03 4 / 2016
The real reason why investors say your market size is small
It’s super annoying when investors say your market size is small. So, you do all this extra research – you look for Gartner’s excerpts and articles about projected market sizes, etc, and you come back with research to argue that your market is much bigger.
Unfortunately, it’s ineffective. The investor passes. And you walk away thinking he/she’s a dimwit. This could be true, but it’s important to understand what is really happening here.
First, stop with the research. It won’t help.
Here are the actual reasons why an investor passes when he/she says your market is small:
1) You are “in-between” multiple markets and are seemingly not addressing ANY market.
Market trends change a lot, and sometimes a new market appears in between two existing ones. However, because your company is early, investors don’t yet know if that market between markets will exist.
A good example of this is 500 Startups-backed Intercom.
When I first met them (when I was an entrepreneur), in the back of my mind, I was thinking, “Gosh, what are they actually addressing? It’s a weird mix of customer service and marketing and sales.”
It turns out that a few years later, marketers are looking to build tighter rapport with their customers, and this tighter rapport really is a weird mix of marketing / sales / customer service. And the company is doing really well! But when they first started, this was not clear at all.
In a situation like this, I commonly see entrepreneurs try to increase their market size by computing and adding the market sizes of all adjacent markets. E.g. the market size of marketing automation plus sales automation, and customer service software.
Found on Pinterest: https://www.pinterest.com/ECEPDNZ/i-love-venn-diagrams/
But, in fact, what you really need to do is the opposite. Pick just one market – say marketing automation – and talk about the trend towards personalized marketing. What helps with this is to even go squarely head-to-head with an existing dinosaur product and say that you are going to overthrow that incumbent because of a, b, and c reasons. E.g. Marketo sucks because you need to spend 10 days learning their software only to spam non-personalized emails at your customers – we solve this by making 2-way communication easy within products themselves, which is the way of the future.
2) Your product / business does not sound differentiated enough / the investor doesn’t know anything about the space to discern differentiation.
Companies in certain verticals tend to have this problem more. Adtech, security-tech, fashion, etc. Just like I, as a software investor, know nothing about solar panels or pharmaceuticals, not all software investors will know most verticals to be able to understand what you’re talking about.
If you don’t need specialized knowledge to be able to see your company’s differentiator, then you need to practice and test your messaging on lots of people.
However, if you do need specialized knowledge to understand your differentiator, then you need to find the right investors to talk with.
A good rule of thumb here is that if you cannot visually show your differentiator to a random person on the street, you need a specialized-investor.
In the old days (i.e. 5 years ago or earlier), it was difficult to know which investors to approach, because portfolios were not always online and there wasn’t a search engine for investors. These days, AngelList should be able to help you filter investors by category and look for investors in your space.
Now, the really hard part is if you are addressing a category that just doesn’t have that many investors. Fashion and beauty, for example, is one that doesn’t have a lot of investors, though this is something we are actively changing at 500 Startups. One of the best ways to navigate this is to talk to lots of entrepreneurs in your space who are further along than you. Ask them for intros to their investors. Ask them to meet other specific people in your space. This may be a lot of work, but this is absolutely necessary. Form tighter / deeper relationships in your space.
3) An investor doesn’t have conviction in you / your team.
Lastly, a market size is “too small” is unfortunately often an explanation of what an investor thinks about you / your team.
This is especially true if you’re in a crowded market. If you’re in a crowded market, you not only need to convey the point above well, but you also need to convince people that you’re a really solid leader. Unfortunately, because of pattern matching, a lot of talented leaders who do not fit a typical mold really struggle with convincing investors of this.
Entrepreneurs who are introverts, of non-majority races, women, etc tend not to fit these patterns, and have to go above and beyond to convince an investor they can win in a crowded market / they have the right leadership abilities to win.
Keep in mind that “win” in an investor’s mind is not selling for $30M. An investor is hoping its winners do 100x+ (obviously, this doesn’t happen most of the time, but this is what investors are looking for). So, they are thinking about how you will become a $100m-$10B company, and at the seed level, the only thing they have to believe is if you / your team is the right person / people to get to this stage.
Fundraising is a nebulous process that I aim to make more transparent. To learn more secrets and tips, subscribe to my newsletter.
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27 3 / 2016
Fundraising pitches are not actually pitches…
The startup industry should stop using the word “pitch”. It suggests that entrepreneurs should go into an investor meeting with a deck and stand in front of the room and start presenting.
Doing a Demo Day or a startup pitch competition is NOT the same as a pitch meeting with an investor. Yet, too many entrepreneurs think that this is what they are supposed to do when they walk into an office on Sand Hill Road.
