tech | growth | venture | Perspectives from an operator turned VC in an underserved market
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2017 was a year of incredible change for me professionally.   We sold Choose Energy in Q2 of this year which triggered a wave of emotions that I wasn’t expecting. Subsequently, we launched Intelis Capital, a dream 18-months in the making.

While the acquisition was our goal, it was also bittersweet. Our team and leadership had worked so well together in the 12 months leading up to it, but the timing was right and I couldn’t be happier with the result we produced together.  Luckily, I still talk with most of the team regularly and hope we’ll have a chance to work together down the road.

Perhaps most surprising to me, was the feeling of anxious excitement that came once Jonathan, Kevin and I officially announced Intelis Capital.  We’d spent a lot of time strategically planning our firm and the brand we wanted to build, but there’s no feeling quite like the one that rushed through me once I realized my job was officially a partner at a firm I’d co-founded.

Partnering with Jonathan and Kevin continues to be an amazing experience, and I’m excited about the future as we work to execute on an ambitious vision in which we deeply believe.

If 2017 was an inflection point for new opportunities, 2018 will be about optimizing the way I work to accelerate the trajectory for potential growth. I ended the year still struggling to adjust to my new schedule and workflow, so my 2018 will center around getting into a rhythm that makes me most effective in my new role.

While most would say they want to read or write more, that strategy didn’t work for me in 2017. I read about the same and only wrote slightly more. Instead, I want to improve the prioritization and protection of my schedule so that I can work on the things that make me a better resource to everyone in my expanding network.

I believe, maybe naively, that this will lead to more research, reading, writing, and listening to podcasts. The goal is to increase the quality of the time I spend with others instead of the quantity.

The result will be me saying “no” more often, but will also give me a chance to improve the way I communicate that response moving forward.

It’s safe to say that regardless of what happens in 2018, 2017 marked a turning point in my life.  I’m thankful for all of you who continue to be a part of the journey.  With the backing of an amazing wife, which I’ve come to learn you cannot start a business without, I’m excited to expand on the opportunities that are in front of me.

It seems like a lifetime since I have been out of the retail industry.  Around this time of year, I always think of those who have to work through the holidays while most of us are able to enjoy time off with our friends and family.

The truth is, the time between Christmas and New Year’s Day is often the worst. The sales start trickling back as returns while stores are working feverishly to meet their year-end goals. Meanwhile, customers seem a lot less excited about returning gifts than the anticipation of giving them.

This year, as I was reflecting back on what a wild, crazy, and mostly lucky ride I’ve been on for the last decade, I realized several of the first business principles in which I now believe were actually born during those days in retail as I was working to put myself through college.

First and foremost, I learned that, as in all businesses, success depends on an entire team and culture starts with the hiring process.  Today, the staff we hired looks like this:

  • 1 doctor
  • 1 dentist
  • 1 Navy member
  • 1 special-needs teacher
  • 3 accountants (all with master’s degrees)
  • 3 team-members still working together, with 1 a Sr. Product Manager
  • 85% college graduation rate
  • 0 remaining in retail

I wish I could take credit for these numbers, but the truth is we hired people that had the determination to succeed long before they joined our team.  However, I realized during that time that I loved mentoring those who were going through big changes or making big decisions in their lives.

“The customer is always right,” is a phrase uttered throughout every service industry.  While I don’t believe this is the case for every interaction (and I’ve seen some bad ones), I do think it is correct from a macro perspective.

Fossil had built a reputation for trendy watches with a wide selection at a reasonable price.  Additionally, they’d built a vintage brand with a distinctly American feel.

For reasons, I still don’t quite understand, we pivoted to a streamlined selection and began to raise price points rather dramatically.  Customer purchasing decisions for Fossil were driven by brand, selection, and value.  All of which were drastically changed in the span of a year, decisions which our team had warned HQ against.

Enter Shinola: a watch company that has sold itself as a catalyst for the rebirth of Detroit, making a variety of durable goods at the higher price point Fossil so badly desired.  It wasn’t about price, customers wanted a product they valued from a brand that felt authentic.

The lesson: listen to your sales teams. They are the front lines of your business and interact with the customer every day. It’s possible they could be the key to raising prices while still winning the market.

Lastly, I learned that execution and operations matter.  More importantly, execution and operations often go unnoticed until they are being done poorly.

In retail, that may mean things like inventory being unorganized or poor scheduling leading to missed sales.

In early stage startups, that may mean poor product organization leading missed deadlines, bad database design making effective accounting and marketing almost impossible, or strategic meetings that lead to nowhere.

My time in retail was a necessary grind to help me accomplish a life goal.  However, looking back, I took many good lessons that helped me set the foundation for a few key business values which have served me well so far.

Finally, if you’re working in the service industries this holiday season, thank you for putting up with all of us and enjoy the well-deserved break after inventory in January.

For decades, incumbents in industries such as energy, healthcare, and finance have enjoyed the luxury of being protected by regulation. This has provided a moat against competition and eliminated the need for innovation leaving behind inefficient businesses and frustrated consumers. However, customer expectations are changing rapidly resulting in a demand for change and a major opportunity for building impactful, durable businesses.

Unsurprisingly, the concentration of talent in several regulated industries is actually higher outside of Silicon Valley and in cities where those sectors play an outsized role in the local economy.  This density enables several of the same qualities, such as network effects and proximity to potential customers, that make Silicon Valley a hub of innovation.  The metros listed below have a high number of industry experts and the technical talent to implement the solutions that will trigger a massive wave of disruption in regulated industries.

 

“I also see tremendous stuff happening in highly-regulated markets where there is such a demand for change. I think the dismantling of regulated markets through software is something to think about and watch.” – Chamath Palihapitiya

 

Energy: Houston

Houston is the energy capital of North America so it should be no surprise the city has a great chance to play a significant role in shaping the future of the energy sector. Texas accounts for 31% (335,000) of the nation’s oil and gas related jobs thanks in large part to its largest city and the international energy behemoths such as Exxon, Shell, Schlumberger, BP, and Engie that call Houston home.

The industry is full of seasoned employees who have spent most, if not all, of their careers in the space accumulating impressive field-specific experience. This dense, highly-specialized network creates unique advantages for energy-focused startups such as a labor-force with knowledge of a complex industry, hundreds of potential customers within close geographical proximity, and low-friction business development opportunities.

