by Frank Gruber
Los Angeles's Science Inc. is a technology studio led by former AOL and MySpace executives Michael Jones, Mike Macadaan, Peter Pham, and Ryan Sit, among others. Science Inc. funds ideas or develops them in-house and then applies its team of specialists to kickstart the company. It has worked with about 20 companies so far, including Dollar Shave Club and OUYA.
Startup competitions: There are a number of startup competitions out there for you to take part in, such as MassChallenge in Boston, Challenge Cup in DC, Disrupt in San Francisco and New York, LAUNCH Festival in San Francisco, Women 2.0, and others that I've mentioned in previous chapters. You usually have to submit an application (often with a fee) and then compete on stage for prize money. That means you could get in but still end up earning no money. On the plus side, that money is generally equity free. There are plenty more out there for you to uncover and participate in—check out the list of popular startup competitions at http://tech.co/book.
How to Pitch to Investors
So you've made the decision you need investment and it's time to get out there and talk to investors. How are you going to present your idea and company? That is, what's your pitch going to be?
You usually do a presentation with slides (around 10 to 25) and include the who, what, why, and how of your business. But the pitch should be different depending on whom you're pitching to. Aziz Gilani, director of the Mercury Fund, explains, “Know your audience. Different investors want to see different things; some care about pedigree, while others care about technical details, while others care most about market traction. Cater your pitch to the things they care about.”
Here are some elements of the pitch to consider including.
Problem and solution: Show that the problem you're trying to address is a real issue. Be sure to explain who has this problem—in other words, explain who your customers are. Share how your solution solves this problem. But don't go into extreme detail. Your investors aren't your target customers. They just need to know you have a strong business and a sound value proposition.
Business model: Explain your business model and how you'll make money. Reid Hoffman, cofounder of LinkedIn, believes it's best to talk about only one revenue stream; otherwise, investors will think you lack focus. I can't tell you how many times I've heard a pitch where the startup outlined three, four, or five possible revenue streams. Pick one—it's okay to be wrong and adjust it later. Share with your potential investors how you'll reach and acquire customers under that business model. Also show how you'll use the funding you're looking to raise. It's helpful to include a timeline.
Reid Hoffman
Reid Hoffman cofounded LinkedIn in 2002, and it has since grown into the most popular business social network, with more than 200 million members as of January 2013. Hoffman's role has transitioned from CEO to chairman and president and now to executive chairman. He's also a partner at Greylock Partners, a Silicon Valley VC firm, and coauthor of the book The Start-up of You.
Metrics: Share some metrics. Focus on bottom-up metrics such as revenue, engagement, and traction rather than top-down metrics such as total addressable market. Show that the cost of acquiring a customer is less than the lifetime value of a customer.
Challenges: You'll want to address the challenges that your startup faces. Sharing your risks and challenges may be scary, but it has the reverse effect—it gives you more credibility by showing you think long term and tackle things head-on. For example, acknowledge that you have competition and explain why you're different and what advantages you have over them.
Jessica Kim, the cofounder of BabbaCo, raised funding while pregnant. She was originally shy and apologetic about it, and investors doubted her. Over time, she learned to be up front and tell investors how she was going to handle it before they even asked. This changed the conversation from doubts to confidence in her ability to execute. “Own it. You have to own it. If you feel confident and you're in control of it, investors (or suppliers or whoever you're going to partner with or people you're going to hire) are going to accept it more,” Kim explains.
Jeff Clavier
Born in France, Jeff Clavier moved to Silicon Valley in 2000 to work with RVC, the venture fund affiliated with Reuters. (Reuters had acquired the startup he had been working on as chief technology officer.) Clavier left RVC in 2004 to found SoftTechVC and become a super angel, making larger investments than most angels. SoftTechVC gained attention and eventually raised its own fund, pioneering the micro-VC category. Since 2004, SoftTech has made more than 150 investments, including investments in Mint, Fitbit, and Eventbrite.
Team: Your pitch is also about you and your team. In fact, your team may be even more important than your idea since the idea may change, and investors are investing in people. Share your qualifications; show expert knowledge of your industry and how you're the ideal people to build this business. Remember that you're pitching yourself throughout the interaction, including how confident and knowledgeable you appear and how you treat the investors.
Jeff Clavier of SoftTechVC is famous for this three asses rule. As an investor, he's looking for “a smart-ass team building a kick-ass product in a big-ass market.” You'll find this rule on the back of Clavier's business card, on his website, in a painting in his office, and in the book Do More Faster by Brad Feld and David Cohen. But for SoftTechVC, the smart-ass team accounts for more than half the importance. SoftTechVC is open to funding multiple or solo founders, but it wants to see teams who exhibit the three Ds: Developer: Strong technical talent
Design: An eye for user experience
Distribution: Understanding of the tricks and rules of getting users
In the end, finding a smart-ass team is really a question of judgment. “It's a mix of vision, it's tenacity, it's empathy,” says Clavier. “Do we feel that they have the passion, the domain knowledge, this unfair advantage that will make them execute and realize the potential of the company in a different way than the rest of the market?” He adds, “We really respect people who have this belief that if there is a wall, they can walk through it.”
