My billion dollar idea for the day is offering a lending tree type product for small business financial services such as merchant processing. Small businesses always get the shaft. Let them get a good deal! I think it’s a billion dollar business. Someone do it and throw me a few points!
So the capital market is pretty dry right now but don’t let this hold you back. A friend of mine, Jeevan P. coined the term “me7″ companies. He says that in a hard environment only great companies will get funded and me7 companies that like to play the follow me game are left on their asses. I tend to agree. There is always money around for great ideas and great people. There isn’t money around for followers and crap. In a bubble sometimes there is and that’s what causes issues. Corrections are a part of life. If you are a young startup, don’t fear, you may be diluted or not have great terms but money is out there. Later stage companies will feel the pinch more since PE funds and the like are taking a beating and the public market sucks.
So just to put something on the table - at a lot of firms, Associates get bonuses when they fund deals, not even on the performance of the deal so next time you bitch about how a young VC treated you, remember they are in the same game as you and get a bonus if they give you money. They have every reason to want to fund you. If you don’t get funded, it’s probably because you weren’t a fit so don’t take it personally.
So this post is about a fictional company I wasn’t asked to investigate. Someone I don’t know approached me to pretend to look into this company that supposedly sells this cool product but doesn’t generate much revenue but burns a lot of cash. This non existent person was not an investor and wasn’t considering making a future investment to save the company.
So I did my non-digging by sending out 10 emails to my network and getting feedback from people that weren’t C-level executives or investors in the space. The feedback was that no one really knows anything about the product but it sounds good.
So what does this mean? It means they don’t know how to position or sell their product. In fact this non-entity has a name that doesn’t represent the product, the wrong sales pitch and is selling the product as a single product when it should be brought into parts. The underlying technology may even be worth something but the company is running out of cash and may end up being shut down.
So what can we learn from this situation? Don’t staff up and hire a huge staff until you have revenues. In fact, don’t even attempt to do that until you have proved the concept behind your company and have a fail safe sales pitch and product positioning. If people don’t know what you do or want your product, no amount of money will save you.
Will this non existent company raise another round? Maybe, probably not but maybe. If they do, the odds are they will give up control and most of the company. All because they put staffing up above proving the market.
So I wrote yesterday about what my average deck looks like. And yes, they all look the same. Maybe a different logo or maybe I borrowed a chart from somewhere else - maybe. Okay fine, I use google images usually once a deck for a visual.
Anyway so I was approached by a buddy who invested in this company. Let’s call the company Mr X. So Mr X. has a cool product but didn’t do a very good job marketing it and was looking for more money. MY buddy asked me to do some due diligence on it and dig a bit. I did dig and found out that no one knows a dam thing about the product - which means that the marketing sucks. Usually, you’d at least get some negative feedback but nada, no feedback and I put in 10 calls to some of the most connected people in the space.
Anywho, so I ended seeing a copy of a deck used to try to raise money. My initial reaction was AHHH TOO MUCH TEXT MY EYES WANT TO PUKE. After my eyes puss’d a bit I spent 20 minutes, cut the deck in half, rewrote the slogan and messaging into a way that was very easy to read and made you want to buy the product and actually understand what they did - when the company deck left you wondering, so what do these guys do?
I get a call from one of the investors the next day saying hes laughing his ass off because my deck (all 20 minutes it took) was much better than managements. Why was it better?
IT was stupid simple and spoke to the customer in a way that the customer understood. SImple, simple, simple.
If you are in the start-up world, I’d bet you’ve heard that you’re fair share of times. VC’s hear it all the time, execs hear other execs wine about it all the time and I’ve even been guilty of it. I mean c’mon, everyones had at least one cash crunch in their life, usually more than one.
What does it mean? — That it’s time to be creative. As soon as you utter those magical words, that should be a wake up call to stand erect and get to work because it’s time to bootstrap. Don’t wine, win! If you think you need a million dollar, earn it, go out and sell more widgets. Take a second job as a mortgage broker and convince all your friends in the valley that it’s time to cash in on their million dollar mansions. Whatever you do, don’t just sit around and wine and hopefully to find an investor cause unless you’re in the been there done that crowd, don’t bet on it. Bootstrap on it.
I went to the Always On conference this week. Cool people. Met the VP Sales & Erin there, nice people. Ran into a few friends from the industry and a couple of interesting companies presented. Some of the companies while very successful i don’t understand why there are there because they aren’t innovators…Azoogle & Hydra, while great companies that i’ve known for a long time are not technical innovators, they are affiliate marketers. they are also already established large companies. who knows. i spent most of my time there around the food just talking to people and meeting new people. Always fun.
