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.




9 tips para conseguir inversión semilla

Este artículo fue traducido por Lucía Tróchez – @lulutro

La suerte favorece a las mentes preparadas – Louis Pasteur.

Uno de los objetivos de las compañías que pasan por Techstars y otras aceleradoras es asegurar financiamiento. La mayoría de las compañías entran enfocándose en acelerar sus negocios y luego asegurar capital para continuar con su crecimiento acelerado. Como accionista de la compañía, Techstars está completamente alineado a estos objetivos.

La realidad es que la mayoría de las startups necesitan levantar capital para crecer y convertirse en compañías reales. No es típico que tu o tu aceleradora pueda generar dinero si no haces levantamiento de capital, y ciertamente muy poco probable que nadie genere dinero si tu compañía no crece.

Entonces nos encanta cuando las compañías consiguen inversión.

Pero hemos visto un patrón claro con las compañías que se involucran en inversión desde un comienzo — de hecho, tienen más dificultad cerrando ese financiamiento. ¿Por qué? Aquí ahi 9 razones de inversión semilla que te puede ayudar a entender lo que va mal.

1. Falta de preparación

Para estar listo para levantar capital, necesitas tener un conocimiento profundo del problema que estás resolviendo– por qué empezaste este negocio; tu ecosistema de negocio – tus usuarios, oportunidad de mercado, competencia, mercado potencial, canales de distribución, precios, y muchas otras cosas más. Te van a preguntar muchas preguntas y más de parte de los potenciales inversionistas. Si no estás preparado se va a notar y va a ser malo para tí.

2. Falta de tracción

Muy pocas compañías llegan a buscar inversión semilla con algún tipo de tracción. A no ser que sea un equipo de emprendedores en serie exitosos, y aún así, los inversionistas esperan tracción de usuarios/clientes. Esto no significa un ajuste de mercado/producto perfecto. Significa tener evidencia temprana de que hay un problema y que tu solución / producto tiene un buena posibilidad de resolverlo.

3. Ser atraído hacia levantamiento de capital

Entonces no estabas pensando en levantar dinero, pero conociste un montón de inversionistas, y te dijeron que realmente deberías. Otros fundadores a tu alrededor te dijeron lo mismos. Entonces dices, ‘¿Por qué no?, lo voy a intentar.’ Es un error. No estás listo – no estás preparado, no lo estás planeando. No levantes capital en territorio y tiempo ajenos. Controla tu destino preparándote, revisando cada detalle y saliendo a levantar el capital. Nadie se va a ir, y los inversionistas no te van a decir que no a una reunión más adelante si les dijiste que no cuando no estabas listo.

4. Perseguir a las personas equivocadas

Esta es una de las principales razones, y es mala. Todos los inversionistas son diferentes. A cada uno le gustan verticales específicas. Escriben cheques de diferentes tamaños. Sólamente porque son un inversionista no significa que son el inversionista indicado para ti. Investigar y entender lo que a un inversionista en particular le gusta y por qué tu podrías encajar bien con él es importante. Así como también es importante conseguir una introducción a través de alguien que te conoce a ti y al inversionista.

5. No hacer el Pitch a los ángeles inversionistas y VCs correctamente

Los ángeles inversionistas, micro VCs y VCs son todos diferentes en términos de sus objetivos y estilos y consecuentemente en cómo deberían ser contactados y cómo presentar el pitch. Un ángel inversionista que escribe un cheque de $25K USD- $50K USD puede querer un par de reuniones, y un micro VC que escribe cheques de $100K USD – $250K USD puede estar enganchado por un mes y puede o no liderar. Los VCs se toman más tiempo, escriben los cheques más grandes y les gusta liderar rondas y tomar asientos en la junta de asesores. Si no entiendes cómo enganchar a cada uno correctamente, perderás tu tiempo y puede que no obtengas el resultado que deseas.

6. No tener una estrategia general

Incluso si sabes a quién acercarte y por qué, todavía necesitas una estrategia. Una estrategia que conlleva la planeación del proceso completo de levantamiento de capital, con quién reunirte primero, y con quién después. ¿Empiezas por levantar un par de cien miles de ángeles primero, o vas directo a los VCs? Tomar las decisiones correctas acerca de tu estrategia de financiamiento, especialmente si eres un fundador primerizo, es realmente importante. No tener un plan incrementa tu posibilidad de no levantar el capital que necesitas para crecer tu negocio.