Traditional fuel sources aren’t the only major source of jobs as cleantech-related jobs number close to 50,000, while Texas ranks 1st and 9th in wind and solar generation respectively.  The diversity in energy sources has made Texas’ grid among the most complex and advanced in the US, but the fourth-highest penetration of smart meters (80%) gives startups the potential to easily access the energy usage data for approximately 7.5 million households.

Additionally, utility regulators in Texas are forward thinking when compared to the rest of the country and end-users are acutely aware of their energy usage due to volatile weather and comparatively large home sizes.  When combined, these factors make Houston the perfect testing ground for consumer and utility products such as demand-response, utility-scale IIoT, and grid security.

Sectors to watch: digital oilfield, cleantech, DER software, utility-focused IIoT

 

Finance: Atlanta

Atlanta affectionately calls itself “Transaction Alley” and with good reason.  Several of the world’s largest payment processors are headquartered or have major offices located in the city including First Data, Fiserv, Global Payments, and World Pay.  Additionally, Charlotte, currently the third largest banking city in the US, is only a one hour flight away.

These industry heavyweights provide Atlanta startups with the industry talent and local partnerships needed to fuel growth. One particular example is the Advanced Technology Development Center at Georgia Tech which includes a FinTech specific incubator funded in part by a $1M donation from World Pay in 2015.

In addition to large financial companies, Atlanta is home to large corporations like UPS, Home Depot, Delta Airlines, and Coca-Cola which provide growing startups with potential anchor customers. These firms don’t just represent large revenue opportunities, all of them have provided local incubators and co-working spaces with sponsorships and donations to support the local ecosystem.

The perception of Atlanta as a FinTech leader is already well underway due to the large successes of local startups Kabbage, Cardlytics, and BitPay.  For most, Groupon and Braintree helped to put Chicago’s tech ecosystem on the map. These companies have the visibility to cement Atlanta’s status as a FinTech hub for decades to come while incubating talent that could start the next wave of great companies in the space.

Sectors to watch: payment processing/disintermediation, cryptocurrency, authorization, automation

 

Healthcare: Nashville

Nashville is much more than the country music capital of the world. It’s also a major center of healthcare contributing more than $40B annually to the local economy and supplying residents with over 250,000 jobs.

The impressive numbers don’t end there.  Eighteen publicly traded healthcare firms, 4,000 small businesses related to healthcare, and Vanderbilt University (the 14th best medical research university according to US News) reside in the metro. The result is an unmatched opportunity for clinical trials via hospital systems like HCA and Vanderbilt as well as a large customer base software solutions for small and large practices.

Perhaps more than any other industry, healthcare requires a deep industry knowledge including, but not limited to, issues such as the regulatory pathway, intellectual property rights, and the role of insurance in the overall revenue of hospitals and small practices.  Nashville’s diverse but concentrated talent base provides founders with an abundance of resources as to solve these problems as they work to get their startup off the ground.

Sectors to watch: patient compliance, remote patient monitoring, small practice and hospital system operations

 

Regulated industries have been absent of major innovation for several decades but as customer expectations evolve these businesses will be next in line for a wave of disruption.  Due to the nuances of these sectors, it just so happens those waves are likely to be triggered from outside Silicon Valley. Instead, innovation will likely originate in the metros which know them best.

A few days ago, I published a post on the importance of setting up internal processes for fundraising.  Part II focuses on identifying the correct potential firms, interacting with them during the process, and finally closing the deal.  Let’s jump in.

Raising capital, like any sales process, becomes easier when you identify the proper targets and their individual goals.  However, in this case, a deal will hopefully lead to a long-term relationship with a partner or partners who want play an important role in the success of the company.

When raising institutional capital, there are generally two types of prospective investors: venture (private equity) and strategic (CVC).  It’s important to know the traits of each category in order to craft a pitch that will resonate and understand the terms that will matter if the deal begins to materialize.

Venture capitalists are primarily financially motivated. As a founder, it’s important to research a firm’s thesis, geo-focus (if applicable), and stage focus to find the best fit. While the chief goal for a VC is optimizing ownership, good investors are seeking a deal on fair terms that will leave the founder with enough equity as to maximize the incentive to pursue long-term value creation or seek additional capital.

Corporate venture capital is a little more tricky as it pertains to motivation.  Depending on the CVC, the reasons for investing can range from outsourced R&D, first-look at potential acquisitions, reduced customer acquisition costs, or synergies with upside potential.

It’s easy to imagine the difficulty in predicting the motivations of a CVC and the potential hazards that come with misaligned incentives.  Combine these uncertainties with the typically longer deal process and it becomes clear that raising capital from a strategic requires careful consideration.

The next factors are ones we see many founders neglect to consider: understanding both how and where you fit in a VC fund.

  1. How: the combination of thesis (discussed earlier) and funding stage.  In the slide above, we use a $100M fund as our example.  Typically, a fund makes 20-25 investments and reserves for follow-on. (note: this varies by fund, but this is the typical model).  Let’s assume this fund reserves $60M to maintain or increase its position in the winners, leaving $40M for initial investments. This means an average first check lands somewhere in the neighborhood of $2M. If you’re asking for $500K, it’s unlikely (though not impossible) this fund is too large.
  2. Where: the age of the fund and how this will impact the VC’s need for an exit.  Most investments are made during years 1-5 of a 10-year fund. Depending on the stage, a startup can be great for either end of that timeframe. However, it becomes possible to be pressured into an early exit due to a mistimed investment or have a board seat change hands in a secondary sale of equity.

It’s completely fair for founders to ask questions surrounding these issues.  I would argue it shows maturity in both understanding the venture process and wanting to ensure that both parties are completely aligned for the entirety of the partnership.

Much too often, we see cold-emails that are clearly of the “spray and pray” variety meaning founders are emailing as many potential investors as possible with no difference in message.  My advice to those startups would be to take a step back and really consider building a targeted pipeline of potential investors.

Start with a wide funnel that encompasses all the investors in either the industry, technology, or geographic region in which you operate then begin to narrow by the remaining criteria plus average investment size. For example, if you are a healthcare company in Dallas you might build a funnel of all healthcare investors which have done a deal in the last 12-18 months in the US, then narrow by the ones who have made an investment in your technology (ex. software/hardware), and finally by Texas.

