelList is more useful as a tool to pour fuel on an already-burning fire, than it is to get the fire lit. In other words, use it to round out a round vs. trying to source a new round.

Granted, getting the first domino to topple is usually the most difficult part of the game-- as a rough proxy, plan on spending 80% of your time and effort closing Investor #1, and the remaining 20% locking down the rest. As needed, be ready to offer sweetheart terms to the first person to take the plunge. In short, do whatever it takes to make sure the “Current Investors” field on the AngelList application form is not blank when you go live.

In addition, you get massive bonus points on AngelList if your lead is “someone who has done something”-- in other words, an investor who is not your dad or your dentist, but a recognizable personality or industry expert. Here’s why: I believe that the long tail of investors on AngelList are paying close attention to what the “head" investors are doing; in other words, of the 2,250 angels, perhaps 10% are very actively taking intros, making comments, and otherwise generating buzz for certain startups, and the other 80-90% tag on when a startup starts to heat up.

Thus, there is tremendous marketing value in a name brand lead, and the more effort you put into finding one-- even if s/he is investing a relatively small amount-- the easier the rest of the process will be. A good place to start is the first 3 or 4 pages of this list here, combined with LinkedIn's "How You're Connected To..." function.

UPDATE / COUNTERPOINT Naval responds: "Thanks for this. I vehemently disagree with this first point, though :-) The majority of companies-- probably even 75%-- that we send out now and raise money have no lead and often no investors, e.g. . It's just that companies that don't have something else obviously special about them need that to get past our bar. The rest of this post is pure gold. The conveyor belt and watering hole analogies are spot on."

2. Focus (a lot more than you’d expect) on building “social proof.”  When you list your startup on AngelList, you populate fields such as Company Description, Traction, Management Team, and so on. Many of these fields are similar to the information displayed on Google Finance or Yahoo Finance for a publicly traded company. But one very clever field you’ll find only on AngelList is a category called “social proof.” This is where you name drop key people, both inside and outside the company, who are involved-- Advisors, Referrers, Endorsers, and Current Investors.

This is a hugely important field, for two reasons. First, unlike a publicly-traded stock, most startups do not have much (if any) revenue, profit, or other financial metrics for investors to analyze and compare; thus, angels are relying on “who you know” as a filter (and presumably, are assuming that someone among this bunch has done their due diligence). Second, due to the sheer number of startups listing on AngelList, it is efficient for investors to filter for those that have attracted name brand folks. Spend the time and legwork to connect with influencers who can signal that your startup is In With The In Crowd.

But don’t stop there-- prod your social proof folks into action. Get them to generate buzz on the site and amongst their peers. Have them promote you using the Follow and Share buttons, and have them Comment on your status (feed them soundbites to talk about, if necessary). As with other social networks, these actions get pushed out to their followers, and they may be amplified if Naval or another AngelList uber-member “likes” that comment. In short, get your social proof points talking.

Let me give you a quick example using one of my advisory clients, a startup called Zerply. Zerply worked it pretty hard and did almost everything right to generate positive social proof:

Jonathan Nelson, founder of the networking group Hackers & Founders, originally referred us in --> instant street cred
The team met Naval at an event, and he sent out a “cultivated email” to an initial group of hand selected investors --> very valuable initial buzz and endorsement
Startup networker guys like Adam Rifkin and Brendan Baker became Endorsers and commented on Zerply’s profile --> more buzz, particularly among these users’ followers
Zerply's CEO Christofer kept the company's profile updated with current screen shots and traction metrics --> demonstrating both business momentum and the team’s design prowess
I and another advisor Nicolai added a few Comments such as an announcement of some NY Times coverage --> further reach within the AngelList news feed
A few prominent angels including Dave McClure put in money, and were added to the profile --> additional credibility, momentum, followers, intros, etc.

...And so on; momentum begets momentum.

3. Stand up, stand out, and get noticed. When I initially explain AngelList to founders who are considering it, I use the metaphor of a fast-moving conveyor belt loaded with startups rolling past a line of angels who are scanning them as they go by. It’s a highly-efficient system, yet the trip down the belt goes pretty quick, and if your company doesn’t get noticed and plucked out of the masses by an interested investor (or three), you’re dumped into a bin at the end of the line and are quickly buried under the avalanche of new startups in the queue behind you. It is then very difficult to claw your way back to the top of the pile.

This happened with one of my startups in the social marketing space-- we went out with no lead, and with a ho-hum profile. Traction was good but not outstanding. The product demo was still a work-in-progress, and we only had one other advisor (aka social proof point) involved. As a result, that company was ignored on first pass, and it took an extraordinary level of hustle to generate enough interest to close the seed round.

Appearances and presentation count. I suggest you learn from our mistakes. To do so, make sure that:

you show Screen Shots that are compelling, and your links point to stellar demos (that are not password protected)
you have Traction Stats that are meaningful, and that tell an up-and-to-the-right story
you frame said Traction Stats in a compelling manner, and you dress up your profile with eye-catching charts and graphs showing your momentum
you portray each co-founder in a favorable (and well-rounded) light, with bits from your bios that prove credibility and an ability to execute
you have recruited Advisors, Endorsers, a recognizable Referrer, and ideally, a Lead Investor.
you have set your valuation and raise amount in the sweet spot of the majority of investors on the system (e.g., a $500k - $750k raise at a $2m -$6m valuation)
you get a quote from Robert Scoble or another accessible-yet-trusted entrepreneur as the icing on your profile cake.

Doing this work upfront-- before going live-- will make your profile “pop” and as a result, you’ll be hard to ignore. Call it "peacocking for the investor mating dance."

4. Pare your company down to its “Hollywood pitch” soundbite. As mentioned, there are simply so many quality startups running through AngelList that it’s critical to have something unique in your pitch-- something that spurs investors to stop and take a closer look. In short, you need a hook. For many popular startups on AngelList, the format that works well is similar to the Hollywood pitch, where new movie concepts are sold to studios by references or mash-ups using the familiar-- e.g. it’s “Ghostbusters meets Waterworld.”

In the startup world, this becomes “We are Airbnb for puppies”. This approach does seem to be quite effective, and the shorter the hook is, the more memorable it becomes and the less friction with which it spreads among investors. Just be on the lookout for any investor soundbite fatigue (comparisons to Uber, Pandora, and Airbnb all come to mind). Further, as HubSpot CEO Dharmesh Shah recently tweeted, “Saying you are [x] of [y] is shorthand for describing your startup; it’s not really a long-term strategy.”

As an alternative, consider using a super-short description of what you actually do, e.g. MogoTix is "Simple, social, secure mobile ticketing."  Another approach is to have a teaser that doesn't actually say that much, but is very intriguing; e.g. TracksBy is "The most viral way to launch music" or Pipedrive is "If Apple designed Salesforce." Clever.

5. Tweak your profile, tweak it again, then tweak it some more.  Startups can game the AngelList system somewhat by making frequent changes and updates to their profile information. Essentially, when you update something, it shows up in the News Feed as “Acme Corp updated their profile” and you can get viewed again. However, I’d suggest that startups not overplay this card, which would quickly become annoying to your followers and prospective investors. Update your profile frequently, but only when you have actual, real news to report (e.g. you’ve just added another 10k users or inked a distribution deal with Oracle).

6. Do (at least) one thing exceptionally well. Naval covered this point beautifully in a recent talk he gave to the Founder’s Institute members called “Anatomy of the Fundable Startup."   Here’s the nut of his message: “investors are trying to find the exceptional outcomes, so they are looking for something exceptional about the company. Instead of trying to do everything well (traction, team, product, social proof, pitch, etc), do one thing exceptional. As a startup you have to be exceptional in at least one regard,”  Of these five categories: (1) Traction, (2) Team, (3) Product, (4) Social Proof, (5) Pitch/ Presentation, which ones do you have? What can you work on prior to debuting on AngelList?

7. Use AngelList as a resource for self-directed hunting. Despite your best efforts and despite following these tips to the letter, there’s still a good chance you might not get much attention on AngelList. Indeed, quite a few interesting startups generate just a few follows or comments, but not that many intros. Others are more or less ignored. In short, investor interest is not distributed evenly on AngelList; rather, it tends to cluster around a couple dozen companies.

If interest in your startup is lackluster, then take the matter into your own hands, and go on an active hunting trip. AngelList is quite possibly the single largest and best collection of angels, all gathered in one place-- like a watering hole on the African Savannah, “all the great animals” are here. Thus, why not use this resource to research profiles of money folk, form a short list, craft a really poignant and targeted intro, and go after these angels directly instead of hoping they notice you? Ideally you can use your personal network, attorneys, advisors or LinkedIn to find a warm intro; significantly less likely, but still possible, is to form a connection on Twitter or a cold email. Regardless of the form factor, put them on your radar, and there’s a good chance you’ll find a way to get to them. Don't just passively wait to be discovered.

Bonus Tip: Create a catalyst to close the deal. This tip applies broadly to raising capital vs. being purely AngelList-specific, but it’s worth mentioning. Second only in difficulty to landing that first lead investor is wrangling the rest of the cats toward a signed term sheet. Investors drag their feet. As long as they're not at risk of getting bumped from a deal-- and assuming that the valuation is not skyrocketing-- it is in most prospective investors’ best interest to watch and wait as long as possible before actually handing over the check.

Thus, it helps to have something on the horizon that will encourage investors to get off the fence. Setting an artificial deadline is rarely effective; you’re asking for their money-- they can ignore this. Marginally better is a deadline with some actual basis in reality, like the fact that you’re about to head off to Israel for 3 weeks. But my favorite is a deadline triggered by something that has the potential to a) suddenly generate a lot of investor interest; b) ramp up the startup’s valuation; or c) all of the above.

As an example, one of my startups is participating in Dave McClure’s 500Startups accelerator program. At the end of the program a few months from now is Demo Day, which will bring startups and investors together for pitches and meet-n-greets. We know there will be a ton of frenzied press and buzz leading up to this event, and we know our startup is well positioned vis-a-vis the other startups demo-ing.

Thus, we are using this event as a catalyst to help close a near-term convertible note. Investor psychology is always driven by fear and greed; so at the same time we are overtly selling investors on the opportunity (greed), we are also subtly signaling the possibility of missing out on the deal when it heats up at Demo Day (fear). It’s amazing how fast investors can move when motivated in this manner.

Sum
I hope this list provides a few good pointers for making the most of AngelList. AngelList is a true a gem of a resource for startups seeking capital, and Naval and Nivi do a fantastic job of measuring, tracking, tweaking, and all around improving the site on a near real-time basis (seriously, it blows me away-- every time I check in there are new features). Start playing around with it and get to know it.

Is your startup on AngelList? Have you raised money? If so, I look forward to hearing what has worked well for you (and what hasn't)-- please email me at nathan (at) venturearchetypes (com) or you can follow me on Twitter @startupventures.

Startup Financial Models and Forecasts: Part II

2011-07-11T11:58:00.000-07:00

Note: in my first segment on startup financial models, I discussed the reasons why an entrepreneur should build a startup financial model. You can read that post here. In this post, I discuss what makes a model a "good" model.

Attributes Of A Good Model

Hopefully by now I’ve convinced you why building a model is worthy of your time; now let’s discuss some best practices and attributes of excellent startup forecasts. The best startup financial models are:

Logical: The architecture, assumptions, and inputs used should all be logical, with the model accurately reflecting your business and its economics. To achieve this, build the model bottom-up—for example, number of salespeople X monthly quota X price. Also, try to base your key business metrics on proxies from “real world” companies or established benchmarks. For example, let’s say you have an ad supported website. It’s generally not too difficult to search for average CPM data (or play around with Adsense) and figure out what the going ad rates are for content sites in your market. For other key inputs, you might ask an advisor or investor—someone who sees multiple businesses in the space and has a feel for typical metrics.

Reasonable: Here, we look at things like margins (gross, operating, and net), revenue growth (and rate of increase of that growth), hiring plan, etc. Take the outputs and filter them with simple sanity checks; e.g., are your margin forecasts in line with those found in the 10-k’s of analogous, publicly-traded companies in your space? For example, if your startup is a SaaS business, are you showing Salesforce-type numbers? Based on your full-year unit sales forecast, is your implied market share percent reasonable, or does it show you’ll own 80% of the market? Is the model showing a required funding amount that that you could realistically raise?

Simple: Good models are readily understood by model users or future model developers. This is especially important when we develop a model that will later be handed off to a startup CEO. Likewise, good models distill the number of key business metrics down to just a handful of inputs; this takes discipline, and a desire to model only that which really matters. There is beauty in simplicity; try to avoid over-engineered, complicated and unwieldy tools that will ultimately frustrate model users.

Navigable: Related, good models have an intuitive navigation system and well designed layout. The more complex a model, the more important this becomes. In addition, a clean presentation signals a solid and logical architecture—I can usually tell within seconds if the formulas are spaghetti code simply by looking at the format and presentation.

