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. 

Interesting Bessemer move to get Designer in Residence

TechCrunch reports that Bessemer has hired Jason Putorti, from Mint, as a Designer in Residence.

Interesting move for them, promising.

Gives Bessemer and their portfolio access to someone who can really help with a key discipline across the consumer internet properties they have.  If nothing else, having good clean design will pretty up sites.

Working with VCs part 2: reverse due diligence

Earlier this week, I posted part 1 of a currently 2 part series on working with VCs.  As I mentioned there, and as I’ll repeat basically any chance I get: working with venture capitalists isn’t summer camp.  It shouldn’t be.  My personal experience and view is mixed–I’ve had great experiences and some bowsers.  But as I’m generally an optimistm, my basic view is that you’re served best by approaching the relationship with a well-grounded, objective perspective.  Again, this is business, not summer camp; you should know this as the venture capitalists with whom you might work certainly know this.  Not a ding on them, just the reality that you and they should share.

Alright so this post is about tips and tricks to drive reverse due diligence.  In other words, these are the questions and steps to take if you actually get a venture capitalist involved and you want to research whether they’re worth partnering with in building a company.  Feel free to suggest other ideas in comments.  FWIW, these are my concrete ideas and steps.

First, probably the #1 most useful data point would be a VC working with repeat entrepreneurs who’ve had sizeable exits in the past.  Founders who’ve achieved exits previously are the “A-Listers” of the Silicon Valley star system.  The Max Levchin‘s or Kevin Rose‘s are the Tom Cruises or Tom Hanks of Silicon Valley.   To a degree, they have a choice in working with the VCs they want to work with.  A successful founder who chooses to work with the same VC again is a signal that that VC is solid.  (Otherwise, why would the founder keep working with the person?)  Ask the VC which founders he’s currently working with, and research their track records on this specific dimension.  I’ve met and gotten to know a few VCs who can point to successful rockstar founders who continue working with them–these VCs are the guys you want to work with before anyone else.

Second, find out if the VC on your deal is working with founders on a repeat basis who did not have an exit.  Very similar to the above, except with founders who didn’t exit.  This is somewhat interesting, in that it conveys that both parties still think enough of each other to work together again.  There’s a slight flag here that you should check out, but in generla I’d interpret this as a positive.

Third, ask the venture capitalist to get intros to the founders he’s working with currently, and call them up.  Ideally you meet these folks in person, and you really get them speaking frankly.  This can be easier said than done, but you’ve got to do this. Here are the questions I’d ask them:

• Please describe your experience with them in depth.
• What is the best thing that has occurred in this experience. (This should be concrete.)
• What is the worst thing that’s happened.  (This should be concrete. )
• If you were to have a successful exit and you could work with anyone, would you work with this person again?
• What is the biggest and most significant impact this person ahs made on your business?

The purpose here is not to drive a gotcha type conversation.  You are just trying to get information as clearly as you can on the pros and cons of this specific VC.  I consider this must do work.  What I’m providing here is just a basic set of guidelines.  For your speicifc business, there will be a whole host of individualized issues that you need to drill in on.  The point isn’t so much that there’s a single list; its that you’ve got to go through it.

I’ll probably add more to this list as I mull, but here I thought I’d take the approach of getting this out there and then adding as I think further about it.  Comments welcome.

Working with VCs part 1 : its not summer camp (nor should it be)

This week in the geekosphere, this presentation on venture capitalists has been making the rounds.

Its funny, and as an entrepreneur who’s met and worked with VCs, I can relate to this.  Some are clueless, herd following clowns, and there’s no small amount of glee we all take in poking fun at those folks.  Many aren’t, though.

Irrespective, if you’re working as an entrepreneur and you want or need venture folks to build out your company, then it’s important to have a clear-eyed, rational view of what venture capitalists are doing.  Having this perspective will help you more effectively set your own expectations, and ideally, will help you do a better job in working with them.  This thinking led me to a two part post.  Part I, below, is meant to provide a different perspective from a founder’s poin

t of view on VCs.  I think its useful for founders starting out to have this perspective.  Part II, which I’ll get to later, is about how I’d suggest doing reverse diligence on investors or VCs–who do you speak to and what questions do you ask them–this is more concrete.

So, Part I has the risk of labeling me a VC apologist, a kiss-ass. Whatever.   I’ll share this not because I think VCs need defending.  Rather, I think its important for founders to have a rational view of VCs, in order that founders are thinking clearly about what VCs can do, and how to think about working with them.   If you’re a good entrepreneur, you need to be thinking clearly and rationally about what you’re doing.

Here are the key 3 things I try to remember when I think about venture capitalists.