Richie
So I’ve been pitch on a pile of “new” incubator type models for building companies lately. This led me to think through the venture process and my conclusion, though i may very well be wrong and I just thought of this so it’s not fully fleshed out, but i think that the general structure of venture funds today is wrong - at least for web tech. I mean the costs of building these companies are very low and the values to get from selling them are pretty low so I think it needs a new approach.
Yes, people are doing this now but it should be formalized.
I think the following are the stages of a company life cycle:
1) Choose the flower (plan the idea) = Limited to no cash required
2) Plant the seeds (get a product launched) = under 50k
3) Water The Plants (supporting cash for marketing, tweaking, 1 full time employee)
4) Sprouting (founders come on board full time and it takes the shape of a real company) = 250-750k
5) Flowers Grow (growth phase) = 500k - 2MM
6) Bloom (combination of Series A/B/C leading to an exit) = $X
There really isn’t a need for Series A, B & C anymore. Yes you can do it but there isn’t a need. The Bloom phase is essentially when you build a real sales force and get bit with the giant hosting bill but what more do you really need cash for in most internet plays today? Not much.
If I was starting a fund I would be in one of two places
1) Incubation Phase: Help people build a business model and get live. Up to 50k investments.
2) Development Phase: 50-500k - building the official team = you are a company now
3) Secondary Financing: 500k+ = most money goes to marketing and strategic deals
That’s my new 3 phases of VC.
Curious what everyone thinks…
There a number of ways to finance ventures. Here is my quick and dirty analysis of each funding mechanism.
Self Funded - you are in control and own it but unless you are discplined and have experience, entrepreneurs tend to lose their head in the clouds. This is great if you are an expert and experienced already - if not get to the point where you can sustain professional help fast - or you too will need professional help.
Partners - Partners are great as they can counter each other but two partners with no experience does not equal one with experience. Partners where one is at a higher level or more dedicated is bad. Most partnerships break up. They are only good with two experienced people on the same level.
Dumb Money Angel: This is the guy that runs the carwash. This is great if you know what you are doing. If you too are clueless - besides for being lucky at finding financing - you are going to waste his money. So the question is if you have a conscience or not? Many a fund managers can’t sleep when they lose OPM.
Smart Money Angels: This is generally the best way to start a company, esp. if smart money is from the industry you are targeting. Usually you’ll get a fair valuation and validation on your concept and expert help achieving your goals and be able to leverage their network. It’s a win-win all around.
Tier 1 VC: This is good if you need a LOT of cash and is second best to smart money angels. Names like Softbank, Seq, DFJ etc… are great. These leads will take a lot of equity, rip you to shreds on due diligence but be fair and add value. If you can get them to invest that means something.
Tier 3 VC / Vulture Capital: Tier 2/3 VC = people playing VC’s that aren’t in it for building real value. Vulture Capital is selfish money that screws entrepreneurs (short term approach since our industry is small and word gets around). If you take on this capital, have a great friggin lawyer and make sure you are protected. Always ask for references of successful exits and failures from your investor and see what happened. Do your research. These guys will take 95% of your company if you are not careful.
Debt Financing: Take it if you can get it. It can be free. Mortgaging your house is self financing and not debt financing. Debt is actual real debt. Debt can kill a company as fast as it can help though so watch your ass. Sometimes you can get a mix of debt & equity. If you are careful this is great - if you are not careful you will give away your whole company. Why? Equity/Debt hybrids usually have a convertible clause where if you don’t pay it back in X debt converts to equity - you lose control and your equity is worthless. Then again if you can’t pay it back - your equity probably is worthless anyway.
Reverse Merger Financing: This can great (access to debt, liquidity, stock to acquire companies and incentivize employees) or horrible (work with shady people who stick you with nasty convertible debt and consulting fees and then convert the debt into equity, take control and kick you out. This is shady finance though can be extremely productive if you are careful - or it will destroy your business and make mortal enemies of the people pulling the strings.
As for me - I’m a serial entrepreneur, run BootStrapper.com, have self funded a couple ventures, taken on partners and broken up hard, run a seed capital group and am involved in some interesting ventures now.
Some things to keep in mind
1) Always do research and have some numbers behind you. Even if they are full of crap, numbers help sell.
2) Lead into your pitch with a story or have a demo or an inspiring use case. A few seconds is fine but people like to hear a story.
3) Keep it under 3 minutes for the full pitch and 60 seconds for the quick pitch. If it’s too complicated odds are you won’t be able to execute it because you won’t be able to focus on the core or articulate your vision. More importantly, people get bored fast.
4) Have an exec summary and a PPT and a video. The plan itself is more of a right of passage. It probably wont’ get read. If it’s read it probably won’t matter but investors want to see that you can create one. In the end your vision sells, not your recycled paper.
5) Get professional help/advice. If you are serious about your startup call in a favor, give a point of equity or spend $1000 and get it done right. Also the people that can help probably have connections to capital as well.
