Posts Tagged ‘startup’
- Convertible debt should count in total shares outstanding b/c it almost *always* converts.
- Properly-written double triggers give meaningful downstream protection.
- Divide by 5-10 what the VC swears he won’t sell the company for less than.
- Have written proof of preference structure, and you’ll be taken care of upon exit.
It has been a little over 6 months since I took the plunge and left L Capital Partners to join VMTurbo. It has been a great move so far and a huge learning experience. Unfortunately, this move hasn’t been helpful in maintaining a regular blogging schedule (See “Prioritize relentlessly” section below) so this post has been a long time coming.
I hope some of these personal experiences and observations are helpful to some of my VC friends who have always toyed with taking the plunge, as well as people who may be thinking about careers in VC or in VC backed startups.
And if you’ve played on both sides of the ball, or have thought it about it, chime in with your thoughts.
1) Prioritize relelentlessly. If I was 23, unmarried, with no kids, I could devote 80 hours a week to work. In fact, that sounds like many weeks at my first startup. However, I’m now 32, married, and have two kids. :) Therefore I need to make every working hour as productive as possible-it is just not an option to work on the wrong things. Fortunately, startups are about results and not “ass time,” so I can be creative with how and where I achieve them. Another good reason to set 3 goals per day and per week, and devote yourself to crushing them, instead of having 10 TODOs and doing a mediocre job on all of them. (Better get this blog post done and get back to work…)
2) Beware of spinning your wheels on way-too-early business development. So far I have not heard (or witnessed) any good reasons to put much effort into seeking partnerships right off the bat. In the software biz, business development is all about taking your product and combining it with the products of other companies to develop a Whole Product. When you are still doing Customer Discovery and Customer Validation (see Blank and 4 Steps to the Epiphany), you’re still trying to figure that stuff out and aren’t going to have much of an idea of where you can plugin with other companies to make that Whole Product. An exception to this caveat would be opportunities to use APIs as business development, which in an ever more cloudy world would allow you to create a Whole Product without having to cut any deals. However, for most behind-the-firewall enterprise software stuff, an APIs as BD strategy isn’t going to make much sense. (BTW I have heard from friends doing mobile startups that BD is critical in the early stages…so your mileage may vary with this particular tip.)
3) Learn to love “The Ask“. In a startup, you’re constantly asking prospects to take the next step, asking for introductions, asking for feedback, asking for money, asking for references. You’re constantly asking, when often it is not immediately clear to the receiver of “The Ask” what the benefit will be. Nothing at a startup happens unless you make it happen-and making stuff happen usually requires an “ask”. So get comfortable with it!
4) Business development skills and personal network are highly transferable between VC and startup... Warm intros and getting people to take my calls/emails was a big part of my job as a VC, and its a big part of my job at VMTurbo. If you’re looking for an escape hatch, moving from VC to business development at a startup is a pretty logical move, and one where your industry network will have the most impact.
5) …and those due diligence tools come in handy, too. Startups play in a world of imperfect information and compressed timeframes, as do their investors. Being able to get a quick handle on markets, competition, and processes is very important when you’re trying to quickly determine the best route to market, or to pivot and investigate new processes or markets when the first set doesn’t pan out.
6) Fail. It’s OK-really. Given the uncertainty within and around early stage startups, there is a better than 50% likelihood that any decision you make on any given day will be wrong. I’ve never been wrong so many times in such a short period of time :) Just means you need to fail faster. Get your minimally viable product to the market as fast as possible, hear the feedback, iterate, lather, rinse, repeat. This really hits home once you actually try it, because you find that erring on the side of releasing something what seems like “too early” is actually the best way to get feedback. Customers engage most deeply when they can see and touch. Slide decks and landing pages are nice and can certainly help gauge demand for a solution to a problem, but there ain’t nothin like the real thing.
Social connections trump business plans by a long shot, says Goldfarb Thus it is that people who already know VCs and angels have an easier time raising money. The irony, says Goldfarb, is that people who don’t have connections need to go out and make them, which may require that they have a business plan to discuss. But the plan is sort of like a business card, he says – just something that business protocol dictates you carry around.
I wasn’t surprised by the results from this study, although the study only looked at plans from the dot-bomb era. I’d be interested to see how the conclusions would have been affected had they also looked at a less frothy period.
On a related note, here’s what I like to see when being pitched, in lieu of a full business plan:
- 3 year financial model
- 10 slide pitch deck (I like the guidelines they’ve got on www.garage.com for early stage company pitches)
- 20+ slide supplementary deck that reads more like a document, filling in details from the pitch deck
With these three items, you’ll have the meat of a business plan, without the less nutritional filler.
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A venture capitalist I know once told me that he only wants to do competitive deals (deals in which there are more than one firm bidding to lead a round).
On the other hand, a guy I know who does seed investing who says he never competes for deals. Just doesn’t happen and it doesn’t seem to bother him, either.
As a newcomer to this industry I’m trying to figure out my philosophy on this topic. Are the best deals always competitive?