Once you’ve selected the top 20% of firms that seem like potential fits, find the partners which made the investments.  Generally, all will have an online presence wether it be Twitter, a blog, podcast appearances, or just quotes in press releases, find something to use in the initial outreach which explains why it’s the right fit for a partnership outside of capital.

Though it varies from round to round and startup to startup, fundraising often requires thousands of interactions with hundreds of contacts.  It is essential to keep up with these contacts in an organized way while delivering positive news throughout the process.

For this reason, in addition to a CRM, we highly recommend finding a meaningful KPI which is unlikely to go down and sharing an update at the end of every week. The weekly update serves several purposes: it creates a trend line from dots, it shows accountability, it shows execution ability, and it keeps your startup at the top of the investor’s mind.

As the interactions with prospective investors increase, it becomes important to filter the noise and avoid “kissing a lot of frogs.”  After all, you’re still running a business and time is precious.  We encourage entrepreneurs to do their diligence on investors including asking service providers such as banks and lawyers for their opinions.  Association with the wrong investor can be a negative signal to the investors you covet.

Lastly, ALWAYS authentically respond to no’s.  They are an amazing chance to show humility and learn.  When a founder ignores a no, it feels like a confirmation, right or wrong, I made the right decision.  After sending a response, move on.  Time is money.

It’s often said time is the enemy of all deals.  Once a VC has agreed to invest, work to close as quickly as possible. Often, it’s hard to manage the process especially when it pertains to service providers but there are steps that can be controlled.

The groundwork laid in the previous post really comes into play as the close nears. Thorough research on comps helps guide the valuation process and an organized data room containing the appropriate materials increases the speed of diligence by reducing the need to find materials and limiting unnecessary communication.

Much like the previous post, this one was long in nature.  However, I hope these tips are potentially useful and maybe introduced a few unfamiliar nuances in the fundraising process.

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

Part I can be found here.

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.

 

 

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.

Recently, CrunchBase published a new case study on early-stage funding including the different types of deal structures, priced (equity) and unpriced (convertible notes or SAFES).  The post was a useful, if very high level, overview of the early-stage funding process.  However, due to this simplicity, the article painted a naive picture of how unpriced rounds often work in practice. While notes and SAFES have become the norm in recent years, it doesn’t mean they should be, especially in underserved ecosystems like Texas, Pittsburgh, or Atlanta.

In these metros, early-stage capital is scarce, thus increasing an investor’s negotiating leverage.  Given that context, fundraising is often an extremely difficult hurdle to navigate for local entrepreneurs. Ultimately, unpriced rounds making up the majority of early-stage deals in emerging ecosystems can be shortsighted.  Over the long term, it can limit a startup’s ability to raise future rounds and hinders the ecosystem as a whole by sometimes forcing great entrepreneurs to start companies in more favorable markets where investors are accustomed to optimizing for a startup’s long term success.

It’s easy to forget that, just 130 miles outside Chicago, is the University of Illinois’s main campus. “Remember, Marc Andreessen was building Mosaic at U of I, and Max Levchin,” probably best known as the founder of PayPal, “was down there too.” Carter relayed the story of how Levchin came to Chicago to raise money for his first startup, he was spooked by the terms put forth by the independent investors he spoke with. He probably left for the Valley because we [Chicago investors] couldn’t structure a deal,”  – Jeffery Carter, Hyde Park Angels

Convertable notes and SAFES only make the process more confusing by putting off the valuation and thus hiding the potential ownership (i.e. possible dilution) at the time of conversion especially in cases where the startup has raised more than one note on varying terms.  I believe some investors do like this opacity.

Entrepreneurs are not the only ones put at risk by unpriced rounds of fundraising, the investor hasn’t actually put themselves on the cap table which leaves open the possibility of issues such as the renegotiation of their terms by the next lead investor. This puts the seed investor in the awkward position of getting the terms they believe they negotiated or being the “bad guy” who could potentially spoil the next round.

The goal of any aspiring startup ecosystem should be collectively working to eliminate onerous term-sheets to better incentivize founder upside for the ENTIRE lifecycle of a company, not maximizing the “paper” upside of one investor for one round. This perspective enhances the goodwill between investors and entrepreneurs while encouraging both sides to continuously participate in the scaling of great companies.  We achieve this by taking four simple steps:

  1. Use priced seed rounds whenever possible.  Legal fees used to be the main sticking point for doing an equity term-sheet but now the prices can be fairly comparable.  As mentioned above, there remains little reason to delay valuation for sophisticated investors.
  2. Provide extreme clarity in the event the round must be a note or SAFE. One of the best practices we’ve implemented is showing our entrepreneurs pro forma cap tables in the event of down rounds and at the “cap” set in the term sheet.  This allows us to highlight the various levels of dilution possible for founders.
  3. Simplify the terms. We advise the startups with which we work to offer only one round of convertible notes with the same terms to all participants. As Fred Wilson has recently pointed out, $1-2M “feels about right” for the as the maximum size of the raise. Obviously, this depends on the product and other factors affecting the anticipated runway.
  4. Provide a list of established VC resources and discussions of notes.  By doing this, we allow founders to do the research themselves and collect opinions from both sides of the table.  Y-Combinator, Fred Wilson, Seth Levine, and many others have written extensively on this topic.  We encourage founders to seek, and in many cases we provide, these resources.

Anyone who has discussed venture investing with me knows I passionately dislike unpriced rounds though that doesn’t mean I won’t do them.  The ultimate goal for us has, and will always be, to partner with the best possible companies. However, if we do participate in Notes or SAFES we work extremely diligently to make sure the terms are clear and founders thoroughly understand the pros and cons of the structure.

I caught up with a friend yesterday who is an up-and-coming architect in the Austin area and it turns out we are facing a lot of the same challenges in launching a new venture.  We both are working to optimize processes in order to spend the most time possible on the core aspects of our firms.

During a 2016 shareholders meeting, Elon Musk said “We’ve realized that the true problem, the true difficulty and where the greatest potential is, is building the machine that builds the machine. In other words, building the factory.”  Similarly, Homebrew’s Hunter Walk has been quoted as saying “the company is the first product, and you have to be really intentional about how you build it before it’s ready to scale.”

This highlights an important reality of building a great company or product: the processes and frameworks put into place will often decide the level of success achieved and those operational components should be designed with the end-goal in mind. As my partner Jonathan recently wrote, the best of the best almost always “perform the common uncommonly well.”

