by Brad Feld
Despite the challenges, self-funding has allowed us to maintain complete control of our company as it has grown.
While we have avoided taking funding thus far, it doesn’t mean we won’t seek it eventually. However, should we decide to seek funding, we’ll be able to negotiate better terms than if we had raised funding before defining our real business model or reaching profitability.
If there’s one point to make about raising money, it’s that there is no perfect formula. Defining your goals can help drive your decisions about funding. It’s important to consider the advantages and challenges to self-funding, but remember that you don’t necessarily have to raise money.
Joe and Jesse caught a wave at the very beginning of Facebook opening up their platform, and, as a result, created a series of very popular Facebook applications early on. Given their visibility, they were approached by numerous investors and acquirers. In many cases, Joe and Jesse realized quickly that their long-term goals were not necessarily aligned with the investor or acquirer who had approached them. In other cases, the alignment was better, which resulted in deep and thoughtful conversations with their mentors. With every conversation, Joe and Jesse learned a lot—both about themselves and the opportunity they had in front of them. While deciding which path to go down was never easy, each situation challenged them and tested their commitment to the path they ultimately chose. Looking back on their progress over the past decade, it’s clear that they chose the right path for themselves and their business.
Chapter 61
Seed Investors Care about Three Things
Jeff Clavier
Jeff founded Uncork Capital in 2004 (then called SoftTech VC) to serve an unmet need of startup founders: active support and capital for companies in their first 18 months of life. Jeff has been a Techstars mentor since 2007.
In August 2010, my family celebrated the 10-year anniversary of our move from France to Silicon Valley as well as my joining the venture capital industry. Six of these 10 years were spent working with very-early-stage teams, ranging from the raw idea stage to the point at which the initial product worked so well that the company has two founders and tens of millions of avid users.
One of the most common questions I get several times a week is “What characteristics are you looking for in an early-stage company before making an investment?” You could list 10 criteria, 20 things, or 30 checklist items and they would all be valid—things like the result of lessons learned, experience gained, and mistakes made. In the investing business, the best lessons are often learned the hard way—by losing or wasting money on things that eventually don’t work.
Seed investors—people like me who are typically putting the first chunk of cash into a new startup—have the shortest checklist. Because we invest so early in the life of a company, a lot of the data points that later-stage investors use to evaluate an opportunity are not yet available to us. So, I focus on three things: “People, Products, and Markets.” Or actually:
First of all, the market the entrepreneurs are going after needs to be “big enough.” You will often hear VCs state that an opportunity is “too small for them,” that they don’t see “VC-type returns,” or can’t see a “$1 billion company.” When you are investing very early, you want to make sure that the target market feels big enough; that is, that the company you are looking at investing in can reasonably grow revenues to $10 million or more in three years and $50-to-$100 million in five to seven years without needing 100% adoption.
Next, I look for products that win users over. You either have users (alpha, beta, gamma—whatever you call them doesn’t matter) or you don’t. If you don’t, I’ll look at mockups and demos to figure out if what you are building will get the traction that you are claiming it will. But it is tough to figure out future traction, since having users is real external validation that your product is perceived as interesting, valuable, and differentiated and that one day, maybe, someone would actually pay for it. As a former product guy, I will also spend a lot of time using the product myself, trying to assess some of the characteristics I just mentioned.
But, most importantly, it’s all about the people. Until recently, my trifecta “People, Products, Markets” was “People, People, People,” but I adjusted it because the product and market clearly have a big impact on my early-stage investment decisions. I’m looking for a variety of characteristics in early-stage entrepreneurs, such as:
Passion
Determination, dedication, and tenacity
Raw intelligence
Agility and resourcefulness
Clarity and focus
Empathy
Natural leadership
Working smart rather than working hard (okay, working hard, too)
Team dynamics
All these characteristics are important. While some are more important than others, founding teams display different mixes of these. Think of them as being weights of different shapes and sizes that you place on a scale: at some point the scale will tip—and you will get a funding offer (or not). In recent years, where capital efficiency has been a prevalent factor in building an entire generation of consumer Internet companies, the traits I favor the most are determination, agility, clarity, and working smart.
I’ve used the following tag line for my firm Uncork Capital:
Seeking the perfect combo: “a smart-ass team with a kick-ass product in a big-ass market.”
I think that it perfectly embodies what I am doing for a living, and it’s easily shortened to “The Three Asses Rule” once you know the long version.
Jeff was involved in Techstars from the very beginning, flying out to Boulder midway through the program every year, spending an entire day at Techstars, and visiting with each team. Jeff uses this to serve a dual purpose—he’s acting as a mentor to help shape and focus the teams and he’s also efficiently evaluating 10 prospective investments. Having watched Jeff over the years, he leaves Boulder pretty sure which of the teams he’s interested in investing in and then quickly decides after investor day. Now that’s the kind of seed investor a first-time entrepreneur is looking for!