On the one hand, if you are the only firm bidding on a deal, the options for the startup are to accept your bid, try to negotiate (having little leverage), or walk. This would seem to be a good thing for the VC since they should be able to get the best pricing and terms. The flip side is that if you are the only firm bidding, the implication is that all the other VCs the company has spoken with don’t think the company is investment-worthy.
If there are multiple firms bidding on a deal, then the startup has the negotiating leverage. The entrepreneur can play the firms off one another and strike a much better deal than they could have had if they just had one termsheet. This will usually result in the winning firm paying a higher price (higher pre-money valuation and less degree of control) than they would have expected had the deal not been competitive. This also implies that there is market demand for a company’s shares. In an early stage investment market where < 1% of companies are able to obtain funding, maybe you could argue a deal that has multiple bidders is a good deal.
However, deals often become competitve once the first firm “jumps”. In other words, there may be investors watching a company on the periphery and waiting to issue a termsheet once they see another firm issue a termsheet.
In this case, the deal certainly becomes competitive, but is it actually a good deal?
I don’t know where I net out on this topic yet as an investor, but I can certainly tell you one thing. If you are an entrepreneur, you’ll end up with much better investment terms if you create a market for your shares.
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- How bad is it for startups seeking financing? (lsvp.wordpress.com)
- Why “Flat Is The New Up” and VC Funds Are Under-Reserved (bostonvcblog.typepad.com)
Eric Ries is keeping a blog called Lessons Learned where he discusses the application of formal rigor and process to all parts of a startup. Today I missed my stop on the train because I was engrossed in his post about hiring. I thought that if the post was good enough for me to (almost) accidentally take the V train to Queens, then I should probably blog about it!
Eric spends a great deal of time in this post talking about when to hire (answer: when a bottleneck exists not when you’re annoyed that you’re doing 18 different jobs at once) as well as how to hire.
The latter is extremely important and an area in which many startups underestimate what it takes to recruit the best of the best.
For example, it’s not enough to post to a mailing list and say something to the effect of (and I see this all the time):
I’m a business person with a great idea set to turn the XYZ market on its head, looking for a tech cofounder to join for equity (read: no pay) and help us build a prototype which will then be used to help us pitch investors.
Besides the working for no pay thing, there is no attempt to convince the audience of tech people you’re hoping to recruit why you are going to lead the charge, attract investors, and help create a breakout company. There are so many business people looking for tech people that you need to go the extra mile…
You need to get out there and recruit.
Get on LinkedIn and identify the top people in the market you’re going after, find out how to get in touch with them, and pitch them on your idea. Get them excited about what you’re doing. Even if they’re not willing to join you, oftentimes they’ll be willing to help you connect with other individuals who could be helpful as well. And if they aren’t willing to come work for you and don’t seem particularly interested in helping, maybe you need to work on your pitch. Keep in mind that hiring (especially hiring people out of positions they’re comfortable in and that they like) is sales, plain and simple.
Your ability to recruit could impress potential investors. As an example, I recently met with a company where the founder (a 1st time entrepreneur) was able to recruit a very well-known individual to join his team. This person arguably was a perfect hire and a perfect match for the company’s mission. We didn’t end up investing in the business but this was one of the reason these guys got my attention.
In any case, take a peek at Eric’s blog post, it is well worth reading, especially if you’re building your core startup team.
Founders spend lots of time, money, blood, sweat, and tears in creating a new business, and they obviously want to maximize the financial return on their investment. Thus it is important to understand how to value either a) new strategic hires or b) investment capital, as both will reduce the founders equity stake and controlling interest in their business.
I think the question to ask when valuing new hires and investors is “How does this new hire/investor make the pie bigger?”
For example, if you are a technical founder but don’t have the key contacts within your target industry that will get you in the door with potential customers, how much is it worth (in equity terms) to get someone with those contacts on board? This person will probably demand a significant chunk of equity but if you are confident that they can get you in the door with potential partners and get deals closed, maybe they are worth the dilution you’ll experience as a founder.
Now let’s turn to the investor case. If you have bootstrapped your company and are able to become cash flow positive without raising outside funds, then you have a business that self-financed and quite possibly sustainable. However, if your company is burning cash or has ambitious growth targets that can only be met by significant investment in product, sales, or marketing (beyond what you can finance through cash flows or your own wallet), then you will need to think about outside funding. Taking on outside funding is going to dilute your ownership stake but may also allow you to make the pie (the size of your company in revenues, valuation, etc) bigger.
If taking in $X million in investment will allow you to hire 3 sales people to sell into target accounts and create a channel sales program but will reduce your ownership stake by Y%, is it worth it? Do you believe that the $X million investment (and the hiring capability, etc that it affords you) will help you build a $50 million dollar company instead of a $5 million company? Taking said investment may reduce your ownership stake to 50% from 100%, but my guess is that most entrepreneurs want to own 50% of a $50 million company versus 100% of a $5 million company.
Obviously you will never be able to accurately compute that adding $X of investment or giving up some % of equity to a key employee will grow the overall pie by a specific amount. However, you should think about (in orders of magnitude) how these decisions will help you grow the overall pie (your company’s value) as well as the absolute size of your piece of the pie (the value of your share of the company at exit).