7. El problema de ‘Soy especial’

¡Pero por supuesto que lo eres! Yo también. ¿No lo somos todos? Cuando vas a un casino a jugar, piensas – pobres tontos a mi alrededor, todos van a perder, ¿pero yo? No, no, no. Yo soy un ganador. Y esto es triste por que como emprendedor realmente eres especial. Todos lo somos. Somos esta raza de individuos imparables, locos, con coraje, que no se rinde. Pero la realidad es que no es una buena apuesta cuando se refiere a inversión semilla. Estás mejor cuando estás preparado y vas a ganar por esa misma razón.

8. No darte cuenta que estás corriendo una carrera

Cuando estás haciendo levantamiento de capital, se corre la voz. Los inversionistas son personas, y hablan. No por que son malos o en contra de tí. Es natural comparar notas en cualquier industria y los VCs no son la excepción. Cuando sales a levantar, necesitas hacerlo rápido y tratar de alinear todas las conversaciones. Una vez empiezas, tienes que correr hasta que termines o hasta que decidas detenerte por que simplemente no está funcionando. Dáte cuenta de lo que es esta carrera antes de que empieces a correrla.

9. Acabarte las balas

Puede ser una analogía chistosa, pero tiene sentido. Al principio del proceso, tienes una pistola cargada y empiezas a disparar y tener estas conversaciones maravillosas. Luego, en algún momento, especialmente en un ecosistema más pequeño, encuentras que has hablado con prácticamente todos. Ya no hay nadie. Te acabaste con las balas, y ahora tienes una pistola vacía.

La mala noticia es que si ya te reuniste con todos los inversionistas y ninguno te escribió un cheque, ya no puedes regresar a pedirles dinero el próximo mes para volverlo a intentar. La buena noticia es que de hecho si puedes volver en 6 meses, mostrar tu progreso, y si estás siendo exitoso esta vez, lo más probable es que recibas un cheque, y las únicas balas que necesitas son las que tienen tracción.

Cómo y cuándo levantar capital

¿Entonces cómo ganas y consigues dinero? Dos cosas –preparación y tracción. Organiza tus cosas. Tu presentación, tu pitch, tu estrategia de fondeo, con quién vas a hablar y por qué, consigue las introducciones, etc. Está listo.

Pero aún si estás preparado, puede que no sea suficiente en este tiempo y era. Vemos menos y menos personas fondeando ideas y presentaciones. Los inversionistas quieren ver tracción temprana. Algún tipo de indicación que les diga que tu idea no es solamente buena, sino que también hablaste con clientes, construiste un producto mínimo viable, y tienes algo de tracción – prueba de que lo puedes hacer y puede que funcione.

Y si te parece muy desalentador y complicado, busca ayuda. Habla con amigos emprendedores que lo hayan hecho antes.  Aplica a Techstars y te podemos ayudar a acelerar tu negocio y levantar capital. Piensa bien en el financiamiento. Prepárate. Sé considerado. Gana.




Action and Idea Lists for Lean Startups

Startups are easily overwhelmed with ideas. They have a ton of their own, and they hear a lot of advice from others. How do you actually take all of the ideas and prioritize, focus, execute and grow?

Here is a simple system inspired by Agile software development that can help you do that. It’s a spin on the traditional to-do lists that helps you keep it simple and actually execute.

Screen Shot 2016-08-29 at 11.59.12 AM

 

1. Iteration

The key to getting things done is to set goals and divide time into chunks to hit each goal. If you don’t have goals, then you are just doing stuff, but not clearly making progress. Let’s call a chunk of time to hit a set of goals an “iteration.” The duration of any given iteration can vary – it can be 1 day or 2 weeks, but not much longer than that. At Techstars, for example, we measure time in weeks, since we are trying to accomplish a lot in just 13 weeks. Every week has its own set of goals, so every week is its own iteration. The tasks you do during the iteration go onto the Action List.

2. Action List

The first rule is that the Action List can only have 10 items (or less!) at any given time. The #1 to-do is what you are working on now. To-dos 2, 3 and 4 are pretty solid – unless there is a drastic change in your world, they will make it to the #1 spot soon and you will work on them. To-dos 5-10 are a little less solid; you might not actually get to them, or you may tweak or even delete some of them. But as of now, you do intend to execute them during this iteration.

That’s really it in terms of Action List setup. You work through it one to-do at a time. Intensely focus on each task and crush it. Make sure you do it as thoroughly and as completely as possible.

Every time you check off an item, take a quick moment to celebrate. Every small win is the opportunity to smile and relieve stress.

3. Idea List

This is what every single person, from CEO to an engineer to a social media manager, gets wrong. They get excited about a new idea, drop what they are working on, and start working on the new thing. This is the worst possible way to get things done. The task at hand is left unfinished. Most likely you will have to go back to it, but you will by then lose the context and the flow. Most likely you will keep adding new tasks, and you will find yourself context switching all the time. As a result, no tasks will be done well. You are going to create half-baked things and nothing will really work.