User friendly: We like to separate the model into three sections: Inputs (Assumptions), Calculations (Logic) and Outputs. Our favorite approach is to create one main page for (almost) all inputs, which we call the “dashboard;” this is then followed by the revenue buildup and monthly / quarterly / annual rollup. We also employ a few tricks to make it even more user-friendly, such as having all inputs be in a blue font, all hard-coded entries in red, and all formulas in black. This way, the end-user knows exactly what (s)he can play around with, and what not to mess with.

Sensitivity & Scenario Analysis Capabilities: as discussed in the “Why build it” section, having robust scenario analysis capabilities is a critical feature of most forecast models to facilitate decision making; this is particularly valuable for startups still figuring out the optimal business model. In many cases this takes the form of visuals such as charts and graphs; for example, a line graph is a nice a way to visually show where the revenue and cost lines cross, i.e. where we start to make a profit on each user or customer (which ultimately is what gets investors excited to pour more fuel on the fire), and where the ’search for business model’ crosses over into ‘execution of the business model.’

Good Output Page: Finally, in most cases we will want to extract some data from the model to present to investors, lenders, partners, etc. in the business plan or investor presentation. However, we rarely want to send the entire model over—the burden is on us to present the data in an appealing, digestible manner. For this reason, good models have a very clear summary page that might contain the key business metrics alongside such tables as Summary Income Statement, hiring plan, customer growth line, breakeven point (in units and/or number of customers), total capital required, and tables showing per-unit economics such as average revenue per user (ARPU) and cost-to-acquire (CPA) metrics over time.

Ok, that’s about it for the moment. I’ve run out of steam on my mission to evangelize startup financial models.

I now turn this over to you—what value have you received from working on your financial forecast? What “model hacks” have you found that you’d like to share?

What Startups Can Learn From Sailors (Part Deux)

2011-06-04T09:47:00.000-07:00

Note: This is the second installment of a series that draws parallels between sailing and running a startup. The first installment can be found here. This series is the result of having waaaay too much time to think during a 6-month, 7,000 nautical mile sailing adventure that took us from SF to Mexico and then across the Pacific to Polynesia (a 22-day open water crossing).

Part II of What Startups Can Learn from Sailors:

A For Attitude. On a boat, as in a startup, you are working in close proximity for extended periods of time with people you depend upon (and who depend on you). Conditions are often stressful. Fatigue is the norm, not an exception, and serves to amplify any negative emotions. In such situations, attitude is the primary determinant of whether the journey—or business—is a success or failure. It impacts everything.

For example, we had several passages where our crew was made up of newbies, but they were eager to learn and eager to help. Their attitudes more than made up for a lack of experience. They were enthusiastic, pro-active, and looked for ways to make the trip more enjoyable for everyone. When things got tough, they stepped up their game. This type of attitude is infectious; when you find employees or crew with it, do whatever it takes to retain them. Your entire operation will benefit.

Captain, My Captain. When conditions are calm, boats pretty much sail themselves. Likewise, when markets are buoyant, companies find the going easy. It’s when things get rough that the value of strong leadership emerges. In stormy weather or stormy markets, it becomes critical to have a level, cool head at the helm—someone able to see the big picture, quickly assess risks, and give clear, decisive direction. In short, every boat—and every startup—needs one single captain.

A captain’s role is to set the vision, and delegate responsibility to carry out that vision. It’s a tough role to fill; in exchange for the crew’s trust and faith, he or she is solely responsible for the safety of the boat and crew. Yet shouldering this burden has a profound positive effect on the crew. By removing the stress of ultimate responsibility, it allows them to concentrate on their specific jobs, which helps keep the boat (or startup) functioning optimally.

The challenge, of course, is to find the right captain. Skills and background count heavily, but the necessary critical ingredient is leadership—a much trickier thing to gauge. It’s almost impossible to assess during an interview in a cozy office how a leader will react during the proverbial perfect storm. The only real secrets (if you can call them that) are to look for those with experience navigating companies through difficult times, and then to back-check that  experience with those who were ‘crew.’ It sounds overly simplistic, but you’d be surprised by how often young companies are seduced by charismatic personalities, only to find them duck and run when the skies turn dark.

Joy of Control. I’ve spent a lot of time crewing on "OPB"—other people’s boats. It’s a great way to get experience, and since it’s not your boat, it can actually be more relaxing. You don’t have to worry about every little detail. You’re not the decision maker. However, there’s nothing quite like the joy of sailing a boat you own. Our boat was not fancy, large or new—but it gave us a sense of pride that was unmistakable. Plus, owning a boat means you can choose—where you want to go, how you get there, and who you go with. It’s an incredible feeling of empowerment. So it is with a startup that you control. Your ego, reputation and personal savings are on the line, but the rewards and successes are yours, and to have control over your destiny is a joy few ever experience. Savor it.

Sh*t Happens. Deal With It. Despite our extensive preparations, and despite being constantly “on” and monitoring everything, boat stuff breaks. Sometimes it’s big stuff—I once snapped a mast in half, which caused the entire rig and all the sails to fall overboard. And, it usually happens at the worst possible moment—like when the wind and waves are howling and the boat is being tossed every which way, or when everyone is exhausted from an all night watch.

But as mentioned above, out on the open sea there is no “pause” button, no “esc key” or “ctrl-alt-undo.” There is no tech support line to call. It is in these situations that you quickly realize your options. You can panic. You can freak out. You can yell at your wife or crew. Or you can just buckle down and deal with it.

It is in these moments that I channel a bit of Spock. Yes, Spock. Bear with me here; as geeky as that sounds, it’s what works for me. I find it helps to strip out emotions of panic, fear and frustration—they are distractions, and an energy drain—and to aim for a clear, zen-like state of mind. Next, take a moment—even if conditions are worsening—to visualize what you’ll do next, step by step. Then, take action—leave the safety of the cockpit and execute the plan.

Doing this on a boat keeps you from falling overboard or injuring yourself or others. Doing this in a startup—when a product fails or a PR crisis is looming—keeps you from acting impulsively or rashly. It prevents you from responding out of emotions like anger or fear, thus making the situation worse. Try it the next time startup life throws a curve ball your way. Channel a bit of Spock.

Have Fun! To conclude this essay, I’ll leave you with my final and perhaps most important takeaway—the importance of making it fun. Due to work obligations back in SF, I hired a delivery captain to bring the boat up the California coast. I found him on the web, and his email signature file has stuck with me; it read: “If you’re not having fun, you’re not doing it right.”

This one line, this one cliché, somehow encapsulates everything else I’ve written here. If you’re not having fun sailing, it’s because…you’re fighting a headwind…your sails aren’t set right…you aren’t prepared…your attitude sucks.

The same holds true with a startup. You’re living the dream. You are doing something most people only fantasize about. Money is probably a motivator, but for most entrepreneurs, it’s not the primary reason you’ve launched a startup. In short, if you’re not having fun…you know the rest.

Fair winds and following seas!

Coming Soon: A Game Of Startup M&A Musical Chairs

2011-01-17T14:27:00.000-08:00

Several weeks ago, I organized an event called StartupExits.com, where Naval Ravikant of Venturehacks gave an excellent keynote called, "The Rise of the Super Angels" (you can watch Naval's video here). Naval was discussing whether there was a new seed investment bubble forming, and one of his comments stuck with me me– namely, that while the number of seed investments has grown 20x, the number of acquisitions has barely risen.

The implications of this are rather profound; essentially, it means we could soon see a serious glut of startups populated by impatient investors, founders, and equity-incentivized employees, but not enough buyers to make everyone happy. It’s a classic supply and demand imbalance, and my conclusion (also voiced by Naval) is that startup failure rates will rise.

So, what are the takeaways for early stage startups? How should you prepare for a game of ‘M&A musical chairs’ to ensure you get a seat when the music stops?

Ask yourself if you really need external funding-- or if you can get by without it. Any startup that takes outside capital is obligated to generate an exit for their investors either through an IPO (extremely long odds), or through an acquisition (very long odds). However, with the cloud, EC2, offshoring, viral social media marketing, etc., it has become ridiculously cheap to start a startup, particularly in the software / SaaS / Internet space (Guy Kawasaki famously started Truemors, which led to Alltop, for $13k). In addition, many startups are great at generating healthy cash for their founders, but will never be “M&A material.” In short, if you can bootstrap your way to cash flow positive, you can control your own destiny, and avoid any M&A shakeout altogether.

Start working on your exit strategy now. I genuinely believe that entrepreneurs should strive to build something great, and not ‘build to flip’. But successful exits do not just happen; they need to be part of a startup’s broader strategy and gameplan. Developing an exit strategy is worthy of its own blog post, but in brief an exit plan covers topics like: when to sell (ASAP, or let the chips ride?); minimum acceptable valuation (at what price would you sell your baby, and give up control?); type of acquirer (who is likely to buy you and why?); type of acquisition (are you ok with an earnout, and working for the acquirer for another 3 years?). A key exit strategy goal is to set and align expectations for the above between founders, investors, and employees; failure to do so now creates fertile ground for lawsuits down the road.

Build acquirer relationships early. This is an important one. Startup acquisitions can happen quite quickly– sometimes in as little as a few months– but in most of these cases, a relationship already existed long before acquisition talks heated up. This can take several forms; for example, Google often buys startups founded by ex-Googlers–they already know the folks they’re buying. Similarly, many large companies acquire startups with which they have an existing business development relationship. The key point is to get on the radar of potential acquirers early, and to stay on it; reach out to their business development, developer relations, or corporate development group and start exploring ways to work together.

Pivot faster and more frequently. I’ve worked with startups for more than a decade now-- through both Web 1.0 and 2.0 cycles--- and something I’ve noticed recently is that the speed of business model “pivoting” is accelerating. Entrepreneurs are getting better at experimenting with different business models, testing and measuring feverishly, and quickly scrapping things that don’t work until they lock on something that clicks with customers (which is usually the point at which acquirers and investors start to pay attention as well). The classic example is PayPal, which went through multiple, completely different business models before settling on one that was successful. In most cases I think this experimentation is a very healthy thing, and acquirers are often willing to pay a huge premium for startups that have successfully “figured out” their business model (cue Steve Blank here) and are now ready to scale rapidly.

Fail quickly. This might be somewhat controversial, but the moment it becomes apparent that your 'great idea' is actually just the 22nd Twitter desktop client or the 56th Groupon clone– and you do not have a clear, better idea for a pivot– I would argue that you should fold up shop quickly and return as much money as you can. This is advantageous for your investors– $0.40 on the dollar is better than $0– and it’s advantageous for you, allowing you to get back in the game with a fresh start (and fresh capitalization table) and try again. This does not mean you should give up easily-- very few things in life are as hard as getting a startup off the ground, and it takes a special level of persistence and faith. But all too often I've seen great entrepreneurial talent locked up in a startup that has no exit options and really isn't going anywhere, and it's a waste.

That’s it for now. Let me know what other topics related to startup exits you’d like to see covered, and stay tuned for our next StartupExits.com event, tentatively scheduled for late Q1 or early Q2 of 2011. In the meantime, be sure to check out our "Exit Strategy Thought Piece" on Slideshare-- please 'like it', 'tweet it', 'friend it', whatever.

Deals Gone WIld (aka "What Drives Massive Startup Valuations?")

2011-01-11T09:22:00.000-08:00

A few months ago, I wrote a blog post on startup valuation that presented a table of normal or “typical” price ranges for startups depending on the sector and stage of development, among other things. You can view that post (and the valuation table) here.

But what about the outliers? What drives the sky-high valuations and manias we occasionally see around a deal? What about the deals we all envy and aspire to do?

In short, what creates valuations such as the $2B for LinkedIn, $2.1B to $3.7B for Twitter, $5.5B for Zynga, $6.4B to $7.8B for Groupon, and last but not least, the $42 to $70B for Facebook? (estimated ranges, based on recent secondary market trading).

While every deal is unique, here are three of the top startup valuation drivers of "deals gone wild":

Founders who have done it before (ideally at a name-brand company). The premise here is that a proven jockey will figure out the best way to win the race. And while history is generally a decent predictor of future results, other success-determining factors probably come into play too. For example, ex-founders of “hot” startups often find it easier to attract top talent (e.g, FourSquare, Square, and Quora), which in turn draws in more top talent. In addition, seasoned founders have presumably gained much of the scar tissue and lessons learned from navigating companies to a successful exit the first time around.

A leadership position in a winner-takes-all market. Some startup business models benefit from so-called “network effects,” which means that as the number of participants grows, the network becomes incrementally (or exponentially) more valuable to each new member. Social networks like Facebook and LinkedIn work this way, as do services like Groupon. The ultimate result is the creation of the Borg (for Star Trek fans) or a snowball rolling downhill (for non-Trekkies); in other words, an entity that sucks up all the customers in a market space as it gathers mass and momentum, and that produces a dominant new platform leader. In my view, this is the biggest driver of deals that go truly wild.

