tech | growth | venture | 2017 October
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Inspired by recent conversations with aspiring entrepreneurs and the questions they asked, I’ve been posting recently on topics that are useful during the fundraising process.

I’ve covered storytelling as a tool to help others emotionally engage with the business and displaying empathy for users via a heightened degree of customer knowledge.  Here, I’ll cover more of the capital raising process itself and a few tips that should make things go a little more smoothly.

 

 

Fundraising is commonly a long process that begins well before an actual roadshow and investment take place.  We’ve come to think of the capital raise in 3 distinct parts.

  • Part 1: Preparation and iteration – The key milestones here include getting the presentation deck prepared, inviting feedback from key stakeholders, organizing the data room with all necessary information, and creating a place to track investor outreach.
  • Part 2: Presentation and follow-ups – This step is self-explanatory and contains the presentation to investors as well as the follow-up conversations that occur after the initial pitch.  In the next post, I’ll dive deeper into how to identify and rank these potential investors as well as best practices in communication.
  • Part 3: Close – Speed matters.  Look to close the deal as quickly as possible after receiving a yes, uncertainty can derail the process if allowed.

 

 

More often than not, a snapshot of the headlines on sites like VentureBeat and TechCrunch can give the impression everyone is fundraising and doing so with minimal effort.

What’s missing is the real story, unless a startup is a runaway success, deals rarely come together quickly.  In reality, fundraising is usually a marathon that will test resolve and require luck along the way.

 

Despite that fact, fundraising is an amazing career experience, and with the right attitude, can be a lot of fun.  You’ll meet more interesting and successful people in a short amount of time than at any other point in your career.

It’s important to take advantage and learn from every interaction.  Great investors will force you to think outside the box about the business and highlight the potential hurdles ahead which they’ve learned from experience as operators and investors.  LISTEN, you’ll be better prepared for the next pitch meeting and to run the business overall.

Outside of the opportunity to learn, other benefits include adding new skills:

  1. Sales – Obvious example, fundraising is all about learning to sell.
  2. Leadership – Fundraising may have one point of contact, but it takes a team to build a deck articulating a well-rounded vision. Not to mention, the possibility jobs can be dependent on closing the round, placing an increased emphasis on communication.
  3. Presentation – Another obvious example, being able to present to large groups of unfamiliar faces only gets easier with practice. Additionally, the ability to craft a well-designed deck comes in handy. People love pictures.

Perhaps most importantly, fundraising is unmatched when it comes to teaching humility and bouncing back from failure.  Even small venture capitalists see ~500 deals annually, and make somewhere between 8-12 investments meaning “no” is the answer 98% of the time. While it’s important to understand the odds are steep, the fundraising process is an incredible experience that teaches career-long lessons like only it can.

 

 

Now that we’ve established fundraising is a difficult, but rewarding task, it is VITALLY important to know when to begin the process.  More often than not, we see many startups believe the process will take 3-4 months.  Our advice is to take that timeframe and at least double it.

The other crucial mistake we see is not raising enough capital for a given burn rate.  This is usually a combination of misunderstanding two variables, as mentioned the first is the length of the process, but the other is much more nuanced: negotiating leverage for the subsequent raise.

Attempting to close while the cash balance is dangerously low is likely to negate any negotiating leverage and creates the opportunity for investors to include less favorable terms.  These terms often have the tendency to become an issue at the worst time possible.

We advise raising no less than 12 months of operating capital and prefer to see startups targetting a raise that buys them 15-18 months of runway.  This creates a buffer in the event unforeseen circumstances such as a slower than anticipated average sales cycle or a longer than anticipated capital raise create a cash crunch.

Lastly, always know the seasonality or cyclicality of revenue and sales.  A downward trend, even if the YoY growth is great and can be explained, creates an unnecessary hurdle.  For example, if sales ramp up in Q1 and Q2 but cool off in Q3, it’s best to ramp the roadshow and target a close in those first 6 months or be confronted with undesired friction.

Once the decision to raise capital is made, the next step is often to create a “pitch deck.”  However, that’s only the beginning of the process.  Great startups recognize that fundraising is much more than a pitch deck, but a process that will likely take months and involve contact with dozens of individuals.  As a result, they build the process for scale.

This includes creating various presentations tailored to the type of investor and method of communication, preparing a data room that can be easily shared, and creating a CRM (excel, Hubspot, etc..) to keep track of each interaction.

One last tip, research market comps and use them to direct the narrative of the future.  I’ve seen several startups use this tactic, and when done well it can be extremely powerful.

This was a long post covering a lot of (hopefully useful) information.  If you made it this far, thank you for reading!  I’ll be back in a few days with Part II which will focus on identifying the right investors, keys to pitching them, and how to close the deal.

As always, if you liked this post, please share!  Part II can be found here.

Credit: John Tough, partner Invenergy Future Fund, for the inspiring the images used in this post.  

This week, behavioral economist Richard Thaler won the Nobel Prize in Economics. Thaler is best known for his work for disproving the traditional assumption that people make completely rational economic choices. If you’re a founder and not interested in behavioral economics, you should be.  A great place to start is Dan Ariely’s Predictably Irrational.

A few days ago, I mentioned the possibility of putting together a few posts on pitching and fundraising topics that are not covered as extensively as others. One particular topic that is often touched upon but, as evidenced by Thaler’s work, cannot be over-emphasized is the ability to demonstrate profoundly deep knowledge of your customer.