Fit: Finally, as much as the pitch is about you, your team, and your startup, it's also a way to share why you fit with this investor. Feld likes to see pitches that include how you fit into his portfolio and expertise, and how you might be able to work with other portfolio companies. It shows that you did your research.
On your end, use every pitch as a way to gauge if you do fit with this potential investor. Sometimes you think you do, but you discover in a meeting that your styles of thinking or communicating conflict. If that's the case, you may want to find another investor that you mesh with better. You don't want your startup in bed with someone you don't jive with, so use your gut and go with what feels right.
“Ask to speak to entrepreneurs the VC has backed that have found success and those that haven't. Strive to understand in detail how the VC works with entrepreneurs in the good times and the bad and what the firm provides outside of the check. The good VCs want you to do this homework,” says Eric Olson of Origin Ventures.
How Much Funding Should You Raise?
Figuring out your funding needs starts with a plan and budget. You need to map out what your growth plan looks like to get you to the next milestone or two, at which point you'll be able to raise more money or get acquired. Factor in estimates on how many employees you'll need, their costs, and other business costs and then determine the amount of money it'll take.
Graham offers this simple formula for determining your funding: multiply the number of people you want to hire times $15,000 times 18 (months). Version One Ventures founder Boris Wertz says you should aim for 15 to 25 percent dilution per round.
When raising seed funding, Dixon advises you to raise enough to get you to a Series A round with double the valuation (from postseed to pre–Series A), plus a fudge factor. What is the fudge factor? It's up to 50 percent more money to account for unexpected setbacks. As I mentioned earlier, you can't foresee every obstacle
, and we're generally bad estimators of our time.
Funding will always be a delicate balance of raising too little and raising too much, and you probably won't get it right. When Jessica Mah was fund-raising for inDinero, the expense she didn't take into account was something she calls founder tuition. In a Stanford interview, she said that she wasted half of her initial $1 million in angel funding on her own mistakes. If she had to do it all over, she would have raised more.
In the summer of 2012 and into the spring of 2013, we saw new opportunities in downtown Vegas in the way of funding, partnership, and a bigger mission for Tech Cocktail. After just two visits, something clicked into place for us and we knew that working with the Downtown Project was the right move. So we relocated the company headquarters to Vegas and raised $2.5 million from the Downtown Project.
Here was a huge opportunity to apply our community building experience from Chicago, DC, Boston, and the many other cities we were privileged to get to know. We could help build a fresh tech startup community in Las Vegas—while continuing to scale our events and editorial coverage across the United States and eventually the globe. It wasn't just about the funding, but the whole package that downtown Las Vegas had to offer. When I looked out across the vast empty parking lots from one of the top floors of the Vegas building that would soon be my home and Tech Cocktail's home, I saw a blank canvas. As an entrepreneur, I thought this was exciting and like no other opportunity I had seen before.
Fund-raising Tips
As in all areas of startup life, relationships matter when fund-raising. You want to get introductions to target investors from your other investors, from the target's portfolio companies, or from other mutual contacts. It makes sense to start building those relationships long before you're ready to raise money. As the common wisdom goes: ask for advice first, not money. Then, once you've made some progress along your path, come back with an update; if they like it, they may invest.
Esther Dyson
Esther Dyson is an angel investor and a supporter of the health and space industries. She's the director of 23andMe, Russia's Yandex, and Meetup and has invested in companies such as Square and Flickr. Now, Dyson is devoting her attention to an initiative called HICCup, which would create citywide health intervention programs around preventive medicine, nutrition, and exercise. With a background in journalism, Dyson also serves on the board of various nonprofits.
Research your target investors to understand what deals they like to do, then include that information in the fit section of your pitch. Look at their track record and what evidence of success they get excited about. For example, if you did some research on angel investor Esther Dyson, you'd find out that she isn't interested in a cute little app. She looks for companies solving big problems—problems that might not get solved by someone else. She wants to see founders with ambition and a spirit of adventure, but no grandiosity. If you don't do your research, you might waste her time—and yours.
And it's easy to waste time during the fund-raising process. This is one of the biggest issues that Graham warns against. He advises that only one founder focus on fund-raising so the whole company doesn't get derailed. He also says you shouldn't talk to investors who won't lead funding rounds. As for the rest, you can calculate how much time to devote to any one investor based on that person's expected value, which equals his or her probability of investing times the value of having the person as an investor. The more likely the person is to invest or the more valuable, Graham says, the more time you should devote to e-mailing, meeting with, and convincing him or her.
