What do investors really want?

The most obvious answer is “growth.” But does the answer change after they have invested in you?

A long time VC who was a Board member of two of my companies told me what investors really want: Predictability. Once you think about it, that becomes obvious. They invested in your company because they saw its growth potential but now what they want and expect is predictability: no surprises! That means you meet ship schedules, project budgets, financial goals, whatever the metric: meet or exceed those targets consistently and you will have investors whose expectations you have met and who will stay out of your strategic and operational hair.

But be careful of the “under promise, over deliver” maxim. Too much of that and you will be accused of “lowballing” or “sandbagging.” Take your pick: neither is good.

So what investors want should be want you as CEO, COO, CXO, director or manager, or staff want: predictability. It’s very hard to predict the future, but then building a successful startup is very, very hard.

So get buy-in on your metrics or in Silicon Valley Lingo, KPIs, then boringly and predictably meet those metrics, again and again.

If you do that you may eventually get to a pleasant surprise, such as a buy-out offer or an investment bank calling because they want to take your company public.

Investors questions to address

I picked up this great list of questions courtesy of a VC at what was then Softbank Ventures many years ago. So long ago that I’ve forgotten his name if I ever knew if, so I can’t give credit for it.

But even after all these years I still find it a useful tool to use with entrepreneurs.

A list of questions that a pitch to a VC should address

1) WHAT IS YOUR VISION?

– What is your big vision?

– What problem are you solving and for whom?

– Where do you want to be in the future?

2) WHAT IS YOUR MARKET OPPORTUNITY AND HOW BIG IS IT?

– How big is the market opportunity you are pursuing and how fast is it growing?

– How established (or nascent) is the market?

– Do you have a credible claim on being one of the top two or three players in the market?

3) DESCRIBE YOUR PRODUCT/SERVICE

– What is your product/service?

– How does it solve your customer’s problem?

– What is unique about your product/service?

4) WHO IS YOUR CUSTOMER?

– Who are your existing customers?

– Who is your target customer?

– What defines an “ideal” customer prospect?

– Who actually writes you the check?

– Use specific customer examples where possible.

5) WHAT IS YOUR VALUE PROPOSITION?

– What is your value proposition to the customer?

– What kind of ROI can your customer expect by using buying your product/service?

– What pain are you eliminating?

– Are you selling vitamins, aspirin or antibiotics? (I.e. a luxury, a nice-to-have, or a need-to-have)

6) HOW ARE YOU SELLING?

– What does the sales process look like and how long is the sales cycle?

– How will you reach the target customer? What does it cost to “acquire” a customer?

– What is your sales, marketing and distribution strategy?

– What is the current sales pipeline?

7) HOW DO YOU ACQUIRE CUSTOMERS?

– What is your cost to acquire a customer?

– How will this acquisition cost change over time and why?

– What is the lifetime value of a customer?

8) WHO IS YOUR MANAGEMENT TEAM?

– Who is the management team?

– What is their experience?

– What pieces are missing and what is the plan for filling them?

9) WHAT IS YOUR REVENUE MODEL?

– How do you make money?

– What is your revenue model?

– What is required to become profitable?

10) WHAT STAGE OF DEVELOPMENT ARE YOU AT?

– What is your stage of development? Technology/product? Team? Financial metrics/revenue?

– What has been the progress to date (make reality and future clear)?

– What are your future milestones?

11) WHAT ARE YOUR PLANS FOR FUND RAISING?

– What funds have already been raised?

– How much money are you raising and at what valuation?

– How will the money be spent?

– How long will it last and where will the company “be” on its milestones progress at that time?

– How much additional funding do you anticipate raising & when?

12) WHO IS YOUR COMPETITION?

– Who is your existing & likely competition?

– Who is adjacent to you (in the market) that could enter your market (and compete) or could be a co-opted partner?

– What are their strengths/weaknesses?

– Why are you different?

13) WHAT PARTNERSHIPS DO YOU HAVE?