1) Start EarlyThe larger a company grows, the more difficult it becomes to put processes in place.  This one is straightforward, as a startup begins to scale it becomes exponentially harder to move everyone in the same direction.  Getting a group of 10 engineers to agree on a product development methodology is easier than asking 40 to do the same and infinitely easier than asking a team of 100 or more.  This isn’t just an engineering or product problem, the same rules apply to marketing, finance, and sales. Bonus: it will make cross-functional execution that much easier.

2) Overly-Simplify: The best early-stage companies have an innate ability to focus when it is most difficult to do so.  Early-on, startups are vulnerable to chasing shiny objects as everything feels like a big opportunity.  Instead, avoid temptation and focus on executing toward one core product or market.  Example tactics to accomplish this include: shorter meetings (i.e. standups), picking 2-3 metrics that are core to success (ex. contribution margin and conversion), and selecting 1-2 strategic priorities per timeframe.

3) Scrutinize: Be honest with yourself.  One of the most effective practices I’ve seen teams use is the agile concept of a retrospective.  This gives teams the chance to discuss what’s working, what isn’t and ideas for improvement.  The most crucial element to this step is accountability, without it, these meetings don’t help move the company forward but instead become chances to be overly critical without inspiring action.  Begin each “retro” with a review of how well the team executed on previous takeaways and keep score.

Operations within early-stage companies often get overlooked as there are more exciting challenges to tackle.  When processes are in place, no one notices because things are running smoothly and challenges do not begin to surface until later in the game. However, neglecting them is akin to puncturing a boat while it is still in port; it may leave the dock, but it won’t make the entire trip.

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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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Yesterday, Capital Factory CEO Joshua Baer announced a partnership with The Dallas Entrepreneur Center to bring Texas’ biggest accelerator to Dallas.  In his post, The Texas Startup Manifesto, Baer proposed a “Texas startup Megatropolis” combining Austin, Dallas, Houston, and San Antonio.

The vision is exciting and highlights many of Texas’ obvious strengths:

  1. Growing at a rapid pace
  2. A low cost of living
  3. Diverse both in people and jobs
  4. Full of business and tech talent
  5. Home to great universities
  6. An energy and healthcare hub

It also highlighted many of the weaknesses:

  1. Underfunded
  2. Competitive, not collaborative
  3. Lack of mentorship

The combination of Capital Factory and the DEC will begin to address these issues and increase the diameter of the Texas ecosystem flywheel.  But to take advantage of the work done by Joshua and his partners, we’ll need do to even more to make sure the larger flywheel gets the momentum it needs to keep accelerating at an even faster pace.

We still need a few key ingredients in order to make our ecosystem comparable to the best.

  1. Operators that have scaled AND exited
  2. Density fueled network effects
  3. Follow-on capital

My favorite pieces of reading are those that say a lot without saying much.  It’s a skill of which I am always envious and explains my addiction to Twitter.  Last night, I came across one such tweet:

The more time I spend in startups, the more I’m impressed by those who scale than those who start. Many can start, few can scale. @mosbacher

My partner Jonathan recently wrote about the 80/20 problem being more right-skewed than perceived, specifically in startups. (I.e. the  difference between great and exceptional is bigger than the one between good and great)  CB Insights recently published a report using a cohort of 1,098 companies who raised seed capital from 2008-2010 that illustrates his point. The funnel below puts into perspective the increasing difficultly of each subsequent round.

According to Crunchbase, 184 companies headquartered in Texas raised seed funding last year. Let’s round to 200 for easy math.  Using the successful exit criteria above ($50M+), 8% of companies exit for a desirable valuation.  That leaves Texas with potentially 16 companies from a cohort of seed rounds in 2016 that have operators with both scale and exit experience. Assume each company has 5-10 rockstar employees (potentially more for the companies that truly scale rapidly) that experienced the entire company lifecycle and we’re left with 80-160 people.

In order to reach our full potential at the fastest pace possible, we need those operators to start, fund or mentor companies. This will create an exponentially increasing pool of talent to help new founders scale.  For new companies, the chances of success increase when it’s not your first time down the road. To paraphrase Michael Seibel, partner at Y-Combinator, it’s easier to climb on the shoulders of others to get ahead.

Another point to consider is the density of the nodes (Dallas, Austin, Houston, SA) in the network. Texas has the distinct advantage of having several major cities within a 3-5 hour drive or 45min flight from each other, but what happens inside of those cities will be just as important.

The effects of startup density are obvious.  When talented people who share a passion for startups interact on a regular basis it’s more likely that successful companies will be founded. The Kaufman Foundation defines density as:

entrepreneurial density = (# entrepreneurs + # people working for startups or high growth companies) / adult population

Since that number is almost impossible to easily obtain, Brad Feld asked the team at CityLab to use another indicator of density, deals per capita (100,000 people). I pulled similar data from Crunchbase using findings from 2016.

Unsurprisingly, the cities & metros you’d expect rank well with this metric, but a a few of the top cities may surprise you. College towns Boulder, Ann Arbor, and Austin are more dense with startups than cities like Chicago, LA, and NYC.

City Deals Per 100,000
San Francisco 616 71.2
NYC 521 6.1
Boston 113 16.8
Seattle 704 14.6
Chicago 105 3.9
LA 136 3.4
Ann Arbor 13 10.8
Boulder 37 34.2
Austin 96 10.1
Dallas 33 2.5
Houston 33 1.4
San Antonio 8 .5

 

While this data is certainly not perfect, (# of deals can be skewed by the fastest growing companies raising more than one round annually and Crunchbase only let’s you search by cities, not zip or metro) it illustrates the work Texas cities have left to do to achieve a saturation close to other metros and perhaps further illuminates the need for more venture funding in Texas.

Lastly, Texas is sorely missing the big checks.  While seed stage investors from outside of Texas are beginning to invest more in the state, the evidence is still clear the follow-on capital is hard to come by.

This map by the Martin Prosperity Institute shows the per capita investment of venture dollars. Austin is the only city in Texas to find it’s way into the top 20 at $252.

To be seen as an ecosystem ripe for more institutional follow-on investment we must inject more risk-tolerant capital into promising seed-stage companies to increase total deal flow and subsequently support them with the talent and resources needed to scale. These steps will increase the number of rapidly growing startups and make Texas more attractive to those who deploy growth-stage capital.

Overall, the partnership announcement is a huge win for the Texas entrepreneurs.  The ingredients are here for a vibrant and successful startup landscape.  However, we have to take this momentum and run with it to reach our full potential as an ecosystem.

