How to Effectively Use Mailing Lists to Update Mentors, Team, Current and Prospective Investors On Your Startup

This post originally appeared on Thoughts on Tech Startups and Venture Capital.

Mailing lists can be a simple yet powerful tool to set cadence and keep people up to date on your progress. The advantage of having several mailing lists is that you can share the right kind of information with the right group, and choose the right cadence for each.

List for Mentors

Mentors are a handful of people who are close to the founders, but aren’t involved in your business day to day. Use this list to deeply engage mentors and help them help you.

The mentors list is particularly handy when you are going through a mentorship-driven accelerator like Techstars. Since most accelerator programs are three to six months long and you are trying to get a lot done, weekly cadence for these emails will ensure that you can get the most out of the mentors. After you are done with the accelerator, sending an update once a month is sufficient.

The key thing in the mentor update is to ask for help. Explain what you are struggling with and put down specific asks for how people can help you.

In order to get better response, use @specificmentorname through the email, so that asks aren’t generic but addressed to specific mentors.

Consider including the following in your mentor updates: Shout outs – thank specific mentors for their help, update on KPIs and milestones, short list of non-quantitative wins, struggles and asks and a short bullet list of upcoming goals.

List for Your Team

When you are starting the company and there are only a few co-founders, it seems like everyone knows everything that’s going on. It is, however, a good practice for the CEO to send regular updates to the team, even if you are just two people.

Early stage startups should be setting goals and making progress every week. Having a weekly update email along with the weekly meeting and weekly goals will help your team get aligned and execute.

Once your company grows and scales, you can switch the cadence of these emails to monthly and later on quarterly.

The content of the email should be similar to the mentors email. Include shout outs and thank you’s to employees who did a great job, summarize KPIs and wins, explain struggles, ask for help and set new goals.

Lists for Investors – Current and Prospective

Use one mailing list to keep your current investors up to date. This is absolutely critical and we’ve previously written a separate post explaining why this is important.

In addition, you should have a separate list for a group of investors who said they want to be updated on your progress. This is particularly critical for raising a series A and beyond, and is handy in slower funding environments since investors are more hesitant to commit.

Mark Suster, in his classic post, explains it best. He says that later stage investors want to invest in lines, not dots. That is, they want to get to know you, want to see your progress and want to get more conviction that you can execute.

A great way to prove your worth to investors is to show them how you execute over time. If the investor asks to keep them posted, ask if they want to be on your updates list.

Since these folks are prospective investors, name the list something simple, like updates@company. Send these updates every four to eight weeks, but not more often than that. For a later stage company, consider sending them quarterly.

The focus of these updates is your progress against your KPIs and milestones. You are showing that you can set the goals and, hopefully, achieve them. It is also important to be candid about your struggles. You aren’t necessarily asking for help, but you are not just delivering the good news.

Expect that prospective investors will reach back out with questions. If you are hitting it out of the park and numbers keep growing, expect that investors will want to meet again and potentially propose to invest.

We’ve seen this simple system of engaging potential investors via a mailing list really work. Remember that like any list, there is a social pressure. An investor knows that there are other investors on the same list who are getting the updates, and feels compelled to act if they are interested in your business and you keep growing and executing well.

More Lists to Help You Communicate

The four lists we talked about above – mentors, team, investors and prospective investors are the basic lists that all startups should setup.

In addition, you can, of course, use lists for other communication. For example, you can use a news@ mailing list to update friends of the company – anyone who is not a mentor or investor but you want to keep updated.

Once you have a formal board of directors, which I highly recommend you set up after you raise a seed round, create a separate mailing list for the board. The investor list is a broader list that would include all investors, but a board list would include just the board members. This is part of effective board management that we covered in this post.

Basic List Maintenance

Lists can be a very effective way to help you manage your communication with your team, mentors, investors, etc. Be sure to clean up your lists and keep them up to date. Be clear and be careful who you are sending information to and why.

Keep your updates formatted and short. People don’t have time to read lengthy updates. Lead with essentials.

Be direct, ask for help, engage and build advantage for your startup through simple mailing lists.

 








Funnels for Startups: A Primer

This post originally appeared on Thoughts on Tech Startups and Venture Capital.

Funnels are remarkably useful in many aspects of startup life.

Whether you are trying to get users to try your product, or sell to an enterprise customer, or hire an engineer, or raise capital, you are dealing with a funnel.

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Funnels are essentially inverted pyramids that are divided into stages. The objective is to move through the funnel from top to bottom, while trying to lose as little as possible in each stage. 

In other words, a perfect funnel would be – you talked to 100 companies, and every single one became a customer, or you talked to 20 investors and all wrote you a check.

Perfect funnels basically don’t exist in real life, that’s why we are going to talk about strategies and methods for getting to as close to a perfect funnel as possible.

Rule 1: Optimize Funnels Bottom Up

Here is the first and most important rule of any funnel:

Optimize funnels bottom up.

Why? Because it is too costly for you to add leads or potential customers or investors to the top of the funnel, spend all the time moving them through the funnel, only to find out in the end that they won’t close.

Picture this – a massive bucket of water. You keep pouring a ton of water, but it doesn’t fill up because there is a hole on the bottom. 

Leaky buckets, or funnels that aren’t tuned on the bottom, are a waste of your time.

First, you make sure the bottom of the funnel is solid and then you work your way back up through stages.

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For example, if you have a conversion funnel to get people to download your app, but there is a bug in your on-boarding process, then you have a leaky bottom – no point in trying to get more users to come to your site. You need to fix on-boarding first.

Another example, you had 10 customers in a later stage of the conversation for an enterprise sale but they all said no. Why? Apparently your product doesn’t pass their security requirements.

Another example, you have two to three meetings with investors, and they keep passing and saying you are too early.

Being able to close is critical, so you want to make sure you really understand what closing would require and how to optimize the bottom of your funnel.

Rule 2: Understand Conditions to CLOSE

While you can’t be positive that a customer will buy or an investor will give you a check, you can reduce the risk of not closing by qualifying your leads, actively communicating and using reflective listening.

Here is a powerful technique – imagine a sale already happened. Imagine an investor wrote you a check. Imagine you have a lot of engaged users actively using your product.

Now ask what must have happened? What conditions must have been true? 

With that in mind, construct a set of questions and a check list to help you confirm that you are on the right track.

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For sales – make sure you know the economic buyer, a decision maker, confirm there is an intend to buy, understand the timeline, the budget, criteria for success of a trial, and all other things that need to happen in order for a sale to occur. Ask about the process, but most importantly fully understand the end game so you can win it.

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Similar with investors, ask about their process in advance, ask about the check size, if they invested in competitors, if they intend to make more investments this year, ask if you are a potential fit, which partner would be working on this and ask them right away what their concerns are and how you can address them.

Rule 3: Tune One Stage of a Funnel at a Time

Once you spent time optimizing the bottom, and have more confidence about closing, work your way up one stage at a time.

This is another really important rule – don’t try to optimize across all stages of the funnel at once. Focus on one stage at a time.

Focus on one stage, and try to improve the drop off by a little bit. Set a small goal and hit it. For example in the picture below, try to improve drop off between Meeting and Trial stage by five percent. If you succeed in tuning it, do not stop – keep going.

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You should focus on tuning the same stage until you can’t tune anymore. Then move off to the other stages of the funnel and repeat the tuning.

Below is an example of how DigitalOcean (Boulder ’12) was able to dramatically improve their conversion funnel, by tuning one stage at a time.

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Tune each stage of the funnel as much as you can, starting from the bottom, and work your way up.

Rule 4: Use Actions and Nudges to move through Stages

So, how do you actually tune the funnels?

In general, it depends on whether you are working on the product or doing sales or raising capital.

One common strategy in all of them is a Nudge to take an Action. A Nudge is an explicit ask for a user, a customer, an investor to take an Action.