An investor meeting is much more akin to a power struggle.
Only 50% of an investor meeting is about storytelling / conveying information about your business. And, you can find all kinds of information on the web about what makes a good pitch. But, the other 50% is about controlling the conversation – how you answer questions, how you address topics, what the power dynamics are in the meeting, etc. This is the part about fundraising that no one talks about.
When I was pitching LaunchBit, I followed all the common advice about creating an investor deck (in fact, you should have multiple decks). And, I would go into investor meetings, go through my deck, and answer whatever questions an investor may have had throughout the conversation. And I felt pretty pleased with myself.
But then one day, I pitched 2 seed partners at a VC firm. I thought the meeting had gone well, but afterwards, one of the partners pulled me aside and said that although he was championing my deal, he was very disappointed in how the meeting went. He said that it went horribly. He said that the conversation went all over the place, and I had no control over it.
The conversation basically went like this:
Me: [Intro to LaunchBit.] The market size is HUGE and…
VC: What about your team? Do you have experience in email?
Me: [Talk about my team’s experience]…
VC: But what about how you acquire customers?
Me: We acquire customers by doing outbound sales, and we…
VC: But, the market just feels really small.
A good fundraising meeting will feel more like driving a car. You should not zig zag from Place A -> Place D -> Place C -> Place A -> Place B in an abrupt way. You should start with topic A, finish it, and then move on to topic B, complete that, and then move on to topic C.
Although you do not need a deck to raise seed money, this is why I like to use a deck in my conversations with seed investors. It is a lot easier for me to remember all the points that I want to cover in a story that makes sense. And, if investors have questions that are not related to the particular slide you are covering, it’s easy to say, “That’s a great question. I’m actually going to address that a couple of slides from now,” and then go back to completing your thought around whatever slide you’re on.
When you drive the conversation on your terms, it not only paints a more coherent story, but it also implies what your leadership ability is like. It may not be a fair assessment of how you’ll lead a company, but with limited data points, this is what seed investors are paying attention to.
Make sure you are driving this car.
Fundraising is a nebulous process that I aim to make more transparent. To learn more secrets and tips, subscribe to my newsletter.
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17 3 / 2016
Becoming that frat boy
I was in LA earlier this week meeting with some entrepreneurs. One new entrepreneur was an engineer, and she was telling me about how she hadn’t yet talked with potential users for her not-yet-finished product. She wanted to wait to perfect her product first, because she was scared to talk with users before the product was done.
And it occurred to me that I was just like her only a few years ago. Like that time in 2010 when I wrote about What A Frat Boy Would Do?
I remember writing that post when my co-founder Jennifer and I worked out of her apartment in Bezerkeley on our side projects.
At that time, it was incredibly nerve-wracking to ask our customers for feedback on our various projects. Call up strangers? How frightening! It was much more comforting to debug a technical issue. And yet everything we read about related to Lean Startup said that we needed feedback - no matter how awful it was - in order to make progress. So we made a paper sign that read “What would a frat boy do?” and hung it on a wall in her apartment.
Every time I needed to hop on a call with someone, I would read that sign to pump myself up. And thus began my multi-year journey to become less shy and less awkward in talking with people I didn’t know, to become less nervous/less intimidated in talking with people in powerful positions, to become more bold in asking uncomfortable, awkward questions, to become a shameless hustler, and to eventually sharpen my sales skills to become a pretty good salesperson.
I had completely forgotten about that frat-boy blog post until this week. So when investors say entrepreneurs are born not made, that is complete BS. Much like learning to play a sport or an instrument, if you put your mind towards learning a skill that you’re weak at, you absolutely can change - even as an adult. The entrepreneurial journey is not easy, but it is amazing how much you can learn and overcome.
Fundraising is a nebulous process that I aim to make more transparent. To learn more secrets and tips, subscribe to my newsletter.
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13 3 / 2016
You should have 4 fundraising plans…
When I was raising money for LaunchBit, sometimes my conversations with investors would go something like this:
Investor: So how much are you raising?
me: We’re raising $750k.
Investor: Really? Why so little? You should be raising $2M+ or even a series A.
Of course, the first thought in my head was, “Wtf? I’m struggling here to just raise anything!” But, of course, I couldn’t say that out loud, because then the investor might not want to back me.
This kind of conversation happens a lot, though. So what do you do? You need to prepare 4 fundraising plans. What would you do if you raise:
- $0?
- Below your target raise?
- Your target raise?
- Above your target raise?
What happens if you can’t raise at all?
First, let’s address the easiest scenario – what if you raise $0? Do you bootstrap and attempt to raise again when you have made more progress? Do you have family / friends who can help float you?
