Everybody’s money is green!

 

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When I started my first company I was employed at MIT as Director of Information Services. When I told a colleague, Cecilia d’Oliveira, that I planned to leave, she told me I should talk to Allan Bufferd, who was then Treasurer of MIT. Cec told that Alan was in charge in MIT’s investments. I knew Allan as we served on an administrative committee together.

When I saw Allan all I had was a two-pager we had written about our startup, Course Technology. I only remember a couple of things about the conversation. The most memorable was when he told me that “everybody’s money is green.” I told Allan I had no idea what that meant. He explained that all investors can put capital into a startup, the question we needed to ask was how else could they help us to be successful?

The other thing he told me was that if we had a lead investor, he would invest directly in the company, which was highly unusual for MIT, as the Institute only made one or two direct investments in startups a year at that time. All other investments were made through venture capital firms, like Greylock. To make a very long story quite short, we had been introduced to Greylock in their San Francisco office and brought Alan Bufferd to our first meeting in the Boston office with Bill Kaiser, way back then a young partner being mentored under senior partner Henry McCance.

It didn’t take long for us to understand that Greylock brought a lot more to its portfolio companies than capital, for one thing about half a dozen of the country’s top universities and colleges were limited partners in their fund. Greylock also had a very long track record as one of the most successful VC firms in the country.

So we decided to accept the term sheet from Greylock, the only VC firm we talked with, which brought along the direct investment from MIT, shepherded by Alan Bufferd.

When Course Technology was purchased by Thomson, now Thomson Reuters, both Greylock and I’m glad to say, MIT, got good returns on their investments.

So keep the “everybody’ money is green” saying front and center when you are raising capital. Interview potential investors to find out how they will help you succeed. Do they have great contacts in your market? Can they help recruit world class CXOs to the company? Can they syndicate the investment with another blue chip VC firm (as Greylock did)? Get beyond the platitudes on their web site and dig for specific examples of how the VC firm has helped companies like yours succeed. Green money is necessary, but far from sufficient for startup success.

Funding is all about story telling

 

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In my experience raising capital – successfully over multiple rounds for four startups, unsuccessfully for a few more – investors decide with their gut, then justify their decisions with the numbers and logical process they seemingly went through to make their decision.

You don’t get to the gut with numbers, comps, or logical argument – you get there via story telling.

As written in another post, you first need to capture investors’ imaginations, then their wallets will follow.

In the article Would-Be Carmakers Tap the Wisdom, and Dollars, of Crowds  by Eric Taub in The New York Times Darren Marble, chief executive of CrowdfundX says:

Crowdfunding is all about storytelling,. You need to tell a story that emotionally inspires people. Financial return is secondary to this for investors.

While it’s the received wisdom that crowd funders and angels make their decisions less on financial return than “professional” or institutional investors like venture capitalists, even VCs can be influenced by factors other than financial return, even if not consciously.

There are a number of workshops and online aids to story telling. If you aren’t a natural story teller, investing time in learning the craft will have a big ROI if you are planning on raising funds for your venture.

Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist by Brad Feld

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Decades ago I met Brad Feld when he was an angel investor. He later joined my advisory board at Mainspring Communications (along with Tim Berners-Lee, Linda Applegate of Harvard Business School, Mary Cronin of B.C. Carroll School of Management and others). Then when I left Mainspring, Brad was the lead investor and a Board member of Througline, Inc. Despite my losing all of Brad’s money when I shut down Throughline, we still remained on good terms.

I’ve been thrilled to see his success of these past many years and how he’s been sharing his wisdom and experience through a series of well-received books. Venture Deals is now in its third edition and is a must-read for any founder seeking funding: not just venture capital either. Brad has expanded the scope of the book to include crowd funding, corporate investments and more – it belongs on every founder’s bookshelf – real or virtual.

There are lots of very smart, very successful VCs and over the years I’ve met many of them. But what distinguishes Brad from virtually every other VC I’ve meet, with the exception of Fred Wilson, is his commitment to helping founders truly understand the VC funding process, to be totally transparent, and to help founders succeed.

I don’t have enough space to list all of Brad’s achievements, from single handedly creating the Boulder, CO entrepreneurial community to all the other books he’s written, and his successful investments. You can use Google for that.

However, there’s a post at Feld Thoughts by Brad that will give you more detail about the book and the blog itself is a goldmine of information about startups and investing.

But before, or after you do, invest in a copy of Venture Deals – it may be the best investment you make in you entrepreneurial career.

Its all about growth if you want VC funding

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It’s the secret sauce of internet valuations. Revenue and earnings are forgiven if you can show growth in users. Whether that makes sense, of course, is another matter.

So get out the old hockey stick curve for those presentations, much better yet, grow your user base rapidly before trying to raise VC funding, as this article from The New York Times makes clear:

Twitter’s Troubles and Snap’s Appeal: It’s All About the Mojo

The company’s fundamental problem is that it is struggling in user growth.