  • An action is something a user, a customer or investors do
  • An action causes movement from one stage of a funnel to another
  • Nudge is something you do to cause the action

For example, a nudge for a web site could be as simple as copy – please sign up to get our updates. Or another similar example of a nudge could be a logos of customers or press articles — sign up because we are awesome. In this case sign up is an action we want a visitor to take. If we succeed, then the user moves to the signed up stage.

Another kind of nudge would be an email announcing a 50 percent sale on all sweaters. The expected action is a click followed by a purchase of a sweater.

Yet another example of a nudge would be informing a VC that you have a term sheet from another VC. The action you are looking for is to get a competing term sheet.

Rule 5: Figure out Stages of the Funnel

The next thing to understand about funnels is that they are ALL DIFFERENT and have different shapes and stages.

When someone is new to sales, they’ve heard about finding leads, qualifying them, setting up a demo, doing a trial and then closing.

A generic sales funnel is likely actually wrong for every single company.

The actual sales funnel has a lot of nuances, and captures the sales process specific to each company, and sometimes even to each customer. It is fine to start with a generic funnel, but very important to quickly recognize where and why it is wrong and tune it.

For example, when you are pitching a venture firm, the process is literally different for different firms. Some have you meet with associates, then one partner, then two partners, then ask for diligence, then have you present at the partner meeting.

Other firms have a different process – meet with associate, then do initial diligence, then meet with one partner, then do deeper market diligence, then meet with two partners and you don’t need to present to full partnership.

If this sounds confusing, it really is, and thats why it is so important to ask in advance what is the process for each firm.

Activation and Retention Funnel Tips

We will now look at some specific tips that apply to different types of funnels.

If you are running B2C business, you need to master Activation and Retention. Activation typically includes getting a visitor to sign up and explore the product. Retention is focused on bringing the users back and making sure the user continues to use the product.

Activation:

  • What does the user do right after they sign up?
  • What do they do the first five minutes, first day, first week?
  • What is the hook that will get them to come back?
  • What are the key Nudges?

Retention:

  • When and why would the user come back?
  • What are the key Nudges?
  • What do you expect the user to do?
  • How often do you expect the user to comeback?

B2C Churn and Magic Moment Tips

Churn occurs when a user stops using the product. Since it typically costs money for most businesses to acquire users at scale, businesses with high churn aren’t viable.

The Magic Moment is a state such that if a user hits this state, there is a very high likelihood that the user will remain a user in the future and won’t churn. 

More precisely, if the Magic Moment is reached by N users, then for this group of users, and each such group, Life Time Value – Cost of Acquisition equation results in a viable business.

For example, Facebook discovered that once a new user added 20 friends they would stay. The reason was that friends would generate content that would help pull back the new user. Facebook benefited from discovering their Magic Moment early on and tapping into massive Network effects.

To sum it up, the Magic Moment helps us create a viable business. We have covered the Magic Moment in depth in a separate post.

Sales Funnel Tips

Sales are the bread and butter of B2B and are pretty well understood. When you are starting a new company, you don’t know in advance what YOUR sales funnel will look like. Once you become a real business, you will have a lot of predictability and control over your sales by mastering and optimizing your sales funnel.

Here are some important things to consider with your sales funnels early on:

Qualify Leads: Come up with a checklist to qualify your leads. Disqualify quickly.

Define your funnel: Guess stages of your funnel. Make it specific and unique. Iterate as you learn more about your customers. If you are struggling or have a big drop off, you may need to add a stage / nudge.

Use reflective listening: Ask about the process in the beginning, and confirm your understanding at every stage, every meeting.

Create predictability: As you optimize your funnel you should be able to get better and better at forecasting.

Kevin O’Brien, sales veteran and CEO of GreatHorn adds these specific tips:

  • Establish your target persona; building the top of your funnel, typically what marketing will provide into a sales organization, requires that you clearly understand the title, role, responsibilities and challenges facing your buyer.
  • 67 percent of the buying process happens digitally. This is often mis-cited as “before sales speaks to a prospect” — don’t fall into this trap. Instead, generate strong content that maps to your target persona’s needs, incorporate strong metrics and tracking into your site, and follow-up when a potential buyer is engaged. Filling the top of your funnel with website visitors for whom you have no follow-up strategy won’t generate business.
  • Have a clear progression that aligns with how your target buys what you offer. At GreatHorn, ours is designed around simplicity: Discovery -> Qualification -> Proof of Concept/Trial -> Procurement -> Close. A common mistake is to have far too many stages in your sales process; ideally, your funnel stages should mirror the buyers’ experience of learning who you are, what you do and how you can help them.
  • Mercilessly track your conversion percentages between stages. How many website leads become discovery calls? How many start trials? Are you converting 20 percent of trials to close, or 80 percent? You can optimize a sales funnel in two basic ways: by generating more top-of-funnel activity at your current conversion rates, or by improving conversion at the middle- or bottom-of-funnel stages.
  • Get out of Excel. Your marketing stack and sales CRM should be tightly integrated, enable automation and metrics, and should generate actionable stats easily. If you need more than two minutes to determine your total funnel, forecast or strongest content pieces, invest time and resources into better tools — technology doesn’t sell for you, but it’s one of the few things you can directly control that can block you if done poorly.

B2B Churn and Magic Moment Tips

B2B churn happens when a customer cancels or doesn’t renew contract. 

B2B businesses with a lot of churn typically have have Cost of Acquisition > Lifetime Value and are not viable.

The Magic Moment in the B2B world isn’t a sale, it is usage of the product.

Products that aren’t used eventually churn all of their users. The customer success function in the B2B world is tasked with ensuring high satisfaction and low churn, but of course the product needs to be awesome to begin with.

Pay close attention to customer satisfaction, renewal and churn. Even costlier than not closing the sale is to close the sale of a product that won’t be used. Use analytics to obsessively track usage of your product, and use nudges to help customers get the most out of it.

Investor Funnels Tips

We’ve written a lot of posts here on the topic of fundraising. To succeed, the founders need to prepare, execute on the business, get in front of the right investors and walk through the Investor Funnel.

Here are some key things to consider:

Setup your investor funnel: Create spreadsheet or use another tracking system to setup your investor funnel. We covered it in details in this post.

Pre-qualify each investor: Before engaging, figure out if this investor is right for you. Are they interested in your space? Are they actively investing? Have they funded a competitor? Is their check size appropriate for your stage? Do they have bandwidth? Make sure you are clear about all of this in advance. Here are the questions you should be thinking about.

Understand the process: Ask investors about their process. Ask during each meeting what the rest of the process is like from here. This allows you to keep track and keep refining your funnel.

Use reflective listening: Use reflective listening to confirm that you understand what’s being said. Avoid happy ears. Accept a NO, don’t accept a MAYBE.

Understand how to commit: Commit investors and understand conditions for each commitment. Read this post on how to commit investors with confidence.

Funnels are really important in all aspects of startup life. There is a lot more to them, but hopefully this post is a good starting point for you.

And now please share tips and tricks that worked well for YOUR funnels.








6 Ways Startup Founders Can Deal With Extra Stress

This post originally appeared on Thoughts on Tech Startups and Venture Capital.

Recently, I came home from work at 10pm, opened the door and immediately heard my wife say how stressed she was.

Her pharmaceutical company recently bought a biotech startup for a lot of money, and my wife is leading a very tough integration project. She works super hard, all the time, and is still behind on things.

The truth was that I was really stressed too. After my wife finished complaining I complained right back.

In general, running a Techstars program is super intense and stressful. This winter, though, just feels unusually challenging and demanding at work for me as well. I am behind on projects, concerned about not doing my best with founders, feel more tired and more stressed.

On Friday morning, while driving to work, I was trying to dig deeper to understand the cause of our stress. Suddenly it hit me – subconsciously, me, my wife, all of our family, friends and co-workers are way more stressed because of political instability in United States. Regardless of the political views, the stress caused by politics on Twitter and CNN combines with the typical stress at work, and amplifies.

