I find the most successful fundraises are ones where founders treat capital as a weapon, not as oxygen.
If capital is like Oxygen, the conversation focuses on what might go wrong. Will your numbers and assumptions hold up? Will new risks blow up your model or the quality of your service? What unforeseen challenges might make you miss your numbers and run out of money sooner, requiring more oxygen down the road. What’s around the corner that will be a threat?
If capital is a weapon, the conversation tends to focus on what might go right. What will be the benefits around the corner with increasing returns to scale? What kind of game changing people will you attract, that will raise the level of all future hires? What kinds of unbreachable moats will you be able to build? What kinds of new partnerships or new capabilities will be achieved? What’s around the corner, and how can you play that to your advantage?
By the way, it’s not that those who treat capital like oxygen don’t talk about upside and results. But I notice the focus tends to be more on numbers and scale. “We’ll get to $xx in revenue” or “We’ll be profitable”. When capital is a weapon, the milestones tend to be different.
Capital as a weapon can backfire. If you read my last few posts, you will see that I’m totally wary of that. Some companies I know use capital as a weapon, and I think of them as enormous cannons sitting on top of a house of cards. Some funds I notice fund companies like this systematically. It’s kind of scary, but if a solid foundation is actually built for these companies, it will pay off.
Regardless, when you go out to raise capital, you should ask yourself if you can credibly talk about how the capital will be a weapon that will help you win, and keep winning. If you can’t, that will be a problem when you talk to investors.
There is something so funny and also so appropriate about all this talk about Unicorn companies.
I’m not the first person to say that the proliferation of $1B+ valued startups is a signal of an overheated late stage market. Yet, there continues to be so much fanfare and excitement about all of these unicorn companies.
Unicorns are a great metaphor and a brilliant meme – just excellent marketing. But what I find so funny is what is so obvious:
UNICORNS DON’T EXIST!
Unicorns are mythical creatures. And guess what, the unicorn-ness of many of these companies are equally mythical. Moreover, all the excitement around these unicorn financings are IMHO pointing entrepreneurs and the whole market in the wrong direction. In particular, I feel a few things really strongly.
1. $1B private financings do not equate $1B of company value. These are private sales of a minority position in these companies, not IPO’s or acquisitions. It’s what one investor was willing to pay to have a small position in a company. Not a measure of true underlying value. I think Fred Wilson had a post on this a year or so ago, but I couldn’t find it, so I’ll leave my attribution at that
2. The goal for a great company isn’t to get to unicorn status as quickly as possible (or to be on that trajectory as quickly as possible). It’s to build a great company that creates huge value for users or customers and will keep doing so for a long long time. I wish there was more excitement about great, durable businesses instead of unicorn financings. I’d rather read more thoughtful reflection on what made Etsy a fantastic, thriving marketplace vs. the next company that raises a unicorn round.
3. Sometimes, great companies take time. It takes time to build a durable foundation for a great product or scaleable growth. This can be true in all sectors, even consumer-social. I loved Hunter Walk’s quick post on the “Slow Graph” as he talked about Meerkat. No commentary on Meerkat itself, but the post points to choices focused on durability, not just the fastest rise possible. Tumblr’s user growth wasn’t actually very fast in the early years, but over time, the community became incredibly rich and robust.
4. There is a shocking disconnect between public market valuations and private market valuations, and it’s not because the public markets a) don’t know how to value these companies accurately or b) great companies find the public markets too much of a burden vs. private financing. Keith Rabois wrote an excellent post here on Quora going into more detail. Read it.
5. Some of these unicorn companies will be (or already are) wonderful businesses that will be around for a long time. My point isn’t that these companies are bad, some are great. But in this market, unicorn status is becoming less and less of a real indicator of actual greatness (or accurate value).
I wish I could come up with a clever label for these rapidly scaling, great companies aside from unicorns. I kind of like the idea of Alligators or Sharks. Both are pre-historic and at the top of the food chain. But I guess they aren’t rare enough. Maybe a good marketer out there will have better ideas for a good unicorn replacement.
When entrepreneurs think about approaching VC’s to cultivate a relationship for a round, they often try to match their company with what the VC has funded in the past. It’s pretty rational. That investor should both know more about the sector than the next person, and should have an inclination to invest in that sector as well.
I’ve tended to find that this doesn’t always work. Often, a VC that has invested in a sector has a particularly high bar for their next investment in that same space. Once you have gone deep in an area, you are exposed to all the non-obvious challenges and hardships associated with that market segment, which makes you very very pessimistic and picky. Sometimes, it’s easier to invest in an area that you have some knowledge in, but don’t know all the gruesome details – after all, it’s nice to have some level of ignorant optimism.
There are quite a few examples of this. I think this is particularly true in the ad-tech space. You see investors dive deep into ad-tech, make some investments that are pretty successful, but then pull out just as someone else enters to take their place. The same is true for e-commerce. Both markets are obviously ones where success can be found, but they are also very competitive and have particular challenges (eg: capital intensity of ecommerce, bad exit multiples, etc).
So, I think it’s sometimes tough to pattern-match based on sectors. But I do think it’s pretty successful to pattern-match based on founders. When an investor has success with a particular profile of founder, they tend to be enamored by founders of a similar ilk. I have multiple conversations with investors that say something like “I really like this company, the founder reminds me of <insert name> when he/she started <insert successful portfolio company>. Investing in startups is a very personal business, and as someone who is going to be spending a lot of time with a founder, investors tend to gravitate towards similar profiles of people.