Remember, you are not necessarily smarter right now than you were 10 minutes ago or a day ago or a week ago. If you made a decision in the past to schedule the task, respect yourself and finish it.

Of course there are sometimes exceptional cases when you can cancel the task at hand, but it should be very rare. In any case, the new task shouldn’t replace what you are working on now.

It doesn’t even make sense to stick new ideas into the Action List yet. That list has already been prioritized, and it’s not yet clear where the new idea would fit. For that purpose, you will have another list, called the Idea List. The new tasks ALWAYS go to the bottom of the Idea List. ALWAYS.

The Idea List can also only have at most 10 items. Why? Because you don’t need to add every single idea you have or you hear to any list at all. In fact, quite the opposite – the default should be to NOT add. Every idea first needs to prove itself to you.

Like things in the real world, the ideas need to compete for your attention and win before they make it to the Idea List.

You need to hear an idea over and over from your customers, co-workers, advisors and yourself. Once it becomes obvious, then the idea will get a spot on the Idea List.

4. Prioritize: Append, Trim and Delete

Regardless of the length of your Iteration – 1 day or 2 weeks or anything in between – in the end of the Iteration, you will re-prioritize. To do that, first append all items from the Idea List to the bottom of the Action List. It does not matter if the Action List is empty or the Idea List is full.

You then re-prioritize everything based on your current understanding of the world and trim the Action List to again be 10 items only. After that, place the 4 runner-up ideas on the Idea List and discard the rest. Don’t be afraid of this step. The ideas will come back if they are great ideas.

Give this a try and let me know how it works out for you. Using another system? I would love to hear about it in the comments.

 

This post was originally published on Alex’s blog




Understanding Network Effects

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

I am a big fan of A16Z podcasts, and they just released terrific episode on Network Effects.

Network Effects is an important and somewhat confusing topic.

The reason Network Effects are important is that the businesses with true Network Effects are highly defensible, have strong retention and engagement, exhibit characteristics of monopoly, and tend to last for a long time.

Definition of Network Effects

A Network Effect is achieved when adding new users creates value for existing users.

That is, the overall experience and value being inside the network increases with the addition of new users.

How exactly does it work?

Users want something from each other. Each user in such a network is both producer and consumer.

For example, I write blog posts, and I also read them. I post tweets, and I read other people’s tweets. I check traffic on Waze and I also contribute to traffic reports on Waze.

In other words, I am both a producer and consumer. I am both a reader and a writer.

Businesses with Strong Network Effects

Let’s consider three different types of businesses with strong network effects – Social Networks, Multiplayer Games and Sensor Networks.

Let’s start with a canonical example – Facebook. It is famous for its Network Effects and organic growth. Facebook started at Harvard and grew deliberately and slowly to ensure strong connectivity. The more friends and family that joined, the more value existing users derived.

The core Network Effect is that basic activity on Facebook is sharing or posting to your network. Posts are the glue and the trigger.

Each Facebook user is both a producer and consumer, both the writer and the reader.

Next, let’s look at Twitter, which, much like Facebook, has strong Network Effects. The interesting thing about Twitter is that because it is based on a unidirectional “follow” relationship, it has stronger virality. News spreads a lot faster on Twitter. Yet, Facebook is a stronger network because of the family and friendship ties with personal photos acting as a super glue.

Another kind of business that has strong network effects are Multiplayer games.

By definition, these kinds of games are designed to be played with others. When new players join, existing players are better off. Just like how on Facebook we see formation of cliques of friends, in the Multiplayer games we see cliques of players.

The glue and the trigger for the Network Effects in games is the game itself and objects inside the game.

They provide touch points and the opportunities to co-create the game world for the players. The games are highly sticky because the players need to level up, and starting from scratch in these co-created worlds is very costly.

Lastly, consider Waze, a traffic app acquired by Google. Cleverly, Waze creators realized that people in traffic would be willing to share their location in exchange for being informed about the overall traffic patterns and alternative routes.

Each app writes data points and reads back the traffic. Each app is both a producer and consumer of information.

Network Effects and Virality

Next lets look at the difference between Network Effects and Virality, Marketplaces and Economies of Scale — terms often confused with Network Effects.

Virality is about something spreading quickly over an existing network. Network effects, on the other hand, are about creation of a brand new network.

For example, word of mouth is an example of virality – news about an attack in Paris travels quickly through Twitter. PokemonGo is another example of virality – millions of people raced to play the game. And of course, funny cat videos on YouTube are known to be viral.