As soon as I recognized this I felt better. In general, I’ve been good at self-introspection, de-stressing and identifying causes of my stress and addressing them. I think this is an important quality particularly because when dealing with startups, the stress tends to be extreme. 

I want to share tips for how to deal with founder stress, which tends to be amplified nowadays.

1. Recognize That You Are Stressed

The first step in dealing with stress is recognizing that you are stressed.

Do a self check-in once a week on how you are feeling. Literally, put it on the calendar.

If you are stressed, think about the source. What exactly is stressing you out? Uncertainty about the future? Fundraising? Co-founders? Co-workers?

Whatever it is, figuring out the source of the stress helps address it better.

2. Get More Sleep

Whenever I feel really stressed, I go to bed.

Stress for me is typically combined with physical and mental exhaustion. To deal with it I go straight to bed. I’ve never had a situation where I didn’t feel better after a full night of sleep.

The clog, and chemical build up of stress tends to wash out and get garbage collected during the night. We are all sleep deprived these days, especially founders, so extra sleep really helps.

Conversely, lack of sleep, and repeated stress causes people to malfunction. Literally, our brains don’t work well under repeated stress, and can we can’t think straight. Ongoing sleep depravation and stress can lead to permanent brain damage, so be sure to catch up on your sleep.

3. Take a Regular Vacation

Brad Feld has a rule of one week off the grid every quarter.

While you, as founder, may not be able to afford this, there is no reason why you can’t take at least one weekend completely off every few months, and take a week off twice a year.

Plan vacations ahead of time, and don’t ignore them. You always comeback refreshed, and ready to go. Give your body and mind the break it needs and deserves.

4. Eat Better and Drink Less Alcohol

This one is really important, and often founders get this exactly backwards. Startup culture is a culture of unhealthy foods, snacks and drinking. All of these tend to compound stress. Make an effort to plan your meals and to cut out alcohol. Healthy food leads to a less clogged and less stressed body.

Alcohol seems like it relieves stress, but it really doesn’t. I was drinking to reduce stress when I was running my second company, and developed an addiction. It was pretty bad, as I would drink, a lot, every single day.

I quit cold turkey over 3 years ago and never looked back. If you are founder and catch yourself drinking daily, be mindful that this is a response to stress and can turn into an addiction.

5. Exercise & Meditate

Regular exercise is an awesome way to release stress.

Personally, I do yoga, running and strength training, and try to exercise every single day. By trying to exercise every day, I end up exercising 5-6 days a week.

I exercise first thing in the morning, because I realized that if I don’t do it then I won’t get to it at all. Any sort of exercise (at a gym or participating in sports) is a great way to destress. Figure out what works for you and commit to it. 

Meditation is one activity I’ve not been able to incorporate into my daily routine yet.

I’ve tried meditating a bunch, but never stuck to it. Many investors and founders do it and find it extremely beneficial for mindfulness, and stress relief.

Similar to sleep, during the meditation, the brain tends to relax and clear out the clogs and stress that’s building up. Just ten minutes a day can make a massive difference in how you feel.

6. Have a Routine and Plan Your Calendar

As you probably know, I am a massive productivity nerd and do a lot of scheduling and planning.

Uncertainty in the schedule causes stress. Startups in general are chaotic, but sometimes total chaos leads to stress.

You need to own your calendar and plan time for everything – meetings, work, email, family time, exercise — everything you do should be planned and mapped out onto a calendar.

Planning helps you clearly know what to do next and it helps you to reduce the stress.

Please share your tips for reducing stress with our readers!

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30 Questions Investors Ask During Fundraising

This post originally appeared on Thoughts on Tech Startups and Venture Capital.

We’ve written a lot here about fundraising and how it is a complicated, and at times, confusing process. To fundraise effectively you need to prepare and have a strategy, understand different types of investors, understand how much to raise and create an investor pipeline.

We also talked about a fundraising deck and how you put it together. In addition to the deck, it is helpful to prepare answers to typical questions that investors tend to ask.

Below we discuss the typical questions you will hear from investors and discuss how you might go about answering them.

1. Who are your customers, and what problem are you solving for them?

Investors are looking for a simple and clear answer of who you are selling to. They also are looking to understand how clearly you know the pain point, and how big of a problem it is for the customers.

This question also opens up a conversation about founder-market-fit, as well as helps investors think about the size of the opportunity.

2. What is unique about your solution? What is your unique insight?

Investors want to understand how you are proposing to solve the problem, but more importantly, they are looking if you have unique insight. Has anyone else thought about this before? How is it different from other solutions? Do you have a secret?

Seriously, investors want to know this because the more differentiated you are, the more defensible the business might become in the future.

3. How does your product actually work?

Investors naturally want to see the demo of your product, because a demo is worth 1,000 words. A lot of investors want to fund product-obsessed founders – founders who get lost in details of the product, who are super thoughtful and nerdy about features they built, and really understand customer needs.

Always show your product to investors and make the demo awesome.

4. What are your KPIs? How do you measure growth? How do you know you have product market fit?

What numbers do you use to drive the business? Lack of clarity or hesitation is a major red flag for investors. If you as a founder aren’t clear about your metrics or not measuring the right things, investors won’t believe that you can grow the business.

Investors want to make sure you understand and measure your conversion and sales funnels, activation, retention, magic moment, churn, CAC, LTV, etc. Investors want to know how you think about KPIs, look at your dashboard and understand how you think about growth.

They will likely dig in on how you think about attaining product market fit as well.

5. What is your traction to date?

The question of traction is really two-fold. First, investors are literally asking what is your traction. Second, and more important, how do you define traction?

Many founders mistake progress or effort for traction. On the other hand, investors think of traction as revenue and paying customers or significant growth in weekly and monthly active users.

6. What is the size of this opportunity/total addressable market?

How big is your market – a question that matters to a lot of investors. Why? Because VCs economics force them to only focus on very large markets. VCs look for big markets with lots of money so that when they own 20 percent of your business, they get a meaningful amount to return all or a portion of their fund when you exit. Otherwise, they don’t make money.

In addition, investors expect you to size accessible markets and do the calculation bottom up. Too many founders say they are in $1BN+ markets without realizing that, because of their business model, they can’t be addressed.

Spend time sizing up your actual addressable market using your pricing and growth projections.

7. What are your CAC and LTV?

This is another typical question that investors ask founders during each round of financing to establish how fluent they are in the business.

In the early days, founders are expected to know the terms and have an idea of what the numbers are, but it’s fine to say that you are early, and the numbers are likely to change in the future (typically CAC goes up and LTV goes down).

The cost of user acquisition conversation leads to the conversation about channels, marketing and advertising spend. If you are B2B company with direct sales, you will talk about cost of sales and how it will change at scale.

Life-time value of the customer is equally important. How long does it take to pay back the amount it cost to acquire this customer? How much money will you make on the average customer?

The LTV conversation touches on churn, revenue per customer and enables investors to understand how you think about your whole customer lifecycle.

8. What is your business model?

Naturally, investors want to understand how you make money. They want to know who your customers are and how are you planning to charge them. This question combines not just pricing, but strategy and tactics. If you make money indirectly, via advertising, they would then focus on how your acquire customers.

If you are a marketplace, the conversation turns to whether you are going after supply or demand and the incentives to be on the platform. What will be the expected average revenue per user? Will you have recurring revenue? All these questions get explored when investors ask about your business model.

9. How did you come up with your pricing?

This is probably a less common question in the early stage, but it is an important one. Investors are looking for you to demonstrate that you’ve done customer research and competitor research. They are also looking for you to acknowledge that you are early and the pricing is likely to change.

In addition, if you are currently free or have a free tier, investors will look to understand when are you planning to get rid of it and what the implications will be.

10. What are your unit economics?

Unit economics give essentially an inductive case for your business. For example, for Uber, a unit would be either one ride or one driver, depending on how you model it.

The key thing in unit economics analysis is to capture all associated costs and revenues and then see if you are actually making money. Some startups have poor unit economics initially and say they will optimize costs later.

