Best presentation I’ve seen on raising money for new entrepreneurs

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Fundraising 101 How to Land your seed round by David Chang is the best presentation on raising capital for new founders that I’ve seen. It clearly spells out all the key issues in about 30 slides.

David knows whereof he speaks. He’s a very successful startup operators, angel investor and connector. He’s done five startups and returned many millions of dollars to his investors and he’s personally invested in nearly forty companies.

 

Why a prototype is worth 1,000 pitch decks

The article All about creating a startup pitch deck to raise funding is by far the best compendium of  pitch decks successfully used to raise startup funding. If that’s what you are doing, investing the time to read this very lengthy article and review all the decks will be time well invested.

However, as I advise my mentees who are raising capital, there’s a hierarchy of approaches to investors, in descending order of pitch power they are:

  1. A product or service in the market and a growing number of paying customers
  2. A product or service being used by a signifcant and growing number of people
  3. A prototype that blows people’s socks off
  4. A great pitch deck

The best pitch story comes from Fred Wilson of Union  Square Ventures, whose partner at his early firm, Flatiron Ventures, Jerry Colonna, was an investor in my first company, Course Technology. Fred is now one of the top VCs in the country. I believe that Jerry has retired. Fred’s blog, AVC, is well worth following.

This story is so good I’m going to quote it in it’s entirety rather than just post the link:

Best Seed Pitch Ever

I read yesterday evening that our portfolio company Twilio, which priced its IPO last night, is going to live code from the NYSE this morning. That brought a powerful flashback to the first time I met Jeff Lawson, founder and CEO of Twilio.

It was 2008 in our old offices on the 14th floor of the building we still work in. My partner Albert, who led our investment in Twilio, had met Jeff and was impressed with him and his vision for Twilio. He asked me if I would meet with him and so I did.

Jeff came into the conference room, sat down, and said “we have taken the entire messy and complex world of telephony and reduced it to five API calls”.

I said “get out of here, that’s impossible.”

Jeff proceeded to reel them off and I said “wow”.

He then pulled out his laptop, fired up an editor, and started live coding an app. He asked me for my cell phone number and within 30 seconds my phone was ringing.

I said “you can stop there. that’s amazing”.

It was, and remains, the best seed pitch I’ve ever gotten. I’ve told him that many times and have told this story many times. I am not sure why it has never made it to this blog. But this morning is a great time for that to happen.

You’re selling your equity, not giving it away!

One of my pet peeves about entrepreneurs is that they very often speak of “giving away their” equity when they raise capital. They aren’t giving away anything!

Here’s the CEO of liquor delivery company Drizly quoted in the Boston Globe today.

“This is the right number for us given the climate. It allows us to make the investments we want to make, without having to give away more of the company than we want to,” Rellas said.

They are selling their equity! This may not seem like a big deal, but this attitude creates a less than optimal mindset when it comes to raising capital from investors.  Raising capital needs to be approached much like any other B2B sales opportunity: generating leads, qualifying leads, making the pitch, overcoming objections, negotiating the deal (including Ts and Cs), closing the deal – and often forgotten, post-deal customer support.

The idea the founders are “giving away” equity also doesn’t help educate employees about the investment process, which is already opaque enough and threatening enough to employees as it is.

The more entrepreneurs approach raising capital as a sales process – where they are selling their equity to qualified customers (VCs or angels) the more likely they will maximize their opportunities and manage the process for the best outcome.

The Social Innovation Forum

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If you are a social impact entrepreneur you need to know about The Social Innovation Forum in Boston. SIF has programs for both non-profit and for-profit social impact organizations.

The Social Innovation Forum (SIF) plays a critical role in the social impact community by educating, engaging, and connecting resource providers (funders, investors, and volunteers) and on-the-ground leaders of nonprofit organizations and social impact businesses. Our programs and services provide a unique combination of capacity building and network building as we actively connect supporters and practitioners to build productive relationships focused on growing social impact.

This spring I had the privilege of helping SIF as a presentation advisor and as a mentor for the new bootcamp program that prepared organizations to develop their presentations for an SIF investor conference.

SIF is an amazing organization. A two-year old spinout from Root Cause, the people, processes and purpose of SIF are road tested and top-notch. The companies they serve are doing great work. I was privileged to work with both Budget Buddies, which helps low-income women become more economically self-sufficient and transform their lives by teaching them core money-management skills and Change Is Simple, which educates children on the connections between, environmental, community and human health.

I hope to have the opportunity to work the great staff and wonderful companies of SIF this fall. That’s my highest recommendation.

Creating a sense of urgency

One of the major problems facing early stage entrepreneurs is how to create a sense of urgency, particularly with investors, but also with potential channel partners and other 3rd parties they are eager to do business with. There are at least three good ways to create a sense of urgency:

  1. Competition – the best way to get investors or others to act is to let them know, subtly, not aggressively that they have competitors out there. That’s when FOMO kicks in – Fear of Missing Out. Investors tend to network and know each other, so if you have a term sheet or other evidence of strong interest from an investor, word will get out. And you want it to get out. Competition validates. Competition drives valuation. Competition is the best friend an entrepreneur seeking investment can have. So keep those conversations with investors going. Until your check clears the bank you should keep working to have multiple investors very excited about your company. They may even syndicate the deal.
  2. Traction – the difference between a startup and a small business is that growth is the metric and goal for startups; security and profitability are the goals of most small businesses. So the number one thing that most investors look for is customer traction and its growth rate. And engaged customers, not just eyeballs! Investors tend to like to sit on the sidelines and watch to see how you execute. To get them off the sidelines and into the game they need to see what they are watching for: explosive growth. Building virality into your product from the get-go can trigger that explosive growth.
  3. Buzz – buzz today almost always means going viral on social media. Perception becomes reality and the herd mentality takes over. But even the old legacy media of print, TV and radio can help you create buzz. Buzz draws attention. And if you are offering an opportunity: to investors, to job seekers, to developers for your platform, to customers, buzz can help get them to take action. Buzz is activating.