This is a situation you should always be prepared for regardless of whether you are actively fundraising or not. Investors will likely even ask you this question as a hypothetical scenario to understand how you think about your business.
Investors want to invest in growth
The trickier situation is to prepare the remaining three fundraising plans.
Taking a step back, it’s worthwhile to know that regardless of your stage, investors want to invest in growth. To be clear, growth means increased revenue or increased number of users/customers (or both!). But, it does NOT mean growth of your employee base!
With that in mind, you should understand clearly what lower and upper bound raises you’d be wiling to chase. I.e. your lower and upper bound numbers should ALWAYS be raises where you could put the money to good use to grow the company. Here’s a quick thought experiment:
For your upper bound number, if someone offered to invest $50M into your company, would you know how to deploy that money efficiently to increase your growth tremendously?
For nearly all seed stage companies, the answer is no. You could certainly hire more people with $50M, but again, growth is not measured in terms of employees. It’s measured in revenue results. Could you turn $50M into $1B in revenue in the next 2 years? At the seed stage, you don’t have enough information about the levers of your business to know how to do this.
In many cases at the seed stage, you have some sense of 1 or maybe 2 customer acquisition channels that are working (at least for the time being). And, you should use your data from these experiments to figure out what is the maximum amount of money that you’d feel confident throwing into these channels to yield great growth. Great growth in venture investors’ eyes is often 30% MoM growth or higher depending on your baseline revenue and the space/business you’re in.
Similarly, you’ll want to repeat the same exercise for your lower bound number. If you were to spend 2 months dedicated to fundraising, what is the smallest investment number that would be worthwhile raising such that you could immediately pour that money into growth for your business?
Consider growth, 18 months of runway, buffer, and milestones
Ok, so now you have a lower bound and an upper bound number for your raise.
Now, to pick your target raise, which is in between the lower and upper bounds, you should figure out what is the number in this range that will:
- Give you 18 months of runway
- Multiply that number by 2 for buffer, because things always take twice as long to achieve
- And also gets you to the next milestone in that timeframe
If your next milestone is a series A round, you should consider that series A milestones tend to be in the $2M-$3M net revenue runrate range these days. This is a step up from the $1M runrate milestone that people touted a few years back.
If your next milestone is a seed-plus round, you should know that a lot of startups chasing after seed-plus rounds (i.e. what the old series A rounds used to be) tend to be doing $500k - $1M net revenue runrate range as of this writing.
NOTE: Marketplace and ecommerce companies, GMV is NOT REVENUE.
I’m sure the milestone targets will only rise as more people become entrepreneurs and competition for limited investor dollars increases. So, aim to err on the side of being more conservative around what milestones you need to hit. Also, if you are in a crowded space (e.g. on-demand food), you will need to above-and-beyond surpass these rough milestone guidelines to demonstrate you can rise above the noise.
More on milestones in a subsequent post, but the bottom line is that you should make sure to pick a target raise number that hits these criteria, because you do not want to fall short and be dismissed at the next round for not having accomplished enough in a timely manner because you raised too little money.
Form a concrete plan
So, now you need to prepare a concrete plan for all three raise numbers. You should figure out:
- Who you would hire? (If you have specific names of people in mind who want to join you, this is even better)
- How you would deploy the money for growth? (the more specifics, the better)
- What milestones would you hit? And on what timeframe?
- What would the payback period of your customer acquisition be? (if you know)
4 plans give you optionality
Now that you know what you’ll do in each of these four scenarios, you now have a lot more optionality. Although you will still go out and discuss your target raise, if an investor asks you why you aren’t raising more, you can always say, “Well, actually, I’ve prepared a plan around X, and if we have the interest, we’ll certainly opt to do more with a larger raise.” By preparing details around how you’d use the larger raise, an investor may actually offer to invest at that larger amount.
Alternatively, let’s say an investor says, “I really don’t see how you’ll hit your target raise, and if you’ll fall short of your raise, I’ll lose my money. I’m out.” You’ll have a good response to this as well – you can describe what happens if you raise near $0 and also what you can achieve with your lower bound raise.
Alright, go get ‘em!
Fundraising is a nebulous process that I aim to make more transparent. To learn more secrets and tips, subscribe to my newsletter.
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06 3 / 2016
Who is the best person to ask for an investor intro?