Revenue growth may be on track, increasing about 20 percent in the quarter ending June 30 over the same period of last year, but it is the user growth numbers that have put Twitter into the loser category.

When Twitter went public in 2013, and its stock price shot to over $60, it had far fewer users and a third as much revenue. But back then, Twitter had user growth of 39 percent year over year. And with that growth, all other sins were overlooked.

Snap has the youth market, which advertisers covet. Revenue is low, at about $376 million, according to Bloomberg, but is projected to grow fourfold by 2018. Profits appear nonexistent, but as usual, who cares?

The intense focus and pressure for growth in B2C companies, and more specifically for social media companies, leads me to advise entrepreneurs to consider B2B ventures, where the cost of customer acquisition may well be significantly lower and the momentum and fundability are more about the quality of enterprise customers and the level of engagement of end users.

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.

 

Investors as customers and evangelists

ar-ao173_rockma_p_20160928173224On a twist on Kickstarter and other crowdfunding sites, RockmaniaLive plans to raise truly significant funding from potential customers and provide them with exciting perks as an incentive. This plan is mentioned as part of the article Orchestras to Take Up Rock’s Classics in today’s Wall Street Journal.

Jimmy Page and Robert Plant haven’t performed together since a rare Led Zeppelin show in 2007. But starting Friday, fans can invest in a company that plans to stage hundreds of live performances of their music around the world over the next five years.

Mr. Konowitch is planning to sell to the public $1 million of shares in the $10 million company. Those investors—who he hopes will help him promote the shows by hosting parties and inviting their friends—will get perks such as free admission and private dressing rooms when they buy in, at a minimum investment of $1,000.

Rather than conducting a traditional initial public offering, RockmaniaLive is taking advantage of rules adopted last year by the Securities and Exchange Commission allowing companies to sell securities through crowdfunding. Musicians who have crowdfunded on platforms such as Kickstarter have typically raised amounts of less than $100,000.

If raising a million dollars from potential customers works for RockManiLive it could well open the door to a whole new funding alternative to angel investors, angel groups and even early stage VC firms.

 

 

 

What’s the most important part of your financial projections?

Contrary to what most entrepreneurs believe, the most important part of a startup’s financial projection is not the proverbial hockey stick growth curve they believe all investors need to see before they will offer a term sheet.

In fact the most important part of financial projections may not even be in a spreadsheet at all.

Why do investors insist on financial projections, often for 3-year periods, but sometimes as long as five years, when everyone knows that for any pre-revenue or very early stage company these projections are largely, if not totally, wishful thinking on the part of the entrepreneurs?

One reason is that investors what to see if entrepreneurs understand the key drivers of their business: cost of goods sold, recruiting expenses, economies of scale, gross margin, lifetime customer value and a number of other metrics. In other words they want to know if a) you are thinking and planning about the right metrics for your business b) you can make the business case for your plan, and c) how it jibes with similar businesses they have seen in the past.

So what is the most important part of your financial projections? It’s the assumptions behind the numbers. 

Since most investors have historically been most focused on growth, the assumptions behind your revenue forecasts are the most important: total addressable market, marketing and sales budgets, etc. But increasingly these days investors want to understand how you will scale to get to profitability. So the assumptions behind your operating costs are becoming more important. For most tech startups, staffing is the number one cost by far, so prepare detailed hiring plans, which include your assumptions for such items as salaries, recruiting costs, benefits costs, and incentive compensation.

Each major element of your income statement needs to have a short, concise and well-reasoned assumption behind it: what you will need to pay per year in rent for your office space; market rate salaries for the engineers you plan to hire; marketing expenses, health care insurance, etc.

For example, if you plan a subscription sales model you need to include not only what growth assumptions you are making and why, but also what retention or churn rates you are projecting as well. The best assumption statements will be buttressed by actual company operating data or publicly available data from similar companies. One source of this information is the annual reports of public companies, but of course be careful as these companies are far past the startup stage. Experienced CFOs for hire, who have worked for companies in your specific market be it robotics or biotech, can be invaluable in building the assumptions behind your financial projections. Your friends in the entrepreneurial ecosystem may also be able to help you.

These assumptions can either be a text document with sections that mirror the specific elements of your financial package – revenue projections, operating expenses, etc. – or if brief enough, can be added as text in a notes column of the spreadsheet. The former offers much more space for explication, while the latter syncs up the numbers and the assumptions, which can make understanding both easier for the reader.

One advantage of having a separate document or presentation on your assumptions is you can start you dialog with the investors there. Once you have had a chance to present and defend your assumptions, you can then present the numbers generated by those assumptions.

Finally the assumptions behind your numbers are not simply for investors, they are the backbone of your business operating plan. And requiring presentation of key assumptions behind any type of financial projection or expense request should become part of your company culture.

It’s way too easy to fool yourself, and attempt to fool others, by manipulating numbers in a spreadsheet. Your financial plans will be far more likely to be realistic if you start with the key assumptions behind the numbers before you launch Excel, Google Docs, Apple Numbers or whatever your favorites spreadsheet is.