Profitability from Day One. Some startup business models are, quite literally, profitable almost from the get go. Assuming the startup has achieved some baseline level of engagement, stickiness, and (ideally) viral growth, the investment bells go off the moment that ARPU > CPU; or, in simpler terms, each new customer brings in more revenue than it costs to acquire them. At that point, it becomes less about the business, and more about the opportunity to arbitrage that delta through increased marketing spend. In such cases, funding is a no-brainer, and it simply becomes a function of figuring out how large the company can grow, and how quickly capital can be pumped into it. The virtual goods space with its almost zero creation and transaction costs, and the online gaming space in general (especially those that feature low cost-to-create casual games like Zynga) fit this model.

Granted, there are typically many other factors at play when valuations skyrocket, such as general frothiness at the secondary markets, implied validation by a trusted party (such as the Goldman deal with Facebook), or a hot exit or IPO environment. But in my view, the three factors above are at the core of most hot deals, particularly in the Internet space.

What am I missing? When you put on your CSI hat and analyze the scene, what other causes of 'deals gone wild' do you see? What do you think drives huge startup valuations?

Your Financial Model Is A Work Of Fiction; Build It Anyway

2011-01-04T10:29:00.000-08:00

Startup Financials Series

Startup financial models are a pain in the ass. They take a ton of time to build. They are complex and often messy. They are never truly “right.” And they are outdated almost the moment you finish them.

Yet building a solid financial model is absolutely one of the best things you can do for your startup. Here’s why.

Why Build A Model?

I've been building startup models and forecasts for over a decade now, and I've seen the entrepreneurs and founders that I work with gain a lot of value by going through the model-building process. Here are a few of the core benefits:

Analytical Lens: First off, building a model brings a much-needed analytical lens to your startup. It’s a great framework for thinking through your business in an objective, critical manner, and it forces you to construct numbers around each assumption you have about your business model. Consider the model a vehicle that captures all the drivers and levers of your business plan in a single, cohesive place, and explores how sensitive the business is to these levers.

Operating Roadmap: A model is, by its nature, a chronological way of laying out what you expect to happen and when—and what it will cost—in a very granular manner. As such, it becomes a roadmap for your business, and a great way to set milestones, track progress, and identify issues or problems as they arise. It’s also a great way to set goals with your team (e.g. monthly sales quotas per salesperson) and to manage expectations with the board, investors, and other stakeholders.

Risk Assessment: Identifying the key levers (and sensitivities) of the business helps illuminate the risk points of your startup— in particular, the magnitude of downside risk. For example, at most startups, expenses precede revenue. Matching cash outlays to a timeline helps us monitor our "burn rate" and remaining months of runway, and it helps us get a handle on how deep in the red we might get before hitting breakeven. (Notably, this can be very illuminating and even a little frightening—on more than one occasion, I’ve worked with founders who decided to pull the plug after building a model and uncovering the real economics of the business; this is healthy.)

Scenario Exploration: Models allow for multiple forms of really useful business model analysis. For example: what happens to our break-even point when we lower prices by 10%? Or, how much extra money will we need to raise if sales take a lot longer than we expect? Or, what do margins look like if we hire a direct sales team vs. recruiting a network of affiliates? When we isolate a key factor to analyze, we’ll often do a best case, base case, and worst case version of the model. Trying out various business model scenarios in a spreadsheet is far cheaper and easier than learning by trial and error.

Pitch and Sales Tool: Last but not least, models are a great way to bolster your pitch to investors, lenders or strategic partners. At its most basic, the model eloquently explains how much money you need, and how much you will make for the investor or partner. And in my opinion, it’s a perfect left-brain / right-brain combo when you can go in with an excitement-inducing pitch deck or demo (which sells your vision and appeals to the emotional side of the brain) as well as a solid model (which speaks to the logical, rational side of the brain). I’ve seen numerous situations where the model is the icing on the cake, the tool that ultimately helps seal the funding round or deal.

That’s it for now; in my next installment of this Startup Financial Model series, I will cover several attributes that make a really excellent model. Let me know what you'd like to see addressed, or how you’ve used your models to solve business issues.

In the meantime, here is a presentation we gave at Plug & Play Tech Center a couple years ago: Financial Modeling Tips for Startups Plug and Play Tech Center

Startup Acquisitions: Exit Strategy

2010-07-28T13:56:00.000-07:00

We recently put together our "thought piece" on the dynamic world of startup M&A. The premise is that for many startups, it is actually more profitable for founders to raise a small amount of capital and sell early to an acquirer like Google or Zynga, than it is to raise multiple rounds of VC (with accompanying dilution) and aim for an IPO or mega-acquisition.

See below for our presentation, which can also be found on Slideshare by clicking here. If you like it, please share it or tweet it. Thanks!

Also, it is an evolving 'work in progress'...please send along your feedback or tips from your own experience with startup acquisitions. We'd love to hear from you.

Startup Exit Strategy Thought Piece V7.6

View more presentations from VentureArchetypes LLC.

Finally, we are putting on a killer event on December 9th in San Francisco on this topic; check it out: www.StartupExits.com We have an excellent cadre of panelists, including Corp Dev folks from Google, Facebook, Yahoo, Twitter, and well as a keynote by Naval Ravikant of VentureHacks / AngelList. We hope to see you there.

When Is A Startup "Venture Fundable?"

2010-07-12T15:56:00.000-07:00

I spend a healthy chunk of my time helping startups think through their capital raise strategies. Part of this work involves assessing whether a company is “fundable” given its current stage of development, traction and business plan.

Being strategic about when to raise capital is important, since a full-court investor press takes a huge amount of time and effort to do right. Fundraising essentially becomes a full time job, and can easily become a distraction for founders who should be focused on growing their businesses. I’ve seen worst-case scenarios in which the fundraising becomes so consuming that important business milestones slip, which then derails the fundraising—a dangerous spiral.

To try to bring some clarity and structure to the critical decision of when to raise capital, I have attempted to boil down the basics of what constitutes a “fundable” company in today’s market. In a nutshell, the main factors are:

1. The “Big Idea.”  A good first filter is to honestly and objectively assess whether your startup is doing something truly novel.  Novelty and originality are surprisingly rare traits; many startups are highly derivative-- a slightly better mousetrap or an incremental improvement over what’s being done today (think: Groupon clones). While a better mousetrap can certainly be the basis for a profitable niche business, it is not usually venture fundable (or at least, not easily fundable—it becomes more so, with #3 below).

By contrast, pitching something truly unique, big, and audacious—what Mike Maples calls the “thunder lizard” startup—creates an entirely different response from investors. I’ve worked with startups doing something interesting but not game-changing, and I’ve worked with startups with ideas that seemed crazy—but if they worked, they’d be huge.

The latter situation is much preferred, and makes the tiring work of raising capital exponentially easier. A really cool technology with the “wow” factor or a big, audacious, disruptive concept is almost magical in the way it can cut through the noise and generate buzz amongst jaded investors. At a minimum, VCs will take a meeting to hear what the hell you’re talking about.

2. A Story, Well Told.  While the Big Idea is the cornerstone of the foundation, the pitch is what gets people to stop and take a closer look. Investors are pitched by literally thousands of good companies each year; an outstanding pitch will break through the noise and set your company apart from the unwashed masses.

A solid pitch neatly packages the company, vision, and deal in a compelling manner (typically via your slide deck, exec sum, and model), with a narrative crafted to appeal to the nuances of what investors are looking for. It involves telling a clear and exceedingly simple story, so the message is frictionless and can be circulated among the partners at the VC firm and among other VCs in a syndicate. In other words, the pitch is portable (and often somewhat “viral”).

A solid pitch also includes polished and practiced Q&A, and an overall story that strikes both rational (how do I make a return on my investment?) and emotional (why do I want to be part of this vision?) chords. Bringing all these elements together is surprisingly difficult, but when done well it is a beautiful thing.

3. Supporting Evidence.  This is the clincher, and the one most startups miss. VCs fund businesses, not concepts. A concept alone is not fundable--startups must get the fire lit; venture money fuels an already-burning fire. Or, to put it in other terms, VCs typically want to see most of the technology risk and at least some degree of the business risk removed before doing a deal.

In the absence of some special factor (for example, a founder with multiple successful exits under the belt), startups need to generate some evidence of "market validation"—e.g. initial traction, early customer adoption, or a monetizable proof of concept--before approaching investors. In short, startups need data showing the beginnings of a growth curve.

Fortunately, it only takes a few data points to show a pattern. I’ve seen startups with just 3-4 months of live customer data get a lot of investor interest. Investors recognize that the delta between a startup with "deal in hand" and one that "will have a deal, if we raise funding" is very large, and they use this gap as a filtering mechanism.

This is why designing and presenting startup metrics plays such an important role--metrics like engagement (MAU, DAU), stickiness & retention, upsell / conversion rates, virality, etc. In a perfect world, you can show—even with just an initial, limited data set—that your average revenue per customer is greater than your cost to acquire said customer. In such conditions, an investment is a no-brainer; this is what closes venture rounds.

While I’m a huge proponent of “pitching the numbers,” qualitative evidence can be useful as well, such as blogger support, press and journalist attention, rabid Facebook fans, evangelistic Twitter followers, etc. Regardless of the form, it’s a powerful combination when you can start your pitch with a right-brain lead-in (i.e., an emotive, visionary angle) and finish with a left-brain close (rational, unambiguous data).

Those are the three foundational pillars that offer startups at least a fighting chance at raising venture capital. Keep in mind that raising external funding is significantly “harder than it looks”—estimates from the SBA and Angelsoft show that only around 2% to 5% of startups seeking angel or VC dollars actually get funded. The bottom line is that being strategic about it— getting your sh*t together, and timing your investor outreach for when momentum is building around (and within) your startup—will greatly improve your odds of success.

Analysis of Common Mistakes

The most common mistake, in my view, is trying to pitch too early without any supporting proof / evidence / traction / metrics. Without any data, you’ll tend to get a lot of false positives-- meetings that just lead to “let’s keep in touch” responses. This is a huge time sink, and it is often hard to re-ignite the conversation weeks or months later when you finally do have some data points to show.

Indeed, there is a direct correlation between customer traction/momentum and the speed at which a deal gets done. Thus, one of the key success factors in getting funding is that founders somehow get their startup trains moving—by bootstrapping, doing consulting work on the side, tapping friends and family or "dumb money,”—and come at Sand Hill Road from a position of strength. The alternative is just too frustrating and draining.

Another common mistake is going out with a rough-around-the-edges pitch. The people you are pitching probably sit through 10+ pitches each week, and a confusing or overly complicated message won’t stand out, or worse, is quickly forgotten. Clear pitches—the kind, as Sequoia puts it, that can be elucidated on the back of a business card—enjoy a “halo effect;” muddled pitches are weighed down by their own inertia.

One more note: if you’re missing one of three key components described above, then, like the guy driving next to you in the large Corvette, you’d better have an oversized version of something else to compensate. No real traction, but your concept is so big—so truly disruptional—that if it works it will be the next Zynga or Facebook? You might have a shot, if you can adequately tell/sell the vision in your pitch. Or, no pitch developed, but your unique monthly visitor growth on Compete.com is going hog wild? You’ll probably have VCs (or at least their associates) calling you.

(**Just to be clear, there are many, many other things that are important, and that can make or break a deal—things like the team, defensibility, IP, advisors, partnerships, market size, relative degree of customer need, and so on. This blog post isn’t a comprehensive summary of every factor; rather the aim is to set an initial threshold of what needs to be in place so you’re not wasting your time on a fruitless money hunt.)

So that’s it in a nutshell. Big idea + attractive story + supporting evidence = fundable deal.

Have you got it? If not, what can you do today, tomorrow, and next week to get it?

Startup Business Development Strategies: 7 Tips For Putting Together Stellar Deals

2010-01-24T16:41:00.000-08:00

Business development is fun.  Putting together partnership deals requires a special combination of hustle, strategic thinking, technical chops, project management, and sales and negotiation skills.  It’s a bit like a triathlon, in that it stretches your abilities in multiple arenas.

Business development is both creative and analytical—left brain and right brain—and done well, business development deals can be the purest representation of the equation “1+1=3” to drive growth.

A few tips for startups doing deals:

1. Focus on the right targets.
Any meaningful partnership deal will require a significant amount of time and attention from your management team.  This places a real constraint on the number of potential partnerships you can chase down at any given time, especially if you’re trying to simultaneously keep the business afloat, hire staff, raise money, and manage all the other critical-path activities that startup founders are responsible for.

As such, the “shotgun strategy” does not work well for startups; you’ll waste time fielding exploratory tire-kicker meetings that lead nowhere, or worse, you’ll find yourself paying attention to the firms who respond to inquiries quickly only because of some underlying flaw in their business (for example, they are struggling and desperate for something to move the needle—an ‘adverse selection’ problem).

Since a founder’s time is his or her greatest constraint, it becomes critical to instead take a “sniper’s approach,” and carefully select a short list of partners who will deliver the most bang per bullet.  Strategic targeting—instead of being reactive to those chasing you—front-ends the bulk and burden of your work, but ultimately delivers a better investment return on your time and effort.  Selective hunting keeps you focused on the game that really matters.

