I’ve been getting this question a lot recently. I think everyone who asks the question isn’t really expecting that unique of an answer, but find it helpful to ask anyway in hopes of gleaning something specific to me or the firm.
All investors pretty much look at team, product, and market, in various ways. We are no different. But in a nutshell, here’s our take on what we look for that mirrors pretty closely to these three.
1. Golazo Potential. The #2 reason why VC’s pass aside from strength of team is “it’s too small“. It’s because of fund return economics, but also because of personal interest and ambition. Golazo is a spanish slang for a “beautiful goal” in soccer, and we are most excited about opportunities that have the potential to be uniquely spectacular. My partner Lee has shared more about this here.
2. Capital Efficient Beginnings. Although a company might have a spectacular goal, we focus on companies that have the potential for capital efficient beginnings. This is a fit for our own investment strategy as seed stage specialists, but also because we notice many of the best entrepreneurs take a capital efficient approach to starting and testing their businesses. Extraordinarily few internet based businesses started out by raising $10+M before ever launching a product. Our model works when a company is able to prove a lot with modest capital, and then leverage that early validation and market knowledge to really lean in and start growing their business. Some of these companies may raise quite a bit of capital to grow, but we look for opportunities where significant, value-creating milestones can be achieved with modest capital up front.
3. Excellent, authentic teams. We look for high-potential founding teams with some unique insight into the market they are going after due to authentic and deep prior experiences. This is in contrast to some companies that are hatched through a more academic approach of “what’s an opportunity that fits X, Y, or Z attributes”. Some great companies have been birthed through a more academic approach, but we tend to get excited about authentic founding stories, and feel like on the margins, authentic entrepreneurs have better intuition and determination in the early stages of building a business.
I was lucky to attend a discussion last night on technology education in Arlington schools. It was graciously organized by Larry Bohn from General Catalyst, who sent multiple kids through the Arlington school district. There was a great group of investors, entrepreneurs, and educators who all live in Arlington. As the parent with the youngest kids in the group (4 and 1.5) I was mainly learning, although I really hope to contribute in the months and years to come.
It’s not entirely clear what will come from this meeting, but I’m pretty optimistic. A couple broad observations and thoughts.
1. Do something, fast. Paul English, the founder and CTO of Kayak very quickly noted that there was a lot that could be done to bring technology to the Arlington schools fast, and with litte/no cost. There are terrific resources out there that are free, like Codeacademy that can get high school students engaged tomorrow. As a group, we pushed our town’s assistant superintendant to think through what it would take to get some meaningful new programs in place by the 2014 school year. There are a lot of practical reasons why this isn’t possible, but I think this is something that the startup culture is really good at – circumventing beaurocratic timelines and driving for things to be done quickly, and utilizing terrific free resources even if it won’t be used perfectly early on. This ethos of cheap experimentation with openly available resources is something that needs to penetrate our education system to drive faster change and adoption of effective (and cheap) tools in the classroom.
2. Human Capital Limitations. There were a number of discussions tonight that revolved around human capital. We talked about the difficulty of recruiting teachers with technical skills because of opportunity cost, and the expense of training teachers in skills that we want our kids to be able to learn. It’s a real issue that has no easy solutions. For a long time though, I’ve been thinking about how the race towards smaller class sizes actually goes against the economic reality of teaching. Rather than have smaller class sizes, is there a way to leverage great teachers and allow them to impact twice as many kids (or three times as many, or many more times over)? I think technology allows us to do this – both multiply the presence of great teachers, and replicate the impact of their know-how through software. I’m excited about companies that are starting to do this, and think it would be wonderful if we could couple this sorts of technologies with a delivery model for education that would allow great teachers to make 2x+ what they make today, and still have the math work economically for schools and districts.
3. Start Early. My friend Adam Medros from Tripadvisor also made a good point early on inspired by Sheryl Sandberg’s talk earlier this week. His point was that a big issue is not just around the availability of technical education, but in the attractiveness of it to kids. And especially, to girls. He argued that in order for both girls and boys to get engaged in technology and programming, it’s important to integrate it into the curriculum (as opposed to providing it as an after-school program) and to start really early, before strong social gender norms start to form. As the father of two girls (and with a wife who also attended Sheryl’s talk), I’m totally a believer and am starting to think that I might want to be more aggressive about encouraging my daughter to play with my ipad, rather than rationing her time with it each week.
These are just some quick thoughts, but I’m ruminating on a lot more. Hopefully, I’ll have some more insightful conclusions to share in future posts. Oh, by the way, I also learned about a terrific programming language for kids developed by the Media Lab called Scratch. I’m looking forward to checking it out!
