Over the past year and a half, I have spoken to more than 100 entrepreneurs that are in various stages of company building, and are looking to raise money. Over that time, I have gotten better and better (at least I think I have) in outlining the best way to frame the story of the startup.
BTW: If you are looking to really understand raising money and everything that goes with it, stop reading this and go buy Venture Deals by my friends Brad Feld and Jason Mendelson. They are smart; I just have a big mouth.
What I can tell you is how I look at the world of raising capital. Also, this is for seed rounds, after your first money, I am no longer really helpful. (And, please this is MY VIEW. You might disagree. Great comment away.)
Excepted Success Rate
|Friends and Family||High||Emotional||0%||~$10,000|
|Professional Angel||Medium||Emotional / Money||5%||~$50,000|
There are four investor types:
- Friends and Family: These tend to invest 100% in the person and less worried about the idea. They are your friends and family after all. Most expect to lose the money, but want to be helpful. Usually are just money not great advisors or rolodexes.
- Personal Angels: These are rich people who invest their own money. Often they have had a successful startup and want to see other entrepreneurs do well. Often they invest because they have a real interest in a market segment (They just love location based gaming!!) but really invest because they become passionate about the team. They do 25 – 40 deals over the course of 18-24 months, and expect one or none of them to really return anything meaningful. Usually these guys are great money, but not great advisors since they tend to not want to get super involved. Can have fantastic rolodexes. You have probably never heard of them, but should.
- Professional Angels: These folks are investing their own money, but are doing it as a job. Sometimes, they invest other people’s money as well. They are better as advisors, but also tend to be bigger “names” and in higher demand, which leads to their inability to sit on boards or get super involved in anyone startup. If you have professional angels in your round, you need to make sure that you effectively communicate with them to get the most value, which can be immense in terms of connections and advice.
- Venture Capitalists: Stop caring about the fund’s name. Worry about the partner. A great partner can add more value than having a big brand name fund investing in your startup. Being able to call a partner 4 times a week because you are freaking out is worth more than you will ever know (until you are freaking out and have no one to call). They are professional investors. That means they do more due diligence, want to see more traction and make bets that mitigate risk for their LPs as much as possible. They tend to work the hardest for you, but you also tend to give up more of the company and expectations explode. The cadence of your company you’ve been running out of your living room changes, and its about knocking it out of the park, not about slow growth and organic success.
In terms of how a company is evaluated, its pretty simple: Team, Problem/Solution and Market are the three levers. (There might be micro-levers, but on a macro, story telling level, these are it).
- Team: A great team is made up of at least a Hacker and a Hustler. The quick of it is: A Hustler sells passion and gets people excited about what you are doing; a Hacker is a problem solver. They dont have to be the best engineer, just the best at seeing the innovation and helping it get built. If you team is great two things happen. Its easier to raise money, and recruitment is easier. Not because A players recruit A players (which is true), but because A players set your culture and make it easy to understand what working for your startup is like; and more importantly they SCREEN FOR GREATNESS.
- Problem/Solution: Is your solution interesting and unique? Is it a real problem? This is important, but not as important as the team or the market.
- Market: One question: Is it a big market? Yes? Thats good. No? Thats bad. How big is a big market? $10B+ is interesting. Start talking $100′s of B’s thats awesome. Its why Square is so valuable. Its an interesting (but not unique) solution in a BIG MARKET.
- Great Team + Weak Solution + Big Market = investment (A great team will make a weak product great)
- Great Team + Strong Solution + Big Market = investment craze / high valuation
- Great Team + Weak Solution + Small Market = investment / low valuation
- Great Team + Strong Solution + Small Market = no investment. In that idea. But, they will pivot and get investment. Or they will get investment and told to pivot.
- Weak Team + Weak Solution + Big Market = no investment (a bad team wont pivot into something big)
- Weak Team + Strong Solution + Big Market = investment / low valuation (potentially, the investor might suggest adding or subtracting from the team)
- Weak Team + Strong Solution + Small Market = no investment. In that idea. But, they will pivot and get investment. Or they will get investment and told to pivot.
- Weak Team + Weak Solution + Small Market = facepalm. Dont pass Go.
Over simplistic? Yup. Accurate. Damn straight.
Your team is probably not as strong as you think it is. Really evaluate the skill set of each member, and make sure that everyone is filling the role they should. If you are flipping a coin for CEO, guaranteed an external CEO will be placed, or one of the founders will be gone. Think it through. You spent a lot of time on technology and infrastructure choices why bullshit on executive roles?
All of this should boil down to a 6 slide deck:
- Cover slide
- What is the problem?
- What is your solution?