Since our work is primarily focused in areas where the startup ecosystems are just beginning to grow, we often get questions that have been answered by more veteran investors or founders in more established markets.  Inspired by John Gannon’s blog and instead of finding them one-by-one in my bookmarks, I’ve decided to start compiling them here in order to make sharing easier.

The resources I post are ones that have helped me throughout my career or have been recommended several times over by established founders or VC’s.  Much like John’s blog above, I’ve posted resources that are also geared to VC only because it’s impossible to sell to anyone whom you don’t understand well.

If I am missing anything or you’ve found a resource you’d like me to add please comment below. I’ll be editing the list regularly as I come across interesting content and subtract the outdated ones.

Must Read Books

Venture Deals by Brad Feld – considered by most to be the bible of startup fundraising

The Hard Thing About Hard Things by Ben Horowitz – a16z partner and co-founder Ben Horowitz discusses the ups and downs of running a business

Founders at Work by Jessica Livingston– a collection of stories about the day-to-day activities of startup founders

Venture Capitalists at Work by Tarang and Sheetal Shah – a collection of stories about the day-to-day activities of venture capital investors

The Lean Startup by Eric Reis – the book that codified running a startup in a way that is nimble and able to learn from customer feedback quickly

Shoe Dog by Phil Knight – memoir of Nike founder Phil Knight, a story of pure hustle and perseverance

The Business of Venture Capital by Mahendra Ramsinghani – similar to Venture Deals, but more in-depth (Brad Feld wrote the foreward)

Deep Work by Cal Newport– strategies about how to focus your day and keep control of your schedule, very important for anyone who will be pulled in a million directions

High Output Management by Andy Grove – considered the Silicon Valley handbook for organizing, directing, and developing employees

Zero to One by Peter Thiel – the PayPal and Palantir co-founder discusses how to create enough value and more importantly how to capture it

Contagious by Jonah Berger – how do you make things catch on and go viral? Berger takes a systematic approach to the process of virality

The Outsiders by William Thorndike – 8 different stories on CEO’s who were great at capital allocation using rational blueprints

Predictably Irrational by Dan Ariely – insights on behavioral economics and consumer tendencies

The Everything Store by Brad Stone – the story of Amazon’s creation and what makes it great

Creativity Inc by Ed Catamull – leadership book by former Pixar CEO whom Steve Jobs credited with his growth as an executive

 *full transparency, the links for books are affiliate links from Amazon*

 

Blogs / Medium Posts

HaystackVC – Semil shares why he made each investment + several interesting insights on markets outside the Bay Area

Fred Wilson’s MBA Mondays hint: you should be reading Fred every day, but this particular tag discusses everything from fundraising, hiring, strategy, etc..

Elizabeth Yin – one of my favorite blogs, Elizabeth does an amazing job with transparency from all angles of the startup world

Feld Thoughts – author of Venture Deals, Brad has been investing since 1987. Look for a lot of thoughts on the mind of great founders and what questions they should consider

Above the Crowd – Bill Gurley is one of the best VC’s ever, and THE resource if you are building anything marketplace related

50 Things I’ve Learned About Product Management – how you manage a product, and the product that makes the product matters

John Tough – my mentor, Chicago based, great perspectives on the Midwest and the path from VC to operator and now back to VC

Thomas Tunguz – data-driven approach to issues facing startups, from product to fundraising and everything in-between

Hunter Walk – VC at Homebrew, previously a Product Manager at Google where he led YouTube, great perspectives from an operator turned VC

First Round Review – one of the best, if not the best, seed stage investors in the country takes a look at management, fundraising, product and other topics from an operational viewpoint

 

Fundraising / Pitch Decks

Alexander Jarvis Pitch Deck Collection – widely considered the original pitch deck guide with the biggest collection assembled

Dconstrct– company looking to build upon Jarvis’ work to create a searchable database of pitch decks

Why You Should Have a Data Room – the team at Kiddar Capital looks at why you need a data room for fundraising and what should go into it

How We Raised $7M from Foundry – Adam Healey, CEO of Borrowed & Blue provides a 7-step guide to fundraising from a major VC

First Round Review – Fundraising – the fundraising section of First Round’s blog above

Great Story = Great Pitch – all great pitches are actually great stories, it’s not only about what you do but it’s why you do it and why it’s important that counts

Getting Your Head in the Fundraising Game – Mark Suster from Both Sides of the Table offers 10 tips on how to be a more effective fundraiser. His blog is another great resource.

How to Communicate with Investors – Reza Khadjavi, CEO of Shoelace walks founders through the process of taking dots and turning them into a trend line.  A great, execution focused look at raising capital

Font Series A Deck – Mathilde Collin, co-founder and CEO of Front, shares their series A deck, a few thoughts on the process and best of all critiques her own deck

 

Business Models / Strategy

Financial Modeling For Startups: The Spreadsheet That Made Us Profitable – Startups.co provides a great starting point for building a financial model and even better it’s one that comes with an execution story behind it

Metrics that Matter – Part 1 – Jeff Jordan, Anu Hariharan, Frank Chen, and Preethi Kasireddy provide 16 (and then 16 more) metrics that matter for growing startups.  It’s impossible to raise if you don’t know which of these metrics are important to your business and how you are going to improve upon them.

Metrics that Matter – Part 2 – a continuation of part 1

How to Analyze Your Startup – Tunguz takes a look at how to evaluate your startup from a VC’s perspective. Additionally, he’s right, frameworks rule:

Product Canvas

Business Model Canvas

Porter’s Five Forces

 

Podcasts

This Week in Startups – Jason is one of the first investors in Uber and got his start as a VC scout.  His new book is Angel.  And as the podcast description says, “Need strategies for improving your business of motivating your team? Just want to catch up on what’s happening in Silicon Valley and beyond? Your journey begins here.”

Masters of Scale – Silicon Valley investor / entrepreneur Reid Hoffman tests his theories of growth with famous founders.  Hoffman is most well-known for PayPal and LinkedIn.

The Pitch – A show where real entrepreneurs pitch to real investors—for real money.  If you are going to pitch investors there is only one way to learn, by doing.  But this show is a close second.

The Official Saastr Podcast – Jason Lemkin and Harry Stebbings host operators from various SaaS companies focusing on scale and hiring. They host the occasional investor as well where the focus turns to the metrics that matter for capital raising.