In my last post, I talked about how to write an email requesting an investor intro, but I didn’t talk about whom you should ask.
tl;dr - in order, the strongest referrals to investors come from:
portfolio founders who have raised recently from that investor (i.e. not enough bad stuff as happened at their company to make the investor disillusioned w/ the entrepreneur) OR past portfolio founders who have made the investor money investors in your company personal connections other investors / founders / former colleagues of theirs; note: exercise caution here
When I was raising money for LaunchBit and I wanted to reach investor John Doe, I used LinkedIn to see who knew him. A very often, I was a 2nd degree connection to John Doe via a number of people including:
Investor Billy Bob - someone I’d just pitched; jury still out on whether he’d fund LaunchBit
Entrepreneur Sarah Smith - someone I’d known for years who is really nice
Entrepreneur Erlich Bachmann - a well-known entrepreneur whom I’d met once before at a startup party
Investor Christine Tsai - an investor in LaunchBit whom I’d known for years and even worked together with at Google
Entrepreneur Jane Do - an entrepreneur whom I’d met a couple times before at various startup circles and had just raised money from John Doe
Who is best to ask for a referral?
Obviously, this situation wasn’t super ideal. In an ideal world, my best friend would be a super successful entrepreneur who would know John Doe and could make an intro, but when you’re asking for potentially hundreds of investor intros - yes hundreds (more on that later), this is not going to be the case a lot of the time.
The seemingly obvious person here is Christine Tsai, because she’s known me for quite a while and also invested in LaunchBit. So, I could ask her. And you certainly should leverage existing investors. So, I’d ask Christine.
But, Christine is also an investor and pings potential co-investors all the time about deals, so what is the weight of her recommendation? In fact, to a certain extent, it’s her job to sell her companies to downstream investors…so will LaunchBit stand out to John Doe amidst all her other referrals?
I should probably also get a second intro in parallel in case Christine takes a long time to do this intro AND as a way to stand out once her email hits John’s inbox. If he sees a couple of people mentioning my company, that would remind him about us.
I definitely shouldn’t pick Billy Bob. Even though I’ve talked with him most recently, I don’t know yet what he thinks about LaunchBit. I don’t know if he’d be an advocate, and I’m not sure if he’d recommend us. In fact, if he and John Doe were to discuss the deal, they could both end up talking each other out of it, as often happens when investors get together. Ideally, they should come to their own independent conclusions about my company.
I could ping Sarah, since she’s always been super helpful and nice to me. But, I should find out first how she knows John. Did she pitch John and did he say no to her company? Just because John and Sarah are connected via LinkedIn, I’m not sure what John thinks of Sarah, so a recommendation from her may or may not be a positive signal.
I haven’t talked with Erlich in years and only met him once at a party. Like Sarah, I don’t know what John thinks of Erlich and vice-versa. Since Erlich is successful, chances are that John respects him professionally on some level. However, I’ll need to pitch Erlich and sell Erlich first on LaunchBit before talking with John, and since it’s been years since I’ve spoken with him, that might be tough. Erlich is probably not my first go-to person after Christine if I have a choice but could be a last resort.
Finally, there’s Jane, who just raised money from John. Based on that signal alone, I know that John thinks highly of Jane and is still really excited about her business. Like Erlich, I would need to sell Jane first on LaunchBit so that she could sell John on meeting with me. Note: you are always selling – even if someone isn’t an investor! They can often help you sell your company to investors or other great contacts. Even though Jane isn’t famous, she’s a much better person to get a referral from over Erlich, because I already know that John not only respects Jane for her work – he’s so committed that he invested in her work.
So in this situation, I would ping Christine and in parallel, also ping Jane to discuss w/ her briefly about whether she thinks it makes sense for me to connect with John about LaunchBit and whether she can help me with that introduction.
Getting investor intros is a game of hustle that often takes a long time. Approach the best people who can help sell your company and whom an investor thinks highly of. Approach multiple people. And always be selling – even to people who are not investors.
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03 3 / 2016
How to ask for an investor intro?
The VC world is very relationship-based. This is changing, but many VCs would prefer to meet with founders who come highly recommended from close connections. The problem is that well-connected people who can help with intros are often inundated with intro requests.
So, even if you ask your well-networked friend who is your total supporter of you and your company for an intro, it could still take him/her a couple of weeks to do your intro-request.
Unfortunately, as a founder, you really don’t have time to wait a couple of weeks just to get an intro. And sometimes, you need to get an intro from your well-connected friend to another well-connected friend who can do a strong intro for you. And that could take weeks!
So what do you do?
You need to make it super easy – as easy as possible – for people to do intros for you. Here’s how.
1) First briefly ask/email your friend/acquaintance if they wouldn’t mind pinging Investor John Doe with your request
Tell your friend that you’re raising a round, and you’re interested to talk with Investor John Doe to gauge his interest in your business. Ask your friend if he/she wouldn’t mind pinging John Doe with your request to meet up briefly. Tell your friend/acquaintance that if that’s cool, you’ll send a separate email with the request.