2. Come to the table from a position of strength.
Startups are often at a disadvantage when forming partnerships with larger companies, due to the simple fact that they are startups.  There is a natural bias against working with firms that are unproven, underfunded, and still developing and/or evolving.  The best way to compensate for the ‘startup stigma’ is to bring something special to the table—an asset that cannot be easily replicated by another firm.

An “asset” can take many forms, both tangible and intangible: it could be an innovative technology that plugs a critical gap in your partner’s product line; it could be access to a market segment or demographic that you have been able to crack, but others haven’t; it could be the brand and “buzz” that you are generating with your business; or it could be a combination of all three.

It is remarkable how much attention a startup can garner when it has something noteworthy, and how frustratingly little a startup can get when it is another minnow in a school of similar-looking fish.  The two situations contrast starkly with one another:  the challenge of the first is not being able to handle the avalanche of in-bound inquiries; the challenge of the second is that your emails are never returned and your phone calls never answered.  There is rarely a middle ground here. Thus, if you don’t currently have something noteworthy as your ace card, go back and continue developing or marketing until you do, so as to avoid a slow, painful drain on your time and resources, and motivation.

3. Get creative.
One of the best things about being a startup founder is that you (generally) have the leeway and latitude to write your own script.  Contrast this to a partnership deal between two well-established companies, where there are already formalized processes and procedures—in short, “rules”—for doing deals.  As a startup, especially if you’re in a new or emerging space like social media or online radio or video, you have the ability to make it up as you see fit.

Indeed, the best business development deals are often those that break new ground and introduce new models for doing business.  Follow the rules of brainstorming, where no idea is a dumb one, and explore all sorts of possibilities; as long as the contemplated deal structure benefits both parties, it’s worthy of consideration. Set aside your predilections and constraints and get creative.

4. ”Ask not what your partner can do for you--ask what you can do for your partner.”
Before pursuing any deal, it is useful to get inside the mind of your target partners, and view a potential deal from their perspective.  What is it they are lacking?  Where are they falling behind?  What keeps them up at night?  This takes research and an ability to connect the dots of an often-complicated mosaic of market trends, products, competitors, company culture, and other factors.

Once you’ve established a pain point—for example, a competitor is eating their lunch in a new market segment—craft your pitch and business case from the perspective of how you can solve their problems for them.  Bonus points if you can do so in a way that connects directly to increased revenue, profit, market and mindshare.  In this way, you will find that the gap between your companies is small, and the deal will go exponentially smoother and faster.

5. Introduce competition into every deal.
This is a key point, and perhaps the most powerful technique of them all.  In every situation, getting some competitive heat on the deal will give you negotiating leverage, increase the tempo of discussions, and greatly raise the odds of a successful outcome.  Even if you’ve followed the advice from point #1 and zeroed in on your dream partner, opening up a dialogue with their competitors is well worth the effort. In addition, you should skillfully and subtly let your target partner know you are having talks with other firms.   This is the “art of the reveal,” and weaving in the knowledge that their rival may sweep the deal out from under them greatly helps level the playing field.

For example, I once worked with a mobile startup that needed to source both a carrier partner and a wireless chip vendor. We brought to the table dual assets of innovative technology and a ton of press buzz.  We initiated parallel discussion paths with two carriers and three chip manufacturers, even though we knew exactly who we wanted to work with from the outset.  The benefits of this strategy were clearly evident in the tempo of every meeting and in the tone of every term sheet. The deal was still a challenge—we were fighting the startup bias, after all—and there were a few heart-stopping moments where it looked like it would all fall apart.  But in the end, we got favorable pricing from our preferred partners, and did the deals in an accelerated timeframe.

6. Be operationally ready to do a deal.
Startups are notoriously under-funded, under-staffed, and over-stressed.  Before going too far down the path with a partner, ask yourself whether you really can support the deal from both a business and technical perspective.  Can you spend weeks hammering out technical details and timelines?  Do you have the bandwidth and attention span to turn around multiple drafts of an MOU or LOI?  And of course, do you have the engineering bandwidth to actually implement the JV technology and nurture it through the launch and post-marketing support phases?

To note, this is a classic balancing act; being “operationally ready” at a startup is almost an oxymoron.  Many startups have struck game-changing deals before they were really prepared to handle them, and then hustled like hell to successfully pull things off.  Indeed, startups need a healthy level of outsized bravado in their DNA.  But if your answers to the several of the above questions are clearly “no” it may make sense to get a little further down the path before sinking time into partnership endeavors.

7. Know when to cut bait and run.
This is a tough one to do well, but it’s a critical skill nonetheless.  Sometimes your company’s goals will shift, taking a proposed deal off the critical path.  Other times, you’ll be two-thirds of a way through the partnership negotiations when you realize it is not a strategic fit. The initial enthusiasm fades as you get into the details, and you realize that the technology integration hurdles are massive, or that your partner’s marketing channels are not as strong as they appeared.  Sometimes it’s simply cultural or personal—the thought of spending years with a partner who doesn’t “play well in the sandbox” gives you night sweats.

The challenge here is twofold.  First, it can be difficult to discern between deals where there is truly not a fit, and the normal struggles, politics, highs and lows that accompany any deal.  Second, in many cases you’ve already sunk a ton of time and money into the process, and it is emotionally draining to accept that it was all wasted effort.  However, time is the enemy for startups; the clock ticks faster when your funding is running out and markets are evolving rapidly.  Do the analysis, but trust your gut—if it’s clearly not going to work out, consider your efforts as sunk costs, extricate your firm as smoothly as quickly as possible, and move on to the next deal.

In sum, business development is fun—happy hunting!

Startup Valuation: How Much Is Your Company Worth?

2010-01-19T16:19:00.000-08:00

Part of my job description involves prepping startups to raise capital. One of the most common issues that concern entrepreneurs is how to address the "Valuation Question."

I understand this concern; raising money puts a very un-ambiguous stamp of “worth” on what you’ve worked so hard to create. Thus, it is logical that entrepreneurs want to approach the negotiating table with a bullet-proof spreadsheet detailing and supporting their valuation down to the last dollar.

Which is exactly why they hate my answers to the question, “what is our valuation?”:

Startup valuation is an art not a science; and,

Your company is worth is what the market will pay for it.

They hate these retorts for several reasons; for one, it essentially means that valuation hinges on their negotiating skills (which is daunting since they’re going up against professional investors / negotiators). Second, these are fuzzy answers— not what they expect from a CFA with a graduate degree in finance.

Unfortunately, I cannot make it much less fuzzy. It’s not because I don’t understand valuation; on the contrary, I spent the first few years of my career doing nothing but valuations of technology companies.

But the challenge is that none of the traditionally-accepted valuation methods really apply to early stage startups. Let’s briefly review why:

Discounted Cash Flow Model: A DCF model “feels” the most robust because it is very quantitative and analytical, and it results in a single valuation number. In a DCF, we forecast several years of revenue and expenses, and then discount the resulting cash flow back to the present using a “venture capital expected rate of return.” The models are beautiful, sophisticated, and complex. They dazzle.

But here’s the problem: a skilled Excel wizard can make a DCF spit out any valuation they want. Because there is no (or very little) historical financial data with most startups, forecasts are pure conjecture and fantasy. In addition, the model is extremely sensitive; adjust the discount rate down slightly and our growth rate up, and suddenly your valuation doubles. No serious investor would ever pay much heed to this.

Cost-To-Recreate Model: This is just as it sounds—we back into an estimate of what it would cost to duplicate or recreate the company with one of like utility. It is analogous to a make-vs.-buy decision, and the premise is that a prudent investor would pay no more for an asset than its replacement or reproduction cost. As one simple example, we might estimate the cost in terms of the number of man-hours of programming required to write a comparably-functional software program. While this method also spits out a tangible, “hard” number, it doesn’t fully capture the future potential of a business, and it doesn't reflect the value of intangibles like the brand (which can obviously be quite valuable).

Market Multiple Model: This is the most robust method and it is actually used in the venture world. With the market approach, we value a company by looking at recent sales or offerings of comparable companies, then we adjust the multiple to reflect specific characteristics of our company. This gets us closest to the answer above that “valuation is what the market will pay.”

However, here’s the catch: it is very difficult to find accurate data on truly comparable startup financings. Not only is it hard to find apples-to-apples comps, but funding valuation data is often kept close to the vest. While some companies report this—usually when they get a huge valuation round—most startups do not, and as private companies they are not required to do so. (To clarify, many companies report how much they raised, but not at what valuation they raised it at). Even some of the very powerful databases we use such as Capital IQ do not always contain this data.

So, having crossed off traditional valuation models, what do seed and series A startups do? How do we best approach the question of valuation? Here are three methods:

1. Use Stage of Development As A Proxy: A startup’s path from idea to IPO can be charted as a series of major milestones (as well as hundreds of smaller stepping stones). At each milestone, a startup’s valuation rises as more and more risk has been removed from the business. Thus, one way to assess valuation is to look at where your company is at, and match it to typical valuation ranges for each stage. For example a funding-path for a web or software business may be as follows:

Different types of investors play at each round, and if the company is executing to plan, there is generally a sizable jump in valuation at each stage. For example, the increase in valuation between stages 1 and 2 – where we’ve eliminated most of the technology risk—is usually relatively slight. Between 2 and 3, we’ve proven that a market exists—someone will buy the product. A much larger segment of investors are interested at this stage. Between 3 and 4, customers are piling on, which leads investors to pile on—thus creating astounding valuations like we see with Facebook or Twitter.

2. Tell A Really Good Story: Because there are few really solid quantitative ways to value a startup, estimates of a company’s worth often come down to perception. This, in turn, comes down to how well you present your company in the form of your investor pitch and pitch deck. My rule of thumb here is simple: present the company in as favorable a light as possible, without misrepresenting it in any way. This includes how you position your company vis-à-vis the competition, what you choose to emphasize or call out with respect to opportunities and strengths, and so forth. As in sales, it pays to focus on the attractive and compelling parts of your business and the value your company brings. Pitch it with passion, while addressing any issues or ‘warts’ candidly and honestly (they will come out in due diligence anyway).

A corollary note is that presentation matters. How you present the company to investors in the form of your pitch deck and business plan is a signal of how you will present the company to the outside world, and to future investors in later rounds. To elucidate this, I use the example of selling a car. A few simple things like a thorough cleaning, detailing and a good polish can spark an emotional response in the buyer and raise the valuation far more than the cost of such services.

The converse is true as well: a messy, unattractive, or problematic car will turn off most buyers; or, if buyers are still interested, they will use such flaws to beat down the price. This analogy carries through to due diligence: fixing a $20 rattling door handle preemptively removes that obstacle to a sale, just as cleaning up your startup’s capitalization table and IP assignment rights in advance will ensure the funding process goes that much smoother. In short, make it attractive and make it easy for the buyer to buy.

3. Put On Your Best Poker Face And Just Ask: Let’s assume that you have a SaaS company that has built a decent first version of the technology, launched it, and generated a base of initial customers (and corresponding metrics). You’ve eliminated most of the technology risk and some of the market acceptance risk, and you only have one or two gaps to fill on the management team.

Looking at the table above, you determine that Series A deals for companies with similar characteristics often fall into the $5 to $15M range. Your customer pipeline is filling up, and VCs have been receptive to your meeting requests; your pitch and slide deck are polished, and overall, you’re feeling good about your funding prospects. Thus, at the end of a pitch meeting, when asked what you think your valuation is, the best approach is to either avoid the question (saying you’ll let the market decide), or to state simply and without blinking, “we’re looking for a $12 to $14 million pre” (with "pre" signifying pre-money).

From my experience, if the ask is within the range of reason, there is usually not much further discussion. The VC takes note of it, and files the information away as a point for future negotiations. After all, it’s not like we’re demanding a certain valuation and trying to justify it. We’re simply stating what we’re looking for. Continuing with the analogy of selling a car, the buyer probably knows the general price range for cars like yours, and if you’re within the relative range, then it comes down to how much he really wants the car. Whether he accepts the price you’re asking also comes down to how many other buyers are interested, which brings us to the next point…

3. Get Other Buyers In The Game: This is the biggie. The level of interest in a deal is the single most important factor influencing valuation (and for that matter, for negotiating everything else on the term sheet). In short, if you have just one investor interested, he or she sets the price, and you are free to accept it or walk—you are a price taker. If you have multiple investors interested, then your leverage increases tenfold, and you become a price maker. In such situations, we have effectively created a “market” for your stock—and in some cases, this can escalate to become a heated auction environment (which is the reason why some valuations catch fire and go through the roof).

In sum, a little knowledge (of comps and ranges), a little confidence (the “art of the ask”) and the ability to generate demand from multiple parties are your best tools to manage the valuation discussion and term sheet negotiations.

Remember: your company is worth is what the market will pay for it. Create a market for your startup, and you will have the leverage to get what you feel it is worth.

In Praise of "Dumb Money"

2010-01-04T12:21:00.000-08:00

I am frequently contacted by startup founders seeking help raising an angel round of capital. I give an explanation of what angels are looking for, point out a few of the various formal angel groups, and describe the growing army of “super angel” investors like Ron Conway or Aydin Senkut that has emerged in recent years.