Many investors, however, are now weary of this approach because as you scale, new challenges and new unforeseen costs may arise.

11. What is your go to market strategy?

The go to market strategy question is a really important one and is often misunderstood. Investors ask this typically when founders say that their product works for everyone. Investors are skeptical, as experience says that focusing on a vertical or a segment is typically better.

For example, if you are building developer tools, you could initially focus on freelancers and individual developers. Then once the product is solid, you can move upstream to mid and large enterprises. Tesla had the opposite strategy. It first made a high end car and has been moving downstream.

You can also focus on a specific vertical. For example, if you are a security software provider, you can first focus on insurance companies or law enforcement agencies. Having a focus narrows down the opportunity but allows you to really perfect the product and sales.

When talking about your go to market, investors are really looking to understand your strategy and why you think it will work.

12. What are your customer acquisition and distribution channels?

How are you planning to acquire customers? In the consumer world, you have paid and unpaid means. You can advertise or you can use content marketing, social channels and word of mouth. Investors want to understand how deeply you understand your channels.

The challenge is that most obvious channels often do not really work or aren’t cost effective. That is when you start your CAC via Google or Facebook ads is just too high. Investors are looking to understand if you figured out a growth hack / have an insight on how to acquire customers quickly and efficiently.

In the B2B world, investors want to know if you have an unfair advantage, like you’ve worked in the space before and have a rich rolodex. They are looking to understand if you are able to secure key partnerships that can help you distribute the product faster and win the market faster.

13. Why now?

This is a question that often goes unasked, but is certainly on the investors mind. Timing is everything, and really understanding why now is the time for your company to win is important. The VC industry is full of examples when something was too early or too late, and as a result, it didn’t work or didn’t get as big.

Before Facebook, there was Friendster, before Google there was Alta Vista. Even Uber wasn’t the first company to think of on demand rides, and AirBnB wasn’t the first company to let people host people in their apartments.

Before the current wave of VR and AI, there were at least 3 other waves. Why do we believe now is different? Why do we believe now it will actually happen? Some argue that we finally have enough cheap computing power and have evolved other key technologies necessary for VR and AI to go mainstream.

When investors are asking “Why Now?”, they are really asking about conditions of the market, context and state of society – dozens of factors that will make a difference between success or failure this time around.

14. Why you? What is YOUR Founder-Market-Fit?

We’ve written here before about the importance of Founder-Market-Fit and how most investors pay close attention to it. Investors don’t want to fund accidental founders. They want to fund people with deep domain expertise, massive vision and passion. Investors want to get to the bottom of why you started the business – do you have unique insight and unfair advantage?

15. Where did you grow up? Where did you go to school and work?

In addition to understanding if you know the space, investors want to understand if you are resilient and smart. The question about where you grew up is really a question about how hard you have had to fight through your life to get to where you are. If you grew up in a well to do family where you didn’t have to struggle, investors may not be as excited about funding you compared to, let’s say, an immigrant.

There are no hard and fast rules of course, but the environment you grow up in often defines your level of resilience. When things get difficult, and they always do, will you walk away? When you get knocked down, will you get back up?

When asked where you went to school, people look to see if you went to a top school, what you studied and what you learned. Sometimes this conversation leads to a common connection. Sometimes it is just a starting point for learning more about you. Investors are looking to assess your level of intellectual curiosity and honesty.

16. How did you meet your co-founders?

This is another interesting question that doesn’t have a clear cut right answer, but is telling to investors. If you say you met at a hackathon 3 months ago, what you are saying is that you don’t really know each other well. Investors may think that the connection between you and your co-founders isn’t solid. If you are saying that you’ve been friends since high school, investors know that you trust each other.

However, they also know that you haven’t worked together. Friends don’t always make the best business partners, and startups have ruined thousands of friendships.

Most likely, investors are looking to hear that you worked together before, ideally in another startup and ideally for a while. This would imply that you get along socially, but more importantly, you can make things together under a stressful environment.

17. Who are your competitors and how are you different?

We’ve written here before how to think about competition. Investors are looking to understand how knowledgable you are about competitors and what is different about you. If you say you don’t have competition or if you bad mouth them, it is a red flag. Simply acknowledge competitors, and highlight what they are doing well. Explain how you are different and why.

18. What is your vision, your true north?

Some founders stumble on this question and this is a red flag for investors, particularly for VCs who want to back founders with big vision. What do you want your company to be in 10 years? This question reveals not only how you think about the business long term, but whether you plan for it to exist a decade or more. If your plan is to sell quick, you won’t have a broad long tem vision.

Similarly, a question about your true north is an important one. It reveals what you aren’t willing to compromise on. Great companies are always flexible on their path, but not flexible on the destination.

19. What milestones will you achieve with this financing?

We touched on this topic in our How Much Capital Should You Raise post. This topic is complex and founders often approach it with a naiveté. A typical answer might be expressed in terms of specific product milestones and scaling of the team. This is not what investors are looking for. They want to understand tangible business milestones you will reach with the capital you are given.

There are really two outcomes investors are looking for – either profitability, which is very rare in early stage startups, or the follow on financing. That is, investors are asking if you get funding and then execute and hit specific milestones, will you be fundable again? For example, if your plan says you raise $1MM, and then grow 20 percent MoM to achieve $40MRR in 12 months, to you this may sound great, but to investors it is clear that it will not be enough to raise a series A.

It makes sense to really think through your milestones and where you want to land and why.

20. How much will you be burning per month?

This is a pretty straightforward question that follows from your financial model. A few things to pay attention too: a) Your HR costs should roughly be 70K-100K per head. b) Investors will look for clarity around advertising spend — in the early days, before strong product market fit you should not me spending a lot of money to acquire customers and c) Investors will look for any outliers, anything that jumps out as out of ordinary or unusual.

21. What will be your MoM growth in customers and revenue?

Another straightforward question based on your financial model. As a startup, you need to make a growth assumption. The trick is that you don’t have a ton of historical data to back it up. Whatever data you do have, include it in the model and explain it, because it helps establish credibility.

Also, avoid cookie-cutter 20 percent MoM year round growth assumption, as it may come across as sloppy. Really think through seasonality and other factors that may influence your growth. Do your customers pay you right away or not? Does your cash in the door trail booked revenue? Reflect all the nuances in the model and your revenue forecast.

22. When will you be profitable?

Historically, many of the best startups have reinvested their revenues into the business and sacrificed profitability in favor of growth. Since the financing market has become tighter, profitability is fashionable again. Becoming profitable is important for many reasons, but the main one is that it allows you to become self sufficient and control your destiny.

When you are profitable, you are no longer in need of external capital in order to survive. Investors are looking to understand how you think about profitability, and tie this to the conversation about your burn and the need for follow on financing.

23. Why is your business defensible?

VCs want to know what happens to your business over time. Assuming you can get a lift off, investors want to know what happens year 5, year 10, etc. Why? Because this is a typical horizon over which more successful startups go public or get acquired for a significant return. Long-term defensibility is difficult to predict. That’s why many investors look for natural monopolies, winner take all markets and businesses with network effects.

This is a complex and important topic that is less likely to be top of mind for the founders, but is certainly something investors are paying a lot of attention to.

24. What is your intellectual property?

If you are startup that is creating a new technology, investors want to know about your IP. Are there things here that can be patented? What is the true innovation in your business? While software patents haven’t been effective in recent years, depending on the type of your business and depending on what kind of investors you are talking to, IP can be an important topic.

25. What is your tech stack?

This question will be particularly relevant for startups that are working in AI, VR, dev tools and other areas that require deep tech. Some investors, particularly technical ones, will want to nerd out with you on your stack.

26. What are the key risks in your business?

This is one of the hardest questions investors will ask you – why might you fail? This question is a probe for a) how do you think about risks in your business b) do you acknowledge risks and c) most importantly, are you self-aware and intellectually honest. Great founders bring up and face risks head on. They don’t try to shove them under the rug and ignore them.