As it’s been reported, a number of companies are having a harder time raising money in the Series A crunch. As a response, I’ll sometimes hear entrepreneurs say something like this:
“I know that fundraising is going to be tough. Se we are going to start earlier and give ourselves more time to raise”
I don’t know if this is really the right approach. It’s not like investors now need more time to make a decision than they used to. There remains only so much due diligence one should be doing for a series A stage company.
The other problem is that budgeting more time for fundraising usually means starting earlier. Is that a good thing or not? The positive is that it might allow investors to “watch the movie” more. But the downside is that A) you wont’ be as far along with your company and B) because of the time allotted, there is no sense or urgency on anyone’s part to get it done.
I think that fundraising is taking longer is a symptom of something else. Instead of starting the process earlier than normal, I think the right strategy is to start at the same time, but go broader.
The #2 reason why VC’s pass (aside form team) is some version of “I just don’t get how this is a really big opportunity”. In some cases, this is just objectively true – some companies are going after markets that are too small. In many cases though – it’s more a matter of fit than a matter of fact. The goal for a company looking to raise their series A is to show as much market validation as possible, and then find the right investor that shares the same vision as you do. That’s it.
More time doesn’t help an investor really absorb your vision. The only benefit of having more time is that you have more opportunities to turn over more rocks. What I’d say is instead of budgeting more months to fundraise, my mentality would be to just hit the process harder, go broader, and search for true believers.
Final thought – sometimes, I find that entrepreneurs want to reach out to investors sequentially. They focus on the most name-brand, aspirational firms first. Don’t do this. Make your targeted list, make it pretty broad, and go search for true believers all at the same time. If anything, you want to save the aspirational names for your 4th or 5th meeting, not your 1st or second, because you’ll need to work out the kinks of telling your story.
We did a little upgrade on our website recently (about time!). We are pretty frugal, and think it’s nice to flex our operating muscle every now and then, so we didn’t hire an outside firm. Instead, I got to play product manager again with a terrific designer and developer we know.
There are a bunch of things that aren’t quite perfect about the site, but in the spirit of the Lean Startup, we put out our MVP pretty quickly and will continue to improve it over time. I also learned a lot going through the process. Some observations.
1. I never really noticed the shift towards flat design over the last couple years. We made a subtle upgrade to our logo based on this, and reduced a fair bit of the layers, shadows, etc from our former design aesthetic. It does look cleaner and more lightweight. I’m curious if the flat design aesthetic will continue to persist or not.
2. It’s amazing how quickly designs look old and out-dated. We built our old website a couple years ago, and I found it pretty old school two years later (but I was pretty happy when we first launched it). Time moves fast.
3. I like how simple a site seems when you restrict it to a single page. For a VC fund, it totally makes sense because our business is reasonably simple and what you see is what you get. Not sure if the continuous scroll design will continue to be a standard, but I’m happy with it right now. The other nice thing is that the continuous scroll aesthetic works pretty well on mobile without too much effort.
4. Speaking of mobile… it’s pretty important. Duh. ~20% of our traffic is on a mobile device, and this is true of our blogs too. That said, mobile traffic often has different intent from desktop traffic. That’s why “mobile first” is a bit of an over-simplification, and I believe you can’t simply do “responsive design” and have a great mobile-optimized site. Our goal was to have a first version of the site that looked great on desktop and worked for mobile. Ultimately, however, we’d like to build a great mobile version of the site that really meets our customers’ needs. Specifically, this means catering specifically to entrepreneurs and others who are hitting our site on-the-go, probably on their way to a meeting with us. This actually means thinking less about a “mobile site” and more about what the “mobile landing page” is for someone in this situation, and crafting the site around that. This probably means a mobile site with only a few options: links to big mug shots of our team, one-click to launch a map and get directions to us, and one click to get a condensed version of our content in a way that is easy to scroll through quickly. The good folks at BlueTrain mobile have some smart thoughts about this here.
5. The little things really really make a big difference. That’s something that I really had an appreciation for this time around. Our designer spent a lot of time perfecting the actual interaction of every click and hover state, and was very detailed about the timing and overall “feel” of the site. I’m more of an 80/20 kind of guy, so this was fun and really instructive. I particularly like the steam you see when you go to the “invited guest” section of our ethos. Next time, we’ll try to put in more fun “easter eggs” in the site. I already have a running list.
These things are always a work in progress, and we will do another site refresh in not too long. If you have comments or suggestions, please let me know! Also, many thanks for the people who helped make this happen. Specifically:
- Moses Ting who worked with us nights and weekends for his design and development work
- Junhee Chung for his terrific photography
As an uncreative VC, I figure I’d find a way to outsource idea generation for my blog. So I was excited to partner with the good folks at Intelligent.ly on a regular series of posts where we would collect a bunch of questions from the local tech community and respond to a few that I think are relevant to a reasonably broad group of readers. Here are my first two questions and responses below! If you have questions, please post them in the comments or on intelligent.ly here.
