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Pitchbook has released a new study on startup ecosystems and a few things immediately stand out to me:

1) TX has anemic local capital per venture backed startup. It’s WAY behind states with growing ecosystems like Tennessee, Utah, Michigan, Missouri, and Colorado.

Some might argue the number is artificially low due to the angel ecosystem filling the gap, but outside of Colorado and Utah the states mentioned above have very minimal VC activity. Additionally, the number of startups receiving funding hasn’t proven this to be true, bringing me to my second observation.

2) TX seed start-up density (# of startups receiving seed funding / pop.) is low. TX’s number is around 15 – several states are ~20+. This makes sense given the above – seed rounds are often led by local investors, and if there isn’t enough capital then fewer ideas are funded. However, Texas does beat IL which is a surprise given Chicago’s recent success.

3) Unsurprisingly, the density gap between established ecosystems like CA, MA and NY really grows in early-stage and late-stage funding. However, the gap is MUCH wider than I expected. In some cases, TX trails states with more active startup ecosystems by 5X.

All of these things are evident on the ground and it’s good to see data backing up the assumption more capital is needed in TX. The report highlights the need for startups to seek angel / seed funding that really understands the fundraising process and has a network to connect them to follow on capital.

You can find the study here.

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.

 

 

Over the last 18-24 months, as we were working to evaluate the product-market fit of an early stage venture capital firm focused on emerging ecosystems, we met with several entrepreneurs. The goal was to gain insight into the strengths and weaknesses of their respective ecosystems and determine how we could best solve their problems.

Lately, as we’ve become more public about our intentions to invest, I’ve noticed some founders who approach us don’t feel comfortable being completely clear in their intentions for meeting.  I’m unsure if this due to the current atmosphere in these ecosystems, if we aren’t doing a good enough job in expressing our desire to help founders to the best of our ability, or I am naive and should always expect to be pitched.

Regardless, I strive to tailor the circumstances of the meeting to the appropriate levels, and to quote Jason Calacanis, when it comes to meeting founders “there’s nothing I love more.”

The reason I do this is that I want to be known for always having time for founders.  People tell me, “I know you’re really busy, I don’t want to keep you.” But it’s my job to meet with founders.  There is nothing I love more.  – @jason

If I know your intentions for our meeting, it allows me to optimize the time we spend together by adjusting three important aspects to any encounter.

1) Setting – If we are meeting as an opportunity for both of us to expand our network, I’m more likely to suggest lunch or a coffee due to the more relaxed nature of the conversation.  However, if we’ve agreed to a pitch meeting our conference room is preferred.  First and foremost, the founder now has the choice of how they’d like to present their deck, if at all, and they don’t have to do so on a laptop screen at an awkward angle inside of a loud coffee shop.  Secondly, it provides me the opportunity to take better notes and in turn offer much better feedback regardless of our investment decision.

2) Preparation – I am a huge fan of Cal Newport’s Deep Work and Greg McKeown’s Essentialism which means I’ve learned to immensely value other’s time as well as my own.  If we are meeting as a casual get to know you, I’ll do some light research on you so that I am able to anticipate your needs and how I can help. However, my preparations for pitch meetings are often much more in-depth and take up large portions of my day.  It’s crucial to me founders leave those meetings feeling as though they got something other than another opportunity to pitch and if I’m surprised by the pitch I won’t be able to be adequately prepared.

3) Time Allotment – This one might be a little more counter-intuitive.  If our meeting is a more casual, networking style encounter, I’m more likely to be strict with my time. Whereas during the more formal pitch meeting, I’ll put a 30-minute buffer on the back-end to allow us to go over.  The last thing I want to do is rush out of what is a vital conversation for both parties.

I hope this list encourages founders to feel as though they can be open with their intentions in meeting with me moving forward.  The best part of my job is meeting with people who are on the front lines building businesses that could potentially change a major part of our lives.  Running a business is often a 24/7/365 endeavor, and my goal is to ensure I don’t waste a minute of an already precious resource….your time.

Nothing is more critical to a growing startup than pricing strategy, and all too often startups leave too much money on the table by not charging enough. This makes it difficult to take full advantage of the new value their product creates.  As Marc Andreessen recently said, if he could put one phrase on a billboard in Silicon Valley it would be “raise prices.”

My hypothesis on why startups currently have an issue with pricing is the recent (but now seemingly over) period of apathy towards negative margin growth. It conditioned startups to capture as much of a market as possible without thinking deeply, or at all, about pricing. While this gets a product into the hands of users, it does leave open the question of what buyers are willing to pay for it.

To answer this question, it’s useful to turn to Econ 101’s first lesson – supply and demand – and more specifically, consumer surplus.  Why is consumer surplus good?  For one, you always want your customers to feel as though they are getting a deal.  More importantly, it becomes possible to leverage that feeling to push out the demand curve for the core product, which is what any business really wants to accomplish.