– Who are your key distribution and technology partners (current & future)?

– How dependent are you on these partners?

14) HOW DO YOU FIT WITH THE PROSPECTIVE INVESTOR?

– How does this fit w/ the investor’s portfolio and expertise?

– What synergies, competition exist with the investor’s existing portfolio?

15) OTHER

– What assumptions are key to the success of the business?

– What “gotchas” could change the business overnight? New technologies, new market entrants, change in standards or regulations?

– What are your company’s weak links?

 

 

Keeping your angel investors in the loop

There’s an excellent article 5 Rules for Building a Great Relationship With an Angel Investor by  in Fortune magazine.

His rule #1 is “Keep them in the loop”. Years ago my friend and former colleague Kevin Donahue had many, many angel investors and found he was answering the same types of questions constantly.

So being a developer, he quickly put together a password protected web site and posted all his companies’ vital information regularly, mainly sales and financial data, but also milestones achieved and other information of interest to his investors. This saved Kevin a lot of time fielding phone calls and the investors were happy as well; they could take their time looking at the latest sales report or whatever interested them and only have to call or email Kevin if they had a question.

I’d advise any startup with multiple angels to emulate Kevin’s model, which with today’s tools is even easier, to not only keep your angel investors “in the loop” but your employees as well.

Getting to “no”

As a former bus dev exec I, of course, was focused on getting to yes with partners like Lotus, Apple, IBM, and many others.

And as an entrepreneur I’ve had many meetings with investors, only a handful of which resulted in investments. But an issue entrepreneurs often have with VCs and other investors is that VCs hate to say “no”. On the other hand it is very hard to get them to say “yes,” as only a tiny minority of startups ever get VC or any outside funding. The reason for their reluctance to say “no” makes sense from their standpoint: why turn down a company that might become a success? if no one else has offered a term sheet or demonstrated strong interest why not wait on the sidelines and see if the company meets its milestones and becomes more desirable as an investment?

But this is a problem for entrepreneurs. You don’t want to be the victim in that song by the Supremes “You Keep Me Hangin’ On“.   A quick “no” enables you to cross that investor off your list and move on. An “interesting, we’ll get back to you” puts you in limbo.

There are some VCs who invest based on a certain framework or set of criteria they have determined and those VCs, like Brad Feld, will quickly tell you, “sorry, but that opportunity doesn’t fit our investment strategy.” But many will keep you in limbo for weeks, then say, “we’ve decided to pass.” But then it becomes very difficult to find out why: is it the team? the market opportunity? too much competition? what? They will rarely say.

So if you are raising money, obviously you want to get to “yes” with the right investor(s). But getting to “no” – and better yet understanding why the answer is “no” can help you focus your energies on those investors who have demonstrated strong interest in the company and not waste time and energy on the fence sitters.  VCs hate “zombie” companies, those who are neither growing nor dying. Entrepreneurs should be equally wary of investors of can’t bring themselves to say either “Yes” or “No”in a reasonable amount of time.

“Always buy the small meal”

After finishing lunch with a local VC, who shall go unnamed, I went to pay the tab for the two of us, as I had asked him to lunch.

As I did so, he said, “Steve, remember, always buy the small meal.” Meaning, of course, it’s ok to pay for coffee, breakfast or maybe even lunch, but never pay for dinner that’s just going to be too much money. Just another example of an investor teaching me how to stretch the dollar.

Lunch was worth it for that lesson alone, though I never did try to calculate the ROI.

Doing your due diligence on investors

Most entrepreneurs are familiar with the entrepreneurial rite of passage of “due diligence” where they get scrutinized more heavily than an immigrant from the Middle East entering the U.S. CFO’s scramble to get the financials in order, the founders scramble to clean up the cap table, the management team scrambles to line up references – it’s a massive scramble drill.

But how many entrepreneurs perform due diligence on investors who present them with term sheets?