What are some common-sense tips for startups as they seek to avoid the “Trough of Sorrow” that Brian Balfour has blogged about? That is – running out of cash, letting staff go, facing potential failure. What can founders do in advance to make the trough as shallow as possible?
[Rob Go] This is a great question! There really aren’t many easy answers – honestly, most startups face some sort of trough of sorrow. Even Mailbox (which just got acquired by DropBox for likely a big number) I’m sure faced a trough of sorry when they shifted resources away from their original product (behind which their raised their seed round) and pursued what could have been yet another email client. The trough I’m sure happens even for every successful companies.
That said, I have a couple basic tips of advice:
1. Know that the trough is coming. Sometimes, just knowing that hard times are ahead allows you to get yourself and your team ready to push through. These troughs tend to happen at somewhat predictable points. First, the first time products hit the market and it’s clear you don’t have 100% product market fit. Second, when you do have PMF, but growth starts to stall. Third, when you have PMF and growth, and you find yourself needing to really build a repeatable business model. Fourth, when major team members start vesting serious chunks of their equity and start finding themselves unmotivated or lured by other companies. etc etc. Be aware that these milestones are ahead of you and be prepared!
2. Don’t fool yourself for too long. The challenging points I mentioned above happen to nearly every company. The trough is worse when you have less time and resources to deal with these problems. You don’t want to fool yourself into thinking your product is great, or just one or two features away from success until you have 3 months of cash left and it’s clear that things aren’t working. Be brutally honest with yourself. The best trick I’ve heard (which is actually really hard to do) is to talk to customers, but to do it from the perspective of a skeptic. If you are in the pre-product launch stage and want to ask random people what they think of your idea or product, don’t say “hi, I”m the founder of XYC company, can you tell me what you think of this product?”. Say instead “hey, a good friend of mine is thinking about quitting his job and starting this company. I think it’s a pretty risky move, but I said I’d help him get feedback from potential users. Do you mind having a look? I just don’t get it… but maybe I’m missing something?”. By positioning a question like that, you are way more likely to hear the negative feedback, and probably the honest feedback vs. the sugar-coated feedback of someone not wanting to crush your dreams. Find ways to get realistic feedback so you know sooner not later that trouble is brewing.
3. Find good financing partners. You want to find financing partners who help you in the situations described above, don’t become yet another impediment. When you are going to be dealing with growth and business model scaling issues, it’s nice to have big VC’s that are committed to your company because they can write you one more check if it’s just taking a bit longer to figure stuff out. If you are still really early and aren’t sure exactly how big your venture could become, you might not want to take money from big VC’s who could kill you with signal risk, but instead finance your company with angels who can help you navigate a plan-B type funding path if things are going well but it looks like your opportunity isn’t as big as you hoped. Which leads us to our second question:
Two friends and I are building a company part-time. We all have full-time jobs elsewhere, but hope to work for our company full-time by the end of 2013. We want to bootstrap as much as possible and believe we can because we should be profitable by summer (not a lot of profit, but some). Our desire to bootstrap may be a good thing because we don’t believe our industry is one where we could have a huge exit and potentially attract investors before we get there. So here is my question: should a company that wants to bootstrap apply for an incubator/accelerator? Is it possible to take seed money and not go for the Series A, etc, and just earn revenue? If we never want to exit and plan to own and run the company forever, would anyone invest any money at all?
[Rob Go] Sounds like you are being very realistic about the company you are building and smart about thinking through your financing options.
On the accelerator question, it depends on the accellerator. I find that accelerators that are run more by ex operators (and in many cases, operators who have been successful without huge sums of VC money) are pretty good at helping companies that might not go the VC route. Usually, accelerators do build a portfolio of companies, some of which are kind of binary, others that might be smaller but more straightforwad businesses. Also, many companies that come out of accellerators are funded by angels who would be happy with a non VC outcome that happens through capital efficient financing (and potentially faster).
Now, I will say that all investors in a company will hope to see some liquidity from their investment at some point. Hopefully, anyone investing in an early stage private company knows that that liquidity will not come for at least 5-years+. But if you think you are building your company in a way that it mgiht never go public or get sold, then you probably want to have some concept of how investors will get their money out in a reasonable amount of time with relatively little headache. There are a number of ways to do this. One is to do a royalty based financing, where some percent of revenues goes back to investors. John Landry has been a proponent of this for certain companies.
Another option is the investor put-option, where the investor at some point as the right to sell a portion of their holdings at a pre-determined multiple. The third is some sort of dividend structure. Whatever approach you pursue, do more research and talk to your lawyer and fellow entrepreneurs about the pros and cons of each approach. As an investor who focuses on companies with GOLAZO potential, I rarely contemplate these sorts of structures, but I do respect the fact that different types of companies can be financed differently. And for many investors, this kind of company can be quite attractive!