2) Write an email that makes it super easy to fwd to John Doe
THIS IS SUPER CRITICAL. If your referrer needs to think, write, or spend more than 5s on your intro, then it will not get done for weeks.
Also, write the email from you. DO NOT TRY TO WRITE THE EMAIL FROM THE PERSPECTIVE OF YOUR REFERRER. It will not be in his/her voice, and he/she will end up spending a ton of time editing it.
Here’s an example of a very good email requesting for an investor-intro from one our batch founders with details of the business changed for confidentiality reasons.
Hi Elizabeth,
Thank you in advance for sending this to Martha at BigCrazy VC. We’re raising our seed round and I’d like to get her thoughts on HippoCo. Here’s a quick background:
The $180 Billion hippo education market is antiquated and ripe for disruption:
1. Highly fragmented - over 80% of hippo education is distributed through mom and pop stores and only 20% is branded, elite hippo education
2. Structurally inefficient - archaic supply chains require significant working capital for inventory and long lead times to launch new classes / educational content for hippos
3. Un-segmented - Product offerings are split mainly into expensive, elite hippo education or cheap made-up content for hippos with nothing in-between
HippoCo has addressed these issues and created a direct-to-consumer educational brand that offers affordable, useful educational content for for the millennial hippo. We co-design and market new educational products in collaboration with top teachers at traditional hippo schools.
The results are validating our model and popularity with hippos:
- Annualized revenue: $900K USD, growing +70% QoQ
- Margins: 50% - 60%
- Strong unit economics: CAC: $25, 25% repeat purchase rate in the past 6 months
Founders are third generation hippo teachers and technologists from the Bay Area.
My Best,
Sally
When I forward an email, I simply add my note to the top to give my thoughts / perspective on the founder / company. The email below covers everything that needs to be said – context (why the founder wants to talk with Martha) as well as key information about the business (KPIs and a description).
These are the biggest mistakes entrepreneurs make in asking for intros, which delays them:
- Not providing any context – why the hell do you want to meet?
- Sending a blurb that doesn’t say anything (vacuous)
- Neglecting to include a couple of KPIs
- Asking for 9 intros but only sending one email that can be fwd – you should create a SEPARATE email for each intro you want
If you do any of these bullets, it means your referrer has to THINK about what additional info to add OR do a lot of copying and pasting.
These may seem like silly deal breakers, but if each task takes 5 minutes and your referrer is inundated with even just 10 requests like this a day, it will end up taking him/her an hour to fulfill this. This means that your intro requests will end up being neglected for a couple of weeks.
3) Follow up.
If you don’t hear back from your friend/acquaintance within 5 days, follow up. It may be that he/she forgot to reach out to the investor you want to approach. Or, it may be that the investor never got back to your referrer.
People’s inboxes get buried so quickly, so don’t feel bad about following up!
4) Optional: Let your referrer know how things went
Lastly, assuming you get connected, let your referrer know how things went. It goes without saying that you might like to thank your referrer at some point during this process.
If you end up sealing a deal w/ the investor, make sure to mention that your referrer.
Fundraising is a nebulous process that I aim to make more transparent. To learn more secrets and tips, subscribe to my newsletter.
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21 2 / 2016
Monthly investor reports: how bad news can make you look awesome
As an investor, I’ve noticed that our best-performing companies tend to send investor reports frequently while the ones that are flailing or flatlined never do unless reminded. As an entrepreneur, I know that it can be tough to convey bad news to your investors, because you don’t want them to think less of you or be angry / disappointed. Every time I had to write bad news to my investors when I was running LaunchBit, I would cringe a little bit before hitting the send button.
But, actually, the opposite is true - I think less of entrepreneurs who never send any information, because I think they have no hustle to ask for help when they need it nor are brave enough to own up to the situation. The flip side is that if an entrepreneur rallies everyone together and says, “Hey look, this situation is not going well, can you all help with ABC?”, I really do want to help, and I think highly of an entrepreneur who can bring people together with a tough conversation. Every company goes through tough times – there is always bad news, so you are not alone, and if your investors have done multiple startup investments, they should know that very well. One of my investors at LaunchBit once told me that tough situations are actually an opportunity to shine much more than when things are going well. So, not only should you send investor reports to fulfill your fiduciary duty, it’s also a great opportunity to demonstrate what kind of an entrepreneur you are.