At Techstars, it’s all about the people.
Chapter 62
Practice Like You Play
Alex White
Alex cofounded and was CEO of Next Big Sound, a company that provides online music analytics and insights to over 750,000 artists and bands with 30 million songs. Next Big Sound raised about $1 million from Foundry Group, Alsop-Louie Partners, and Uncork Capital after completing Techstars in 2009. The company was acquired by Pandora in 2015.
Raising money from investors was unlike anything else I’d ever done in my life. When I tried my hardest in school, previous jobs, and extracurricular activities, I had a sense that if I exceeded some threshold I’d be able to get the A, promotion, or leadership position I wanted. When raising the first round of financing for my company, I could give the best presentation in the world, but if the investor was uncomfortable with any part of the team, idea, revenue model, competition, industry, market size, amount of money we were asking for, our development time line, how it fit with their portfolio companies, or an almost infinite list of other variables, then the funding wouldn’t happen.
With so many factors at play, numerous issues can derail a financing. The trick is to present a compelling solution to a big problem and then have the right answers to every conceivable question the potential investor might ask. For me, the first part is the easy one since most entrepreneurs wouldn’t be pouring their hearts into a business if they didn’t think they had a great answer to a big problem. The trouble comes when the investor begins to pry into any number of factors looking for any reason whatsoever why the deal is not a strong investment. By virtue of being a startup, there will be uncertainties and reasons not to put money on the line. Investors need to know you are aware of the unknowns and understand how you are systematically addressing them.
People do not like being separated from their mon
ey. If you’ve ever tried charging customers for a product or service, you have some idea about the tangible value you need to provide for them to justify a purchase. Now imagine trying to persuade them to write you a check but instead of trading their hard-earned dollars in exchange for something immediate, you just promise that you’ll deliver it in the future, and the way they will experience it will be indirectly through the increase in the value of their investment in your company.
So, to be successful at fundraising, I practiced like crazy. I must have rewritten our pitch 100 times and practiced it 500 times. The benefit of running it past dozens of people for feedback was invaluable because it’s nearly impossible to separate yourself from the day-to-day business long enough to put together a high-level pitch that makes any sense. By the time we got to Techstars Demo Day I had well-rehearsed answers to every question I was asked. While the experience of fundraising was totally new to me, I had to remember that many of the investors had been hearing pitches, scheduling follow-up meetings, and grilling entrepreneurs since before I was born. The investors had years of experience and I could tell they were mapping my business, my answers, and my confidence to all their previous successes and failures, trying to draw out the patterns to identify if we were a winner. All we had was our passion, an incredible team, a strong presentation, insane optimism, and confidence from a full summer of practice.
Fundraising is a full-time job and it requires the full attention of at least one team member and the cooperation of the rest of the team to prepare the presentation, hear the pitch over and over, and help brainstorm potential questions and the right answers to those questions. People want to invest in winners. Winners are confident, and confidence comes from practicing like you play. This means pitching in front of people, getting grilled by colleagues, mentors, and friends, and explaining your business until answering the question of how you’re going to make money is so boring it makes you sick. How are you going to get someone to write you a check if you can’t confidently describe what they will get in return?
Alex isn’t exaggerating when he says he must have practiced his presentation 500 times. When he gave it on Techstars Demo Day in front of a packed room of investors, he nailed it. If judges were handing out scores, he would have gotten a perfect 10 from each of them.
The hard work and practice Alex put in paid huge dividends for Next Big Sound. The clarity of Alex’s presentation, combined with the progress that Next Big Sound made during Techstars, resulted in huge interest in their angel round. Alex and his partners decided they were going to raise only a modest amount of money and had commitments of at least three times what they wanted to raise. They had to make difficult decisions about which investors to take, but they did this gracefully.
There’s a well-known cliché popularized by Malcolm Gladwell that to be great at something you have to invest 10,000 hours in it. While you might not have to practice your pitch for 10,000 hours, you should practice it enough times so that you can give it from beginning to end with your eyes closed in a noisy bar when your friends are throwing things at you. When you are comfortable in that environment, you are ready to roll.
Alex White and David Hoffman of Next Big Sound pose with a special guest cardboard cutout in the Techstars Bunker, summer 2009.
Chapter 63
If You Want Money, Ask for Advice
Nicole Glaros
Nicole has been with Techstars since its earliest days and is currently Chief Investment Strategy Officer.
Techstars founders who are adept at actively engaging mentors and investors early in the program (and consequentially before fundraising) have more success raising external capital later compared to founders who struggle to solicit and embrace mentorship.