Keep in mind investor psychology. Basically, investors follow other investors, and they're motivated by not missing out on a big deal. You'll succeed according to how much momentum and competition you create: give off the vibe that this is a hot deal, and the investor better get in on it soon. The worst thing is to appear as if you've been out unsuccessfully fund-raising for a while and the deal is getting stale. According to Chris Schultz of Voodoo Ventures, “The best deals and founders always have a sense of urgency and momentum. You know they are going to close; its just a question of who and when…If you're out there ‘kind of raising,’ you are going to lose heat fast. It's all about momentum.”
Once you get investors to say yes, be prepared for due diligence. It may be more or less comprehensive, but they generally want to investigate the soundness of your business before investing (including talking to customers, verifying finances, reviewing business plans, and more). Think of it like an inspection when you buy real estate: there are a number of things that could hold up the transaction, from a leaky roof to lead paint to a bug infestation. The same is true with startup funding.
To prepare for due diligence, make sure you have your intellectual property locked down if you come from a large corporation or hired independent contractors. Basically, everything we discussed in Chapter 4 on formation comes to the fore when you're out raising money. Anything you didn't do properly in the beginning can slow down your funding.
For a deeper dive on this topic, I highly recommend Venture Deals by Brad Feld and Jason Mendelson. For a list of tools for raising funding, check out http://tech.co/book.
The Harsh Reality
Raising a round of funding isn't easy. If it were, many more startups would do it. You're sure to encounter obstacles along the way. It's hard and can take lots of focus and time. Hoffman, in a detailed blog post about his Series B pitch to VC firm Greylock Partners (where he's now a partner), shares, “In a single year, the classic general partner in a venture firm is exposed to around 5,000 pitches; decides to look more closely at 600 to 800 of them; and ends up doing between 0 and 2 deals.” Hoffman's post shares the odds pretty clearly with you—VC funding is not for everyone.
Robin Chase
Robin Chase is best known as the founder of Zipcar, a car-sharing service that was launched in 2000. Zipcar expanded to more than 25 major metropolitan markets and hundreds of thousands of members and was acquired by Avis in January 2013. In 2011, Chase founded the peer-to-peer car-sharing marketplace Buzzcar in France, which reached more than 200,000 users in May 2013. A transportation enthusiast, she founded two other companies in between: GoLoco, a ride-sharing social network, and the transportation consulting company Meadow Networks.
Evan Nisselson, an investor at LDV Capital, says, “It takes a long time, and you're going to get a lot of nos. So really it's a percentage game. If you don't have relationships with investors, you're probably going to have to meet 100 of them and hope one says yes.” As Robin Chase recounts, even Zipcar had trouble raising funding. Investors were convinced that the car-sharing model worked great in Europe but wouldn't work in America.
Zipcar eventually got its funding, but your startup might not. You can lose focus on your day-to-day operations by going out and pitching to hundreds of investors. And hearing no more than you hear yes could play tricks on your psyche if you start to question whether your idea is worth funding.
Fund-raising is a negotiation, and investors' and entrepreneurs' interests aren't always aligned. Investors don't mind if the process takes a lot of time, whereas entrepreneurs want to speed it up to keep the distraction as short-lived as possible—and get back to building their business. You might think things are moving along with an investor or group of investors, but the answer isn't yes until the papers are signed and the money is in the bank.
Finally, even if you have a great lawyer, investors may try to include terms that you don't like. Gilani recalls two entrepreneurs who turned down his funding offer in favor of a higher valuation. “Unfortunately for the entrepreneurs, the higher term sheet came with a management team and alternate vision for the company. Both founders were quickly replaced,” he recounts.
Celebrate: Enjoy the Journey
Raising funding is not for everyone and in some cases isn't necessary. Ideally you would bootstrap until profitable or until an exit. But if you do decide to raise funding and do so successfully, you'll probably fee
l like you've been through a battle. You may want to have a little fun and celebrate before diving back into business. And we wouldn't blame you.
After two of Gilani's companies raised their funding rounds, they took the management teams on weekend camping trips to bond and plan milestones. I love the blend of work and play this example shows. They took a moment to celebrate but also to focus on the future and start the planning to go after it.
Many people believe that funding isn't a reason for celebration but rather a time to intensify the hustle. Funding is just a means to help you get where you want to go, you might think, so stopping to celebrate is premature.
But celebrating funding doesn't mean that you've made it and can relax. You can celebrate to commemorate all the hard work you put into the fund-raising process and to pause before digging in again harder than ever. I suggest you do this, for your own sanity. Starting and running a company is hard. If you don't enjoy the journey, then why are you doing it?
When Tech Cocktail finally closed our funding, we cracked open some bubbly for an after-hours celebration. I'd also been growing what I called the startup beard the entire time I was raising funding, an homage to the rally beards that you see in professional baseball, football, and hockey. Call it superstition or just a little crazy, but I didn't shave for the duration of the process—it was a constant reminder of the mission on hand: close the funding. My team and the community rallied around the startup beard, and there was even a #StartupBeard hashtag that started on Twitter and Instagram. Other entrepreneurs also shared their startup beards for me to see. After completing the funding round, I got to enjoy another celebratory moment when shaving my beard (which my significant other appreciated).