Moreover, it’s also a way for your investors to get to know you as a person. At the seed level, you often don’t have board meetings, so you’ll want to get to know your investors personally through other means, and a monthly investor report is a great avenue. This makes it easier to ask for help, and investors want to help people they know well. The worst situation to be in is to go MIA for 10 months and then out-of-the-blue ask your investors for a favor. Whether it be intros to downstream investors or intros to other companies for business development or intros to job opportunities, sorry, if an investors doesn’t know you well enough, they aren’t going to be able to refer you or put in a good word.
Investor reports can be quick and simple and should only take at max 10 minutes to write. You should send them at least monthly. The Hustle writes one of the best investor reports I’ve seen and sends them weekly:
Here are 3 things you should make sure to include:
1) KPIs
Every company will have different KPIs they are tracking, but for most companies, this will revolve around revenue. At a minimum, include
- Last month’s revenue
- OR if you are pure consumer company, DAUs / MAUs
- Growth
Other potential metrics (depending on the nature of your business) may include:
- Monthly leads
- Churn / re-engagements / upsales
- etc…
Some companies include a graph of their KPIs, which makes it easier to visualize. But if you don’t have one / it’s not useful to your company, don’t sweat it. Investor reports do not need to be a chore.
2) How long are you in business?
You should also include your burn rate and runway. Most entrepreneurs don’t realize that investors can also potentially help you broker an acquisition / coach you through an acquisition if you can’t raise more money or get to profitability. But, they cannot help if you have too little time left, which is often the case when most startups start to seek acquirers.
Much like how you should allocate months to fundraise, you’ll need even more time to kick off relationships with would-be acquirers. Sending an email out of the blue telling your investors that you have just 8 weeks of runway left and that you are only now seeking an acquisition is not helpful to anyone, and if you do find one, it will not be material.
3) How can your investors help you?
Put your investors to work. How can they help your business? Do you need specific intros? Do you need them to provide feedback on your deck for your next round? Do you need help filling a specific role? Do you need UX feedback?
You should ALWAYS ALWAYS ALWAYS have a call-to-action in your investor reports. They may not all be able to help, but you should ask.
Investor reports can be used to connect people
As an aside, investor reports are also a way to be a connector. Investors LOVE to network, and so you have the opportunity to connect all your investors with each other. The Hustle, for example, will often host and email its investors about exclusive events, and then later, whenever I run into co-investor, we’ll often exchange a line or two about The Hustle, and everyone will feel good about themselves for being an investor.
I should note their events are not fancy / costly at all. It’s about the exclusive attendee list, not the actual food / drinks. People can have a really good time with just $2 wine and simple cheese or pizza. Exclusive events are also a good way for investors to bring in their friends, who will in turn also feel like they are part of something exclusive (and may even invest in your company).
Be transparent
Be transparent with your investors about your business. They are already invested, so you have nothing to hide even if you have bad news, and sending reports on a monthly cadence will make them feel closer to you, and they will be more invested in your personal success.
Fundraising is a nebulous process that I aim to make more transparent. To learn more secrets and tips, subscribe to my newsletter.
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14 2 / 2016
Why fundraising takes so long (for most entrepreneurs)?
Techcrunch makes fundraising look like a breeze. You just mosey on over to Silicon Valley, and there are dollar bills lining the road!
Unfortunately, this is NOT reality.
While fundraising for my company LaunchBit, I was a wreck. The actual process of going to meetings to talk about your company was not difficult, but the self-inflicted pressure to convert investors started to take a toll. Compounding this with a lack of sleep made the process even more difficult. It started getting harder when I started hearing no and still had to go into every meeting just as energetic as the last.
About 10 weeks into my fundraising process for LaunchBit, I had a nervous breakdown. Literally a nervous breakdown. My body felt like it was being pricked with pins all over all the time. Obviously, no one was actually jabbing pins into me, but it was annoying, and I was unable to sleep at night. (not to mention, it simply felt weird)
I went to see several physicians, including some of the best specialists in the country. And of course, no one could figure out what was wrong. Because this nervous issue started around the time I started fundraising, I decided that it was probably related. So, I paused fundraising. And, of course, the problem went away. Fundraising is an incredibly stressful and lonely process that is like a rite of passage for startup CEOs.
Eventually, we raised over $1M in that round (TC reported $960k here), and it sounded like a walk in the park to get name investors into the round. But the reality was it was super hard and took a long time to raise.
These days, I hear a lot of entrepreneurs saying “Oh, my raise will be hard, because 2016 is going to be tough for entrepreneurs.” Honestly, no matter what the economy is or what space you’re in, fundraising is ALMOST ALWAYS F***ING TOUGH as a first-time entrepreneur.
So why is it so hard and why does it take so long?
