Category Archives: bootstrapping

Thru the looking glass: Fund-Raising Lessons

Handling QA in investor pitches

Udemy’s Gagan Biyani wrote a super useful, practical guide on fund-raising lessons learned.  Gagan is a great Silicon Valley startup CEO: he’s tireless, he’s persistent, he’s nice, and he’s adaptive.  All that comes through in his post.  Give it a read here

He set an example that I wanted to follow on slightly with some of my own lessons learned and lessons borrowed.  I’ve gained the opportunity to participate in the fund-raising process from a few angles. As an entrepreneur, I’ve raised money for my own company, Moonshoot.   I’m also at times a venture capitalist/investor at BlueRun Ventures, so I see things from the other side of the table too.  

I’m putting together a series of posts, which aim to share these learnings.  I’m going to start this series with one of the most important –and under-discussed – elements of the fund-raising process: answering questions.  

“Say it once.  Say it well.  Don’t say it again.”

I attribute this quote to one of my best friends, Nils Gilman.  An intellectual historian, published author, and polymath, Nils is a fountain of knowledge, thinking and ideas.  He can also flat out turn out well-written text at a factory pace—it’s crazy.  He uses the above adage, in coaching me on writing.  I apply it to what we say, specifically when answering questions in a pitch. 

Why questions matter

Most fund-raising posts will focus on pitch decks, meeting etiquette, etc.  All that stuff is useful.  In my experience though, a key skill for any founding team is how to answer questions.  Investors want to ask questions to probe more deeply and to see how you respond.   In addition to getting us information we want, asking questions provides a different lens into the thinking and quality of the founding team.  How you answer questions conveys a great deal about you, your team,  your credibility, your command of data, etc.   You may not win by answering questions well; you risk a lot by answering poorly.

Where to Start

As answering question is more improvisational, it tends to get less attention than preparing a pitch, getting the deck in shape, etc..  Don’t ignore questions though—spend time thinking about how you want to answer questions.  Nothing is more painful than presenting a great pitch, only to feel as though you gooned a few key questions and lost your credibility in front of a potential investor. 

I recommend Jerry Weissman’s book, In the Line of Fire: How to Handle Tough Questions.  Jerry is a friend, mentor and teacher.  He’s one of the very best in presentation training and skills.  His thinking and exercises on Q&A (and among presentation planning) are among the best.  Get his book here.

I also recommend writing down the top 10 questions you expect.  Figure out how you want to answer them, and answer them that way.  As you go through pitching, write down the questions you’re getting, along with the answers you provide at the time.  Assess whether there are better answers you could have provided, and add that to your repertoire.  Evolve this so that as you do this more, you’re ready.    

My Observations

Few founding teams handle questions extremely well.  Many struggle with basics—hearing the question asked and answering.  For example, if an investor asks you if you’ve raised previous money, a simple “yes, we’ve raised $80K in friends and family” is a fine answer.  Instead, often there’s some whole discussion of who gave you money, when all it came in, why you took it, etc.   TMI.  Understand the question being asked, and answer it.  Remember the adage:

Say it once.  Say it well.  Don’t say it again.

Focus on this, and you’ll be in good shape. 

As you are focusing on this, I’ll add the two most common breakdowns I see in founders answering questions during a pitch.  Though different, they’re related.  Here are the two most common problems I see in answering questions in a pitch:

Answering about the unknowns

Founders are dealing with big unknowns.  Known unknowns and unknown unknowns.  As someone assessing whether I’d invest, I know you’re dealing with unknowns.  Its generally fine to say, “I don’t know, and here’s my plan to learn/figure out.”  So long as this is credible, that’s fine. 

There are two cases where that does not work.  First, you say you don’t know, when I think you reasonably should.  For example, this summer I spoke to a mobile location-based platform company seeking investment.  The exec with whom I spoke hadn’t heard of FourSquare.  This was unacceptable, as this person should have known of them—something he should have been able to figure out. 

The second is where you dress up the “I don’t know,” in a bunch of bullshit.  I have sympathy for this mistake.  As a founder, we want to know everything on the business.  We don’t want to feel like we don’t know an answer to a question.  We may even have some decent hypotheses.  But if you don’t know, you don’t know.  Just say, “I don’t know yet.  I plan to figure that out this way.”  BS is pretty easy to identify and its hard to watch.  I understand the temptation, but avoid. 

Answering about the knowns. 