6) Network. Always be positive and try making friends. If you cold pitch people and they don’t bite you’ll never talk to them again and it’ll be awkward. Make friends, be nice, talk. Casual pitch in passing if you can.Always ask for referrals if they know anyone that might be interested if they aren’t. If they say no, means they think its a bad idea probably.
7) There are 2 ways to get turned down. 1) That’s a bad idea 2) It’s a good idea but not for me. If it’s the first one, don’t push, you won’t change their mind. If its the second ask for referrals, you may just get one that leads to capital.
The team is as important as the idea. Make sure you have a team or are impressive enough to stand on your own 2 foot. If you work in a retail store, are solo and need money to build a brilliant web idea, you probably won’t get it. If you are an ex amazon marketing guy and need money to build a web idea, you might. If you have success under your belt then your odds are much higher and you probably don’t need my advice. (if this is you, why are you reading this? Go focus on your own startup, maybe you can teach me something new)
9) before you make your first pitch, do at least 10 practice pitches on people you trust. Be able to answer their questions and critique. Do not get defensive. Defensiveness is a sign of weakness and stubborness. Even if you are right! Being defensive will screw you. You need to know how to take advice and rough feedback, and learn from it - a) to better your idea b) to save you time/money if its a bad idea c) to refine your pitch itself for next time because you’ll learn the questions people ask
10) Due Diligence. There are 2 types of due diligence. One is the kind we all do all the time. We judge. We poke holes. We as a people are a negative bunch of aholes. We do it all the time. (except for the rare person). The second you pitch anything even if its not business and ask a question you will be judged. Make sure you are presentable when you pitch and look the part you are looking to fill. Second admit when you don’t have an answer but you better dam well be able to answer the following questions:
- How will the product will be built? By Who? Why are you competant to build it?
- What domain experience do you have?
- How will it be marketed?
- What are your competitive advantages? What barriers to entry can you create?
- why should i invest in you?
the second type of due diligence is basically digging. This is when they are serious about putting money in. They will research you, your team, your product and industry and make sure you are not full of shit or fleas.
For those of you who don’t know, I’m a huge met fan. If you’ve ever been to Shea, occassionally you see a guy in a crazy blue/orange mets mask. That guy is me. I picked it up for $8 in the playoffs last year and its a hoot. Of course my GF thinks its stupid and tried to throw it out but I’m a Met fan through & through. LIke always though, I know how to stand out.
So back to the topic and I will explain my baseball analogy.
1) Prepare. Get your materials together, work through them, get them down. Make sure you’re warmed up.
The Art of Pitching Edit | Delete
Guy Kawasaki wrote the Art of the Start - which is a great book btw. Here is my simpler version - the Art of Pitching…
1) Always stretch first. = be prepared and warmed up
2) Practice makes perfect. Light bullpen sessions in your spare time are a good idea. = rehearsh your pitch
3) Video tape yourself so you can see your mechanics in action. = this serves 2 purposes, one you can see if you�re persuasive and show it to pepople for feedback and secondarily you can send it around as a teaser
4) Get a coach that will critique you and make suggestions = get an adviser to help you with your plan, even if you�ve done it before, a second opinion never hurts
5) Throw = go for it
6) if you see a flaw while you’re in a game, try a different pitch and correct it later. Don’t go back to square one in the middle of a game = if you�re in the middle of pitching and someone brings up a problem, don�t get defensive, deal with it, answer and keep pitching
7) Stretch again after = recap your pitches and critique yourself and edit your pitch for the next time
Rest for 5 days and hit the mound again = rest and try again
9) Repeat
10) W = hopefully close a few bucks
Guy Kawasaki wrote the Art of the Start - which is a great book btw. Here is my simpler version - the Art of Pitching…
1) Always stretch first.
2) Practice makes perfect. Light bullpen sessions in your spare time are a good idea.
3) Video tape yourself so you can see your mechanics in action.
4) Get a coach that will critique you and make suggestions
5) Throw
6) if you see a flaw while you’re in a game, try a different pitch and correct it later. Don’t go back to square one in the middle of a game
7) Stretch again after
Rest for 5 days and hit the mound again
9) Repeat
10) W
When you’re a serial entrepreneur there’s always a question that every possible investor asks “Why don’t you fund it yourself?” I’ve been asked it myself and so have lots of my friends.
Simple question right? Not so simple answer…
Here’s why: Serial Entrepreneurs Dilemma.
There are 2 parts to serial entrepreneurs dilemma.