Here are some common issues:
1) Your story is not yet compelling
Maybe your story is ok, but if there’s no wow-factor to get people really excited, then it’s not going to be good enough to get investment dollars. You’ll need
- a wow product
- a wow results
- a wow team
- a strong / unusual differentiator
- an interesting insight
At least one of these has to be above and beyond amazing to make your story awesome.
2) There are discrepancies in your story
I’m not talking about lying (though it goes without saying that you should not lie about your business!). Sometimes you are so close to your business, you do not even realize what looks off.
For example, if you have a marquee list of enterprise companies as your customers but are only generating $10k / month in revenue, you need a good explanation of why this is when these customers could be paying you so much more.
It could be as simple as stating that your customers are right now just piloting / beta testing your product. But your whole story needs to be consistent.
3) You cannot yet answer questions well
Before you start fundraising, you should be able to answer all common fundraising questions well.
In addition to this list, you’ll also be asked about your vision / where you see the business going / how you see the future. This is often difficult for a lot of first-time entrepreneurs, because you are so heads down in the weeds just trying to fight fires. And who the f*** knows what will happen in 10 years? You don’t need to be right, but you do need to have a vision for the world as the CEO.
You will also be asked about your next hires and what you’ll do with the money. Lastly, you will be asked a hodge podge of questions you cannot anticipate apriori.
4) You do not seem confident in your pitch
Fundraising is an odd beast for first-time entrepreneurs. On one hand, it feels like a sales game, because you are trying to sell an investor on your business. But on the other hand, it is a lot like a power struggle. You must assert yourself and show that you know how to run a company.
However, there are a ton of great entrepreneurs who are not naturally high energy or confident-seeming even if they are actually confident great leaders in quieter ways. You’ll need to exude high energy and high volume to display to give an investor confidence that you can run this business.
This may mean experimenting with how you speak / your body language / what you wear / your mannerisms / etc.
5) Investors have information that you’re not privy to which concern your business
Even if you can solve for the points above, there’s a lot of information that investors know that entrepreneurs don’t.
Investors may
- See way too many pitches in your space / think the market is crowded (e.g. on-demand food delivery)
- Have had a bad experience with a company in a similar space / business 7 years ago and don’t want to touch that space again (e.g. travel)
- Know just how big competitor X is and how much funding they have secretly raised and are concerned that you are too closely related
In your first 20 meetings, your job is to tease out all of these concerns. You need to figure out what is wrong quickly so that you can fix these issues with subsequent fundraising meetings.
However, it’s important not to have pitch-whiplash and change your pitch based on every little comment. But if 3 investors mention the same concern, then you should be self-aware enough to test how to change your pitch / investor conversations OR change the types of investors you pitch to. Test new ways to address concerns in subsequent meetings.
So, fundraising takes a long time, because you need to meet with a lot of investors in order to refine your pitch / how you pitch / and find investor - business fit. And unfortunately, there are just no shortcuts.
Fundraising is a nebulous process that I aim to make more transparent. To learn more secrets and tips, subscribe to my newsletter.
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07 2 / 2016
How do seed VCs pick their investments?
On Friday, I spent a couple of hours at my alma mater talking with student entrepreneurs about their companies. When I got there, most of them wanted to know how do VCs pick their investments and what does 500 Startups look for?
I didn’t answer this.
Instead, I said, “Let’s pretend we’re all forming a VC firm right now. And there’s an entrepreneur coming into the room in 10 minutes. What questions would you ask him/her to decide if you’re going to invest?”
I wasn’t sure what people would come up with, but here’s the list of questions the group collectively came up with in 10 minutes with my commentary in brackets:
Team:
- Do you have a strong team? [Get more specific - what does that mean?]
- Does the team have particular domain knowledge / expertise?
- Have the co-founders worked together before?
- Can they change directions quickly if needed / make fast difficult decisions?
- [Also what about perseverance / grit / tenacity?]
Customers / traction:
- Do they have product / market fit? [Get more specific - what questions would you ask to figure this out?]
- Do they have customers? How many?
- Who exactly is the customer?
- Are they paying? If so how much?
- How frequently are customers buying / using? [Or churning]
- How much does it cost to get a customer?
- What is a customer worth? [lifetime value]
- [How much revenue are you making and how has this changed over the last few months? What are your margins?]
- [How are they getting customers? What customer acquisition channels / what have they tried / not tried / etc]
- [Is this growing? / how quickly?]
Market:
- What is the market size? [I have disputes about this one but that is a topic for another post]
Problem / solution:
- What specific problem are you solving?
- [Why are you doing this? Motivation?]
- What makes your solution unique / differentiated?