If founders talk too much about what they don’t know, they are also prone to talking to much in answering questions on details that they do know.  The problem here is lack of empathy.  Investors are flying at a different altitude than the founder.  Founders have everything invested in a company, and are very close to the businness.  Investors are much more removed—trying to assess in a brief conversation the viability of potentially investing  money in a venture.  An investor is flashing through in his/her mind whether the market, the team, and product could be a fit.  This mismatch leads to times where an investor can feel a pitching founder is just off on a tangent and “in the weeds” to a degree that they won’t be able to manage or lead a company.   

Sometimes an investor really is interested in getting down into the weeds, but that’s pretty rare.  As a founder, you should know whether the investor is asking for that detail—if yes, then go into weeds.  If not, hold back. 

I posit that when most potential investors ask a question, they want to see whether a founder can understand it quickly and credibly clarify the essence of what I’m asking.  Sounds easy; hard to do.  Most of us are so close to our specific worldview that its difficult to context switch and communicate at a more bubbled up level. 

For example, I spoke by phone with the CEO of an outstanding company this summer.  Very clearly, they’d built a better mousetrap.  The issue was, no question I asked, regardless of how basic, had less than an 8 minute answer.  This did damage.  I literally got spooked because the executive’s answers were too disjointed and long.

As I reflect on this, it could well be that these symptoms are related.  As founders, we want to hide the stuff we don’t know and expand the stuff we do.  The result is unsurprising.  For stuff we don’t know, we retreat and hem and haw and deflect.  For the stuff we do, we want to expound and show you in 10 different ways why we know this particular thing.  The problem is, both are exactly the wrong approach.  Which leads me back to the mantra I’m repeating…

Say it once.  Say it well.  Don’t say it again.

In conclusion, I’m kicking off my series on pitching observations with a (hopefully) useful primer on answering questions.  Think about this.  Write down key questions you expect and prepare answers.  Track the questions you get asked and how you answered them.  Be mindful of whether you’re more effective saying “I don’t know, but…” or answering what you do know. 

And good luck.  Happy hunting. 

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Can You Handle the Truth? Advice for Founders

Always tell the truth, its the easiest thing to remember. — Glengarry Glen Ross

I have started my second semester at the Founder Institute, Adeo Ressi‘s awesome incubator.  It has been a blast so far, in my view, a lot of really strong founders wiht great, viable business ideas. It has been a lot of fun to be involved, and it is as always humbling to have smart, passionate people asking for my input.

As it is still early in this group’s process, some of the ideas are a little earlier on, still in “ideation” (terrible word) mode.  This is of course a natural state of being in a startups life, that early stage when you’re still not even sure you’ve got a good idea.  Its an exhilirating time–you’ve not made any mistakes (yet) and the world seems ripe to take on your vision, while at the same time, you definitely have those soul-shaking moments of doubt as to whether you’ll ever be able to turn your idea into reality.

Int this stew, founders will come to me to ask my advice on their idea, and I’m happy to try to take the time to listen and provide a few minutes of helpful input.

A question I have had and answered for myself is how hard core or harsh to be on someone’s idea when it is still on the drawing board.  Although it certainly has its risks and drawbacks, I’ve decided that this is a time to be very blunt and hardcore.  The risk is that this approach dissuades someone or that it gives them an impression that I’m a jerk.   This is the last thing any founder wants to become–the startup world is too small afor people t get such an impression.

The counter argument is that by being hard core you toughen up a founder, you help him or her focus on the key challenges in their business, and  at an extreme, you convince the founder that the idea is not worth investing time and life in.  At the ideation phase, the costs of switching an idea are low.  I have become comfortable with this being on balance the preferred approach–the pain is worth the value.  I also try to remind the founder whenever I do this that my opinion is just one, and I’m certainly perfectly happy to have the founder prove me wrong and make a boatload of money doing just that.  In other words, its not personal, and I’m hopeful that it does help.

I have come to believe passionately that this is the only appropriate response for founders asking for advice.  My input is not costing anything, and if I’m off by a mile, there’s no reason that a founder should listen to me.  You asked and I answered.  No harm, no foul.  Totally makes sense, right?

Right.  As founders we should all be pushing each other in as hard core a way to make our businesses kick ass and take names.  Give the advice, hit hard.

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Venture realities : some big changes, some the same

TheFunded‘s Founding Member, Adeo Ressi, posted an interesting perspective on recent venture capital financing today.  In his post, Ressi describes several of the key issues facing venture funds in the short-term, and he concludes with these predicctions:

new investments will start to surface towards the end of Q2 and in Q3 2009. Since new investments are smaller than later stage support, the amount invested in 2009 will be significantly smaller than any amount in the last 10 years, but the volume of deals will start to normalize by the end of the year.

