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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When I was deciding to leave Lijit and join Graphic.ly as CEO, I met with a ton of different folks about the decision that was ahead of me. Its not that it was a hard decision, I knew I wanted to run a company again, get in early where I could have a large influence on direction, and build the type of team that I could be proud of.
But, Im a verbal thinker (meaning I think out loud), and I like to get feedback from many people.
Among the people I asked for feedback was Brad Feld, who’s advice was: “You might die tomorrow. Do what you think is right.”
(To which I immediately replied by farting in his office, because it just, felt right. Im kidding. It wasnt immediately. I waited for him to get on a call so that I could slink out and not get blamed.)
On a side note, the concept of death seems to come up a lot with Brad lately. Not in a morbid way, but in a “you might die tomorrow” way. If the greatest fear a person has is of death, then how does that uniquely affect entrepreneurs? A post for another day.
(No, I did not fart in his office. After all, thats not very presidential. Instead I made fun of his hippie long grey hair. But, I checked with my pollsters first, who assured me that making fun of his hippie long grey hair would play better in the Bible Belt than making fun of his (then) pending hip surgery.)
I spent time talking to Paul Berberian, who is one person whose advice always is good, but always takes a long time to seep into my brain.
“You like consensus, Micah,” Paul remarked. “I worried about what happens when you have to make the unpopular decision.”
“Shit,” I thought to myself, “I am not afraid to make decisions, unpopular or otherwise. What’s Paul talking about?”
Over the past 30 days or so, it became more and more clear that an unpopular decision was looming at Graphic.ly. I found myself, as a verbal thinker, talking to a lot of people about what the best course of action was, I spoke to team members, mentors and our investors. I spent a lot of time agonizing over what I knew to be right, but also knew would be…well, unpopular.
After a couple of sleepless nights and lots of discussion, Pauls word’s came back to me.
“What the hell?” I muttered to myself. “This is not the CEO you want to be. This is exactly the moment that Paul was talking about.”
Now, the decision is a big decision for us. It has little external impact in terms of the quality of service or the level of interaction with our community. But, nonetheless, it was a decision that had to be made. (It didnt help that I read Mark Suster‘s post about making decisions via indecision. Or that I read Fred Wilson‘s post Fear is a No-No, where he writes:
If I look back over 20+ years of entrepreneurs I’ve backed, the ones who were anxious and afraid of failure most certainly had worse outcomes than the ones who were aggressive and confident. You simply can’t be tentative in a startup. You have to go for it at every chance you get.
It literally felt that all my friends and mentors were screaming at me–in multiple ways, “What the fuck, Micah! Why are you being a pussy? This isnt you. JUST MAKE A FUCKING DECISION!!!” Yes…my friends swear. A lot. It totally fucking blows.)
I made the decision. It was unpopular. People were not happy. Things have to be changed. Production will slow in the short term. (The outcome of the decision was hastened by our investors, which is both a blessing and a curse).
But, its the right thing to do. And, after all, I live by two rules, with one being: “We also know what the right thing to do is, we just choice sometimes to not do it.”
Paul is wrong. I can make the unpopular decision. The vision we have laid out for the company is right. We will do amazing things, and this shift/pivot will help us “do more faster.” (Yes, even David Fucking Cohen was yelling at me in my mind.)
Which, in the end, is all that matters.
Doing the right thing is always the right thing, regardless if its unpopular.
What a disruptive question. The person who asks why constantly in an effort to learn always gets further than the person that accepts the direction and information presented them.
Here is why I have gotten involved with DonorsChoose. Dave Taylor, asked me to write an email to him as to why I decided to get involved:
About a year ago, I was beginning to read VC and tech blogs. During that time, I came across Fred Wilson’s blog. I had no idea who Fred Wilson was, other than a lot of people seem to read his blog. He was linked to by Brad Feld, and Brad was someone I trusted, so I assumed Fred’s content was equally trustworthy.
For a period of time, as I read Fred’s blog, I began to find most of the content pretty interesting and on topics that I found interesting.
Then one day he had a post about joining a “blogger’s challenge” by DonorsChoose. I was a new blogger, and was just learning what a widget was, etc., plus the power of blogging.
Having been an educational fundraiser for years early in my career (mostly colleges and universities), I always have held any philanthropic effort to help education in high regard, so I took a closer look at DonorsChoose.
Its a really interesting charity. It allows teachers to self identify things that are important to them. So music teachers will choose things like new guitar stands, a history teacher might select a trip to a local museum, a english teacher might select a series of books. Then individuals can contribute to which ever cause they find particularly interesting. The amount doesnt matter, and the contributor can designate the entire donation to go directly to the cause (with DonorsChoose getting zero).
I decided to participate and help Fred out. It didnt hurt that the winning blogger would get a lunch date with Jerry Yang, which Fred had decided to give to the participant who provided the best reason for giving. My dad, having recently retired from Stanford University, would love to have lunch with Jerry, so I jumped in.
DonorsChoose allows you to pick a school by geography, and I was very excited to see that my middle school, Morrill Middle School in San Jose, CA had a fundable project. So I sent in a small amount ($500 I think), to fund that project.
Fred did win the lunch with Jerry, and selected someone extremely worthy to get the lunch, but I had found a site that I felt had all the pieces of a site that could make a real difference. And over the next year, I made several donations, usually in the name of a family member. (In fact, for christmas, I gave everyone a donation in their name rather than gifts.)
A couple of weeks back, I got an email from Kris Murray, DonorsChoose’s Deputy Director, Northwest Region. She happened to be from Colorado and was out visiting family. She asked if we could connect, and, like a good Boulderite, we met over coffee.
She told me that DonorsChoose was going to have another Bloggers Challenge this year. She asked me to join Fred, Robert Scoble, Mike Arrington, Kara Swisher and others in the challenge. I knew that I would never be very effective on my own, so I offered to help in any way I can, which I knew was getting more people involved than just me.
In truth, its one of the best parts of the technology scene in Colorado. We are all more than happy to help one another. Unlike the coasts, where often the individual is the center, in Colorado its is usually a collective effort. TechStars is a great example of that. Lijit is a great example of that.
So, I asked the premier bloggers in the state: you, Brad Feld, Seth Levine, Ryan McIntire, Jason Mendelson, Andrew Hyde, Alex King and David Cohen; created a giving page called the Colorado Bloggers Challenge, and asked everyone to join in.
I am glad to see that everyone has decided to be part of the effort.
I took a couple of Jewish History and Religion classes in college. You know what separates the Jewish religion from the polytheistic religions? Jews asked their God why. Thats about it. Except for the one god thing.
Philanthropy is important to me for one reason. I have a lot to make up for. I was a bad person for a long time. As I start to write my book, I am thinking about my life in its entirety. Until recently, I was not a good person. I did not good things. I have much to make up for.
Community is evenly important. I have never lived on the top of a mountain as a hermit. I have always lived in a community. As I try to be a good person, I am also focused on trying to be a good member of a community. Colorado, more so Boulder, takes community to another level. I am struggling to keep up, but its important enough for me that I am trying.
Because I can. Because I can help. Because I can drive awareness. Because, goddammit, I should.
Because you should too. Add the widget. Give some money. Help others. Make a real change in your community. Be good. Its not that hard. And it is that important.