- Is there any special tech or IP here? [in many cases, probably not worth asking]
- What is your unfair advantage? [Often there is little-to-none in the beginning but worth asking about this to see how entrepreneurs think about this / see if there is special domain knowledge / special relationships & partnerships]
Other:
- What is the cost of equity ownership? [May or may not ask this depending on if our hypothetical VC firm leads rounds or not]
- [What is a team’s burn rate?]
Obviously, if we had brought in a real entrepreneur to talk with, the list would also include more specific questions about the particular business / how the product works.
I was pretty impressed by this laundry list of questions they generated - not bad for 10 minutes! It looks like I can go retire on a beach somewhere.
Fundraising is a nebulous process that I aim to make more transparent. To learn more secrets and tips, subscribe to my newsletter.
Permalink 7 notes
29 1 / 2016
How many entrepreneurs are doing their pitch decks all wrong…
Even though there are a lot of web resources on how to put together a pitch deck for seed-stage companies, most don’t address how many decks you need and for what purpose.
If you are fundraising, you’ll need at least 2 decks:
- An email deck
- An in-person meeting deck
If you are participating in a Demo Day with an accelerator, you’ll also need a Demo Day deck.
Obviously all your decks will be similar, since you are pitching the same company! All of your decks should:
- Be compelling - lead with your strongest points first! If it’s team, then lead with team. If it’s traction, lead with traction. If it’s a big problem, and you have an unusual solution, go with that.
- Tell a story - this is not just a series of facts. The slides must flow together.
- Be visual (i.e. verbalize / don’t make an investor read words)
- Be simple - an investor should understand the slide in 1-2 seconds; don’t make him/her think
- Include your contact information so that people can contact you!
But, there are some major differences…
What is an email deck?
An email deck is what you’ll email to investors if they ask to see a deck first before setting up a meeting with you.
There should be enough information here to be compelling enough to take a meeting with you. BUT, not too much such that they can decide NOT to take a meeting with you. Keep in mind that many investors could (will!) forward this to other people, so don’t put anything too confidential in here.
Examples of what to put in (not in this order per se):
- Problem you’re solving
- Your solution
- Traction - key performance indicators (could be MRR, growth, users, etc – whatever makes the most sense for your business)
- Market
- Team
The purpose of the email deck is to get a meeting - that’s it. So, you should include facts about your business that will be compelling to get you that meeting and nothing more.
The flip-side is that you shouldn’t include too much – specifically, anything that can be nitpicked. These are some things I wouldn’t include in an email deck include:
- How many people you are hiring
- Financial projections / forecasts
These are hypothetical – the number of people you hire could change, and if an investor thinks you should hire 5 sales people instead of 4, you shouldn’t let that be what stops you from getting a meeting. Similarly, if you are projecting too high or too low of a revenue number for next year, an investor may think that you are unrealistic or not ambitious enough, and you are not even there to defend your argument when he/she reads your deck.
Realistically, an investor will spend only 10 seconds looking at your deck, so it has to be understandable and concise. It’s ok, if he / she only understands the gist. The meeting will allow for detailed discussion.
Lastly, an email deck serves to provide context. Sometimes an investor you’ve already met with may ask for an email deck so that he/she can send the opportunity to other partners / investors at his / her firm so that they can get context before meeting with you.
What is an in-person meeting deck?
An in-person meeting deck has the meat. Lots of great people have written about what slides you should have for this deck. You can find great resources here, here, and here (among many other places). So, I don’t need to dive into this in detail.
In short, an in-person meeting deck should have ~10 high level slides with appendix slides that dive into the weeds. In addition to the other slides from your email deck, include your business model, 1-2 key unit economics (LTV, CAC, churn, etc), etc.
Even for this deck, you’ll want to still keep the slides at a high level. If an investor asks to dive into the weeds on certain areas, then you can guide him/her to the appendix slides you’ve prepared and fully cover a topic before continuing on. Some investors prefer to dive into product questions and others really want to dive into customer acquisition channels and unit metrics. So, you’ll want to have lots of appendix slides to cater to different audiences, but most of the time, you won’t dive into all of them.
If you’re meeting with an angel investor, this first meeting may be all that you need to secure funding. But, if you are meeting with a VC, the purpose of this deck is to get the next meeting. (Be sure you ask questions to understand how an investor decides to invest and what his/her process is.) At a firm that moves quickly, that next meeting could be an all-partner meeting, which is typically the last meeting needed to make a decision (for seed-stage).
Go get ‘em!
Fundraising is a nebulous process that I aim to make more transparent. To learn more secrets and tips, subscribe to my newsletter.