Virality is great and is really important in successful businesses, but it doesn’t always last. All of the examples above are examples of short phenomenon that spike up and then go away. We don’t think of these events as sustainable over time. They are hits, or outliers, and not a solid foundation for the business.

To put it differently, virality doesn’t guarantee Network Effects, but Network Effects guarantee Virality.

Network Effects and Marketplaces

Next, let’s look at the relationship between Marketplaces and Network Effects.

It would seem that businesses like Uber and Airbnb would have built-in Network Effects, and they do to an extent for some subset of the users, but it doesn’t appear to be true at scale.

Marketplaces have two sides — supply and demand, producers and consumers.

In the case of Uber and Airbnb, some producers happen to be consumers, but not all. Not all Uber drivers take Uber rides, and not all Uber riders are the drivers. Not all Airbnb hosts are also guests and not all Airbnb guests are hosts.

These, and other Marketplaces, have strong virality via word of mouth, but weak network effects.

Economies of Scale vs. Network Effects

In addition, Marketplaces and other businesses at scale achieve supply efficiency or economies of scale.

For example, UberPool becomes cheaper at scale. That is, once enough people want it, your rides get cheaper, so in a way, there is a Network Effect by virtue of more users joining.

Another example would be delivery services like Postmates. If the volume of the orders is low, then each delivery is a one off and expensive. As the volume increases and gets clustered, then deliveries become cheaper because you can aggregate deliveries together along the same route.

In general, the economies of scale are achieved as the business grows. For example, the business can negotiate with suppliers and get a discount in exchange for buying in bulk.

This has nothing to do with the Network Effects – it is related to monopolies and business defensibility.

In general, the businesses with bigger margins at scale become more powerful and more defensible.

Network Effects in Nature

Before we dive into the mechanics of Network Effects, let’s turn to nature which is full of Network Effects.

In science, they are called self-organizing networks. If you aren’t familiar with this concept, I highly recommend you read Complexity, which is one of my favorite science books.

Carbon-based life, the entire living world around us, is based on DNA and RNA, which has the fundamental ability to copy itself. More importantly, DNA and RNA likely emerged as a result of a process called auto-catalysis.

This may sound like a bunch of scientific gibberish, but it is actually really easy to understand and plays a key role in understanding Network Effects.

Imagine the basic blocks of life called A and B. One day they got together and created a new block called AB. Next, A and B blocks can be mixed with AB to form AAB or ABB. Next, you can make AAAB, AABB, BAAB, BABB and so on.

That is, simple combinations of basic blocks can create more and more complex blocks and chains. A virtuous cycle or feedback loop.

How to Engineer the Network Effects

Now we are ready to understand how you may engineer or check for Network Effects in a business.

Each node needs to be part of a simple feedback loop.

On Facebook, the users are readers and writers. Reading and writing creates a strong feedback loop. It is this loop that pulls the users back to use the service. Much like with basic building blocks of life, it is not one to one interactions that are so precious, it is the one to many interactions.

Groups of Facebook users – friends and family, constantly create and consume information, referencing each other, creating basic feedback loops and pulling each other back.

Facebook is a massively successful business because it is a self-organizing network fueled by Network Effects.

The defensibility of Facebook is the network structure and the ongoing Network Effects – the support and formation of new parts of the network. Users who try to leave are constantly being pulled back by their friends and families.

If you found this post helpful, please give examples of other types of businesses with strong Network Effects. Let’s have a discussion and debate!




12 Ways to Give Back Time to Others and to Yourself

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

Time is one of the things we, unfortunately, don’t have more of.

As the amount of information we have to deal with is accelerating, our time seems to be shrinking.

Here are 12 ways for giving back and being respectful of other people’s time.

1. Schedule Shorter Calls and Meetings

We have written here before about calendar management. One of the ways that time gets wasted is by booking more time for meetings than necessary.

For example, Google calendar and other booking tools often default to 1 hour. That’s a really big chunk of time and is rarely necessary.

By default, schedule 10-15 minute calls, and 20-30 minute in person meetings. Having shorter periods of time makes people skip small talk, and get straight to the point.

This makes conversations amazingly productive and people don’t feel like you are wasting their time.

2. Book Less Time Initially, Go Deeper As Necessary

Always start by booking a short discovery meeting instead of a long one. Get on the same page, identify key issues, and schedule follow ups.

With this approach, you accomplish several things – first, everyone is on the same page about scope of the problem and big picture.

Secondly, you figure out separate follow ups that need to be done and schedule additional meetings as needed. No time is wasted and everyone is feeling productive.

3. Try to Discuss One Topic per Meeting

A lot of meetings meander because people move from topic to topic. Try to have a rule of one topic per meeting. If you can get into a habit of doing this, you will be very productive.