Startups need to move fast, but that’s under your own control. Getting others, especially investors, to move fast is the real challenge.

How do investors decide to invest?

If you ask most first time entrepreneurs who are just starting to think about raising money this question, the answers vary from “Our vision” to “Our big idea’ to “Our killer application.”

But none of these answers are correct. In my experience, which ranges from VCs (Greylock, Highland, Sigma, Flat Iron) to corporate (Apple, MIT, Ernst & Young, Reed Elsevier, Silicon Valley Bank) to angel groups (several pitches, no investments), the decision comes down to three factors:

  1. team
  2. market opportunity
  3. product

Of these three by far the most important is the management team. Investors would rather have an A team with a B plan than a B team with an A plan. Why? Because A players can cope with change and if their original business plan turns out to be a non-starter they can successfully pivot. Twitter, for example, rose from the ashes of a failed podcasting startup. And a B team won’t execute an A plan, and if they are hit by market or technology challenges, they won’t be able to cope.

Of the team, the most important person to investors is the CEO. I’ve been told by one VC that he considered the CEO to be 70% of the management team. Without a great leader the best CTOs, Chief Revenue Officers, CFOs etc. will not build a great company. So if you have a startup team where you consider yourselves equals and peers you are going to have to face the issue quickly that either one of you emerges as CEO or you will have to bring on a CEO to secure investment.

And, of course, investors have been known to insist on their own CEO if the founding team’s CEO doesn’t meet their standards.

Assuming you have a CEO who impresses investors, usually the next thing they look at is the market opportunity: how big is it? it needs to be very large. Investors are not interested in niches, lifestyle businesses or boutique companies. How fast is it growing? Who are the competitors? And lots more questions like this. See the post on investors questions to address.

And of course, your product. But this is really a trick answer, because while the product needs to be exciting, compelling, etc. what investors are really looking for is customer traction! How many users do you have? How fast is the user base growing? How engaged are they? How much are they paying you? What is your cost of customer acquisition?

So you can have a great CEO, a huge market opportunity, and a breakthrough product, but without market validation measured by creating real customers and revenue, you will most likely have a difficult time raising capital in today’s investment climate.

 

Why raising too much money is worse than too little

After the successful sale of Course Technology, Inc. to Thomson (now Thomson Reuters), we had no problem raising capital for my next company, Mainspring Communications, Inc.

Unfortunately, we raised way too much money: $8 million dollars for nothing more than two guys and my business plan – which was untested and fatally flawed. Mainspring was born back in mid-1990’s when the Web was just starting to take off commercially. What I thought was the opportunity was to help the thousands and thousands of corporate IT staff to transition from PowerSoft and other legacy applications to Web tools and technology. My model was MSDN, the Microsoft Developers Network. And that was the fatal flaw. Obvious in retrospect, but the idea that Mainspring, like MSDN, could actually charge developers for access to information and tools when everything else on the Web was free, was sheer folly. In fact, Ziff-Davis and all the ad-supported PC tech publications quickly built web sites and gave away the type of information we were creating and trying to sell on a subscription basis.

Worse yet, were were paying staff to create this content, but revenues were no where in sight. However, raising so much money at stage zero enabled us to focus on hiring, buying expensive software (like Oracle!), developing a sophisticated platform complete with credit card processing, taking on large, costly office space, and otherwise focusing solely on the supply side of the marketplace equation. We cheerfully ignored customers completely – we arrogantly thought we knew what they needed – until launch day.

Once we launched, it didn’t take long to find out no one wanted to pay for a subscription to Mainspring, which was barely a “nice to have” vs. MSDN, which in a then Microsoft monopolized world, was a “must have”.

After losing the internal battle to pivot to ad adverting business model, I left the company, only to see it pivot twice more and eventually end up as a consulting company that went public and then was bought by IBM. As I recall, it took them multiple more  rounds of funding to pull off this feat. (As a side note, much to my frustration, a company called Earthweb later basically cloned the Mainspring idea, but with an ad-based business model, and went public well before Mainspring did, at a $700 million valuation.)

But the moral of this story is startups need to be lean and hungry. That forces them to get their product to market quickly and start creating customers vs. spending months and millions building a product no one wants. We were fat and self-satisfied – the formula for failure.

These days with all the open source tools and knowledge out there, building a product is orders of magnitude cheaper than it was twenty years ago. In fact, many leaders in the startup ecology advise against raising venture capital period. VC money, if you raise it, should be used to scale, not build. Too bad the book Nail It, Then Scale It was published twenty years too late for me!

So raise friends and family money and liven on Ramen noodles while you build your product and create customers. Lack of capital is a great forcing function to get stuff done fast and validate your product idea ASAP, since only then will you be able to raise money from professional investors. And when you do, don’t make the mistake I made by raising way too much. The rule of thumb is to raise enough to get you through the next 18 months, with perhaps a 15% cushion. Or better yet, to base your raise on getting to very well instrumented milestones or the road to scaling a product that already has customer traction – known in VC-speak as “staged capital infusion”.