And then I gently shatter their hopes and dreams by telling them there is no way in hell any angel will fund them; I tell them they are not ready to raise outside capital from professional investors.

I do this because of a common disconnect, a misperception of angels as mythical creatures willing to shoulder all the financial risk in a startup. Granted, angels are opportunistically driven by a desire to get in early. But the reality is that they are still highly risk averse (especially since it’s their own money) and seemingly becoming more so (according to a recent NY Times article, total angel funding fell by 27 percent in the first half of 2009, and the average deal size shrank by 30%).

The point I try to drill home is that although angels play early in the game, they rarely invest in pure ideas or business plans. Instead, they tend to invest in entrepreneurs who have been able to get the ball rolling through their own hustle, creativity, and chutzpah. You may not have solved all the technical or market risks, but angels want to see that you are sufficiently resourceful to have built enough of “something” that they can see the shape it’s taking, and kick the tires a little.

So what do I suggest for those who are not ready for angels, and who don’t have enough personal savings to launch the business?

I tell them to seek dumb money.

This pejorative term comes from the fact that an investment in a pre-launch company is almost never rational when viewed by any traditional investment lens. Given the lottery-like odds that a pre-launch company will ever return money to its initial backers, dumb-money investments are more akin to a grant or donation than an “investment.”

But “dumb money” is often exactly what is needed at the idea stage of a business, and it usually means hitting up friends and family—people who know you well enough that they are willing to take a leap of faith on your ability to pull it off. In short, you are raising money from people who are willing to invest in you, as opposed to investing in the fundamentals of a deal.

I dislike this term, as it is both pejorative and a misnomer—anyone who can bankroll the $50k or $100k needed to get your startup off the ground has probably done quite well for themselves based on their own smarts and drive. They may not be savvy private equity investors, but they probably know a few things about business.

Further it neglects how important the friends-and-family funding economy is to a healthy startup ecosystem. Indeed, it is the invisible army of doctors, dentists, parents, grandparents, and great aunts who catalyze the dreams of wild-eyed entrepreneurs and who enable crazy ideas to come to fruition and change the world.

So this holiday season, let’s raise our glasses to the unheralded champions of entrepreneurship, the ones you don’t read about on TechCrunch but who in aggregate are more vitally important to the startup world than all the VCs combined.

And, as the liquid refreshments begin taking effect, and as you move in to seal the deal, let’s review a few tips to ensure the dumb money round does not become a disaster:

Understand The Risks: If you raise friends-and-family money and your startup fails—and odds are it will—you’ll still see your “investors” each Thanksgiving and at each wedding, baptism or bar mitzvah. Is this going to cause significant heartburn and family strife? Proactively visualize your father-in-law’s reaction to losing his money, and it’s effect on your relationship. Make sure you can stomach this before cashing his personal check.

Make Them Understand The Risks: Directly related to the above, you should temper your pitch by being painfully, explicitly candid about the risks of the venture. Talk through all the reasons the company might fail, and state that although you will do everything legally possible to make the business a success, the odds are that they will never see their money again. Is this something they are willing to accept? Perhaps more importantly, is this going to cause them financial hardship? If so, you’d do best to look elsewhere.

Structure It As A Loan: Selling a percent of your company at an early stage is exceedingly difficult, not only because you must issue shares, but because it generally implies you are setting a valuation. Further, a messy cap table—with many small investors who may or may not be “accredited”—can make it difficult to raise money later from professional angels or VCs. A better approach is to structure it either as a non-recourse loan, or as convertible debt (i.e., a loan that converts into equity once a valuation is negotiated later with VCs).

Paper It Up: Many friends-and-family rounds are done via lunch and handshake. In general, I think this is a mistake, and you are better served by drafting a written deal. It need not be overly complex, but it should state the amount being loaned or invested, repayment terms (if any), and an acknowledgement of the risks involved. The most valuable takeaway is that you’ll have something tangible that you can refer to later if things go awry or if perceptions diverge.

Go Like Hell: The best way to solve all of the issues above is to execute like hell and make the business a success. Granted, this should be a given, but building a startup is always a roller coaster ride with serious highs and lows, and many entrepreneurs want off when things get rocky. Taking other people’s money brings an additional level of obligation and pressure; it means you need to be more committed; it means you can’t easily walk away. In particular, this manifests itself in a sacrifice of personal life and freedom. But this is the deal with the devil you make when you take other people’s money. Further, for your investors, demonstrating that you gave it your all will lessen the pain of losing their money if the startup fails.

In sum, dumb money is what you need at the idea stage. But let’s come up with a better term for this critical bedrock of innovation. How about “concept capital”?

What Startups Can Learn From Sailors (Pt. I)

2009-12-16T10:50:00.000-08:00

I’m a simple guy. I basically have just two passions in life: startups and sailing.

Last fall, after nearly a decade spent working with startups, my wife and I embarked on an extended ‘sailing sabbatical.’ On a pre-dawn October morning, we sailed under the Golden Gate Bridge, pointed the boat south and explored Mexico, then headed west across the Pacific to French Polynesia.

It was a fantastic trip, and a long one. Traveling 7,000 nautical miles—at an average speed of about 6 knots per hour—gives one plenty of free time to think. I spent an inordinate amount of this time reflecting on the similarities between sailing a small boat and running a startup.

A few startup / sailing parallels, cliches, and lessons learned from the journey:

The Value Of Charting A (Flexible) Course

Before leaving San Francisco, we spent a good amount of time figuring out exactly where we wanted to go, and then we laid out a plan for each leg of the journey. This process was daunting at first, but it helped us manage our timelines and budget. In addition, it helped keep us safe; as with startup navigation, many offshore hazards are “known” and can be anticipated or gleaned from people who have done it before.

For example, on our first major passage from San Francisco to Cabo San Lucas, we charted our route to avoid the major shipping lanes just outside the Golden Gate. We entered waypoints in our GPS to skirt around Southern California islands, and researched protective anchorages along the Baja peninsula for rest stops. We plotted our course in detail, but we also baked in enough cushion to allow for mid-course corrections or delays. In addition, every time we entered an unfamiliar port or narrow anchorage, we had a contingency or ‘escape’ plan if things suddenly went awry.

Startups can benefit from this approach. Mapping out markets, setting waypoints and milestones, and preparing for ‘what if’ situations helps keep a young company moving forward while avoiding hazards. Successful startups recognize the value of creating a strategic plan to help guide the way, and they develop one that is flexible and can be readily adapted to reflect new information and real-time situations. Finally, they learn from precursors—both by studying other firms, and by integrating “experience” into their company’s DNA through seasoned hires or a strong advisory board.

Build The Boat For The Task At Hand...

Prior to departure, we outfitted our boat in anticipation of all sorts of events—everything from minor mechanical issues to potential catastrophes. We upgraded key components like the rigging and sails, and had backups for most systems—if our nav equipment shorted out, we had a handheld GPS. If our steering went out, we had an emergency tiller. If our boat sank, we had a life raft. Limited by our budget, we kept things exceedingly simple, but in the end, we were (relatively) prepared to take on the high seas.

For startups preparing to venture forth, replace the words ‘right equipment’ with the words ‘right talent.’ Just as a boat requires good sails, rigging, and steering gear to be sea worthy, a startup needs, at a minimum, enough technical skills to develop the product and sufficient marketing skills to sell the product. Indeed, the most potent founding team is made up of a hardcore engineer and an energetic, passionate evangelist. The rest can be outsourced or added later, but without product skills, the startup will be swamped by the first set of customer demands, and without sales skills, it will drift invisibly through the market.

…But Be Quick To Untie The Dock Lines And Cast Off.

Even with the best planning and preparation, no sailor is ever fully ready for the challenges of the open ocean. This awareness can have a paralyzing effect, and if you walk the docks, you’ll meet a sizable number of sailors who wax poetic about future voyages, but who never actually leave the safety of their slip. There is always another piece of gear to save up for, or a myriad of ‘boat projects’ keeping them in the harbor.

At some point, inertia must be overcome, often suddenly and without restraint. We knew we couldn’t possibly anticipate every mechanical issue; no boat is ever fully shaken-down. We also knew we didn’t know it all; some things we’d have to learn on the fly. Yet when our departure date came, we sailed off anyway. The anxiety that had enveloped us for months dissipated within a few hours of our departure. We were off and running, and it was exhilarating.

Similarly, good startups prepare, but they also pull the trigger; they hoist the sails and go for it. There is always a balance between planning and action, but successful startups err on the action side. They know that “perfect” is the enemy of “good enough,” and that the benefits of launching a little bit too early far outweigh the costs of missing a market window. Thus, they get to market with the minimum set of viable features or services, and build from there. They learn and grow as they go. They embrace the challenge and scrutiny that comes with being out in the open, exposed. No startup success story was ever written by staying in the garage.

May The Wind Be Always At Your Back

A key characteristic of a good sailor is that she uses nature and the elements to her advantage, instead of fighting against them. An example is the daily effect of tides and currents. If you are entering San Francisco Bay against a 4 knot ebb, and your boat does 5 knots, you’ll essentially be treading water, whereas if you enter on a flood, the current will whisk you to your destination. A macro-example is in using predictable annual weather patterns to find the best wind to carry you across the ocean—or to avoid seasonal hurricanes.

The startup metaphor is that like the tides and seasonal winds, markets can be studied, and in many cases, predicted. Markets have repeating, cyclical trends and patterns that can be used to help make decisions. Are you trying to sell into a declining or contracting industry—i.e., sailing against a current? Could you take another tack, and point the boat in a more favorable direction? Another example—is VC funding for your space drying up? Can you adjust the shape of your sails, make do with less, and keep moving forward? In short, working with and not against the forces outside your control will make the journey a whole lot easier.

“You Take The Good, You Take The Bad…”

The popular image of sailing is of a spirited, beam-reach blast on a bright sunny day, or a pleasant sunset cocktail hour at anchorage. This is, in fact, reality—10% of the time. The remaining portion is comprised of either not enough wind or too much wind, weather that’s too cold or too hot, cramped quarters, seasickness, and conditions that are either extremely boring or way too ‘exciting.’ However, when the sailing is good it’s great, and it is these moments that keep you going the other 90% of the time.

Similarly, the popular image of a startup is of a fun, hip company that launches to great fanfare, quickly scales its customer base, and is acquired by Google at an astronomical valuation. The reality is much different; popular perception doesn’t reflect the hours of both chaos and tedium, of slaving away in cramped C-class office space on uncomfortable chairs, of fighting to stay afloat and meet payroll while running on Ramen and Red Bull.

Nonetheless, a few key moments—closing the first paying customer, raising a venture round at the 11th hour, or presenting to the accolades of peers at a conference—make it all worthwhile. Savor, celebrate, and then remember those moments during times of stress.

No Rest For The Wicked

While passage-making, both captain and crew must be constantly “on”—scanning the horizon for larger ships that that could present a collision hazard, listening for unusual boat noises, watching the barometer for any sudden weather changes, and repeatedly checking all the gear, gauges and equipment for signs of wear or distress. It’s pretty amazing, actually—you develop senses you didn’t know you had, and you tune in to the littlest sounds and rhythms. But there is no way to turn it off, no pause button, especially on long passages (our longest, the Mexico to Marquesas leg, was 22 days of open water). In short, you’re “all-in” and “always-on.”

Running a startup is much the same—all consuming. I’ve never known a successful founding team who ran their startup as a 9-5 job. They take it home, they take it on vacation (if they get one), they live and breathe it 24/7/365. As in sailing, this takes some serious adjustment, but you soon get used to it, or you head home.

The key for both sailors and startup founders is to find an optimal pace and rhythm, a measured trot that can be maintained without burnout or exhaustion. Further, it’s critical to conserve energy, and not waste effort on unnecessary or trivial concerns. To mix up a few metaphors here, both sailing and entrepreneurship are best viewed as a marathon, not a sprint. By accepting that you’re in it for the duration, your daily rhythm and attitude will adjust to meet the challenge.

The Only Constant Is Change

For sailors, the most dangerous moments generally occur not on the open ocean, but rather, when sailing along a coast or when entering a bay or atoll. Sailing near land means there are things you can hit-- rocks, shoals, reefs, and sometimes even whales. Sometimes you find yourself caught in a situation where wind and currents are working against you, and it takes all your effort to simply stay in place, with no forward progress. It's like running on a treadmill. But as frustrating as it can be, staying in place also means you are not sliding backward, and being pushed onto a lee shore (a common cause of shipwrecks).

It is during these moments that we take comfort in knowing that even the worst weather conditions will, eventually, change. Tidal flows reverse direction at least once per day, and storms always pass. The lesson here is that when things are bad, keep plowing ahead—survive to fight again another day—conditions will improve. Likewise, when things are good, enjoy it, because again, the only constant is change-- eventually, another storm will form. Hopefully the metaphor for both thriving and struggling startups is obvious.

…to be continued (as I mentioned it was a long journey!)

Setting And Shaping A Strong Startup Culture

2009-11-26T21:06:00.000-08:00

Of all the determinants of a startup's success, company culture reigns supreme.