Need to discuss multiple topics? Break them into separate shorter meetings.

With this strategy, it is a lot easier to stay focused, reach a conclusion and come up with the next steps.

Here is a system that I’ve been using for holding office hours at Techstars that works remarkably well. Divide a chunk of your calendar into time spots of 20 minutes each and allow people to book you for 20, 40 or 60 minutes.

The key — only 1 topic is allowed regardless of how much time is booked, so it is up to whoever is booking to think through how much time is needed.

4. Always Have An Agenda and Plan Time per Topic

For most internal meetings you can actually have 1 topic per meeting, but this strategy doesn’t work with, for example, board meetings.

In case you have to have a longer meeting, set the agenda and set the time allowed to discuss each topic on the agenda.

Unless you do that, there is a chance that the a topic will drag and you will never get to other topics. As a result, the whole meeting may run over and feel unproductive.

If you are out of time, sum up the takeaways and schedule a follow up. Don’t spend more time than you are budgeted.

5. Prepare and Send Materials in Advance

The meetings are remarkably unproductive when people aren’t prepared.

Getting everyone prepared is hard because it involves asking for more time.

For example, if you are running a board meeting, it is much better to send materials ahead of time so that the board members have time to review.

Another great strategy that Jeff Bezos instrumented at Amazon is to budget the time in the beginning of the meeting to review the materials. Either way, people need to invest more time to prepare to be productive in the meeting.

It is also helpful to ask people to write stuff down ahead of time. This way, everyone can think things through and really prepare. The culture of writing things down is a super effective tool and helps to avoid wasting time.

6. Summarize Each Meeting and Next Steps

Set aside the last 5 minutes of the meeting to summarize what was said and map out the next steps. Unless you do this, people will walk away from the meetings without a sense of progress and with the sense that time was wasted.

If there is a follow up meeting, be clear on what the topic / agenda will be, who is responsible, and communicate this to everyone. This way, people will feel engaged, positive and productive instead of feeling like their time was wasted.

7. End Calls and Meetings Early and Give Time Back

One of the most wonderful things you can do during a meeting or a call is to end it early.

If there is nothing to discuss, if you got through everything, then wrap it up. Say – we are done, I am giving you 5, 10, however many minutes back.

Get into the habit of doing that and people will LOVE you.

I make a point of repeating this a lot during the Techstars program – I am giving you time back. I am respectful and grateful for your time. By doing so, I hope that founders will start respecting their time, my time and other people’s time more.

8. Don’t Be Late

This is an obvious one, but it is important.

People who are constantly late aren’t aware that they waste other people’s time. There is no situation or reason why this would be okay.

If you happen to be late, always apologize and make it clear that you respect the other person’s time. It’s a seemingly small thing, but it really matters.

9. Don’t Cancel or Re-schedule Last Minute

Another pet peeve is cancelling the meeting last minute or on the same day. I am guilty of doing it a few times myself, and it is really bad.

Cancelling last moment is literally unacceptable if the person has to travel to meet with you because you just wasted hours of their time.

If the meeting is a call or a Google hangout, cancelling last minute isn’t ideal, but it is not as bad, since technically you are giving the person time back.

Still, it is not great because it throws people’s plans and routine off.

10. Don’t Ask for Last Minute Meetings

I’ve written about this topic in a whole post.  When you ping people last minute and ask to meet, it is a bad vibe.

First of all, people most likely already have plans, so by reaching out to them last minute, you are implying that they aren’t busy.

More importantly, these unplanned meetings are rarely as productive. This is particularly true if the meeting is meant to be a working session, or there are specific asks. The last minute meetings aren’t great because the other person doesn’t have the context and isn’t prepared.

11. Send Less Email

Email is a beast. The more of it you send, the more of it you get.

Just making a bit of an effort to reduce the volume will help others and help you reduce the volume. See what you can cut out and see what doesn’t need a reply.

Most importantly, quickly move people to bcc when it makes sense, and avoid unnecessarily cc-ing people on your emails. Those add up to a massive waste of time.

12. Use Asynchronous Communication and Google

While Slack and texting are great in some respects, they cause constant context switching.

The loss of context is super costly, because people, after the interruption, have to get back to what they were doing and that takes time.

Do you really have to ask this question? Can you find the answer on Google or internal docs?

If you do have to ask a question, how urgent is it? Does it need to be immediate? If not, use asynchronous communication channels, such as email or tools like Voxer.

Be mindful of interruptions, they are total productivity killers and causes of stress.

 

And now, please share with us your productivity tips and ways you help others save time.

This was originally published on Alex’s Blog




5 Tips for Startup Engineering Teams

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

Every single company, and startups are no exception, depend on software. Software went from being critical to every business, to being THE business.