Getting an investment is not like auditioning for a movie role, where you get it or you don’t, based on the director’s final decision. It’s a negotiation: over amount, valuation, terms and conditions, and more.

So before you get that term sheet, but when you are getting close, I recommend you start your due diligence process. The best VCs will have no problem with this. I remember Bill Kaiser of Greylock telling me “We are 100% referenceable. You can talk to any of the CEOs of any company we have invested in.”

Here’s a few tips on due diligence on your investors:

  1. If they make the investment, will they take a Board seat? (Almost always). Who will sit on your Board?
  2. Can they give you the names of founders of their portfolio companies you can talk with? CEOs? You want to find out how the investor reacts when things go wrong. Everyone loves you when things go right. But in a startup things often go wrong. How did the investor react? How did the negotiation over the valuation go? This is the most common friction point between entrepreneurs and investors.
  3. Beyond being cool,calm, and collected during a crisis, how have they helped the company? Have they used their network to help recruit talent? Have they interviewed finalists for you? Found partners? Recommended top notch professional service firms or contractors? Brought in additional investors?
  4. How big is their current fund? I’ve wasted time with more than one VC who’s fund either didn’t have enough left to make any more investments, or who hadn’t actually closed the fund from where my investment was supposedly coming from.
  5. Do they often syndicate investments, e.g. invest with other VCs to spread risk and share the upside? If so, what funds? I used to call  Greylock and Highland the Bobbsie Twins of East Coast investment because they did so many co-investment deals.
  6. How often to they lead? Leading is tough as it means setting the valuation and the amount to be raised, as well as the investment preferences. Beware of newbies or investors with reputations for onerous preferences.
  7. Are there other companies in their portfolio that are competitive with yours or could become so?
  8. Can you talk with some of their LPs (limited partners)? Why did they become LPs?
  9. How successful have they been recently? This can be a tough question to answer, but there are various sources on the Web that rate VCs, track M & A activity, and IPO’s.
  10. Can you spend some non-business time with the partner who is leading the investment? While lunch is nice, travel is best, and any non-business activity from golf to attending a Red Sox game will give you a chance to get to know your investor personally if you don’t already.
  11. Do they hold money in reserve so that they can do multiple rounds if necessary?
  12. Finally talk to the portfolio founders and CEOs whose names they didn’t give you. Especially companies that have failed or are floundering. How has the investor tried to help or has hurt these companies? Or perhaps just sat on the sidelines.

Raising money is a very draining, time-consuming process. But don’t quit at the term sheet. The game isn’t over until the check clears the bank. And most important, this isn’t a date, it’s more like a marriage – though VCs by their nature, are polygamous.

As Allan Bufferd, former treasurer of MIT who invested in my first two companies told me. “Everybody’s money is green.” I had no idea what he meant until he explained it. Hopefully you now understand it now too. You need smart, honest, fair, experienced, and helpful money. Not just green money.

Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist

I was chatting with a couple of friends yesterday and the subject of term sheets came up. I mentioned that I thought Brad Feld had done a fantastic job of explaining terms sheets and other VC arcana on his blog. Brad is one of my favorite investors of all time. Not only was he a vibrant member of my Mainspring strategic advisory board, he lead the investment in Throughline, sat on its Board of Directors, and despite the fact I managed to lose 100% of his investment, all the did was thank me for knowing “when to fold ’em” and there were never any recriminations, finger pointing or any sort of blame. We remain on good terms to this day.

So my friends reminded me that Brad had gone from being one of the best bloggers out there to writing books and he’s written a real classicVenture deals when it comes to the all important issue of understanding that investment deals represent a lot money than money, Ts and Cs (terms and conditions) can trump all, pardon the phrase.

Brad has an entire Amazon page devoted to his books! I have to admit to not having read them all – yet – but I’d recommend them anyway, just from knowing Brad, knowing his writing, and knowing his genuine nature of wanting to give back and educate entrepreneurs.