- How do you solve it better than anyone else.
- How will everyone make money (especially the investors)
- How much money do you need to change the world?
Fund raising is about the story you tell. Whether its during a couple minute pitch at a Techstars/Y-combinator/500startups demo day or a two hour meeting with the partners at a big firm.
Think about the story you are telling; and as importantly, to whom you are telling the story.
Now go raise millions.
- 14 Key Findings of the Startup Genome Report (mojosimon.wordpress.com)
- Angel Investors Won’t Swoop Down on Your Startup (businessinsider.com)
- Fred Wilson: Startup Financing 101: How To Sell Preferred Stock (huffingtonpost.com)
- Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist (feld.com)
- Be Smarter Than Your Lawyer and Venture Capitalist (avc.com)
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I hate the belief that in order to be successful, you have to completely sacrifice yourself to your company.
There. I said it.
This is about treating entrepreneurship like you are a professional athlete, and putting yourself in the best position to provide the most value for your startup.
Late last week, a friend of mine, who has founded a pretty successful startup, whose growth is accelerating, and has really big potential (Im still waiting for my advisor shares…) called me. (Unfortunately, it wasnt about giving me advisor shares. Dammit.)
“Im killing myself.”
“Why? You have so much to live for.”
“No dumbass, Ive been busting my ass non-stop.”
(And, now you know why I have no advisor shares. Apparently, I suck at the advising part.)
“Oh. Well that sucks.”
“Yeah, dude. In the past week, my to-do list has grown to a massive length.”
“Start focusing on you.”
“Thats, what I said. You matter more than your company. Focus on you and you will drive more success.”
In the fall of last year, Graphicly was in fundraising mode. We still didnt know quite what we wanted to be when we grew up, some of our early efforts werent as successful as I would have liked, and we had completely re-hauled the team. We had gone from 22 people down to 7, and had completely shut down our UK office, which included a founder deciding to not move to the US, and stepping back from day to day operation. In many ways, we had stretched ourselves too thin, and didnt have the right team to move forward (hence the reduction in staff).
To make matters worse, I was barely sleeping (1 – 2 hrs a night), had ballooned to 363 pounds, and could barely focus on anything. It all came to a head on a call with a board member, Blair, where I, at the end of my rope, discussed if I was the right person to lead the company forward. “I understand that companies fail,” I said to Blair. “I just dont want to be the reason this one fails.”
After talking me off the ledge, I walked back into my office and slumped in my chair.
“If I could change one thing, what would it be?” I mumbled to myself.
“Me.” If I was the problem, then I needed to correct me.
I would focus on me. I would focus on my health. I would change how I managed the business, who we hired, what we focused on. I would stop sacrificing myself.
Mostly, I would treat running a startup like I did when I coached and played lacrosse. I would make sure that I was in the best shape mentally and physically to provide the most value.
I got a sleep study. Turned out that I have severe sleep apnea (A normal person has an ‘obstruction’ 5 times a night. Me? 91.) and I got a CPAP machine to help me sleep (I now sleep 6-7 hours a night. Its amazing how important sleep is to being effective.). I started watching what I ate (and am now down 30 lbs). I took a look at the company and determined what we needed to do, and who we needed to do it.
In addition, to focusing on myself, we made a couple of changes to the company.
1) We are 100% focused on production. People know what they have to produce, and that the company has a short memory. Be awesome always, or be gone. Amazingly, it removes stress, and attracts the right kind of people. Now, there is no question as to what people need to accomplish. And having clarity around your job is comforting. And things like where you work, how long you work and how you work no longer matter. It’s the ends that matter, not the means.
2) We changed our vacation policy: “Take what time you need, but if you arent missed, then thats a problem.” Do people abuse this? I dont think so.
3) Once a month we recognize someone who went above and beyond their job (usually means they crushed their goals) with a $100 gift certificate to whatever they want.
Clarity. Respect. Recognition. It matters.
Over the next couple of months, we completely rebuilt the engineering and product teams, refocused our efforts on what our customers really want, and raised just over $3 million. Now our growth is accelerating, deals are closing, the product is coming along in a wonderful way, our team is happy, our investors are happy, our community is happy. And most importantly, I am now providing real value to the company.
And, it all came from the realization that entrepreneurs need to take time for themselves. They have to put themselves first.
Do I have a work/life balance? In the standard sense, no. I dont leave the office at 7pm and go for a hike. But, every Saturday, I give myself 12 hours to do what I want to do. I go see a movie. I sleep in. Sometimes, I read. And, occasionally, I will catch up with email.