Software creation is an art, a craft and a process.

Building and shipping software is a marathon that lasts the entire lifetime of the company.

To ship software effectively, you need to establish cadence and a process. In this post, we discuss a lightweight framework and tips that startups can follow to ship quality software regularly and effectively.

1. Setup Sprints

To start, you need a light process for identifying what to build and how to actually build it. Teams that choose to ship without a process end up being chaotic, stressed out and ultimately not successful.

Here is a light process, called a sprint, that will help your team ship to production every 2 weeks.

The sprint starts with planning what to build. The features are organized into two lists – all features you want to implement and a subset of features you will actually implement in this upcoming sprint.

Before the beginning of the sprint, the team gets together and re-prioritizes all features. Once the ranking is complete, the top 3-5 features are moved into the list to be completed for the upcoming sprint.

Once the features are selected, they are LOCKED for this sprint. You can’t add new features in the middle of the sprint.

This is critical. Making changes in the middle of the sprint throws off the timeline and causes massive stress to your engineering team. Avoid doing this at all costs.

Similarly to having 2 lists for features, you will have 2 lists for bugs as well. Before the start of each sprint, re-prioritize all the bugs and move the ones that need to be fixed into the list for this sprint.

Here is a sample setup for your sprint:

  • Planning: 3 days before the start.
  • Fix Bugs:
    • Day 1: Wednesday
    • Day 2: Thursday
  • Code:
    • Day 3-7: Friday – Thursday, except weekends:)
  • Test:
    • Day 8: Friday
    • Day 9: Monday
  • Ship:
    • Day 10: Tuesday

There are a few tricks to setting up the sprint.

Never release into production on Friday or in the evening.

Why? Because things tend to break and then you might end up ruining your weekend or be stuck in the office all night.

The second trick is to always fix the bugs first before coding new features. This way you are making sure that you are building new features on a solid foundation.

If your sprint is 2 weeks, you have 5 days to code new features. This is plenty of time assuming you broke down your features into small chunks. In fact, this system forces you to do that. You are always making progress, improving the product and moving forward.

The last part of the sprint is testing and making sure you release quality software.

The last few days of each sprint should feel like a spiral.

You test, find bugs and fix them. The closer you are to the release, the less bugs you should find. Once there are no bugs found, you are ready to ship.

When you are in the home stretch of the release, it pays off for everyone to focus on specific bugs or features together. When everyone is focused together, you squash down a bug faster and then move onto the next problem. This strategy helps the entire team spiral down towards the release together.

2. Prioritize and Handle Emergencies

In addition to implementing sprints, get your team to always prioritize and stack rank features and bugs.

When everything is important, nothing gets done.

Create simple and clear language that everyone can adapt when talking about priorities. For example:

  • P1 – highest priority, business critical
  • P2 – important, needs to get done, but not critical
  • P3 – not important, nice to have

If there is a P1 bug that is found in production, and it impacts the business, you need to pause the release and push a fix into production. This situation should be rare.

If you are finding that this happens all the time, then you aren’t doing a good job testing and fixing bugs in the final stages of your sprints. You need to revisit how you are handling your spiraling down towards the release.

As you review your lists of features and bugs, re-rank and re-assign priorities. It is totally fine to have priorities change between sprints, just not during the sprint.

3. Pair Program and Test

Agile software development comes with a toolbox of methods to help build high quality software. My favorite two are pair programming and testing.

Pair programming is literally two engineers working together. One is typing the code and the second one is watching.

Pair programming may seem like a waste of time, but it is actually a more effective way to code especially critical pieces of your system.

Pair programming increases the quality of the code and establish awesome camaraderie between team members. You create clear and bug free code out of the gate.

Testing, and unit testing in particular, is another strategy to ensure quality code. It is actually pretty hard to write and maintain a body of tests for your code, but it is necessary and it pays off. After all, if you didn’t test something, how do you know it really works?

There are two types of tests that are particularly helpful. The first set of tests are for critical pieces of your software, things that just can’t break. The second are a set of tests that exposes the bugs you find. Whenever you find a bug, first write a test that exposes it and then fix the code. This way, you are certain that if the bug returns, your test will catch it.

4. Refactor Your Code

Like anything else in the universe, software decays over time. This may not be as obvious because we don’t readily see rust in the code, but it surely is there. Overtime, large-scale software becomes tangled and fragile and needs to be refactored.

The way to deal with it is to constantly refactor or improve your software. Much like how you go to dentist for a cleaning, you need to proactively clean your code.

Encourage the engineers to remove unnecessary code and constantly improve the software to make it better.