The Twenty Minute VC – Venture capital’s youngest star, Harry Stebbings, interviews VC’s from across the country.  Here you learn what VCs are focused on, how they invest, and the traits that make entrepreneurs succeed or fail. You can also find Harry at Mojito VC.

a16z – a16z’s partners discuss the biggest trends in tech with industry experts, business leaders, and other interesting thinkers and voices from around the world.

Other Important Resources

Y Combinator – the original Startup Library with tons of great resources dating back to 2008

Crunchbase – easy and free place investors often glance at to check high level business info

Angel List – you should absolutely have one for recruiting and fundraising

Product Hunt – great place to get your product featured at launch

 

Recently, I decided to take a “themed” approach to my book selections.  The first theme has been centered around a new approach to my work habits.  I asked myself three questions (selected book):

  1. How can I learn more effectively and efficiently? (Make It Stick)
  2. How can I spend time in a deeper state of concentration so the most important tasks always get my best work? (Deep Work)
  3. How can I prioritize my day around getting the most important tasks done? I.e. owning my schedule instead of letting it own me. (Essentialism -thanks, JT)

As I engaged with these books and started applying their lessons to my day-to-day workflow, I wondered where else could their principles be applied in a startup setting.  For the latter two books, the answer soon became clear, meetings.

Why do some teams leave meetings without accomplishing their goals and how can they apply the theses of the books above in order to walk away from meetings feeling ready to execute?

Deep Work = (Time Worked x Intensity of Work) – Distractions

How many meetings have you been in that include a “brainstorming” session? The validity of brainstorming has come into question in recent years due to the increased propensity for social-loafing, regression to the mean, and production blocking.  While brainstorming is meant to increase creativity, we are actually at our most creative when our work is done in solitude.

Without great solitude no serious work is possible. – Picasso

Instead of asking everyone to express several ideas all at once, encourage (or perhaps require) members of the meeting to spend 1-2 hours beforehand working through the topic of the meeting individually in order to allow them to achieve a state of deep work on the problem at hand.  The results will be of higher quality and buy-in can still be achieved since everyone will have something to contribute during the meeting.

Essentialism = Less but Better

While leaving any meeting with a plan of attack is a must, it is a partial completion of the actual requirement.  Great meetings end with a prioritized list of to-dos and deadlines.  We all have the tendency to want “more” and to chase shiny objects.  This is especially true early on in a company’s life when there are many things to do.

However, leaving a meeting with ten top priorities is, as Greg McKeown puts it, “ironic.” Make it a practice to prioritize what can be accomplished in the time period given.  In my experience the following limits have worked well:

  • Quarterly: 3-4 priorities
  • Monthly: 2-3
  • Bi-Weekly: 1-2

Additionally, encourage your team to say “no” when they feel overwhelmed or that a task is unimportant to the greater goal at hand.  Healthy debate will lead to an even clearer list of priorities on which to execute.

Leaving a meeting with no clear direction (decision maker, execution plan, priorities) is one of the biggest wastes of company resources imaginable. We often think about tangible costs but almost never compute the costs of pulling multiple team-members into an hours long meeting.  If you’re having the issue of multiple, yet unproductive, meetings I encourage you to try some of these tactics geared toward the individual to make your group sessions more effective.

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Remember those terrible word association problems from your SAT? (A is to B as C is to D) I do, and this is the first time I’ll be using them again almost 15 years later.  But they serve an important purpose in this post as the framework for equating a few common pitfalls of large companies to the high-growth startup.

– Big Company: Bureaucracy; Startup: Democracy

Two of the biggest inflection points for a growing startup happen when headcounts go from 10 to 20 people and subsequently 20 to 50 people. During the former, employees begin to transition from generalists to specialists.  For example, the engineer who was also serving as a PM moves focus to just one of those roles and a startup hires the remaining position.  Yet after this phase, every employee in the company still has knowledge of most decisions that are being made.

As your company continues to grow, roles become even more generalized and senior leadership is brought in to help scale the company. Key decisions are now made by the exec team, and often those early employees begin to feel left out of the process.  It’s crucial to avoid the temptation to save “culture” and include everyone as often as possible.  Don’t get me wrong, I believe in transparency and communication from leadership but when everyone has a vote in key decisions your progress is bound to slow to a screeching halt.  Stick to the Jeff Bezos meeting size, if it takes more than two pizzas to feed everyone it’s too large.

 – Big Company: Paralysis by Analysis;  Startups: Fear of Failure

We now live in a world of almost unlimited data, and the best data any startup can capture is proprietarily customer-centric.  The only way to capture it is to get your product to market.  Entrepreneurs by nature are often visionary, and see the long-term possibilities of the product they are creating. Therefore, it’s often counterintuitive for them to release something that is not up to their personal standards.  I’ve seen products that took over 6 months of development fail, not because they weren’t well thought out, but because the customer wanted something we didn’t see. The cruel joke of entrepreneurship is that most of the time, no matter how great you are, certain aspects of your product will be rejected by the market and that’s okay.

“If you cannot fail, you cannot learn.” – Eric Reis, Author – The Lean Startup

Large companies use data to become proficient and knowledgeable.  However, the returns on data analytics are marginal (at least when done by humans) and often lead to a blind spot where large firms are unable to see the unrealized potential of what lies ahead, preventing them from developing new products that grow market share.  The best early-stage companies are able to get a viable product to market quickly, and thanks to a myriad of new tools, collect as much data as possible including how customers use their product, customer acquisition costs, and customer value.  Combining these types of data with a vision for the future of an industry can be a powerful pairing.

– Big Company: Hire for Resume; Startups: Hire for Culture

When I decided to go back to school in order to get my MBA I knew I was adding a checkbox to my resume for certain positions within large companies.  Little did I know, my passion for startups would prevent that from becoming useful.  Yet, my intentions highlighted an issue with many large firms, they hire exclusively based on things like titles and advanced degrees.  While it’s true that these things can be an indication of effectiveness and leadership, it is certainly no guarantee.  Large companies often neglect things chemistry and creativity.

If large companies neglect culture fit, startups can often do an exact 180 and over-value it.  While I still immensely value culture, I’ve also learned that results (good or bad) are part of the culture and often what is seen as good culture is actually vanity perks masquerading as such. What does this look like in hiring? It means doing things like having subordinates interview their potential new boss for “buy-in” or expecting someone to adhere to the “work hard, play hard” schedule.  I’ve fallen into that latter bucket with people we hired only to be proven completely wrong about the person’s work-ethic and capability.