This capability is almost impossible to fake.  Either a founder speaks regularly to customers, both in-person and through data, or they do not.  Founders who have this deep knowledge are often able to easily speak to the customer behavior that is unique to their industry, and explain exactly which steps they took either with the product or the sales process to exploit these behaviors to the tune of traction.

A few real-world examples from startups include:

1) Understanding that in older, more entrenched industries a full technological leap may be unwanted or not possible.

There are a multitude of reasons this is the case, but the three that immediately come to mind are:  too risky from a financial or operations perspective, lacking the internal technical talent to implement or learn a new software, and the “that’s the way it’s always been done” mentality.  The quote below from Invenergy Future Fund partner John Tough perfectly sums up how founders should think about disrupting these industries.

No new technology solution is going to completely rip & replace existing software. Start-ups that expect to dramatically replace existing software architectures and make generalizations about weakness of existing solutions simply have not done their homework. @johnjtough

We’ve seen attempts to overcome these hurdles through slow-roll outs (note: slower revenue growth), taking increased responsibility for implementation (potentially higher costs), and inserting a human element into the process, think customer starts online but confirms via telephone (higher CAC).

Obviously, none of these options are ideal but are often necessary to gain traction within these legacy industries.

2) Learning that, much like B2C, in Enterprise SaaS it is still necessary to build for the end user.

Telling a visionary entrepreneur not to build the sleekest designed or most technologically advanced product possible seems counterintuitive. But, depending on your customer’s end user it could be the best possible strategy and a great way to conserve already constrained resources.  We came across this insight personally at Choose Energy on the B2C side and it recently surfaced again with a B2B startup with which we met.

Since I want to maintain the startup’s anonymity, I’ve made up this fictional example so please excuse me if it seems completely ridiculous on multiple levels.

Imagine building a software that optimizes call center or chat volume through algorithms based on inputs from the call-center agents themselves.  Who should the startup be building for?

My answer would be the call-center agents who are responsible for the inputs. The algorithm is only as good as the data it receives from the agents, who in most cases will be high school educated workers who are not interested in learning the newest technology but simply want to get the job done as efficiently as possible. A simple product that interrupts their workflows as minimally as possible is the way to go.

3) Adapting to a communication style that makes the customer more comfortable. 

Some new tech expressions can sound scary, especially to those in industries that have yet to be largely disrupted.

While phrases like “machine learning” and “artificial intelligence” can sound great in a deck or pitch meeting, potential customers often hear those words as the potential to remove the human element, i.e. them.

Another common phrase in the tech space is “cloud storage”, and while we think reliability and ease of use, some older industries think “unsecure storage.”

Founding teams who are exceptional at sales strike the right balance of communicating the value of their technology to management, get buy-in from those who the software will impact most, and make everyone comfortable during the process.

Knowing your customer is crucial in any business, but special founders are able to demonstrate unmatched insights into their customers.  More importantly, those founders turn these observations into distinct competitive advantages in sales, product, and marketing.

Like this post? Sharing is always greatly appreciated!

 

 

Last week, Jonathan and I had the privilege of joining an SMU MBA class as the judges for the final assignment of the class: pitching a business born from a mod-long hackathon.  During the break, we held a small Q&A session and one question we were asked by a student was, “how far are we from the real thing you guys see on a day-to-day basis?”

To be fair, this class strictly focused the ideation, market research, and MVP demo of an idea so the answer was quite far.  However, SMU does a nice job of offering entrepreneurial-minded students the chance to take classes which get them closer to a finished product.

This interaction did inspire me to finally begin writing a series of blog posts I have been contemplating on pitching and the fundraising process.  I’ve long assumed it would be worth writing a few thoughts on these topics but wanted to do so outside of the standard pitch deck structure, which I cover extensively by providing examples in my previous 50+ Resources for Entrepreneurs post.

Most venture investors at the seed-stage will tell founders one of the first things they are looking for is a strong team. Particularly, we are looking for great leaders and communicators who generate a lot of energy for their team.

These leaders take the noise, rather internal or external, and produce a clear message from it.  For me, the clear message is key especially in a world where you have your consumer’s attention for less than 60 seconds in most cases.

This skill manifests itself in several different parts of the pitch meeting, but none more obvious than the initial setup explaining what the company does and why it does it.  Here are a few tips on how to clearly explain the mission while getting investors excited to hear the rest of the pitch.

1) Let the audience create their own frame of reference and ask a question to which you know the answer.  For example, in this Y Combinator video, Sam Altman is pitching a company from his cohort that is an all-in-one app to house all of your personal EMR’s.

The first question he asks a potential angel investor is, “What do you believe the biggest problem in healthcare is today?”  Sam has actually done something very clever.  When the prospective investor says, “rising costs,” Sam immediately educates him on how this new product is going to drive down the exponentially rising costs in healthcare.

2) Avoid the “imagine a world” type statement, and tell a personal story instead.  We’ve always been a fan of the saying “the best inventions serve the needs of the inventor” primarily because it often translates to founders being more likely to deeply understand their customers.

The team at BioLum does an amazing job using this strategy in their pitch.  All three founders are asthma sufferers, and as a result solving the problem is deeply important to them personally.  The most successful founders are often obsessed with solving the problem over all else; if that problem is personal to an entrepreneur the desire to find the solution is amplified by a significant amount.

Over the next few posts, I will continue to focus on nuanced tips and wrap up with a post on how we think about running the process of fundraising including this deck on which we will elaborate further.  Until then, I’ll be in Austin for Startup Week until Wednesday.  If you’ll be there, feel free to find me and say hello.