In addition, every 6-8 weeks schedule a cleaning and improvement sprint. In this sprint, instead of business features, the team is focusing on cleaning up the code, making it better and writing tests.

5. Create a Happy and Productive Engineering Team

It is really easy to grind down your engineering team, and most startups manage to do it quickly.

Startups thrive on chaos, but a chaotic approach to building software just doesn’t work. It is like trying to sprint through a marathon – you can’t do it.

Writing software is a highly creative and intellectually intense activity and requires a fresh brain, clarity and specific cadence. Software engineering can be either incredibly rewarding or incredibly stressful.

Setting up sprints and clear priorities is a great first step to creating a happy and productive engineering team.

By creating cadence, you reduce stress. By enabling your team to ship to production frequently, you are making the engineers happy. After all, there is nothing more rewarding than seeing the code you created work and make a real difference in the world.

Please share with us the strategies and techniques you use for building software in your startup.

This post was originally published on Alex’s blog.




What is the API for Your Startup?

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

I was recently chatting with one of the Techstars founders and found myself asking her – What is the API for your business?

This may sound like an odd question, but it actually is not.

Every single startup, every single business, has an interface that it offers to the world. Some of these interfaces are super simple, like Google – all you can do is search. Some are more sophisticated, like ordering things from Amazon – you can browse, search, add to cart, order, request a refund, etc.

Even if you aren’t an engineer or a product manager, it is really useful to think about the API that your business will offer to the world. Thinking about your business as an API allows you to get a lot of clarity of what your business actually does, and why.

API mentality forces you to be minimalistic and clear.

What is an API?

API stands for an application programming interface. You can think of API as an interface or a contract through which a software component, a web service, or in our case, a business, interacts with the world.

In other words, an API is a protocol for communicating, sending requests and receiving responses from a software component, a web service or a business.

For example, take a simple Check Box, a UI component that we see around the web. The interface for Check Box allows you to check or uncheck it.

/check -- causes checkbox to be checked 
/uncheck -- causes checkbox to be unchecked 

A different example of an API would be, for example, launching 10 servers on DigitalOcean web service cloud. That API may look like this:

/launchServers?numServers=10 -- starts running servers in the cloud.

In this last example, the launchServers command allows the user of the command to specify the number of servers to launch. Most services allow this kind of customization or parameterization for maximum flexibility and reusability. It wouldn’t make sense to have a different command to launch 10 or 20 servers, since it is essentially the same command.

What is the Business API?

When thinking about your business API, it is handy to think about the key concepts of your business and the commands associated with them. What can the users of your business do? Here are some simplified examples of the Business APIs that you will likely recognize:

google.com/search?term=techstars

amazon.com/browse?category=books
amazon.com/buy?bookId=b&customerId=c

uber.com/orderCar?location=loc&customerId=c

twitter.com/postTweet?text=t&userId=u

facebook.com/friend?userId=u&friendId=f

Modern businesses run in the cloud, and the way we interface with them is using HTTP protocol. This maybe counter intuitive since most of us, as end users, see pretty screens and friendly apps, but the nuts and bolts interface, the actual commands, are sent over HTTP.

The reason this is important is because HTTP reminds us of the actual bare bone APIs of these businesses. These are raw, direct interfaces that ultimately define EVERYTHING we can do with these services.

How To Design Your Business API

Now let’s focus on your business. When you are starting out, you are doing a whole bunch of things – understanding your founder market fit, talking to customers, thinking about your unique insights and advantages, your go to market strategy and a ton of other things.

Building the API for your business should be one of the early activities you do.

Use HTTP protocol (it is not that hard!) and map it out. Way before you build your MVP, design your API.

The exercise of designing your API will help you get a lot of clarity about your business. You will make decisions about what you will or won’t do in your MVP. You will prioritize some commands over others. You will realize, by writing on a piece of paper, whether you are doing too much or not enough.

Make your API as simple and as elegant as possible. Don’t think about what to add, think about what to remove.

Your basic API will be an amazing tool for helping you communicate with your customers and with your team. It will also be a stepping stone to building your MVP.

Once you design your API and you are happy with it, implement it. One by one, get the raw API working via HTTP. That’s right, you don’t need fancy UX and pretty apps to start. You can get a feel for your business by implementing your API.

Evolving Your API With Your Business

As your business evolves and grows, so will your API. Keep updating it and making it better. Keep adding to it, but be stingy. The best companies have simple APIs.

Think about Google – it has an amazingly simple interface, but it does something incredibly complex inside. Similarly, Steve Jobs always pushed Apple to make the interface as simple as possible, something that just works. Apple products hide incredible complexity and engineering ingenuity beneath a simple interface.

You want your business to be as simple as possible, and the services behind the interface as valuable as possible.