Remember, while many of us are working to disrupt the incumbents in large industries, we’d still be served to look to them for examples, both good and bad.  After all, we’re working toward being as large as them someday.

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What a few months it’s been, Choose Energy sold to Red Ventures and my partners and I made our first investment into a startup.  These big events have led to a lot of discussions among myself and my friends and colleagues.  This led me to reflect on the biggest factors in my growth up until this point, and it was easy to conclude that I’ve been incredibly lucky to work with so many people who shared their skill sets to help me expand mine and gave me the opportunities to put those newfound skills to work.

Almost 4 years ago I was laid off from NRG Energy.  While I should have been panicked, I had an amazing group of friends from SMU that came to my immediate aid.  There wasn’t anyone I asked who didn’t offer to intro me to their network.   Despite these enormously kind gestures, I had no idea what I wanted to do. What I did know is that I was done with energy and had a pile of student debt that needed paying off.

Enter Jerry Dyess.  Job offer in hand (from a chance meeting at a wedding), I agreed to meet Jerry after being introduced to him by a colleague from NRG who had scrambled to help anyone and everyone after the layoffs.  Jerry is the CEO and founder of Choose Energy and among his many skills as a leader, the guy could sell water to a fish.  After 10 minutes I was hooked by his vision for the company and knew I had to be a part of Choose.  It was, and still to this day is, the best career decision I’ve ever made.  Jerry taught me how to be a professional, how to conduct myself in meetings, and how to do subtle things like reading body language.  He also taught me the phrase “things of that nature” which I now use habitually.

After reporting to Jerry for several months, it became clear to him that I wanted a deeper connection to Silicon Valley, and to his credit, Jerry moved my role underneath John Tough.  John is the ultimate mentor.  He expects you to perform at a high level, he shares any and every thing he can to help you grow your skill set, and most importantly (and most like Jerry) he cares about people.  John taught me everything from operational finance to strategy to fundraising.  He remains my biggest mentor and there’s no doubt my future career wouldn’t be possible without his guidance.

I’m not sure what these two saw in me, but for some reason, they decided to let me build and lead what eventually became the US’ largest B2B energy marketplace.  It was the learning experience of a lifetime and one I likely didn’t deserve at the time.  After our new product launched, John set up a meeting with Dave Mount at Kleiner-Perkins who challenged me to think about our business in ways I hadn’t thought about before.  It was the first time I’d been challenged to rapid-fire, board-style questioning and I was hooked.  Jerry and John ensured that I was included in almost every board meeting moving forward and that exposure was invaluable.

Jerry and John weren’t the only Choose employees that helped me tremendously along the way.  As a new product manager, I needed the benefit of learning from people who had been there before.  Kerry Cooper, our then CEO, set up a lunch with Bryan Byrne, the first B2B product manager at Yelp where I learned lessons about how business owners view their time and prioritize it which helped us prioritize features from day one.  Afterward, Kerry and I set up a bi-weekly touch-base where I was able to discuss strategy on how to scale a company with a seasoned executive on a regular basis. This access proved enormously helpful as I navigated my way through the decision-making process of a growing product.

Throughout my time at Choose, I was surrounded by an incredibly talented product and engineering team.  I worked closely with guys like Ethan Wais who has a more capacity to learn than anyone I’ve ever met.  Working side-by-side with him for over 2 years was as challenging as it was rewarding.  Here, challenging is meant to be the ultimate compliment because there was never a day that I didn’t believe I needed to learn something new just to keep up with the guy.

Over the last year, I had the privilege to work Sai Nayagar and our engineering team (Jeff, Chad, Donnie, O’Neal, Jake, Kat and Melody).  Similar to the board meetings, sprint meetings opened my eyes to an entirely new aspect of our business.  This team worked tirelessly, creatively and with great patience while a non-technical product manager learned the ropes.  There’s nothing quite as intimidating as sitting in a room with 9 really smart people speaking in a language that might as well be foreign to you but these people made me feel right at home.

My string of good luck continues as I explore a potential new career.  I’ve had complete strangers on Slack, Facebook, and Twitter introduce me to their network in order to help me get off the ground.  Lastly, in perhaps the greatest stroke of luck of all, my business partner was introduced to me by the best man in my wedding.  Their moms were high school friends who reconnected after a decade.

The biggest lesson I’ve learned is to think of luck as a flywheel that creates amazing opportunities. By being curious and willing to learn it becomes possible to capture the most from those opportunities which in turn creates more luck down the road. I’m thrilled to be moving on to a career where I can not only leverage the lessons I’ve learned and pay forward the amount of luck I’ve had, but also help others create their own.

 

Over the decade, I’ve been blessed to work a variety of different jobs with a diverse group of people. I’ve gone from retail store manager to a publicly traded company, to a growing startup while acquiring my MBA somewhere in between. During that time, I’ve worked with some exceptionally talented, hardworking people who all had two characteristics in common: curiosity and tenacity. There are two phrases you’ll never hear them say during a conversation or meeting, “I don’t know” and some form of “that’s going to be too difficult” respectively. However, I firmly believe that ignorance and level of difficulty should never be adequate reasons for refusing to solve real business problems.

I recently read Raghav Haran’s Career Advice No One Tells You in which he asserts “having the right mentor is the real key… And you’ll avoid the mistakes that keep others stuck for years on end.” He couldn’t have been more correct. One of the best pieces of advice I ever received from a superior was, “remove the phrase I don’t know from your vocabulary.” This mentor wasn’t insisting that I know everything. In fact, he was adamant that I couldn’t, even though I thought I did at 20. Instead, he encouraged me to always use the phrase “let me look into that for you.” This small change in my expression of ignorance had a profound effect on my career moving forward. Not only was I expressing a desire to learn that which I did not know, but I was holding myself accountable for getting back to others with the information they desired because I had promised I would. I’ve worked with several exceptionally bright people and all of them amplify their natural intelligence by being the most curious person in the room. I’ve seen retail managers find their passion by mentoring teenage sales associates and MBA graduates learn how to code on the fly, and both become extremely successful in their fields because they had a passion to learn.