Over the past several years, I've had meaningful interactions-- meetings, calls, etc.-- with perhaps 700-800 early stage startups. From that broad pool, I have worked closely with about 100 firms, on a variety of business plan, business development, and fund-raising projects.

In short, I have been exposed to a 'statistically significant' number of companies, over a long-enough time-frame, to be able to discern certain patterns-- among them, which traits lead to failure, and which lead to success.

The short answer to what I've found?

A handful of factors-- all internal to the startup-- are the best predictors of whether a company will make it big, or crash and burn.

Not the amount of funding raised, and not the vertical in which the company operates. It almost always comes down to how the startup operates, day in and day out. In other words, it all comes down to startup culture. In more detail:

Culture of Speed
The first indicator of a company's success is the speed at which the founding team operates. The reason is simple: startups have the benefit of being fast and nimble; remove these traits and you remove a huge competitive advantage. Large firms have greater resources-e.g., more access to talent and capital-but are weighed down by sluggish decision-making and bureaucracy. Startups, by nature of their lean structure, can adjust rapidly and can often "win" by innovating and responding to customer needs faster.

Slow startups on the fail-track operate at a pace resembling their big-company peers (sometimes due to too much big-company DNA on the resumes of management). They take a long time to make decisions, are slow to respond to inquiries, and hold too many non-essential meetings. In short, slow startups lack a culture of urgency. A key fail-track warning sign: frequent excuses of why something hasn't been done yet or can't be done (and a cultural acceptance of such excuses).

In contrast, fast startups seize opportunities immediately as they arise-even if it means responding to an email at 10 PM or working through a long weekend to deliver on a customer request. They have a cadence of work that emphasizes frequent product releases, short meetings, shared accountability for hitting milestones, and rapid decision-making (even without all available information).

Further, they create their own opportunities by paddling out in anticipation of where the next wave will be, and by trying new things. They realize it's ok when experiments fail, because being nimble means they can bounce back and try again. Simply put, fast startups value time differently, and have a culture marked by rapid plan-test-refine cycles; this is at the core of any startup's advantage.

Culture of "Launch Early, Launch Often"
One of the most dispiriting experiences is when a company never actually gets to market; or, by the time the company finally does launch, the market has passed them by and their product is irrelevant. In such cases, a huge amount of money and talent is often wasted, unnecessarily.

Sometimes this is due to poor planning-e.g., underestimating the time required for product development. But in many cases, startup founders get obsessed with building the "perfect mousetrap," fearing the market or press will skewer them if the product is not up to their impossibly high standards. This becomes exacerbated in a competitive space, when other firms are making noise, and product release paralysis sets in.

In my experience, this is largely a psychological issue; wise founders "let go" and realize that Version 1.0 is just the beginning, not the finish line. Success-track founders get to market early with the minimum set of viable features, and then iterate like mad based on user feedback. If needed, they slap a "Beta" stamp on the product, which brings a greater level of acceptance of bugs or rough edges. In short, they are guided by the knowledge that the benefits of reaching perfection far outweigh the costs of missing a market window.

Culture of Promoters
Second only to the dismay felt when a startup idea becomes stillborn is when the company actually does get into the market, but after initial launch, the product languishes, collects dust, and is soon forgotten. Opportunity lost.

This is most common with startup founding teams that are heavy on the technical prowess but short on marketing skills. Technical teams sometimes underestimate the true level of effort required to not only get attention and mindshare, but also to convert such attention into actual, paying customers. It is the classic "build it and they will come" fallacy.

The good news is that even highly technical engineers can become skilled at marketing fairly quickly. Technical founders- the builders- have a pride and passion for the product that cannot be taught. Further they have more credibility with other techies, who are often the earliest adopters or beta users. The key is to first gain a basic grasp of marketing strategy- where do your customers spend their time? How do they make buying decisions?- and then to develop a simple, flexible marketing plan with discrete action steps, timelines, and milestones, as well as a way to measure effectiveness.

And then, just do it. Get out there and pitch, honing your message as you go, and doubling down on the marketing activities that demonstrate a positive ROI. If you are able to simultaneously pitch and listen attentively, it's remarkable how short the learning curve can be.

We're going to pick up the pace here and cover a few more in short order:

Culture of Focus
Fail-track startups try to "boil the ocean" and compete on the depth and breadth of their product feature set. This is a losing proposition from the start; startups are, by definition, resource-constrained. Most startups that go down this path run out of money. By comparison, success-track startups strip out all non-essential bells and whistles. They focus with a laser-like intensity on the most pressing needs of the most attainable customer base, while retaining the vision for broader markets and verticals as resources allows. They do just one or two things, but they do them exceedingly well.

Culture of Confidence
Fail-track startups are unnaturally cautious-- often bordering on paranoid. They are convinced that around every corner, someone is plotting to steal their idea. As a result, their ‘story' is kept close to the vest. An early fail-track indicator is when the CEO requires an NDA before he can give even a high level overview of what the company does. In every single instance in which I've seen this behavior, the companies never go anywhere.

While you should never give away true IP or trade secrets, a primary job duty of the CEO is to pitch and sell the vision of the company-all day, all the time, to (almost) anyone who will listen. Success-track startups realize that execution- not the idea- will win the game. They are judiciously open with their vision, and they have an evangelizing ability to get stakeholders such as customers, partners, investors, and potential hires to rally around that vision.

Culture of Action
Similar to the "culture of slow" is the "culture of theoretical." Fail-track startups tend to devote too much time to theorizing and hypothesizing, and not enough time doing. They defer decisions to wait for more information, and they spend a lot of time in meetings and at off-sites. Granted, brainstorming and forming a cohesive strategy is necessary, valuable, and important, but unless it leads to action and output, it is wasted time- something no startup has the luxury of. Success-track startups follow the "iceberg model": for every bit of ice visible above water (strategy), there is a huge amount of supporting ice floating underneath (action). Post Script: Fred Wilson of Union Square Ventures wrote a great blog post on this topic called "Action Oriented."

Connecting The Dots (aka, You Want to Be "Playing for the Yankees")
The factors described above have proven to be the most common determinants of success and failure at the several hundred companies I've interacted with over the years. To reiterate, they are all internal traits of an organization-- traits that can be embedded, infused, or hired into a firm.

Granted, external factors will always play a role in determining a company's outcome; markets shift and funding environments change. But teams with strong cultures are flexible and can adapt. As a result, strong teams will view tough markets as opportunities to pull ahead of the competition. After all, the startup ecosystem-- especially in an emerging, crowded, and rapidly growing market-- is the purest business example of Darwin's 'survival of the fittest' theory in a business context. In short, strong startups operate with the confidence that they will come out ahead when the dust settles.

Bringing It Home: Hiring Smart
Having identified that success is tied to stong cultures, the question then becomes, "how do you ingrain a winning culture into your startup?" The answer is disciplined hiring.

A generally accepted maxim is that a company's culture or DNA is set by the time it hires its fifth or sixth employee. Fail-track startups hire based on who's cheap or available. As a result, they hire B-players. Success-track startups maintain a greater level of hiring discipline, and "hire smart," holding out for A-players. The effects are magnified as the business scales, since A-players attract other A-players, while B-players (who are less capable or confident in their roles) tend to attract other B- or C-players. (For more on what constitutes an A-player, click here.)

Hiring smart has many other elements to it, such as the aforementioned culture of speed-i.e.., can each new hire keep up? If not, they should be weeded out before they slow down the overall average pace of the tribe. Success-track founders also know to hire people more intelligent than themselves and to give them free rein to run with the ball. Ultimately, this helps the founding CEO retain his or her job; shifting responsibility to an A-team means the CEO can spend more time on strategic issues and less time on micromanagement.

How strong is your startup's culture? What can you do to improve it?

Financial Modeling for Startups-- How Much Will It Really Cost?

2009-10-08T18:58:00.000-07:00

I came across this blog entry from Christine Herron of First Round Capital detailing the costs of starting web wunderkind Mint.com (acquired by Intuit for a handsome $170M).

Christine does a great job of breaking out Mint's costs by "Garage Phase," "Seed Round" and "Series A," showing the cost structure of building the company at each step.

We build about 10-15 startup financial models per year, and this post is right on the money (pun intended). The key element is in the thinking that goes into the model-- building out solid model logic and assumptions-- since everyone knows reality will be far different than the pro-forma.As Christine puts it:

"Know how the business model works. People do X behavior and it turns into $Y income, add up those $Ys and it's a $Z business. If you can walk people through these assumptions convincingly, you'll get that seed round. "

and she continues:

"What model do you build next in order to raise the Series A? Testing and learning from your seed model, show user growth, retention, COGS, revenue per sale/user, and profit. The accumulated loss is how much you need to raise, and a well-though funding strategy combined with an understanding of (hopefully good) business economics is what will speed the Series A process along."

An interesting side note from a post on WSJ blog Venture Capital Dispatch is that Mint raised about $32 million from investors but only used about $12 million of that capital.

Naturally, it makes me wonder if founder Aaron Patzer now wishes he had raised a series of smaller rounds and retained more of his equity. But of course, this type of Monday-morning quarterbacking is easy to do with post-acquisition hindsight, and in this market most startups are wise to raise as much as they can, when they can.

Either way, it's an impressive success story and a good archetype to follow.

Positioning for a Startup Market Turnaround

2009-10-01T10:33:00.000-07:00

It was around this time last year-- Summer of 2008 to be precise-- that a rash of VC firms and angel investors such as Ron Conway and Benchmark Capital issued highly publicized decrees to their portfolio companies to bunker down, cut costs, and prepare for a deep fund-raising freeze.

Now there are signs that things may be (slowly) starting to turn around. I've had a couple lunches with attorneys this week which were illuminating. I would posit that startup lawyers are the 'canaries in the coal mine'-- they work on deals well before the deals are publicly announced. So these data points, while not statistically significant, were nonetheless encouraging.

During a meal of excellent Osha Thai food in SF, one boutique attorney stated that he has worked on something like 25 early stage financings this summer, mostly involving web startups and angels or 'super angels' (i.e., folks with small seed funds like the aforementioned Ron Conway).

Indeed, angels have picked up the slack in the early stage funding market, as evidenced by an Under The Radar Strategy Series conference I attended in September. This 'fireside chat' was led by Rob Hayes of First Round Capital, Jeff Clavier of Softtech VC, and Aydin Senkut of Felicis Ventures, all of whom have been very active investors as of late. To wit: Hayes had six investments in the last quarter, Senkut had five with three follow-ons, and Clavier stated he had put down two term sheets that very day.

The other attorney I brunched with this week works in Silicon Valley at a large law firm. He stated that he has recently worked on several deals where large VC firms were making seed investments. This is unusual-- large venture firms, who are investing from funds that often top $200M or greater, generally seek to put substantial amounts of capital to work in each deal-- typically a minimum of $4 or $5M and up-- due simply to the fact that any given partner can effectively serve on only so many boards at once.

The attorney's thesis is that the large VCs are making such small bets to secure an 'option' to invest later-- basically, using the $500k or $1M seed round to guarantee a seat at the table for a future larger round, when things pick up again. (Indeed, there is some corroborating buzz around this trend; see this post, "Seed is the new Series A for VCs.") The sentiment he picked up was that follow-on rounds would start happening in Q4 of this year or Q1 of 2010.

It's certainly encouraging, as things have been fairly tepid for all but the hottest web and social gaming startups. August was among the slowest months we've had here at VentureArchetypes since 2002, when the funding market hit bottom in the last recession.

But these things always go in cycles, and we have been taking advantage of the downtime between clients to lay the foundation for the next upswing. It's actually rather nice to have some time to take care of all that is neglected when we're going 100 MPH-- website updates, marketing materials, etc.-- as well as the network. It is a luxury to have the time to reach out and catch up with contacts-- after all, this is a relationship-driven business.

We have also been laying the groundwork for a new service line, which we will debut shortly. It is called StartupPartnerships, and the focus will be on offering outsourced business development consulting to technology startups. It is a service we have been doing semi-formally with clients for many years, so it is a natural spin-off of our business plan and venture strategy work.

You can get a sneak peak at this new direction here: www.StartupPartnerships.com -- please let me know what you think, and how we can make the service as valuable as it can be to startups.

And finally--to end on a positive note-- I leave you with two more links showing encouraging signs regarding the startup market: Mark Suster's post on "The Big VC Thaw" and Bob Ackerman's post on how "M&A and IPOs are Restarting the Innovation Flywheel."

This may, in fact, be the best time to pursue your vision and finally launch that startup idea -- carpe diem!

The Care and Feeding of Startup Advisory Boards

2009-09-02T11:31:00.000-07:00

A recent post on Vator.TV got me thinking about startup advisory boards. This is an often-overlooked, under-utilized, or completely neglected strategy for early stage companies.

But it needn’t be so; setting up a startup advisory board can bring benefits well beyond the cost (in terms of time and equity) required. A brief primer:

Why, When and Who

To begin with, let's start with a basic question: why bother? In short, because a good advisory board can help open doors, keep you on track, and avoid common company-killing mistakes. An advisor's role can take any form, but the most common duties are to provide guidance, introductions, and feedback. They help you think through difficult decisions, and act as a sounding board for company strategy and positioning. Ideally, they tap their network and provide leads for funding sources, early customers or partners, and key hires.