I agree with Ressi’s key points and his conclusion.  His post also got me thinking more broadly what they likely mean longer term for venture capital, and I’ll share those thoughts below.

First, some perspective: venture capital has existed in some form since at least Christopher Columbus, funded by Queen Isabella of Spain.  (I’d have loved to have understood the term sheet those two negotiated!)  I believe the odds quite high that venture investing will remain a vibrant, real sector for investors.  This is based on a few basic rationales:

  1. No one wants to sit aside and miss the next MSFT, Google, or Facebook for what in the scheme of a total institutional investment pie is a relatively smaller sliver;
  2. While venture funds have suffered, so have many PE funds–one of their key competitors as a investment class–along with every other asset class.
  3. When one looks at the opportunities for big-time innovation to solve big-time problems, it seems pretty obvious that the fields of healthcare, clean tech, and so on will continue to draw funding in for new venture invetment.

Thus my sense is that venture capital as an asset class will continue to exist and will very likely thrive over time.

That said, I think that venture capital as we know it is very likely to change dramatically, particularly with respect to asset allocation.  In addition to the oft stated pronouncements about the coming consolidation of venture funds, here are my key predictions to take place over the next 5 years or so.

  1. Consumer Web / Web 2.0 / Social Media investing will decline in overall money invested, though # of deals may stay similar.  Consumer web sites take vastly less money than they did even 5 years ago, before the invention of AWS (Amazone Web Services).  With cloud computing services such as AWS (and competitors such as Microsoft Online/Azure and Google App Engine), the price per cloud computing unit will drop and continue dropping.  Robust, free rapid application development environments and tools such as LAMP, RoR and so on now have rock star developers all over the place who work economically.  As a result, new services can be conceived, prototyped, tested, and launched for vastly less capital.  This trend favors the seed stage venture investors, such as Baseline, Alsop Louie Partners, Jeff Clavier, etc.  Larger funds will find it more difficult to focus here, as it’ll be increasingly difficult for these services to have good use of the bigger checks that larger funds want/need to write in order to get the right leverage on their money.  Certainly, some companies will need more money, a la Twitter, but many a consumer app will be built in next 5-10 years that may never need to raise more than $5m in outside capital.
  2. Enterprise 2.0 applications I expect to stay at near similar levels–roughly same number of deals, same amount of money.  Enterprise applications in a way have all the same kind of positive trends around lower cost development that Consumer web does–Ruby on Rails, AWS, etc.  Developing a product should become easier, lower cost.  The challenge is really around how will these companies really build salesforces and channels.  This is an unchanged challenge for Enterprise apps, and as a result, I expect investment stays on trendline similar to where it is now.
  3. Sectors with strong alignment with government regulation–CleanTech, Health Care, infrastructure etc –likely have important opportunities.  Bigger investment numbers and more deals will get done over next 5-10 years in this space.  I believe that most big-time mainstream venture funds, in order to stay on the cutting edge of where they need to be in order to run multi-hundred million dollar funds, will need to evolve sectors and take on greater focus in cleantech and health care–two areas where there is a lot of capital required as well as strong government regulation.
  4. My dark horse prediction is that globalization will become an increasingly important sector and focus for venture funds.  The world is flattening.  This flattening creates opportunities for venture funds that look to exapnd and extend their reach, networks, experience, and footprint to a global perspective as one of the big, largely untapped opportunities for venture funds.  Many larger funds have presence overseas.  Still, it is unclear whether this is really ‘globalization’ — i.e., where every portfolio company is pushing to become a global franchise–orjust putting a VC flag and office on the ground in a certain country.    I suspect its far more putting the VC flag and office in a foreign country like China and calling it a “global” fund.  That’s not really it.  The opportunity, long-term, is to accelerate and amplify earnings by getting companies earning revenues and traction in foreign lands.  Firms that can really get their arms aroudn this will find that they have upside in their returns, irrespective of sector.  This is a little fuzzier a concept, so I expect it to experience modest growth in investment and deals over the coming 5-10 years.

In conclusion, venture investing likely will survive the shakeout intact, with fewer firms and with over time, different focus.  But so long as there are markets to chase and New Worlds to discover, there will be Christopher Columbus’ and the Isabella’s who fund them.

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Thinking Big

“Fortune favors the bold.” — Cicero

Much is being written, presented, emailed, and blogged about the economic meltdown and the impacts it has on high tech startups and VC-based startup financing in particular.