Risks vastly range from building incorrect products, to the market not being there and to key distribution deals falling apart. Whatever it is, be prepared to talk about risks and show that you’ve been deeply thinking about them.

27. Who is the natural acquirer for your business?

Investors aren’t likely to ask you this question, but they will certainly think about it. Investors are putting money into your business to make more money, and historically, since the IPO market is tight, most successful companies are acquired.

Although you have no plan to sell your company, it is good to think about who might bite in the future and why.

28. How much capital did you raise so far and on what terms?

This is a simple question – just tell investors exactly how much you raised, whether you did it on the note or via equity. Don’t stumble or hesitate, because that would be a red flag.

29. Who are your existing investors?

This is another straightforward question.

30. How much capital are you raising and what are the terms?

You should have clarity on how much you are raising based on the financial model. Depending on where you are in the fundraising process, you may not have the terms set yet. If you don’t have the terms set, then just say so – investors will completely understand.

 

And now please tell us what we missed. Share the questions that investors asked you during your fundraising conversations.








What To Do When Your Fundraising Is Not Going Well

One of the worst things that can happen to a CEO of an early-stage company is to be in the state of perpetual fundraising.

Here is how you can tell that it may be happening to you:

  1. You have been fundraising for a while
  2. You are fundraising and running the business at the same time
  3. You don’t have strong interest from investors
  4. Investors aren’t engaged / don’t ask a ton of questions
  5. Investors keep telling you it’s early / to keep them posted

The list can go on, but you get the point.

You are wasting your time because you aren’t prepared and the timing is likely off.

Please go and read my popular post about 9 seed funding gotchas and I will be right here when you come back.

Disorganized, prolonged fundraising is exhausting and harmful for your company and your personal brand.

So what can you do?

Here are some things for you to consider to help the situation.

Do the Gut Check

Be honest—are you really READY to fundraise?

Have you prepared enough, or are you going out too early? When you go to bed at night and think about it, like really think about it, are you really ready?

The best way to fundraise is not to go out early, but to first prepare and answer a whole bunch of key questions about the business and the opportunity.

Think about questions like: why are you the right team, why are you going after this opportunity, why now, how do you know this is needed, what are the early indications of product-market fit, what is the business model, what are the unit economics, how are you going to acquire the customers, what is the pricing, what will this business be like in three years from now, who are the right investors, why would they invest, how do you get in front of them, what will be important to them—etc, etc, etc.

The nerdier you get about fundraising, and the more prepared and disciplined you are, the higher the chance you will be able to get it done faster.

If you aren’t ready, pause, go back, prepare, read my posts on fundraising and particularly on building a deck and pipeline, and then go back to the market.

Build Investor Pipeline

Assuming you passed the gut check, and you really feel like you are ready, next assess whether you are able to get in front of enough qualified investors.

Like sales, fundraising is a numbers game. If you don’t have a strong enough pipeline, you can’t get to the finish line.

Every single NO should cause you to add 3-5 more prospects to the top of the funnel.

If you are early on in the process, particularly a first-time founder without a strong network, you will find that fundraising is taking a long time because you aren’t even getting that many meetings.

Your fundraising process is stretched over weeks and months, but you aren’t seeing a lot of investors. As a result, you obsess over every single opportunity, like a few conversations you are having instead of focusing on having a lot more conversations.

What you need to do is to pause and focus on filling up your pipeline with 20-30 new investors. Just keep filling the pipeline, but do not take the meetings. After you have the pipeline filled up, THEN go and pitch everyone. This strategy will help you get a real signal and have a chance at creating momentum in your round.

Understand Investor Feedback

Assuming you have enough in your pipeline and you are meeting a bunch of investors in a short period of time, you really need to understand their feedback. What is the reason that people are saying NO? Do you not have enough traction? Is the space not interesting? Is the opportunity too small? Is it something else?

Whatever it is, your job as a founder is to avoid happy ears, parse the feedback you are given and really take it to heart.

If you are early and don’t have enough traction, then you need to understand the milestones people expect and go build the business until you hit them.

Investors may tell you that they don’t believe in the market size, or in unit economics or in your customer acquisition strategy—whatever feedback they give you, whatever the signal is, go back and address it. Understand the pushback, do research, get data, execute and come back with a fix.

Also, know that there are more subtle things that people won’t necessarily tell you about. For example, investors may not believe in the founding team and don’t see strong founder-market fit. Investors may not like the space. They may have issues with well-funded competition. If the issue is more subtle, try to really figure out what it is.

The bottom line is whatever the feedback is, no matter how tough it is, go back and address it.

Pre-seed Fundraising Strategy

Now let’s look at specific strategies for types of financing.

Your pre-seed round is truly an idea stage. You don’t have a product and you may not have your team fully assembled. You are super, super, super early. Read this other post I wrote first.

If you are a first-time founder, focus first on your friends and family, people who really know you and already think you are great. Get at least a little bit of their capital, and maybe even your personal capital so that you aren’t at zero. Being at zero is the worst state.

Don’t spend any time with VCs at this stage; you are WAY TOO EARLY.

You can raise capital from angels, but the key things are to a) get a little first from friends and family, b) target the investors correctly, and c) figure out milestones.

To build a correct list of potential investors, talk to other founders and ask them who the pre-seed stage firms and individuals were that funded them. Research, research and research some more to build the right list, otherwise you will be massively wasting your time.

Only specific funds and individual angels invest so early, so your job is to find investors whose strategy it is to fund the companies at your stage.

Next, think through all the tough questions you will be asked. Do the gut check—do you know the market, the customers, competitors, etc.? The more fluent you are in the problem and the business, the higher the chance you will get the check.

Lastly, clearly define milestones you are going to hit with the pre-seed round.

A typical milestone at this stage would be shipping the product. A better one would be shipping the product and getting a few early customers. No investor wants to give you a check to support your burn.

Investors want to fund you to the NEXT MILESTONE.

In the case of pre-seed, the key question an investor needs to answer is what milestones will enable you to raise a seed round. That’s really the meat of getting the pre-seed check—articulating milestones and metrics that will get you to the next round.

Seed Fundraising Strategy

Everything that we said for the pre-seed applies to the seed round as well.

Keep in mind that the bar is now higher in the seed round. You can’t be pre-product; you need to know your customers and you will likely be expected to have early traction. The game overall is upped significantly compared to pre-seed.

In addition, since the amount of capital you are raising is larger, you need to spend more time on identifying more relevant investors and getting introductions to them.

In terms of targeting investors, start with angels and micro VCs and try to get a few hundred thousand committed. Don’t spend a ton of time early on talking to venture firms, as they take longer and most of them would still think you are early.

By getting several hundred thousand committed on the round, you will be able to create momentum and will have better chance of getting larger checks.

Start with small checks—get to 1/4 or 1/3 of the round then shift focus to larger checks.

Also, how much capital are you asking for? 1.5MM – 2MM may be too high. Review your financial model. Can you make things happen with 1MM? If so, revise your model to be more capital efficient.

It is always better to start lower and then, based on the demand, over-subscribe vs. starting high and never getting there.

Series A Fundraising Strategy

It’s really tough to raise Series A if you don’t have strong metrics. Some founders raise on a story, but they are either repeat founders or working in the hyped-up spaces. Most founders will need really strong metrics.

There are exceptions, but if you are already generating revenue, you will be judged by your a) MRR/ARR and b) MoM Growth. However, strong metrics alone won’t get you a check. Not in this market, anyway.

The dance to raise Series A involves identifying the right firms and identifying the right partners, then getting to know them and letting them get to know you. It will also involve a lot of guts and luck.

Clearly assess how much appetite there is in the market. You should have a gut feel.

If the demand is not there, cut the burn (you should do it anyway), and go back to building the business.

Focus on getting to profitability.

Get feedback from the investors on what your metrics need to look like and keep them posted every eight weeks or so. Assuming you are growing well and hitting profitability, the investors will likely be open to another conversation.