Advisory boards have the most relevance and bring the most 'bang for the buck' for startups that are very early stage—generally, when the company is just 2-3 founders, pre-launch or recently-launched, and trying to gain initial market share and/or raise money. They are particularly useful for first-time entrepreneurs or for founding teams lacking a substantial amount of domain experience in the market.

After the first round or two of funding, an advisory board can still be quite helpful, but by that point there are usually enough people around the table—new senior-level hires, investors, etc.—that talent gaps are mostly filled. Indeed, many startups find that the usefulness of their original advisory board is diminished once they have a complete team and a formal Board of Directors, and contract terms are structured to reflect this (more on this topic later).

In a typical situation, a startup will put together a group of 3-5 people to turn to for counsel. Ideally, this group has diverse yet relevant experience; they will be local (within driving distance for meetings); and, they will have all run or grown young companies before-- but each will bring a different, non-overlapping skill set.

Sample Scenario

As a hypothetical example, let's say your startup is developing a SaaS-based system for managing inventory at independently-owned pet shops. Your founding team is made up of two developers and one person acting as manager/marketer/visionary. The product is nearing beta release and has half a dozen potential customers in the pipeline.

To complement this founder group, an advisory "dream team" might include a former product manager from Netsuite or Salesforce or even SAP, maybe a marketing VP or CFO from Petco, and one or two folks who have started and exited software businesses. To throw an extra bit of flavor to the mix, it might also include a co-founder from Web 1.0 flameout Pets.com.

In this scenario, the product manager advises on development and feature sets for the initial release. The marketing VP advises on channel strategy, while the CFO helps introduce some structure and process around the billing and cash flow cycle. The ex-software entrepreneurs advise on all of the above, and also make introductions to potential investors. Finally, the Pets.com veteran brings domain expertise and helps the young firm navigate around pitfalls (learning from those who tried and failed can be just as valuable as learning from those who’ve succeeded).

Recruiting Advisors

There is no real trick to recruiting advisors-- you simply ask them. Most people are flattered by the request and by the lure of being associated with a new successful company. It's a soft sell, and taps the ego-drive for recognition as an expert. More challenging is finding and screening the right ones.

Finding them is a function of first identifying your needs--deep introspection required-- based on where your founding team is weak, or by what near-term goals you are aiming to accomplish. Next comes scouring your existing network and the open web to find the right folks. Social networks like LinkedIn can be invaluable here, but don’t neglect using Google. Searching on phrases like "former VP of Operations at Google" may turn up articles or interviews with a potential target candidate.

After working your network for an intro (or if necessary, searching online for their email address), a simple introductory note stating what you do and that you're seeking to build an advisory board is usually enough to get the conversation rolling. Include a link or two if you have a beta site or demo up.

Screening and Filtering

Screening the candidate pool, however, takes a bit more effort. I would advise you to filter based on their overall level of interest in your concept and their willingness to actively participate. You want people who are genuinely motivated to help your business—free riders need not apply.

A good way to evaluate this is by how quickly they respond to your emails or phone calls. Many times, an advisor's greatest value comes during a critical moment-- "should we accept this term sheet or keep hunting?" or, "we have a national chain interested in purchasing our software, but they want steep discounts--what do we do?" You don't want to be waiting a week for an advisor's input.

Another criteria, of course, is whether they are willing to get materially involved for the level of compensation you are proposing (more on this later). It makes no sense to overpay and incur unnecessary dilution to your company's equity—there are plenty of fish in the sea. Also avoid those who are well-known, but who are likely to be "advisors" in name only. These types seek to benefit from the startup’s success without actually contributing to it. While their implied endorsement may look good on your investor pitch deck, it's usually not worth the cost in equity to the company.

Care and Feeding of Advisors

Once you've built your rock-star advisory board, what do you do with them? The short answer is: use them as much as you can-- but not more than you agree to. Keep in mind that advisors are not employees; their role is generally to provide introductions and guidance on product and company strategy. They may endorse and/or evangelize your company-- but their role stops short of actively marketing your company. In other words, you should not expect them to do the 'heavy lifting' of building your business, nor be responsible for routine operating tasks.

The best way to manage advisors-- and get the most out of them-- is to invest upfront whatever time is required to accurately set expectations. A 'reasonable' scope for an advisor role might be something like the following: i) 6 month duration, with option for extension; ii) primary responsibility is to introduce the company to 8-10 relevant investors; iii) secondary responsibility is to participate in monthly strategy meetings with the rest of the advisory board; iv) tertiary responsibility is to advise on key decisions or product input via periodic conference calls or emails.

Work It Into Your Company DNA

Curiously, despite all the effort expended to build a great advisory team, one of the more common mistakes startups make is to under-utilize their advisory board. This is rarely intentional—running your business sucks up all your available time and capacity, and trying to "herd cats" (while respectfully wrangling in only their best feedback or ideas) can feel like a distraction.

To help keep this valuable resource from falling by the wayside, I suggest, at a minimum, having a standing quarterly or monthly meeting—say, the third Thursday of each month—for the duration of the advisors’ contracts. This helps keep your company in the forefront of their minds, and it also introduces an element of “communication discipline” for the founders—in other words, knowing you have a meeting coming up will force you to review your progress over the previous month, identify things you need help with, and set new goals going forward. This is also good training for the day when you’ll have a formal Board of Directors to report to.

Advisor Compensation

So, having built a great advisory team and having charted out a realistic gameplan with each, how do you compensate them? This is more art than science, and the real answer is "it depends"-- on their level of involvement, the reach and relevance of their network, and yes, on their name brand. But I dislike fuzzy answers, so let's try to pencil in some guidelines.

I posed this question recently to my good friend and colleague Diana Benedikt who runs Venture Insight Advisors. Diana and I have worked together on numerous startups over the last ten years, and I respect her opinion. Her take, based on many years of experience as both advisor and consultant, is that a reasonable range is 0.25% to 0.5% of the company’s total equity (though up to 1% is not unheard of) for approximately 4-8 hours of involvement a month.

This corroborates with others' views on the subject; most published ranges are between 0.25% and 1.5% per advisor, or 1% to 4% for the total advisory board. Amounts may vary—you don’t need to give everyone identical stakes—but you do need to codify each arrangement in a simple contract, detailing their roles and tasks, the duration of their involvement, and a vesting schedule (generally, monthly over the term of their contract).

Non-Equity Issues

Other items to include are an out-clause (where either party can terminate the contract with written notice, usually 30 days) and the type of currency to compensate their efforts (generally, restricted stock, which has tax benefits for the advisor). To note, not all advisors demand equity—sometimes a few nice lunches, repayment for any expenses incurred, and some heartfelt gratitude and recognition will suffice.

Diana also notes that from the advisor's perspective, the challenge is in holding down the amount of work he or she will end up putting in. Although ideally, if you have done the upfront work of carefully selecting and screening who you bring in, your advisors will be emotionally invested in the business, and will work beyond the contracted level—simply because of passion for the idea. (Indeed, many advisors even take it a step further and invest in the seed round.)

Hybrids and Other Animals

Alternative approaches to a standard 6- or 12-month advisory role are many, and include contracts that are structured around specific deliverables or results. For example, here at VentureArchetypes, we tend to initially engage with a startup around a finite task—developing a business plan, financial model, partnership proposal or pitch deck. Then, following this “dating period” where we get to know the company (and vice versa), the relationship evolves into either a traditional advisory role as described above, or into an interim operating role.

Structuring it in this manner helps avoid the ambiguity that can sometimes accompany the role of "advisor" since compensation is directly tied to specific actions/results. It also affords greater flexibility in terms of the currency used for remuneration. For example, while we typically require a cash retainer for document deliverables, deferred compensation is sometimes used for interim CFO or business development work, and equity can be in the form of options or warrants.

Interim Roles

This type of interim operating role is like a bridge between bringing on advisors (devoting 1-4 hours per week) and full time staff (devoting 40-60 hours per week). The advantage for startups is that it moves headcount expense to more of a variable cost that can be dialed up or down depending on need—for example, a company may need additional, temporary support around a deal or transaction. Conceptually, it is similar to using an outsourced IT development shop, and thus it is a structure that many startups are already familiar with.

Regardless of the specific structure, the aim with any deal should be to align the interests of all parties in the direction of a common goal, and remove any ambiguity about what constitutes reaching that goal. It should also pass the gut-test of being ‘fair and reasonable’—or, at a minimum, both parties should wince equally at the pain.

Remember the Fun

A final piece of advice-- one that echoes the Vator.tv article that originally inspired this post-- is to make the process of being an advisor fun. Be appreciative of their efforts. Make sure they have ample opportunity to socialize with the other advisors on the team. Hold your monthly or quarterly meetings at a restaurant or bar. Take them sailing or to a ball game. One of the companies we worked with sent us on a winery tour, and then sent us bottles of wine periodically-- it was a great gesture.

In short, most advisors are motivated more by being in the startup game than they are by the potential of financial gain. Recognizing their help, and keeping them involved and informed beyond the duration of their tenure will pay exponential returns over time.

In Search Of...The Ideal Term Sheet

2009-08-24T15:29:00.000-07:00

Continuing with our discussion on term sheets (see "Some Thoughts on Term Sheets" and "Closing Term Sheets Quickly"), today a new "plain vanilla" term sheet was published by Adeo Ressi of TheFunded.com.

You can download it on docstoc here.

It is very basic (a good thing) and entrepreneur-friendly. Whether you'll be able to get a VC to actually use it is another question altogether...when the economy is tough and funding purse-strings tighten, investors will often seek to include various onerous terms to help mitigate their downside risk. Anyway, it's useful as a starting point for discussions.

Rather than comment on it directly, I am re-publishing sections from a post on TechCrunch:

"The key terms include the elimination of participation with preferred stock, a 1x liquidation preference, and single trigger vesting acceleration on acquisition.

What this means: VCs try to increase returns by asking for large liquidation preferences. A 3x liquidation preference, for example, means the VC gets to take out 3 times his/her initial investment before founders and employees get anything. So if you raise $10 million at a 3x liquidation preference and then sell for $25 million, founders and emplyees get nothing. With a 1x liquidation preference, the VC is only able to get the initial investment back before others take their share.

More importantly, participation is eliminated. VCs often ask for this. What it means: Participation rights means the VC gets to take a pro-rata share of money in a sale even after the liquidity preference. With it eliminated, the VC has to choose - either take their 1x liquidation preference or convert and share with common pro rata. For any large deal, they will convert and be treated like the founders and employees.

The single trigger vesting provision is also important. VCs like to keep their founders locked up so they have to keep working even after an acquisition. The provision, called double-trigger acceleration, usually requires a sale followed by a firing without cause. VCs want this because it’s easier to sell a company if the founders are locked into staying on. Founders don’t like it because it sucks.

Most importantly, though, is the cost savings. VCs really need to move to a deal structure that doesn’t burn up so much lawyer time negotiating provisions that are almost never used. I could write 10 posts on how this nonsense works, and may in the future. A term sheet like this can be closed with $10k - $20k in legal fees. When you’re only raising $1 million, that’s a big deal."

More on Seed Stage Terms
One more link while we're on the topic-- here is a new post from Caine Moss, an attorney at WSGR, on the changing face of early stage investing. He explores the difference between terms at the Series A stage and at the seed or "Series 1" stage. The main takeaway is that terms will differ, and entrepreneurs should avoid deals where Series A terms are used for a seed financing.

The Business Plan is Dead; Long Live the Business Plan!

2009-08-10T10:08:00.000-07:00

Recently, there has been some heated debate in the web startup world about whether developing a business plan is really necessary. The main arguments are that: a) VCs don’t read them; and, b) a founder’s time is better spent writing code.

Optional if Your "Business" is Really a "Project"
For many firms in the Web 2.0 space, I would agree—to a point. If you are able to code a web site or develop an iPhone app or Facebook widget over a long weekend, it is very efficient to just throw it out to the universe and see if it sticks. In short, many web startups are more akin to a project than an actual business, and given the minimal amount of time and expense it takes to develop such concepts, it makes more sense to try out a lot of different experiments, vs. planning out a solid strategy.

I'll use Guy Kawasaki as an example of this approach. He famously launched Truemors.com for about $12k in development costs, and at a recent NewTech Meetup, he claimed his latest project, AllTop.com, cost about $100k to develop. He used low-cost tools like MySQL and PHP, and he uses sites like Facebook and Twitter (along with his considerable personal blog and 'brand') as platforms for promotion.

Further, for many web businesses the business model is already more or less built in: get some traffic, serve up Google ads, and then layer on a few other revenue streams as your user base ramps. There is no need for a marketing plan—assuming the team knows a bit about SEO and social media. There is no need for a hiring plan, since these ‘business projects’ can be built and scaled with a small team of developers.

