you didnt just say that did you?
Actually, I did. And I hear it from entrepreneurs at least twice a week.
But its not true.
Over the past couple of weeks, along with reading two great articles on venture: Francisco Dao over on PandoDaily talking about the talent economy and Joe Stump’s great post on whether you should raise money or not, I have had no less than 6 conversations with various entrepreneurs whose companies are in the process of raising money.
Its easy to view VCs as opportunistic, money driven old white men who see the vast amount of product and company ideas coming out of the brains of nubile hackers and hustlers as fertile ground. They trade money for equity. As soon as the going gets tough, they focus on the companies in their portfolio that are doing well, they invest only in companies that are talked about on Techcrunch, blah blah blah.
Is that true? For some, yes. Does it make VCs dicks? no.
Its important that as an entrepreneur if you decide to raise money (and I counsel most founders to not raise money for as long as they can) that you understand the dynamic of how venture works. Francisco says it best:
In Silicon Valley, we take venture capital for granted but few people realize what a fundamental shift it represented in the relationship between capital and labor. Since the dawn of capitalism and the industrial revolution, the balance of power has overwhelmingly favored those who controlled the capital. Labor, and all talent associated with it, was beholden to those who owned the factories. The introduction of venture capital essentially reversed these roles with capital now chasing talent. It is difficult to understate what a dramatic change this was. Instead of capital (the means of production) acquiring talent, Silicon Valley runs on the basis of talent acquiring capital.
As the talent, you hold the power. Initially, the only power the VC wields is saving you from living in a box and stealing wifi from the Starbucks on the corner, and by selling a piece of your business to venture firm, you are required to do only one thing: build your business as fast and as big as you can, so that in some reasonable time frame (say, around 5 years), you can experience a liquidity event that makes the initial investment worthwhile for the VC.
And thats when the perception of the VC as a dick arises. Now, the VC’s job is to get you to not think small. To provide insight, connections, and even direction, to push you to grow your company fast. (This is sometimes the same deal with angels, but most often not).
Now, many VCs reading this post, will start disagreeing with that point, while many entrepreneurs will agree.
Its this fundamental disconnect in perception that is the primary reason for friction between VCs and entrepreneurs, even in a successful business.
Brad Feld, a VC, who’s method I believe in, was quoted in a Boston Globe article about Google Ventures:
“VCs love to talk about the ‘value they add’ while trying to exercise control over companies from the top down…’’
Do I believe that VCs are dicks? That their goals are not in-line with the goals of the founders?
I believe that its imperative for the entrepreneur to understand the dynamics of the VC/CEO relationship and define it early on in the lifecycle of the business. Its your business after all. You hire everyone — including your investors — so have the same high bar for everyone involved in the business.
For young entrepreneurs, there are three distinct moments of joy when starting a company: 1) getting other people to believe in your vision and come work with you; 2) getting people to give you money; 3) your first user.
In each case ill-defined communication interaction will make you believe this:
1) your employees are dicks;
2) your investors are dicks;
3) your users are dicks.
When, in truth, you are the dick.
Understand and own every stage of your business and the people the business engages. It may not guarantee success, but it will remove you as the reason for its failure.
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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)
This past week, I did a bit of travel. I spent a few days in Detroit and a few days in Atlanta. I have greatly limited the amount of times I speak (there are a couple of events that if asked I will speak — Big Omaha is one, and its coming up next week — but mostly, I am heads down with Graphicly).
The events I like to speak at are full of entrepreneurs, many of them first time entrepreneurs, and more and more, are not on the coasts.
I grew up in California. In San Jose. In the HEART of Silicon Valley (sorry San Francisco and Palo Alto, y’all aint it). My mom worked at startups for most of my life, with the common cycle of job — laid off — new job that comes with working at a startup. As an experiential learner, startups just seemed to fit my world view.
I never understood how people could feel geographically restricted about starting or growing a company. Here is the key – understand the resources provided by the local region, and work within that.
Does that mean a startup should never move? Of course not. What it means is that the founder needs to start with understand what CAN be done, and what cant. Rather than focusing on what CANT be done, and worrying about what can.
And then, once product/market fit is achieved, if the MARKET requires the move of the business, then, and only then, consider an adjustment to geography.
With that mindset, I headed to Detroit to participate and speak at Funded By Night. A great program put on by Ludlow Ventures and Detroit Venture Partners. 25 companies presented, and one won a $100,000 convertible note with no discount or cap. BLAM!
When I travel, I try to setup a Startup Breakfast/Brunch/Lunch/Dunch/Dinner – something that includes food and sitting down. No bars; nothing formal. Just a place, people and food. In Detroit, we ended up with about twenty folks.
In talking to Detroit area entrepreneurs, I heard much of the same issues that I have heard from communities like LA, Bloomington, Toronto, Omaha and others.
- We arent as collaborative as Boulder/SF/NYC. Everyone is just focused on their own thing. There isnt any great ways for us all to get together.
- When someone is successful, everyone starts talking shit.
It’s amazing that entrepreneurs in ANY community do the same thing: Look at the roadblocks in the road and have mad jealousy.
Here are my answers:
- Stop that shit. Celebrate yourselves and the other startups around you. Its FUCKING HARD to build a startup of ANY size. Celebrate the small successes.
- Understand that the success of the community outweighs the success of any ONE STARTUP. My success is not Graphicly’s; its Boulder’s. Do you think that the Bay Area grew over the years because of individual focus? No, effort, capital and pride were recycled into the region, until it became the place it is today.
- Stop pulling other entrepreneurs and start pushing them. Drive people around you with your own success. Reach out and both ask for, and offer, support and help. Being a founder is lonely, why should that loneliness be exacerbated by your pride?
- Participate. I meet with entrepreneurs constantly. Each time I learn something. While its not my job, nor do I need the deal flow, its my way to stay relevant and understand what people are thinking about. I find myself having to force myself to stay open minded about how things work. We are lazy by nature, but that nature can be overcome. Be curious. Ask questions.
- Be real. Stop lying. Your startup isnt that great. Its not going that well. Money isnt falling from heaven. Its a slog. Its hard. I understand that. I am also an entrepreneur, and other than your mom, we would rather hear that you are dealing with similar issues than skating by like Snoopy in a Christmas Special.
- Think big. This idea that the big ideas come from the San Francisco Bay Area is just crap. You can change the world from Lexington. Just believe it.
Detroit has a lot to offer, and I am excited to track and help out some of the startups that participated in Funded By Night. A few will be amazing. And they all will help put Detroit on the startup map.
Atlanta, and LessConf, was equally amazing. I spoke in front of 300 or so entrepreneurs, developers and other cool ass people. Allan and Steven do a great job of extending what I have always thought “southern hospitality” was supposed to be like. After all, other than these guys, who would let me talk about strippers for an hour on stage?
But, like always, I had a load more fun talking to attendees from all over the south (and a few from the North — including my new inspiration, Randy of LoseItorLoseIt.com, who built an entire business around his desire to motivate himself and others to lose weight. To date, Randy is down 105 lbs. fuckyeahrandy!).
We talked a lot about different ways of doing business in different parts of the country. I find it interesting that there is an assumption of difference between how startups are run in Florida versus New York versus Seattle versus the SF Bay Area.
Want to know a secret? Its true.
Its true, because the geography matters in how startups are birthed and curated. Geography defines the problems and issues that people have that become such painful itches, that they just have to be scratched. Geography matters in personality and personal importance. Canadians are super nice. Boulder folks love to hike and snowboard.
But what isnt different, is in the heart of entrepreneur burns the desire to make a significant change in the world. Stop letting where you live dictate how you live. Go build it.