1. At their core, VCs are the money.  VCs, at their core, represent the money.  At times and at their best, they represent more, but at the end of the day, they are ‘the money.’   This is not meant as a negative–within the sphere of ‘money,’ I view VCs as useful and constructive. They’ll try to be useful, and they’ll (hopefully) try to remember that they’re not magicians.   They want to help, but they’ve got 7 or so boards to work on, in addition to other companies to look at, in addition to raising money themselves.  They want you to succeed and they want to spend less time worrying about problems, more time helping you accelerate, recruit, get press, etc.

They’re way better money than any other institutions out there.  They’re generally not like private equity funds–looking to lever up and sell off! They’re not (generally) in the turn-around business, looking to squeeze costs, downsize, etc.  In general, they are looking to build companies that swing for the fences–they want ideas generally big and wild and possibly able to make an outsized return.  They may do self-interested things, but they’re going to be more aligned with you than any other money you’re likely going to find in the institutional private equity space.  (If you think VCs can be difficult to deal with, try working with guys at hedge funds to finance your business.  Good luck!)

2. The water-finding stick pitch. VCs are funding ideas sooner than most any rationale investor would–that’s why they’re in the business.   While VCs as a group will have different focus, stage, etc., there are many instances where they will give money to people who have nothing more than a powerpoint, a cocktail napkin, sky-writing, whatever.   Some of those who get funded have no professional track record to speak of, with unproven models, unproven businesses.  (!)  Think for a second how crazy that sounds.

Image by Sentience via Flickr

Here’s how crazy I think this sounds.  When I was a wee pup growing up on the farm in Latrobe, we once needed a new well.  (Ours had run dry, and we were literally out of water.)  We called up the well digging people, and out they came.  Their gear consisted of a huge drilling type rig to drill the well, and a ‘diviner,’ a guy who figures out where to drill.   The diviner walks around holding a Y-shaped stick by the Y’s ends in his hands.  The bottom of the Y-shaped stick, the theory goes, will point down to the ground when he walks over a spot in the earth where there is water.  I’ve not yet seen any scientific explanation for why this exists.  All I can tell you is that it worked.  Within about 15 minutes, he’d identified 2 spots, and he suggested one that hasn’t run dry in the 20 years since that well was drilled.

So that’s a cool story, but the epilogue is what’s relevant to this.  After the drill diggers had left, my dad, an entrepreneur in his own right, shook his head and asked “could you imagine those guys going to a bank looking for a loan?  Their pitch would be: ‘we find water using a stick!'”

If the water finding stick guys showed up on to VCs, VCs would at least want to see a demo before telling them they were crazy.  Every other institutional money source would likely just throw them out of their office.  Remember that.  I remember that and think it’s pretty awesome that I live in the US where there’s a whole industry of folks who will do that.

Image via Wikipedia

3. “Its not summer camp.” I once worked on a turn-around situation in business.  It had a bunch of difficult people issues involved.  My boss at the time and I were talking about some of the moves, and whether the team would be comfortable with all the changes.  My boss said something that I say a lot on this topic: “It’s not summer camp, Jay.”  He meant it both for me and for the team, and he meant that I needed to get tough, and the team did as well.  And he was right–we’re responsible to share holders, customers, employees, etc.  Getting a VC involved does not mean that we all spend time making hot cocoa and gazing lovingly into each others eyes.  It’s a business transaction, and founders need to deliver.  You’re not in summer camp.

Now, with that said, know that there will be days that stink.  Investors will move goal posts or get squirrelly.  Commitments won’t quite be met in the way that we might have thought.  Etc.  And you can get embittered, or you can pick yourself up and realize point one and two above–these guys are the money, and they’re funding water-finding stick businesses.  On the whole, with whatever else goes south, I feel generally pretty lucky to have the opportunity to work with smart people to build a kick ass business.

So those are my 3 key perspective points that I’d share as you think about building your business and working with VCs.  Its high level, but I find these 3 points useful to remember.  Stay tuned for Part II, where we talk more concretely about how to run a diligence process on vetting and double checking the investors you might be workign with .

Founder’s Tips: The Forbes 400 Test for Ideation

This week, I had the opportunity to speak on naming / branding as a Mentor at Adeo Ressi‘s TheFunded Founder’s Institute on Naming & Branding.  (I may post slides in an update, depending on permissions.)  The presentation went very well.

One of my favorite things about Silicon Valley and about the Founder’s Institute in particular is getting the opportunity to meet and interact with so many founders and entrepreneurs, people taking big risks to bring something new to the world.  It’s hard hard work, and the people willing to truly put in the time and focus to make the world a better place are worthy and interesting–whether their idea wins or loses in the marketplace.