Critical for Everyone Else
However, for all other startups—i.e., any business with an element of complexity to it—I would argue that writing a business plan remains a very valuable exercise, even in the digital world.
It’s as simple as this—drafting a business plan forces you to think things through in advance—i.e., work out a plan—before sinking your money, or even more importantly, your time into something.

Granted, as founder of VentureArchetypes LLC (www.venturearchetypes.com) I am not an unbiased observer in this debate. In fact, I make a decent portion of my living helping startups develop their business strategies, and we use the business plan as the framework for this activity. It is a very creative, logical, and process-driven approach to thinking through the various elements that will make your business a success.

From a high level view, here is a brief summary of our approach:

Market Opportunity
We start with the big picture—identifying the market opportunity, size of the addressable market, and trends that can be exploited. Why is now the right time to start this business? Timing can be everything, and we want to make the case that the market and the technological underpinnings are ready for your vision. History books are filled with startups that got the timing right—look at Skype, Facebook, and YouTube as just a few of many examples. None were the first in their category, nor were they the last—but they nailed the timing.

There were numerous IP telephony companies before Skype, and several video sharing attempts before YouTube, but bandwidth limitations in the early days of the web were serious constraints. In contrast, by the time Skype and Youtube emerged, broadband was widespread and P2P sharing technology had matured to the point where both firms were able to deliver a quality user experience. The same holds with Facebook— by the time FB launched, consumers were accustomed to building online networks of friends, and the scaling issues that had plagued earlier attempts like Friendster had been (mostly) overcome.

Customer Needs
Once we’ve made a case for the market opportunity, we drill down into our target customers—their needs and pains, how they are solving problems today, how they go about making purchasing decisions, etc. Again, the list is long of companies that have been able to truly get ‘inside the heads’ of their constituents, and to deeply understand what they want—eBay, Amazon, Google, and so forth.

Product Solution and Competitive Environment
Next we map out the company’s product roadmap, and show our plans for attacking the problem by doing something radically different that provides real value to customers. This is where we paint the picture of our big, audacious goals (note: investors love to back game-changing technology companies, not ones who are building a slightly better mousetrap). We plan out our roadmap in the context of the competitive landscape; a deep dive into the competition can often uncover both pitfalls and new opportunities that can be exploited.

Launch and Operations
Next we get into our launch and operations plans—the tactical, nitty-gritty details that explain what we actually need to do to get to market and scale the company. Are we outsourcing development to India, or building everything in house? Are we buying a floor full of servers, or hosting our service at Rackspace or 'in the cloud' using Amazon Web Services? Particularly at the seed or angel round, it’s important to show you have more than just a good idea—you have a workable launch plan and realistic expectations of how you will (judiciously) spend their money.

Marketing and Sales
Next, we synch our launch strategy with a solid marketing and sales plan. Here, we revisit our target customers and figure out the best ways to reach them in a cost effective manner. This topic calls for a good deal of creativity, as it encompasses things like branding, positioning, taglines, pricing and business model options. It also touches on clever ways of getting press and blogger coverage or on building viral hooks into the product. Our goal here is to not only gain ‘buzz’ and mindshare in the market, but to convert awareness into actual, paying sales. (To note, understanding the sales cycle is often overlooked with new companies.)

Team and Hiring
We also spend a decent amount of time elaborating on the “who” – who is on the team now and what value do they bring, and who will be needed to make this vision happen (in the form of a hiring plan). This involves a fair bit of navel gazing, and helps us both figure out our strengths, as well as identify what human-capital gaps we need to fill.

Financials
Finally, we “tell the story in numbers” by mapping out our costs and revenue sources in the form of a financial forecast. This can be very insightful, as it shows how much money we can potentially make, and perhaps more importantly, how much it will cost to get the business off the ground (aka net negative cash flow until break even). A good model can help you demonstrate credibility to investors—it shows that you really understand the economics of your business. Further, since it’s chronological, the model is also a great tool for setting specific goals to keep the business moving forward aggressively.

Now let’s recap the objections to drafting a business plan:

Investors never read them: This is a true statement; most VCs will never actually sit down and read your entire plan. At best, they may read the bios and flip through a few sections. However, drafting a plan forces you to think through the key elements of your business that investors will drill you on—hard. Further, the business plan is a great framework to lay out your ideas, from which you can then condense the “best stuff” into a very succinct pitch deck and executive summary (which are two docs that do get read, very closely). (Postscript: to see what investors want to know, visit Seqouia Capital’s web page on the business plan: http://www.sequoiacap.com/ideas/)

Writing code is a better use of your time—aka “it takes too long to write a plan”: Apart from very basic and experimental ‘web projects’ described earlier, I would argue that the process of drafting a plan is worth the effort—I’ve seen the positive results time and time again. It gets the founders aligned in the same direction, around a common vision. It creates a roadmap for execution, ideally with milestones for each team member-- i.e., by mapping out what you’re going to do, it gives you a structure to hold people accountable for doing it. This in turn helps set expectations and responsibilities, and reduces ambiguity—and in a startup, ambiguity = death.

Planning out your business just makes good economic sense, too. After all, it’s a helluva lot cheaper to think through your actions in advance, vs. wading into the market without a compass and feeling your way around—the 'ready, fire, aim' method. It can get very expensive if you suddenly find you need to rewrite a bunch of code or totally revise your marketing plan because it was ill-conceived from the beginning. This is how startup CEOs get fired by their VCs.

It's All About Process (and a short written doc)
In a nutshell, writing a business plan—wait, let me rephrase that—engaging in the process of developing a business plan—is still a very valid and valuable exercise for 99% of startups. It can save a lot of costs and frustrations that result by doing things the hard way, and a good plan doesn’t need to be exhaustive; indeed, many of the best plans are 10 to 15 pages in length, not a 50 page academic tome.

After all, a shorter business plan, by definition, creates focus, which is always critical at resource-constrained startups. A shorter plan is also easier to revise and update as the business evolves-- we use the term 'living document'-- which provides you with an ongoing tool for managing your business and getting things done.

UPDATE: Here is an excellent post from Martin Zwilling on why good business plans are so important (and so rare). Recommended.

The Business Plan Is Dead; Long Live The Business Plan!

Wisdom from Marc Andreessen

2009-07-06T14:54:00.000-07:00

Marc Andreessen is an amazing guy. He co-founded Napster, Ning, and LoudCloud (later changed to OpsWare). He's made investments in Twitter and Digg. He sits on the boards of Facebook and eBay. And he recently announced that he and partner Ben Horowitz have raised a new $300 million venture fund-- in one of the worst fundraising environments in years.

I've been trolling around his excellent blog site recently. Marc is a prolific writer, and you can see some of the kernels of thinking that have contributed to his success. Here are a few particularly salient links that provide solid insight into the VC world:

The Truth about Venture Capitalists, parts one, two and three.

And, one more for good measure: how to network your way in with VCs. Happy reading!

The Case for Taking a VC's Money (even if you don't need it)

2009-06-29T16:13:00.000-07:00

In contrast to our recent posts which tout the advantages of bootstrapping, here is an interesting blog from the founder of SEOmoz and his (generally positive) reasons for taking outside capital from a venture investor:

http://www.seomoz.org/blog/my-startup-experience-vc-entrepreneurship-selfanalysis-the-road-ahead

He points to the ways that taking venture capital has helped him, such as the accountability, networking, metrics and experience that come along with the dollars. He also rightly points out that raising funding takes a tremendous amount of time, and that in addition to money, founders also gain a "boss" that can fire them-- something that many entrepreneurs fail to realize.

But what I particularly like about this post is his discussion on the importance of timing; namely, he was able to bootstrap his firm to a point where he didn't really need the money. This had the added-- and very significant-- advantage of giving him leverage in his discussions and negotiations. It also made SEOmoz all that much more attractive to investors in the first place, and helped close the deal quickly.

This is a common mantra I try to hammer home with startups that I work with, who frequently want to raise money too early. In short, there is nothing more frustrating than spending three or six months fruitlessly knocking on doors; you've got to be ready to raise money, and generated enough momentum on your own such that you are an appealing investment opportunity.

The rather off-the-wall metaphor we often use is that of a train...the burden is on the entrepreneur to get the engines fired up and the train rolling out of the station, at which point investors will jump aboard for fear of missing it. The investors bring the fuel-- I suppose coal, in this scenario-- but they have no incentive to join if the train is stationary. (And in fact, it is in their best interest to watch and wait as long as possible-- an issue we talked about previously in our post titled "Closing Term Sheets Quickly." Is your train moving?

Basic (But Solid) VC Pitching Tips

2009-06-19T09:18:00.000-07:00

I stumbled across this blog this morning called Startable, co-written by an entrepreneur and a former VC with Atlas Ventures.

They have compiled some pretty useful content and pitching tips. The tips are basic, but all-too-often neglected or forgotten-- things like focusing on the team and demo, or making sure your WebEx account is working and your financial model is formatted correctly.

I have been in a few VC pitch meetings where the first 15 minutes-- i.e., 1/4 of the total time allotted-- were spent troubleshooting the demo, trying to hook up the projector, or fruitlessly hunting for a WiFi signal.

While the VCs were relatively patient and sympathetic, those meetings never progressed any further. Somtimes it's the little things...

http://www.startable.com/category/vc-tips/

Things A Founder Will Never Say

2009-06-16T14:58:00.000-07:00

As a follow-up to last week's slide show of Things A VC Will Never Say, here is the other side of the coin:

Things A Founder Will Never Say

The picture on the front of a very young Bill Gates and his team in some very fashionable "1970's Geek" attire is pretty good, as are these lines:

Consistency: "We're all about real-time, just like we were all about the iPhone last quarter, and Facebook apps before that."

and,

Preparedness: "Our marketing plan is to pray for TechCrunch coverage."

Spot on!

Things A VC Will Never Say

2009-06-09T09:58:00.000-07:00

Let's start off the day with a little VC humor...this slide deck, modeled off the "Successories" line of motivational posters (favored by Michael Scott in the Office), accurately sums up a few of the more common VC sentiments.

Things a VC Will Never Say

My favorites:

Humility: "Quite frankly, I'm not the smartest person in the room."

and,

Confidence: "I will not let my absence of direct experience reduce the intensity of my opinion."

and,

Attentiveness: "It was rude of me to check my Blackberry during the meeting."

Good stuff!

Apple's Business Plan and Offering Memorandum

2009-06-08T11:19:00.000-07:00

Apple is one of the most fascinating companies, ever.

As a kid I was a huge fan-- my first computer was an Apple IIe, and I discovered at an early age both the joys of programming (I could code a program to make a Pac Man open and close his mouth) and the thrills of software piracy (it was quite easy to put a piece of tape over the write-protect chit on the big 5 1/4 inch floppy discs and duplicate a friend's entire Castle Wolfenstein collection over the course of a weekend).

Then, like almost everyone else-- save for a few artist and graphic-design types-- I switched to a PC with the release of Windows 3.0, and never looked back. With a very mild tinge of sadness, I watched as Apple's market share slowly but continuously eroded, and as the company struggled with notable flopss like the Newton PDA and as Steve Jobs struggled to get NeXT off the ground. Apple appeared on its way toward being a footnote in business history.

Apple's turnaround is, of course, one of the greatest comeback stories ever written. Instead of battling it out with Dell, HP and Compaq as PCs became low-margin commodities, Apple returned to it's strengths in creative design, user experience and overall "look & feel" and went on to produce some of the most amazing products ever created.

So, with the company now at the peak of its game, it is amusing to take a look back and see how it all started. These documents are courtesy of the excellent Computer History Museum.

Here is Apple's Investor Offering Memorandum from 1978

and the original Business Plan for the Mac from 1981.

It's amazing to read how far Apple (and the computing industry) has come...enjoy!

VC Blog Lists and Rankings

2009-06-01T12:56:00.000-07:00

About a year ago, we compiled a list of VC bloggers on the VentureArchetypes website:

http://www.venturearchetypes.com/Blogs_written_by_VCs.html

It was a fairly laborious process, involving combing numerous other lists, so I can only imagine how long it took Larry Cheng of Fidelity Ventures to put together this list of the top 100 VC bloggers, as ranked by number of Google subscribers:

http://larrycheng.com/2009/05/26/global-vc-blog-directory-ranked-by-of-google-reader-subscribers-may-2009/#comment-246

While some critics grouse that "real VCs don't blog" (meaning they're too busy doing deals and don't need to market themselves), I actually think the proliferation of the VC blogosphere is a godsend for entrepreneurs. Plus, there are some great names on these lists.

The reason it's so advantageous is simple: in any deal, your odds of succeeding are greatly heightend if you can understand the other party, and tailor your message around their needs and wants...e.g., a "value proposition that meets their values." This is true whether the deal is a venture pitch, a strategic partnership, a marketing alliance/JV, or even an acquisition.

But of all those examples, it's only the venture pitch where there's a ready-made 'window' into the other party-- their blog. This lets the entrepreneur get inside the head of the person he's pitching, and get a feel for his/her personality and ways of thinking. It also serves to de-mystify the VC a bit, which is always a useful thing.

Who is your favorite VC blogger? Who is missing from these lists?