I have wondered why this is, and I believe that the following adage holds true:
When you want advice, ask for money. When you want money, ask for advice.
I believe there are three reasons this adage holds true and it explains why some founders are able to raise money more easily than others
Investors say no more than they say yes. An investor is constantly being bombarded by requests for capital. It’s fundamental to his job. Statistics vary, but it wouldn’t be unusual for an investor to say yes less than 1% of the time. Given that there are only two answers to the question “Will you invest?,” they become adept at quickly discovering weaknesses and saying no. When approached, they are wearing their investor hat and their senses instinctively home in on the negatives of the company. Most investors don’t want to turn you away empty-handed, though, so they will offer advice for overcoming any weaknesses.
Risk mitigation. Getting investors and mentors involved early in your company before you start raising capital provides them a way to track your progress and learn about you before any risk is taken. Asking for guidance doesn’t have to be a yes-or-no question. You can ask for open-ended advice, such as “Which business model might work better in this market?” Many people are willing to put in time and mentorship to get you to a point at which you are a lower risk than another investment opportunity. Engaging people early gets them excited about your company and you, not just in the investment, resulting in them being more focused on the business instead of the returns. That’s what every founder needs in the beginning.
What someone helps write, they will help underwrite. Once you begin seeking and following the advice of mentors and investors, they are more likely to be actively engaged with you and the business. Once they see they can have a direct impact on your decisions and the direction of the company, they’ll feel a sense of ownership in the outcomes. Once they have that sense of ownership, they will go to lengths to help you get to the next level. Whether it’s through introductions, endorsements, fundraising, or just spending more time, the engaged investor or mentor will help underwrite your business if they feel like they’ve had a part in creating it.
If you’re looking to raise capital, engage great mentors and investors from the beginning, before you start fundraising. Seek their advice and guidance early on. Learn when to take their advice, but be sure that you communicate the reasons why some guidance wasn’t followed. Let them and their experience help shape the company, the vision, the direction, the product, and the execution. Make them an active part of your team, let them see the progress you’ve made, and get them excited about what you’re doing. When it comes time to raise capital, you’ll have a champion on your side who is more likely to open their checkbook and encourage others to do the same.
At Techstars, many investors are involved throughout the program as mentors. These investors realize they are playing the role of mentor, and we encourage the companies not to view them as fresh meat but rather as early advisors. By using these investors as advisors, the entrepreneurs develop a real relationship with them. It usually becomes clear over time whether the investor is going to be interested in participating in a financing. If she is, that’s great, but even if she isn’t, the entrepreneurs have benefited from the interaction.
Nicole Glaros mentoring Rick Grote of Spotinfluence in the Bunker.
Chapter 64
Show, Don’t Tell
Brad Feld
Brad is a partner at Foundry Group and one of the cofounders of Techstars.
I get emails every day from entrepreneurs either raising money or telling me about their new idea and asking for feedback. The conventional wisdom is that VCs rarely invest in things that reach them randomly (or over the transom, in someone’s VC vocabulary—I can’t for the life of me figure out why that phrase hangs around). However, this isn’t the case for Foundry Group, as a number of the companies we’ve funded were from cold call emails. I’m very happy to get a steady stream of random emails from people looking for money or sharing their ideas—keep them coming!
I’ve noticed a trend recently toward more video presentations and I’m reminded of the old writer’s adage “Show, don’t tell.” This advice applies nicely to every pitch you ever do. Specifical
ly, I don’t want to hear you describe what you are going to do; I want to see it. If you haven’t built it yet, show me an example. It’s always better to point me at a URL, even if it’s a very rough prototype, as I can usually get a much quicker view of what you are doing by simply playing around than by reading about it in an email.
One video I watched recently was a two-minute segment of the entrepreneur looking into the camera and describing his business idea. The idea was fine, although I could tell within 15 seconds that it wasn’t something we’d invest in given the market he was going after. I ended up watching the full two-minute video to see if he ever shifted from “tell” mode to “show” mode. He never did—the two minutes ended and the whole video was the entrepreneur describing his idea—no different than an email would be.
This was a wasted opportunity by the entrepreneur. I could have read one paragraph that contained the same content. The entrepreneur didn’t take advantage of the medium (video) in any way. While he did a nice job on the monologue, he wasn’t trying out for a TV commercial, a TV show, or a movie. He missed the goal of getting my attention and getting me to engage with him at the next level.
For most of the great VCs I know, the way an entrepreneur makes a connection when there is no preexisting relationship is to generate an immediate interest with the product. This is a repeating theme that for some reason isn’t said strongly enough. The great entrepreneurs (and salespeople) show. Just think of how Steve Jobs did it. Show me!