In conclusion, fundraising is stressful, complex and needs to be done thoughtfully or else it is extra painful and takes way too long.

A lot of founders get fundraising wrong.

Do not fundraise randomly and perpetually. By doing so, you are literally harming your company and your personal brand.

As the CEO/founder, have the strength to listen to feedback, understand that you are not ready, pause, regroup, improve and go back to the market.

And lastly, get help! Read up, connect with other founders and get 2-3 key advisors on board. You don’t have to do this by yourself.

 

Techstars helps entrepreneurs succeed. Interested in joining the worldwide entrepreneur network? Learn how.

Originally posted on Alex’s blog.








7 Tips for Raising Capital in a Slower Market

This post originally appeared on Thoughts on Tech Startups and Venture Capital.

We’ve talked a lot here about raising seed capital. Even when capital is readily available, fundraising is still not easy.

But today, the markets are cooler, and according to Crain’s and Alley Watch, early stage investment activity in 2016 in NYC is down compared to 2015.

We’ve written about the slowdown back in August of 2015. Lack of IPOs and liquidity in the later stage has a reverse domino effect on the whole investment ecosystem. The bitter election and uncertainty around the US and world economics and the future aren’t helping either.

As a result, we are seeing a significant slowdown and reluctance in seed investing. There are fewer angel investors, and those who do invest take much longer and invest much less. Similarly, Micro VCs are more cautious and take a lot longer to make decisions. What used to be two or three meetings to a check, now is five or six meetings to a MAYBE.

This market is not likely to improve quickly. Early 2017, and likely all of 2017 may continue to be slow and difficult for seed fundraising.

Here are some practical things founders can do to be successful in this new environment.

1. Raise Less Capital

Start by thinking about how you can do more with less.

If you previously planned to raise $1MM, can you revise your plan to accomplish the same with $700K? Most of the time, founders ask for arbitrary round numbers like $1MM or $2MM instead of the actual amount of capital needed to achieve specific milestones.

Think about what can you cut. Work to re-budget. Hire less people. Spend a little bit less on marketing. Get rid of your office space. Try to get hosting credits from Amazon or Digital Ocean.

Be creative and stingy. Spend time really polishing your financial model, and forecast, so that you can confidently tell investors why you are only raising $700K and why you know you can achieve the necessary milestones with less capital.

2. Lower Your Valuation

Very few things upset founders more than a low cap or pre-money valuation. Whenever most founders look at a term sheet, the only important term they see is valuation.

In reality, many other terms matter, and post-money valuation actually matters a lot more than pre-money valuation, because thats the true indicator of how much dilution the founders are going to have.

It is important for founders to realize that in a slow market, investors want a deal.

When there is plenty of capital to go around, founders ask for high valuations. When there is little capital to go around, investors push for low valuations. Investors want a deal.

Instead of being stuck on the numbers, lower the valuation and get your round done.

You thought you were going to raise capital on $5MM cap but investors want $3MM cap? Fine, agree to the deal. Yes, this is a lot more dilution, but you’d rather raise quickly on a lower valuation that not raise at all.

More importantly, if you crush it, there will be an opportunity for you to make up the dilution in the future financings. A year from now, when you may need to raise capital again, your numbers will be stronger and there is a chance that the market will be better as well. At that time you will be in a position to ask for better terms and you can compensate for the dilution you have to agree to now.

Simply put, you can get diluted 25 percent now and 15 percent later, or 15 percent now and 25 percent later and it is the same amount of dilution.

Sure, ideally, founders want less dilution now and later, but this is not real world, that’s not how markets work, and that’s not what investors want. Recognize the reality, give the investors a deal, and close your round faster. Also, raise less capital and your dilution will be smaller.

3. Meet More QUALIFIED Investors

We tell Techstars founders all the time – when in doubt, add more to the top of the funnel. This is true for both sales and for raising capital.

In the slow market, the shape of your fundraising funnel changes in two ways.

First, it gets taller. It will take you more meetings and more time with every single investor. What used to take two to three meetings to a check, may now take five to six. Be prepared and ask what are the steps, how long the process will take and what to expect.

Secondly, a lot more people will say NO in every stage, so it is important to triple the top of your investor funnel.

Fundraising, like sales, is a numbers game. You need to meet a lot of investors to get funding. Most say NO, because seed stage companies are super risky. Just be ready to get a lot of NOs, and keep finding new investors to talk to.

While it is important to talk to a lot of investors, this doesn’t mean you need to talk to every investor out there. Quite the opposite. You can only get funding from a qualified investor – someone who is interested in your space, someone who has capital to invest, someone who hasn’t backed your competitor. Research the investors to make sure they are qualified. Do not waste your time by trying to talk to every single investor out there.

4. Become Profitable

In the world enamored with venture capital, we rarely talk about profitability.

Yet, profitability for a startup is the most liberating thing that can happen. When you become profitable, you no longer depend on raising external capital.

Can you become profitable by closing a few more contracts, cutting expenses, and slowing down your growth? If you can, then this is the time to seriously consider doing it. If you become profitable you will be able to control your destiny.

A company that’s profitable is also more attractive to investors. It is less risky and it’s clear that the management team will spend the money responsibly.

Even if you aren’t profitable now, make profitability your next milestone. Instead of telling investors you will need to raise more money in 12 months, build a plan that gets you to profitability.

5. Get MORE Customers

In general, early stage investors are reluctant to invest because the companies don’t have enough traction. Real traction is revenue and paying customers. Get obsessed with sales and getting customers, not just fundraising.

Every single paying customer gets you closer to profitability, and to ultimate independence.

The more customers you get, the more convinced you are about the business and the faster investor dollars will come. Become your own toughest critic, leave no stone unturned and ask all the questions investors will ask.

Nothing excites investors more than actual paying customers and a hockey stick growth in customers and revenue. Get to revenue, grow the revenue and your chances of fundraising will go up.

6. Be MORE Inspirational

In a slower environment the bar for everything is higher. Not only do investors expect a better deal and more customers, they will also expect an inspirational vision and a bigger story.

Investors are naturally attracted to founders who have strong founder-market fit, see the future and have the ability to make it happen.

There reason that investors are attracted to artful story telling is because they know that great CEOs and founders have to inspire customers, employees, new investors and the whole world.

Founders who have a clear vision are also very resilient – they know where they are going, why they are doing it and what they are doing, and that gives them strength.

Inspirational founders with massive vision are the founders who won’t give up.

Take your vision and weave it into an inspirational story and investors will be more likely to invest.

7. Be Ready to Bootstrap

Lastly, be ready to not raise capital.

Strong founders need to be ready for every situation, and there is a real possibility that you won’t be able to raise any capital or will raise a lot less than you set out to do.

Do you feel like investors aren’t biting, and you’ve been fundraising for months? When your fundraising is not going well, it is time to pause and re-think your strategy. It is probably time to switch to plan B and to bootstrap.

The important thing is to have clear plan.

What can you do with no or little capital? How long can your team go without being paid? Can you tap your friends and family to help a little bit? Can you make progress on the product? Can you sell more customers? Can you execute on the business without the capital?

Come up with a very clear plan. For example – we won’t try to raise again for the next six months. During this time, we will grow revenues by X percent MoM and add A,B,C product features. We will all work from home and will have to dip into savings. We think that based on the feedback from the investors, if we achieve the above goals we are likely going to be able to raise capital in six months.

Having a very specific and concrete plan and having very specific and open conversations with your co-founders is really important. Come up with a plan, discuss it, get feedback and then go back and execute on it.

How badly do YOU want YOUR business to exist? If you have to make it happen, then no slow market and no lack of investor checks will deter you. You will find a way to make it happen.








Three Basic Principles Founders Can Follow to Achieve Quality Results 

This post originally appeared on Thoughts on Tech Startups and Venture Capital.

We are all in the rush these days. As founders, we want to literally do more faster all the time. As we rush, we may get a lot done, but sometimes we don’t do things right. 