What this means is that getting to know the founders that an investor has backed gives a really strong clue as to what kind of people that investor will gravitate towards. It also means that the best way to get introduced to an investor is often through the founder of another one of their portfolio companies, and it’s even better if you have similar attributes to that founder at the time they started their business.
For me personally, I tend to be obsessed with what I would call deterministic, design-focused product founders. This is driven by my experience working with Pierre and Jeremy at Sunrise, and by watching the success (and joy) that my old colleague Bijan had in working with folks like David Karp when I was at Spark. There are some other personas that I tend to gravitate towards as well, but that’s an example.
By the way, this also lends a bit of a clue as to how you might want to shape your founding team. You can look beyond just the founder/CEO to what the first 2-3 people on a team looked like at the time of funding. You can’t really change who you are, but you do have influence over who you found your company with and who your first 1-2 team members are. Again, I don’t think you should ever make hires or shape a team for investors, but I think this is an area where past performance can be an indicator of future performance.
So if you’re doing you are thinking about how to best approach investors, don’t automatically just pattern-match based on sectors. Try pattern-matching based on the profiles of founders and their founding teams. It’s a people business after all.
About a year ago, Nancy and I were spending some time with Hardi Meybaum and his family. Hardi is the founder of our portfolio company GrabCAD which was acquired recently by Stratsys. It had taken us a long time to schedule this get together (our girls are of similar age, so we try to all get together now and then) and I commented that I heard that he’d been on the road a lot. Hardi then went on to recount his recent travels, including one trip that had him in 5 cities in one day.
When I reflect on Hardi’s experience and on my observations about many successful founders, I notice something very obvious. Many great founders travel… A LOT. And this is especially true for founders in our core market of the east coast.
Traveling a lot stinks. It’s tiring, throws off your daily rhythms, takes you away from family and friends, feels lonely and depressing, etc etc.
But I think it’s something that entrepreneurs really need to do. And honestly, I find that most don’t do enough of here on the East Coast. The benefits are pretty obvious – it makes you more effective at BD, gets you in the information flow of your industry much better, gets you in front of a broader set of customers, partners, or investors to build your network, and so forth.
There are also some increasing returns to scale in travel. When you are planning one off trips, you kind of need to build momentum around each one, and each meeting is more of a big deal. When you are just visiting someplace very regularly, it makes it easier to fill your time and get entrenched. Is a key decision-maker not around during this trip? No problem, you’ll be back next week! Want to take a meeting that has a small chance of being super valuable but might also be kind of a waste? No big deal! Weather or other mishaps ruin your schedule, no problem, you’ll be back!
I think in the early stages of a business, founders often end up looking inwards a bit too much. Going out on the road forces you to maintain a broad perspective, and keep tabs on what your company’s ecosystem is up to so you are better able to see around corners. When a company is young, it’s a bit scary to be away too much for fear that the team will lose focus without you around. But that’s just another argument to have a strong co-founder and/or have team members that are self-motivated and self-directed.
There is no one-size-fits all here, and I don’t want to prescribe behaviors for founders – everyone’s experience is going to be different. But I think if you aren’t on the road at least a couple times a month, I wonder if you are being hungry enough about the outward facing side of your job as a CEO. I know some founders who will laugh at that last sentence, saying that you need to be on the road multiple days every week.
Maybe you are in an industry where all the action is local to your area, or maybe you are at a stage where it doesn’t benefit to be in front of people in different cities. But I think that’s more the exception than the rule.
Note: Thanks to Bob Mason who contributed some thinking to this post
Over a year ago, I wrote a post describing what I was seeing happening in the early stage financing market, especially as it pertained to what I call “genesis rounds“. Today, genesis rounds or “pre-seeds” are fairly common nomenclature, and in fact, some folks are forming funds specifically targeting these types of opportunities (like my friend Nick Chirls and his partner Alex Lines who recently announced the launch of Notation Capital).
This has led me to quickly take a look at our own investing activity to make sense of how we think about these sorts of rounds. If I look back on the 10 investments we made in 2014:
3 had prior pre-seed rounds before we invested
1 was an extension to a prior seed round
3 were bootstrapped to seed (so the founder essentially provided the pre-seed through their own capital or cash flow of their business)
3 were genesis stage but were larger institutional seed rounds
Some thoughts and observations on these:
- The 3 companies that had prior pre-seed rounds were ones that we did not see at genesis. I think of the 3, we probably would have invested in 2 at the pre-seed round.
- The 3 genesis stage companies were very early, pre-product companies that raised capital very early on. Two of these companies started out as “genesis rounds” but because of investor demand, ended up looking more like institutional seeds. This is why I consider them “genesis stage” companies that raised institutional seed rounds.
- We have been more likely to invest at the genesis stage when the founders have relatively more experience.
- We tend to think of pre-seeds and normal seeds the same way. I like to say we are a “one product company”. Even if we are investing at the genesis stage, we treat every investment as a full-scale investment that takes up a full slot of partner time. This means that we would end up saying “no” to a lot of companies (regardless of stage) unless we have very high conviction around the team and the thesis around the product and go-to-market.
- I’ve always been perplexed by seed investors that don’t invest early. The rise of pre-seed focused funds shows that there is a market gap around these opportunities, and I’m glad to see good investors trying to capitalize on this. It’s great for founders, and will keep seed investors honest. If seed investors want to hang back and invest later, what will happen is that some of the best pre-seed companies will actually make so much progress on their small dollars that they will skip their seeds altogether and raise a larger series A next. Suddenly, some seed investors will find themselves stuck between true early stage investors and life-cycle VC’s .
- We don’t think of ourselves as a seed fund or pre-seed fund. We try to invest in the best companies we can, as early as we can, with as much conviction as we can.