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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.

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

 

A few days ago Hunter Walk (quickly becoming one of my favorite VC blogs to read) posted a blog on the new reality that is non-tech firms being more frequent acquirers of startups than tech companies.

Yesterday, CB Insights did the same putting the spotlight on several of the companies that exited to traditional companies with the graph below to highlight the change over the last few years.

buyersnontechvc

 

As a result of more traditional firms getting into the M&A fray, I believe 2017 is the year we’ll see more startups try to build more sustainable, or close to profitable businesses. Sure, there will still be a few outliers like Jet and Cruise who were likely not operating even close to profitability but Dollar Shave Club appears to have been on its way before being acquired.

There are a few reasons for my thinking:

  1. Over the last year or so, growth rounds (B and beyond) have required tougher metrics for funding and good valuation meaning that companies need to have some optionality in the event they cannot raise capital at the valuation they want or because of internal growth metrics.  This squeeze will put the focus on sustainable business models.
  2. Traditional companies like businesses with economics that make sense when synergies and adjusted revenue are applied.  Hunter’s post had amazing insights on the different levels of acquisition but my particular favorites were levels 3 and 4. Non-tech companies are looking to prevent themselves from the same fate as their peers in retail since Amazon arrived on the scene, which gives reasoning behind level 4.  But I would argue that most of the M&A activity will occur in level 3 where startups with decent unit economics have the chance to provide a real product line or new acquisition channel to a non-tech company where the economics get better with synergy from a bigger firm.

An example of this thinking is Seventh Generation v. The Honest Company.  Two very similar companies but with different business models.  Seventh Generation, while older built itself like a real business, gained profitability after year 10 and took $100M in funding along the way.  Unilever acquired SG for 600-700M in 2016.

The Honest Company, by contrast, has taken the “growth” approach raising $228M in 5 years, has 3X more staff, and the same level of sales.  Fortune highlighted the comparison in December and reports that The Honest Company is restructuring to build higher margins after being snubbed in acquisition talks by Unilever before the SG transaction.

Though the exit horizon for SG was much too long for VC,  the business model contrast with Honest highlights an important point.  In some industries, especially those that non-tech firms are interested in, margins and sustainability matter greatly.

One particular industry that I believe will see this happen is FinTech, banks are slowly being disintermediated from their consumers and Bitcoin is picking up a lot of steam as of late.   As a result, we’ll see more formal institutions create partnerships and acquire FinTech companies focusing on security and payments, digital currency, and customer engagement.

Earnest, SoFi and Student Loan Genius, all of whom are re-thinking the way lending, credit and payments work, are prime examples of acquisition targets for banks that want to engage young, educated consumers who are likely to use their other products like home loans, credit cards, and investment vehicles.  These startups represent a chance to acquire new customers while pre-empting an existential threat on the chance that new loan processes leak into traditional bank products such as mortgages.

With all of the capital raised in 2016 and prices coming back into alignment, it is almost certain we will see increased M&A activity in 2017.  The most interesting question will be if these acquisitions accelerate the pivot of startups building for sustainability instead of growth.