As someone who speaks with a number of early stage and pre-funding founders, I get the question a lot of my impression of what this crisis will do to early stage financings, etc.  My answer is simple: The current financial turmoil really is the least of your problems. 

Instead, the big question to wrestle with is really the same for us as it was when markets were more favorable.  That big question to ask yourself is am I thinking big enough

My 3 step formula in these times are:

  1. Look honestly at your business idea, asking if its a big enough idea.  Push yourself to expand your vision, mission and impact that your idea can take on.
  2. Push forward boldly in your execution.  Follow Cicero’s advice.  It’s the best way to assure success.  Waivering or doubt will only kill you, partiuclarly in these more dangerous times.
  3. Avoid worrying about “the market” or anything else you can’t control.  If you can’t control it, you shouldn’t spend time worrying about it.  Be super optimistic, think great big thoughts–there are plenty of pessimists now, they can carry the negativity water.  You stay away from that. 

Here’s some longer context…  Before I became an entrepreneur, I remember doing a thought experiment as I read through the Forbes 400, the richest 400 people in America.  Briefly, the thought experiment tried to identify patterns among all the entrepreneurs on the list.  There is a business (not a personality) pattern that I think emerges if you look at a tapestry of names like Gates, Buffett, Page/Brin, Jobs, Walton, Bloomberg, Schwab, etc.  That pattern is consistently *big* ideas, where those ideas have a massive sway in our lives and economy today:

  • PC on every desk, in every home (MSFT)
  • Universally findable information (Goog)
  • Stock broker services for everyone (Schwab)
  • Selling for less (WalMart)
  • Financial services information platform (Bloomberg)
  • etc.

Now if you listen to big thinking VCs like Vinod Khosla or John Doerr, you can see that again, they’re thinking big–in particular around cleantech. 

Many early stage entrepreneurs with whom I’ve met and spoken over the past two months have interesting ideas and they’re showing traction against them.  Users, awards, even in cases customers.  This is super to see.  The question that I commonly see though is one around ‘bigness’  — even if this thing was a hit, how many people would it impact? 

I argue that if you really think that venture funders are important for you to achieve the dream of your business, then you need your 1-sentence statement of your business to get you somewhere near the ballpark of those bullet points above.  It should be obvious why the opportunity — if achieved — is a big, big deal.  If you can’t make that clear, then that’s at least a yellow flag. 

My suggestion to early stage startup folks is not to worry about the current financial crisis.  Focus instead on thinking about how to ‘blast out’ your business in a manner that makes the impact to customers and the impact to the world bigger.  Stay focused on that, and if you can start executing efficiently and credibly towards that vision, then the financing piece will work itself out. 

Put this way, its exactly the same advice worth taking when markets are more favorable. 

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Recommended Conference : STARTonomics — Oct 2 in SF

As a start-up guy, I tend to shy away from most conferences.  My personal perspective is that the time and in particular the money aren’t worth the fees.

That’s different with the upcoming STARTonomics,produced by Dave McClure.  For anyone interested in gaining useful insight and practical advice on what you need to do to start an internet company, I’d recommend this strongly.

I’ve known and admired Dave for a few years now, he’s given me straight, pragmatic advice every time we speak.  His blog is enjoyable and useful.  And his investor pitch deck that he’s posted to SlideShare is world-class.

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Free stuff for start-ups : insight from IDEO

Being an entrepreneur in Silicon Valley, you get a lot of different input on what is must do in order for your business to succeed. A lot gets written about this. Here’s my short list of the most critically important must do‘s that I have experienced to date. It’s a pretty simple list:

  1. you must not run out of cash
  2. you must not give up
  3. you must build something people want

The first two are obvious: running out of cash or giving up kill the company.

The third one is where the magic of creating a customer is. And by extention, while the other two are hard, this is the most difficult, most challenging. It also is where you hear the most divergent advice.

The most useful advice I’ve gotten on how to go about building something people want is from IDEO. I did a recent tour of their facilities and got an overview spiel. I’ll write that up in a separate post.

More useful, I bought The Art of Innovation, a book by IDEO’s co-founder on how they operate. It is to building products what Igor’s guide to effective naming — a deep, obvious and useful approach that any entrepreneur could use.

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Randy Pausch’s Time Management Talk

Professor Pausch’s Last Lecture gained international fame last year.  In the course of watching this and reading about him, I stumbled upon a talk of which he is more proud.  It’s his tips on Time Management, a topic (weirdly) I’m really into.

Here’s the HTML link to his notes from this–keep it close.  I refer to it about once a week!

Time Management Talk

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