We forego quality in exchange for speed and quantity.

Yet it is really important to pay attention to correctness and quality. When we rush and make mistakes, we then have to go back and fix them. When we go faster and miss things, we have to go back to fix them, and that usually takes more time.

It pays off to spend a bit more time and get things right. 

Over the years, I’ve adopted a few simple principles to make sure that the work I produce is quality work. I learned these principles as a software engineer and now apply them to all things I do.

These principles are: simplicity, completeness and iteration.

Simplicity 

Always make things as simple as possible.

Ask – what is the simplest most straightforward way to get something done. How can I describe something, or make something happen in the simplest possible way?

For example, is the email or blog post I wrote simple? Can I take away sentences or words to make it simpler? 

Or when working with founders and thinking about their business, ask if the founders articulate their vision in the simple way? Can we simplify? 

Or is our process for matching founders with investors simple? What can we do to simplify and be more effective?

By actively asking this question, you focus on and achieve simplicity.

Completeness 

Secondly, ask if what you created is complete.

Sometimes things that are too simple don’t fully solve the underlying problem. 

As Einstein pointed out, things should be as simple as possible but no simpler.

Look at your document, presentation, task, piece of code and ask – does it satisfy fully what you’ve set out to do?

Is it complete?

Iteration

Iteration is the third key. 

Look over your work and check again for simplicity and completeness. Like a great editor, revise it and make it better. Like a great sculptor, refine and touch up.

Iterate until you can neither take anything away (simplify) or add anything (make it more complete).

When this happens you are finished, at least for now. Tomorrow or even a year from now things may change and you may need to iterate and improve again. 

By applying these simple principles, by looking critically at your work, by polishing it a bit more, by asking if it makes sense, if it is simple, and complete, by looking at your work from an outside perspective you get to a much higher quality.

It takes a little bit more effort to learn and put this into practice. But once you master it, it will just become a second nature. The speed and quality will be happening automatically.

Quality doesn’t have to take more time, it just needs the right approach.

And now please share your principles and ways you achieve quality in your work.








What is the Customer’s Elevator Pitch for Your Startup?

This post originally appeared on Thoughts on Tech Startups and Venture Capital.

I had a pleasure of interviewing Moisey Uretsky, co-founder of DigitalOcean (Boulder ’12), a close friend, and one of my all-time favorite founders. Moisey is incredibly smart, thoughtful, and had one of the best product guts and chops out there.

We talked about a lot of topics around engineering and startups, and one of the things that came up was the elevator pitch.

Moisey said that founders and investors often focus on the elevator pitch, and it’s fine, but it is not nearly as important as the customer’s elevator pitch.

I didn’t really know what the customer’s elevator pitch was. Moisey explained that it is the elevator pitch that a customer of a startup would give on behalf of a startup to a prospective customer.

The concept instantly made sense to me, and connected together two really important concepts – Product-Market-Fit and Virality or Word of Mouth.

The reason that Moisey’s articulation was particularly interesting to me is because it is a kind of litmus test for how well the company is doing, and it is also a kind of shortcut. That is, a concept of the customer elevator pitch embodies both – a successful product and the customers are so happy they talk about the product to prospective customers. 

First, a Product-Market-Fit is achieved when most sales succeed and most customers don’t churn after a sale. We have written previously about the Magic Moment here. It is somewhat hard to understand, but an important concept.

The Magic Moment is a very special state—once a customer reaches that state, the probability of the customer churning in the future is dramatically lower. To put it differently:

An average customer that hits the Magic Moment will stay a customer for a long time, will have high LTV, and will be profitable for the business.

That is, the Magic Moment leads to a viable long-term business. When enough customers hit the Magic Moment, you get to Product-Market-Fit – customers buy and stay happy.

But Product-Market-Fit by itself isn’t always an indicator of a great business. If people keep buying the product or service, but don’t tell other potential customers, the cost of acquiring customers would still be high and margins of the business maybe hurting. 

When the product is so great that customers tell other customers, then the cost of acquiring customers drops dramatically, and that typically leads to a great business. For the exact dynamic of how this growth happens, read this post, this post, and read up on K-factor

Let’s now look at an example, and use DigitalOcean.

The company found Product-Market-Fit after they launched a simple, affordable hosting service using SSD drives and poured a ton of love and exceptional support on top. This offering strongly resonated with developers, and they flocked from other providers like Amazon and Rackspace to DigitalOcean.

The product was so great that developers started telling other developers – their elevator pitch was exactly this – simple, affordable and super cool hosting service. In turn, this elevator pitch resonated with new customers and more and more referrals started to roll in.

DigitalOcean took advantaged of this dynamic and put more gasoline on the fire by introducing a double referral program that gave credit to both existing and new customers. That strategy drastically lowered the cost of customer acquisition and lead to a great business and great margins.

DigitalOcean helped create a perfect customer elevator pitch.

The customer’s elevator pitch is a seemingly simple but really powerful way to look at your business. Don’t have a lot of customers? Business doesn’t work. Don’t have a lot of happy customers – business doesn’t work. Have a ton of customers but they aren’t talking about you – you are doing well, but it is expensive to acquire customers and margins suffer. But if you have a ton of customers that are talking about you, and that leads to other customers signing up, then you are doing great.

So what is your customer’s elevator pitch?








8 Tips for Dealing with Competitors

Competition is a strange topic. It is both underrated and overrated. This may seem like a contradiction, but it really isn’t.

Startups often don’t spend enough time understanding the market and spend too much time worrying about competition once they launch.

In this post, we look at different aspects of competition and how a startup can deal with its competitors.

Do the Market Research Before You Launch

Before you launch your startup, you need to study the market. Startups are about the opportunities, and to identify an opportunity, the founding team needs to do market research.

The worst way to start the company is to start without understanding the market.

Just identifying the need and talking to customers is not enough. Part of the initial research is also understanding the competition. Who else is working on this problem? Are they small startups or big companies? How long have they been at it? How are they doing? Are they succeeding? If not, why not?

Understanding the competition is critical, because the opportunity may actually not exist.

Sure, customers may want the product, but competitors may already have a good enough offering. Founders rarely spend enough time doing market research and really understanding existing competitors, yet it is a critical part of launching a successful company.

Beware of ‘No Competitors’

There are a handful of red flags that turn off investors. One of them is when the CEO of a startup says, “We have no competitors. No one else has thought about this, we are the first ones!”

No matter how you look at it, saying you have no competitors is not a good thing.

First of all, by definition, all good ideas are competitive, and all real markets have competition. Lack of competition may imply lack of opportunity. Either there is no customer need, or the opportunity is small and not compelling.

More often than not, investors know the market better than founders and can name competitors better than the founders. This is also a bad situation, because it means that the founders either didn’t do their homework or did it poorly.

Either way, when a CEO says his or her company has no competitors, this creates immediate concerns and trust issues for potential investors.

Know Your Past and Future Competitors

When investors think about opportunities, they don’t just think of them in the present moment. The founders are expected to know about competitors who failed in the past and about potential future competitors as well.

For example, people have worked on Artificial Intelligence and Virtual Reality before and those efforts didn’t quite succeed.

Many startups are working in these spaces again and say that this time things will be different. While that may very much be true, the investors want to know what exactly is different now, what conditions didn’t exist before, and why this time is going to be different.

Similarly, it is important to think about who else may enter the market. This is a much more difficult dynamic to predict because by definition, predictions are difficult.

Investors often ask the founders what would happen if Google or another large company went after their market. While not possible to predict, it is good to think about this question and be ready to answer when asked.

Figure out Your Competitive Differentiation

Market research and studying your current, past and future competitors eventually boils down to one thing—what is your differentiation?

What is your unique insight? Why and how are you different? Why does this difference matter enough for you to win?

This is why having Founder-Market Fit is particularly important. Founders who have experience in their specific market typically have unique insights and are able to come up with offerings that are differentiated.

A good differentiation is typically product, go-to-market or sales advantage. Product advantage is created when your product is substantially different in how it works from competitors’ products.