As entrepreneurs we have this weird expectation that we should completely sacrifice ourselves for our companies, and every employee should match that sacrifice. And, as investors, we perpetrate that myth, causing our founders to focus on the wrong things, and potentially create untenable situations. (If the myth that people invest in teams, shouldnt that investment–the founders–be protected and nurtured, rather than worked to the bone?)
Take care of yourselves, founders. You will find that your companies do exceeding better, and you are happier doing it.
Enjoy your Memorial Day!!
- 5 Ways to Inspire (learntoduck.com)
- 10 tips for a better work-life balance (simplybusiness.co.uk)
- Work/Life Balance at a Startup — Just a Pipedream? (jeanhsu.com)
- Taking a Break (magosapien.wordpress.com)
- Do More Faster…TechStars Philosophies on Startups (rackspace.com)
- Does Your Startup Need to be Massive? (howardlindzon.com)
There must be something in the Boulder air, as there seems to be a large amount of contemplation going on. My friend Brad is closing in on his 45th birthday, and it seems to have forced him to turn his thoughts internally, having written about it more than once.
I really like taking most of the Thanksgiving holiday to spend time with myself. I usually dont go home or hang out with friends. Most invitations are declined, and I try to stay silent through out the four days.
After a fairly messy six months at Graphicly, the question that seems to be sitting in my brain is a simple one: “Why am I an Entrepreneur?” After all, if I had chosen to work at a large company, and had worked my way up the ranks, there is a pretty good likelihood that I would have a solid job. Maybe a wife and kids. Perhaps a bunch of golf buddies a solid 401k, and if everything worked out properly, I would get to have sex with my wife more than once a week.
Why did I chose the life of an entrepreneur? For most, its a lonely life. You spend more time with your laptop than any living creature. I have literally worn through keyboards and watched computers smoke because of how hard I push them. I travel so much, that I really dont know Boulder very well, or have a local network of friends. If I were to list out the folks I physically spend the most time with, none would be in Boulder.
Its a cheap life. I make less money now annually than I did 5-6 years ago. Yeah, I had the exciting times of building and selling a company, but mostly because of my own idiocy, not much of that money is left. I put a fair amount of cash into Graphicly in the early days, which caused many to question my sanity, but I believe strongly in where we are going. I watch most of the pennies that exit my pocket now, and often spend money on Graphicly and its employees without reimbursement. Does that make me some sort of saint? No, it makes me an entrepreneur.
Its a life of questions. Being an entrepreneur is living a life filled with questions. Every day I wonder if the decisions I am making are good ones. Am I truly helping Graphicly grow? Am I helping everyone within the company get better? What about the team? Is it solid? Can they gel? Am I stepping up enough? While the company may fail; I want to make sure that I am not the reason for that failure.
So why do I do it?
I love problem solving. I love being creative. When I was in the 5th grade, I decided I wanted to learn a musical instrument. So I chose the trombone. Why? Because I liked the fact that you changed the sound by moving the telescopic slide, and that precision mattered. (Apparently, my mom decided that it wasnt the best instrument for me to learn, since after several practice sessions at home, she suggested the violin. And by suggested, one day the trombone was replaced by the violin. When I asked my mom, she simply said, “Micah, trust me, the family and our ears will be pleased by this switch.”) Over the years, I have tried to learn all kinds of instruments, none of which I took to.
I want to be part of something bigger than myself, but in which, I had a hand in building. I want to be able to look back at my accomplishments and see my fingerprints in them.
I enjoy leading. Its hard in the corporate world to find a position that gives you the opportunity to own a project or lead a team at an early ago. My first job out of college was at a non-profit in DC. After a couple of weeks, my boss called me into her office and sat me down.
“Micah,” she said, “You have to learn that you have to pay your dues.”
Silent, I looked at her quizzically.
“Let me tell you a story.” She lowered her voice as if the mere telling of the story would raise the demons of her past. “When I started my first job out of college, I came into the office one Saturday, and re-arranged all the furniture. Can you imagine?!?”
I could, she was a pretty proper person.
“The hubris I had to assume that I, fresh out of college, could rearrange the furniture without even asking. That I would assume that everyone would just be okay with it. Do you understand what Im saying, Micah?”
I realized at that exact moment, that I would never be successful in a big company. I am not a dues payer.
So why am I an entrepreneur? Because when I rearrange the furniture without direction, I will be judged by the arrangement, not my age or rank. I wanted to be able to succeed or fail based on my production and contribution. I wanted to control my ability to be successful, and help the people around me be successful, not because I know how to navigate the politics inherent in a large organization, but because I enable people to be successful through their own efforts.
Mostly, I am an entrepreneur because its an expression of who I am, and regardless of how hard Ive tried in the past, I can just be me.