The first is our tendency to spread ourselves too thin. One success usually mean we invest in 5 more great ideas before cashing out of the first and thus end up in a cash crunch. I know a lot of people that started quality valuable companies but not exit-able companies and thus the founders are worth $5MM, $10MM, $50MM but are basically broke. It’s a funny thing but there’s a good chance that your neighbor that founded a company you hear about all the time and that the papers say is worth X zillions of $ but isn’t public has a lot less money then you in the bank. So when your billionaire neighbor doesnt offer to pick up the check understand - he may need a loan. But one day he’ll cash out and hopefully remember that you picked up the check when you pitch him to invest in your great idea.
The other problem with serial entrepreneurs dilemma I addressed in my last post. We are a rare breed of trustworthy quick thinking people. Our enthusiasm gets the better of us and we tend to get screwed even if other people make a lot of money. We also don’t like to admit that we got fucked getting other people rich. Sure we made money but a $50MM company doesn’t mean we made $50MM. Odds are we made money, saved some, put some in more startups and are trying to double down (not out of greed but out of love for the startup life)
Between the two reasons, we tend to have a lot of paper money and a lot of people owe us favors but not have a ton of cash - though we’re always willing to invest what we can.
So now to answer the initial question “If you are so successful, why don’t you invest your own money” … a lot of times we don’t have a liquid $5MM to invest. Sure we usually can seed fund it but beyond that better to bring on other people’s money then stress yourself out.
Of course there are exceptions. Some people have huge payday’s their companies go public or get bought by Yahoo. Those people are lucky and the exception - they get serious cash out. Most even successful companies don’t sell for huge multiples and most serial entrepreneurs are good guys and like to give cash back to their employees when they cash out (out of their own pockets basically) so for every Peter Thiel, there are a million successful but not quie as successful entrepreneurs that by reading their resume you’d think they have tens of millions of dollars but really did well but not quite THAT well.
A question that often comes up is whether or not entrepreneurs should build a board of advisers for his start up. Its a tricky question. The answer is sometimes.
There are different reasons to build a board of advisers:
1. Buying credibility
2. utilizing their network
3. experienced advice
4. you think their name with get you funding
Now, these are all perfectly valid reasons but investors see through out - well at least most sophisticated ones. In general if you see famous personalities associated with a brand- run for the hills (unless it’s John Elway whose brilliant), its window dressing. (if you’re an investor)
From an entrepreneur’s perspective its all about moderation.
Boards are cool but they usually don’t add value and names usually don’t buy funding. You (founder) buys half the credibility and the other half comes from the idea, pretty much end of story.
However if you have someone on board who will actually make capital intros then sure, its cool. But there’s a big difference between someone who will be proactive and put their stamp on it then someone who will just say ok, use my name. Experienced advice is generally crap. Your asking people that are too busy for their own affairs to help you out. Maybe you’ll get 5 minutes. If you can’t succeed on your own, you shouldn’t be taking other peoples money (or maybe you should - to save your own ass)
My attitude is anyone who volunteers advice, ideas, help without asking for someone and whose advice is useful, you should ask to be on your board. That is the kind of person who would likely stand behind you and make introductions and not just sit idle and bullshit.
Is a big board a good idea = NO. Keep it small with people that are actually productive - with the exception if you’re pitching for political related business (then stock up on people you can buy).
if you try to buy credibility it doesn’t get that far. I know plenty of entrepreneurs with awesome track records (the kind of people other people put on their boards) that can’t raise funding for ideas = because they weren’t sellable ideas. Only give equity to people who offer help and you can trust.
****Bottom line is this: Advisers are good, but keep it simple and only invite people that proactively offer help.
- it also validates your idea.
Just read an interesting book, Wise Words by Sean Wide, a Canadian Venture type. While he’s not an entrepreneur or a VC but a writer and adviser, it actually is a worthwhile read. If you’re an entrepreneur looking raising institutional capital for the first time it really is an eye opener because its honest. The single most important point in the book is the first chapter, it’s who you know and how you got the intro.
There was an interesting quote from the Talmud in there….that the way to find out if someone is fit to marry is to see how they are drunk, in business and when hes mad. I thought it was interesting, you rarely see talmud in business books. I also liked the business ju-jitsu title because of my MMA/BJJ background. Cute.
Some advice from me: make friends VC’s even if you don’t have anything to pitch. Build a real relationship. Make friends. I was at a venture conference once and one of the speakers made an interesting comment “I’m a VC, I don’t have any friends” Remember that it goes beyond simple networking.
For example you’re promoting an industry party and you want people from certain companies to come. What is the best way to get the word out? Call the CEO? No. Call the Director of Marketing? No. … go in person and talk to the receptionist and INVITE HER, show her/him some love and then everyone leaving the office will know about your event.
The same way make friends with a VC, don’t just go for their money. Go to lunch with a VC and split the check.
life and business is about friendships. I only work with people i’m friends with. I learned this lesson the hard way. If you can’t stand someones company, why would you want to go to bed with them?