Go-to-market advantage is based on channels that you are able to secure that no competitors can lock in. Sales advantage is typically based on your experience and deep understanding of the customers.

Keep Track of Your Competition, but Ignore the Noise

Most founders spend too much time worrying about competition on a daily basis. News is extremely noisy—someone launches something every day. If you follow every single bit of news from every one of your competitors, your life is likely a major emotional roller coaster.

In the end of the day, it is not what your competitors do, but rather what you do that matters more. You don’t have control over product releases, sales and PR of your competitors—all you can control is your own business.

Focusing on creating the best possible product that your customers love is your best defense against competition.

Instead of reading daily news about competition, set up a quarterly, or at most monthly, review of both competitors’ news and more importantly, products. This way you can keep track of what’s happening without the stress involved in following your competitors daily.

Accept and Play “The Idea Exchange” Game

When I was running my startups, I remember that feeling I would get when a competitor launched something that we had previously launched. A competitor stole our idea! Even worse, they executed it better, and no one gave us credit for being first.

Founders often complain about this situation. The reality is that this is now an accepted reality. Today, companies readily copy products and iterate on each others’ ideas. There is no protection for ideas; they are basically free to take.

Founders should just stop complaining and assume that their ideas will be copied.

The product and the business needs to be able to survive in the environment where pieces of UX and user flows are being copied.

In exchange, you as a founder benefit from taking ideas from your competitors’ products. Much like they copy your ideas, you can copy their ideas.

Build Relationship with Your Competitors

While sharing secrets with competitors is a bad idea, being friendly in general makes sense. Competitors are typically the most knowledgeable folks about the space besides you, and it is interesting to talk to them and get their perspective, again, without revealing too much.

Founders tend to run into their competitors at conferences and events, and naturally have the opportunity to connect. By building the relationship with your competitors you are both helping co-create the space, and getting to know your competitors as people.

You never know what the future holds. It may make sense for you to join forces or create a partnership. Markets with big opportunities tend to consolidate, so investing in a relationship with your competitors is likely a net positive for you.

Win with Your Heart and Mind

Once you are in the market, you compete on the product and your unique approach to the problem. No one but you knows exactly what you think and what you are building.

You win because of your unique approach, not because your competitors did or didn’t do something, copied or didn’t copy you.

Ultimately, competition does not matter nearly as much as your vision and your resilience.

You win by imagining the future and taking your customers, your company and the world there. You win with the product that is unique to you, with the business execution that is yours.

No competitor can take it away from you because they don’t see the world the same way. Your competitors aren’t you.

The best founding teams have their eyes set on the vision, their true north, and go there, regardless of what the competition does or doesn’t do.

The best founding teams win with their hearts and minds.








Founders First and Other Things I Learned During Three Years at Techstars

This post originally appeared on Thoughts on Tech Startups and Venture Capital.

Three years ago I embarked on what, so far, turned out to be the best job of my career.

I am not just saying it, this is actually true – running Techstars NYC city program and working at Techstars has been the best, most humbling job I’ve ever had.

Here is what I learned in the last three years:

Founders First

I am now an investor in 55 startups, and the thought really blows my mind.

But here is the thing – I don’t think of these investments as investments in companies, I think of these as investments in people. To me, at Techstars, we don’t invest in startups, we invest in founders.

I’ve taken this approach since my first program back in 2014 – invest in best founders you can find. Invest in smart, fearless, resilient founders and get behind them unconditionally.

I am convinced that this 110% commitment, this almost blind belief in the founders is what matters the most. Through the inevitable ups and downs of every startup, what founders can really feel and really lean on is your belief in them.

Prioritizing founders and their interests and their needs can’t be faked. You can’t say you do it. You have to actually do it. And it is a ton and ton and ton of work.

Founders know and feel you are for real and they respond back with raw authenticity, openness and commitment back to you.

Fundraising, founder issues, business introductions, hiring, financial modeling, and just plain simple things like listening and sharing lunches and dinners and responding to phone calls on weekends and evenings all take enormous amounts of time.

But it is worth it, every single second given to the founders is worth it.

The relationships that I’ve built with my founders, the commitment that I’ve made to them have changed me in ways that are impossible to describe.

It feels right, it feels so great to be helpful. It just feels like the right thing to do that made me a much better investor, but way more importantly, a better human being.

Mentor and be Mentored

Mentorship is at the core of Techstars, and I’ve experienced its transformative power myself.

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As a mentor to my founders, my core strengths are empathy, complete openness, lack of agenda and intellectual honesty.

Startups are unbelievably hard. The struggle is real. The first job of a mentor is to relate and to empathize with the founder. But it is not just empathy, it is also intellectual honesty and ability to tell them the truth, as you see it, to point them to the data, to make them sober, to help find the right path, is what has been really important.

Yet being a mentor is not the only amazing thing I was able to experience at Techstars. Perhaps most unexpectedly and in a very transformative way I’ve been mentored myself.

Truthfully, I’ve never had great mentors in my career. My closest experience with good mentorship was with my former boss, Paul Kotas who I worked with at D.E. Shaw.

But something very different happened to me at Techstars. I learned a TON from everyone in the organization. Mark Solon and Nicole Glaros have been incredibly generous and patient with me, and I learned a lot from them.

But the most extraordinary generosity and mentorship came from David Cohen himself. David has made himself available and responsive in ways I could never expect when I took the job. He has patiently, meticulously and deliberately committed to mentoring me and answering any questions I’ve had (and I’ve had and still have many!).

David Cohen truly leads by example and taught me so many things that I know today.

Network is the Magic

I’ve spent more than a decade of my life studying networks and complex systems.

My first company, which was bought by IBM, applied graph theory to software architecture. I’ve studied networks in economics, politics, biology, physics and society. My second company was a social network for entertainment.

So, I know a ton about the networks and how they work. But that knowledge is very different from being INSIDE of one of the most powerful business networks in the world.

At Techstars, the network – founders, alumni, mentors, corporate partners, Techstars staff – is the magic. Period.

Our ability to accelerate the companies, and shortcut the universe through this incredible network is unlike anything else out there. By leveraging the network we are able to go 10x, 100x, 1000x faster than people who don’t have the network.

In the last three years at Techstars, I’ve made a deliberate and conscious effort to invest in this network, my personal network and to build it out. I believe I am literally light years ahead of those who don’t have this kind of network, and I have created an unfair advantage for myself for the rest of my business career.

How to be Thankful

I am so incredibly thankful for this opportunity. I am so glad Brad Feld gave me a call a little over 3 years ago, and asked that I would consider this job.

I am so incredibly thankful for my crew at Techstars — KJ and Jill have been the A-team to help pull off this mission impossible. People at Techstars I work with, our mentors in NYC, our community, our LPs/investors have been incredibly supportive.

But saying you are thankful is not really enough. Being thankful is very different than saying you are thankful.

Being thankful is about pausing and acknowledging others around you. Being mindful of them, being attuned to their needs, spending a few seconds of your life thinking about them.

Everyone can say they are thankful, but are they really?

Being thankful by being mindful and acting on it, leaning in, offering help and being present – that’s what I learned is really powerful.

Trust Your Gut

Life is fundamentally unpredictable.

Startups and venture are so unbelievably hard. Companies that seem to be successful run out of money and fail. Founders who struggle figure things out and create great businesses.

No one can predict what is going to happen. No one knows for sure what will make money.

Of course every investor and every firm have their own thesis as to what will work and what will not. I learned first hand the importance of founder market fit, viable MVPs and resilience.

But ultimately, no matter how you slice this, there is no formula for the perfect startup.

You can come up with million reasons why not. You can find a hole in every single early stage company.

Ultimately, you have to trust your gut, and your gut is tied to your belief in these specific founders. Do you believe in them? Can they pull off the impossible, and if they do, will it be worth while for everyone around the table?

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Ultimately, your gut comes full circle and goes back to this one very simple thing – founders first.