After my presentation on Tuesday, I had the opportunity to catch up  with a number of the founders participating in the Founder’s Institute.  A lot of passionate energetic folks, working through the process of starting a company.  As I reflected on my conversations, one theme we discussed was around the idea and how I think about them.  Trip Adler, who spoke at the Founder’s Institute a few weeks ago, talked in his session about ideas, and different philosophies and strategies on this.  Y-Combinator‘s Paul Graham asks teams to build something people want–a good idea, simple and hard to do.  Trip suggested other approaches as well–e.g., build something that fixes a problem of yours, adapt a successful business idea in one sector to another, etc.  These are all good and useful.

For me though, I  think its important to be able to cross-check your idea for ‘bigness.’  Starting a company is a big risk. To justify the opportunity cost of taking such a big risk, in my mind, the idea also has to be big.  Most seem to go through the work of sizing and scoping the bigness of the idea by doing market research, looking at industries, etc.  That’s good to do.

Image via Wikipedia

I make one addition though, and that’s what I call loosely the “Forbes 400 test.”   The Forbes 400 is a list of the wealthiest 400 people on earth, and what they’ve done to earn this money. Every year, I read this list, but not in the way you might think.  I’m not reading it to learn about wether Larry Ellison or Paul Allen have a bigger yacht.  I’m not really interested in the bling, although there’s a picture of Paul’s boat Octopus, rumored ot have a crew in the hundreds, including 15 ex-Navy SEALS.  What I get from reading and studying the list is an intuitive sense of what an idea needs to be in order to be large.  Think about it.  Many of these folks created entrepreneurial businesses that have been massively successful, based on big ideas.  When I pattern match thos ideas, I see ideas that are broad in scope and impact, while at the same time being simple to understand as a value proposition.  (Think Wal-Mart–‘we sell for less.’)  For me, spending 45 minutes, reading up on these folks and then looking back at an idea is quite grounding.  It helps me assess whether my idea would ever have an opp

ortunity to be that broad in scope and a value proposition that simple.

I’m not saying you need to aspire to be on the Forbes 400 (I don’t begrudge you if you do!).  This is purely an exercie to cross-check your idea at an intuitive level.  I’d argue that your idea had better be big to justify doing it.  Reading about the folks who’ve started some of the biggest entrepreneurial waves on earth is a good way to get your mind oriented towards whether your idea could ever stand on that stage.

Those iPhone App Store Revenue Numbers

TechCrunch and Lightspeed Venture Partners this week worked on estimating Apple’s revenue gained from the iPhone App Store. 

The discussion struck an odd note with me for several reasons.   A far more useful analysis would be what percent of mobile (and other) application developers are building for Iphones, to the exclusion of others.  Understanding this will say a lot about APple’s continuing momentum in this space.  I am willing to bet that Apple likely has a huge number of mobile developers building for the Iphone, and where they need to make a choice, I expect they’ll likely fall in with Apple.  This is a way more important discussion than Apples’s revenue of the App Store for a few key reasons. 

First off, I’d view the strategic importance of the iPhone App platform as far higher priority to Apple than the revenue.  Don’t get me wrong, the revenue is great, but its way way way more important that Apple gets the share of the smart phone market (or whatever we’re calling it these days).  Having app developers building for your platform, because (1) lots of users use your device and (2) the developers themselves can make money will help ensure the Iphone stays competitive.  So far, Apple is basically crushing this, leaving all other mobile “app stores” in the dust. 

Second, the Lightspeed Venture post and TC’s reporting on it took an admittedly shallow view of revenue.  Lookingat pay versus free apps only on the Iphone App Store is a good proxy for now of where revenue is.  I expect it misses however the virtual currency buys that are able to be sold downstream (e.g., Zynga NLHE).   Point here is that the revenue and profit pool in the ecosystem as a whole is likely quite a bit higher than jsut the free/paid app numbers that Liew estimates. 

Third, if you buy into the first two arguments I’m making, then I think the interesting discussion here is how many developers are targeting Iphones versus other platforms?  My suspicion is that as the Iphone apps are presenting a clear route to revenue and profits for small teams of great developers, that this is ramping up quickly.  If this fact brought *zero* revenue through an app store to Apple, it would be worth it to Apple—to quote SteveB “developers, developers, developers.”  That Apple is making high margin revenue off of these Apps is of course awesome for Apple, kudos too them. 

The iPhone App numbers whatever they are, are awesome.  I’m hopeful though that we’ll soon receive good data indicating the mindshare and actions that great developers are taking in terms of which device/platforms they’re spending time writing for, as that’s the discussion that to me is most interesing

 

 

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.

Related articles by Zemanta

• Google spotlights news timeline, labs work | Webware – CNET (via FriendFeed) (news.cnet.com)