Being curious requires a certain level of tenacity to research problems even if the answer and data are not always clear. Due to the amount of data available in today’s business climate, it often takes an immense amount of hard, tedious work to get the results we want. The most successful people I’ve seen in my young career are those who know the hurdles ahead and regardless still tackle the task at hand. I don’t want to confuse the amount of resources (cost) of a project with amount of effort that goes into solving a problem; great business people consider ROI almost naturally. However, it is human nature to be confronted with a complex problem and naturally respond, “this is going to be difficult.” I encourage everyone to reject this natural notion.

I’m often reminded of a summer working with my electrician uncle in California when I’d follow him around the Bay Area for a few extra bucks. We spent an entire blistering summer day changing lightbulbs at a low-income apartment complex. When I asked why we were doing this instead of the more complicated (and to me, fun) jobs we’d been working on previously, his response stuck with me, “there are a lot of lightbulbs that need to be changed, and people who want to pay me to do it.” The very best of my peers and mentors always had the inclination to encourage myself and others to immerse themselves in the problem regardless of difficulty or level of enjoyment even from an early age.

Hard-work and curiosity often go hand-in-hand. It’s rare in today’s specialized economy that an individual possess all of the skills required to solve a problem. Yet, those who do solve the problem, or get the closest for their company, are those who are willing to learn a new skill, dust off an old one they haven’t used in years, or execute on the mundane. While my career post-grad school might be in its infancy, I’ve worked with an extremely diverse group of people with varying skill-sets. However, all of the most successful had an unquenchable thirst for knowledge and the work ethic to solve any problem before them.

Be curious. Be tenacious. Stay hungry.

“You get what you measure.” A concept that seems simple enough, yet even the world’s best businesses get wrong.  Measuring the wrong things drives poor decision making and undermines performance.  Simply put, using a metric the wrong way is as bad or worse than not measuring anything at all.

Let’s take a look at a few metrics that are useful when assessing the health of a startup but might not always be what they seem from an operational perspective.  Before we begin, it’s important to note that these are just examples, and each metric is worthy of a deep dive.  For our purposes, we are just looking to highlight a few metrics that can be perilous if other factors are not taken into consideration.

Customer Lifetime Value (CLV or LTV)

What it actually measures: Effectiveness of acquisition channels or marketing programs to acquire similar customers

How it’s misused: Comparing the cost of customer acquisition with the cash flows that come from the customer over time, often mistaken as the margin made on a customer and relaxing the drive for near-term profit.  Lifetime value is extremely useful, but should be used in combined with metrics like payback period to ensure a startup won’t have to choose between cash flow and growth.

What can go wrong: CLV doesn’t account for revenue timing, i.e. cash flow implications for SaaS businesses. It is inherently uncertain via discount rates and attrition which imply assumptions about future market conditions . If LTV > cost of acquisition, many will justify “pouring gas on the fire”

Let’s take an example. A customer costs you $50 to acquire and pays you $4.99 on a monthly subscription, it will take over 10 months to breakeven on this customer leaving a lot of time for uncertainty. Even if the customer stays, it will take 13 months to make 30% margin on just the cost of acquisition which doesn’t account for the overhead of the business itself.  The other issue to consider here is supply and demand. As you work to buy more customers, the price will go up and the payback period will be pushed out. It’s highly unlikely to get more efficient the more you spend, typically the outcome is the opposite due to competition and the removal of first adopters which are always cheapest to acquire.

Churn

What it actually measures: Churn can be measured in two ways, customer churn or revenue churn.  For the purposes of this post we’re looking at churn as the percent of customers lost monthly.  It is inherently a measure of customer satisfaction and a startup’s ability to retain customers through renewal campaigns.

How it’s misused:  A startup focuses only on the percent of churn instead of combining the measure with the rate of new customer acquisition.  Instead of looking at the percent of churn, it becomes important to look at the actual number of customers lost.  When % churn stays steady, there becomes a point where customers acquired = customers lost and growth slows to a halt.

What can go wrong: Startups recognize the problem too late.  As the number of customers churned grows, two things happen.  First, the cost to retain becomes high through marketing spend and /or operational overhead to put systems in place for retention.   Second, the cost to acquire new customers to replace the churn AND grow becomes burdensome at scale.

Let’s use an overly simple example, last year a startup acquired 5,000 customers at a $100 CPA for a total of $500,000 spent.  This year it needs to grow year over year 70% to 8,500 customers acquired for this year and a goal of 13,500 total customers under contract.

Assuming the CPA stays constant (remember from the CLV discussion this is unlikely), new customer acquisition will cost $850,000 to reach the goal of 13,500 under contract. But what happens when 20% of last year’s customers churn? Now, we have 1,000 less customers and need 9,500 to meet our goal meaning we’ll spend an extra $100,000 to meet our growth numbers.

To drive the point home even further, here is an extreme example.  This week Facebook announced it has 1.23B daily active users as of December 2016.  If they churned 0.5% of users in January 2017, they would lose 6.1M users.

This concept seems simple enough (we use compounding interest in finance all the time), but as a startup focuses on growth and scale it is easy to forget about churn.  The goal is optimal net customer growth, the optimal spend of acquiring new customers and the reduction of churn.

Revenue

What it actually measures: In its simplest form, revenue is the income a business receives from operating activities, but like most things it is much more complicated in practice.  For our purposes, revenue can actually be divided into three parts: booked revenue, recognized revenue and collected revenue. These three are often referred to as the flow of revenue.  Depending on the business, booked revenues can be realized and collected immediately or spread out over a period of time.

How it’s misused:   It is perfectly fair to champion “bookings,” “annual recurring revenue” and other numbers that often exceed actual revenue, as defined by generally accepted accounting principles because they are often better indicators of a companies growth prospects.  However, monitoring the flow of revenue becomes just as important as a startup grows. Startups should dedicate as much attention to the rate, both time and frequency, at which they are collecting revenue as they do to booked and realized revenue.

What can go wrong: The (un)realization of revenue. In some industries, bookings do not always turn into revenues. Marketplaces are one such example of an industry where bookings are often materially different than realized revenue. The marketplace doesn’t actually realize revenue upon signup or booking, but instead is compensated when the customer uses the actual service.

If your business is booking revenue at a high rate, but not collecting it you’ll be carrying a high accounts receivable balance and hinder your cash flow.  In this case, yield becomes an important indicator of performance. While this is just one example across one particular type of business, revenues / cash flow are the lifeblood of any business so it’s critical revenues are measured the right way.