 

Free or discounted complementary goods increase consumer surplus while shifting the demand curve

While perhaps unintuitive, one of the best ways to do this is by “giving away” complementary products or features.  The result pushes out the demand curve for the core product, selling more at a higher price, while simultaneously increasing the consumer’s perceived value (consumer surplus).

It’s easy to see the effect of this strategy in two of the most popular technology business models: Enterprise SaaS and Marketplaces.

  • Enterprise SaaS – Much like iOS and Android, Salesforce has an app store called the AppExchange. Consumers aren’t charged for access to the apps but instead the large selection combined with easy integration of popular applications pushes out the core product’s demand curve, allowing them to charge more than would otherwise be possible for the core product.
  • Marketplaces – There’s a reason almost every successful customer acquisition platform has a “tools” or “analytics” section on the selling side of the marketplace, the goal is help the
    supply side sell more.  Charging $10 for add-ons such as a pricing tool makes little sense in this case because the value is hard to quantify for a seller.  Yet, introducing it for free then subsequently raising the customer acquisition (i.e. booking or listing) fee by a few percentage points has little effect on diminishing the over supply.

Finally, it’s important to address the 800 lb. gorilla in the room: Amazon Prime.  Amazon has leveraged discounts on services that may seem arbitrary but actually create a large consumer surplus for the core product. Let’s take a look at a few of the discounts offered to Prime members on ancillary services.

Amazon Music Unlimited: $9.99 non-prime / $7.99 Prime

Amazon Digital Storage: (100 GB): $11.99 non-prime / 5GB and all photos free for Prime

Amazon Audible Channels: $60 non-prime / free with Prime

By including discounts on these complementary goods, Amazon has increased the demand (i.e. pushed out the curve) for Prime.  Furthermore, the consumer surplus created by including these complementary goods is less than the increase in unit marginal cost for Prime’s main service, faster shipping.

The next time you are thinking about your product pricing strategy, take it from these tech behemoths: it’s not only what you charge, it’s what you give away too.

Special thanks to Jonathan Crowder for helping me think through this post.

Recently, I crossed a passage in Let My People Go Surfing which deeply resonated with me because so few people seem to leverage the giving nature of others.

I had no business experience so I started asking for advice.  If you admit you don’t know something people will fall over themselves trying to help.  – Kris Tompkins

I love the humility and curiosity shown in this quote. It highlights an openness to feedback that is not regularly encouraged.  Often, entrepreneurs in early-stage, high-growth companies (like Patagonia was at the time) feel as though they are drowning in decisions that could make or break their company at a moment’s notice.

These situations create a strong need for honest, candid feedback on the tough choices that move a company forward.  The ability to deliver advice that is sometimes hard to hear relies solely on creating a relationship that is authentic and not artificially created.

The best mentors are able to challenge without being overbearing.  No one knows the business better than the founder, but the ability to have an open, fact-based debate with a mentor is always healthy.  Mentors should help guide when needed but the decision is ultimately in the hands of the entrepreneur.

Lastly, the best mentorships eventually become two-way streets.  I’ve been on both sides of the mentorship table, and it’s always exciting when I can do something to help one of my mentors.  It takes a great person to donate their time to invest in your success, and one of the most fulfilling aspects of the relationship is when you can turn the tables and return the favor.

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Most of my last few weeks have been tied up in various meetings.  The unique part has been that in those meetings my role has been quite different depending on the topic and the participants.

After one of those meetings, I reflected on how I’ve changed my personal interactions over the years and how I’ve had to adapt based on the topic or individuals involved on the other end.

For me, the intriguing part is this process never ends; the topics and people involved are always evolving. After some thought I believe the cycle looks something like the following:

Step 1: Internally feeling a low level of confidence.  In this case, it’s likely you are in the room with several subject matter experts or professionals who are more experienced than you. The best course of action is to be an avid listener and note taker.  Learn from those around you.

Step 2: Demonstrating externally that you belong, but not quite feeling the same assurance internally.  If you listen and take a lot of notes, the odds are you’ll begin to understand the problem and ask the right questions.

Step 3: You begin to engage with the answers. Instead of just asking questions, you are now able to build upon answers given to the questions you ask and build your own internal insights.

Step 4: Giving others the confidence they need to feel as though they belong.  This skill can be broken into two different parts. The first is explaining a complicated subject in a way where others feel as though they’ve became an expert just by listening to you speak. The second, helping others see their own insights but had not yet realize it.

Very few people make it to step four and it’s one of the skills I feel is needed to lead a company or large team.  It is a truly special strength to instill confidence in others especially when the topic is complicated or the stakes are large.

One of my favorite sayings is “if you’re the smartest person in the room, you’re in the wrong room.”  Get in the right rooms, listen, take notes, engage, and help others see they belong in the room too.

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