As your business grows, different parts of your business will evolve their own APIs. You will have a public interface and internal interfaces. It is incredibly helpful to keep all your interfaces simple and clear. Push yourself to always have clean interfaces and use them.

Your own business should always be the first and the biggest customer of your own API.

As your business grows, so will the ways it can be accessed.

You will have a desktop and mobile site, text messages, bots, iOS and Android apps and dozens of other ways your business can be accessed online. All these things can be thought of as clients of your API, clients of your business.

We now live in the world of cloud services and automation. Every major web company, whether it is Google, Amazon or Facebook has APIs for services they offer.

In the future, every single business will be accessed not just through a graphical user interface, but programmatically. As AI and automation enter our world, more and more transactions and access will happen through web services and APIs.

As a startup, you can prepare yourself for that exciting future by simply starting to think about and writing down your own API.

What commands your business offer to its customers? What is your API?

Originally posted on Alex’s blog.




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 on 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.

 

Originally posted on Alex’s blog.




7 Calendar Tips for Startups

I once had the pleasure of hearing Lou Gerstner, former CEO of IBM, speak. Something he said stuck in my head: “Never let anyone own your schedule.” It’s simple, it’s obvious, yet it’s genius.

Over the years, whenever I didn’t follow this advice, I was stressed and unproductive. Gradually, I learned that planning and following a routine makes a huge difference in how I feel and what I get done. Here are some of the things that help me manage my schedule that you may find helpful:

1. Create a routine

No matter what you are working on, create a routine. Block times for specific activities and stick with the plan. Turn your calendar into a bunch of blocks, and put activities into those blocks. Whatever is not planned, you don’t do. If you want free time / exercise time / reading TechCrunch time, plan it all.

Your routine may change throughout the year, but at any given time it’s better to have a plan. For example, if you are working on launching a company, and need to do customer discovery, coding, and hiring, then prioritize and block specific times for each activity.

Here is a sample calendar I made that illustrates some of the concepts and ideas from this post.

Sample Calendar

2. Group meetings and calls into blocks

Group meetings and calls into time blocks. For example, if you need to have outside meetings, block two 1/2 days a week for those meetings, and go to the outside meetings only during those times. Do the same thing for in-office meetings. This way you are not only creating a chunk of time for meetings, you are also creating other blocks of time that you will be able to focus on important P1 work. Do the same thing with calls – book them all back-to-back.

3. Optimize time for different meeting types

Personally, I am now a big fan of 30-minute meetings and 10-minute calls. I think 10-minute calls are a great way to initially connect with someone or give someone quick advice. You can do a Google Hangout or Skype if you prefer to see the person instead of just hearing them. The reason 10-minute calls work is because people skip the B.S. and get to the point. Try it – 10 minutes is actually a lot of time, if you focus. I prefer to do these calls on Fridays, when I am usually working from home.

I am not a big fan of introductory coffee meetings, lunches and dinners. I am a huge fan of coffee and meals with people I already know. Those meetings are typically productive and fun, but the first time you are meeting someone, it’s more productive to do a call, or an actual 30-minute meeting in the office.

Here are the types of meetings you might want to book:

  • 30-min meeting in the office to get to know someone or catch up
  • 45-min meeting outside of the office, allow 15-min travel time
  • 10-min call to help someone who needs advice
  • 15-min daily standup – great for startups / engineering teams
  • 30-min weekly staff meeting

Whatever meetings you do, group them into blocks depending on your particular schedule. If you feel like a particular type of meeting needs more or less time, then adjust the block accordingly.

4. Use Appointment Slots

There is a great feature in Google Calendar called Appointment Slots. It allows you to book a chunk of time and then split it into pieces. For example, I can book 3 hours of outside meetings and then split it into 3 meetings – 1 hour each. Or I can book 1 hour of calls and split it into 6 calls, 10 minutes each. There is also a bunch of specific tools, like doodle, that do that too.

The next step is to create bit.ly links for different blocks of time. You can have a link for your outside meetings, another link for 30-minute inside meetings and yet another one for 10-minute calls. You then share these links with people and they can book the time with you. I’ve done this with Techstars candidate companies and it was amazingly effective. It minimized the back-and-forth on the email and saved a ton of time for me and the companies.

This won’t work with everyone, because some people may find this rude. I personally don’t find it rude at all when someone sends me their availability. In any case, if you are not comfortable sending the link to someone, then you can use your own Appointment Slots, suggest a few meeting times, and then book the specific slot yourself.

Btw, if you are asking someone to meet, always propose several specific alternative times such as Tuesday at 4:30 pm, or 5:00 pm, or Wednesday at 11:00 am, or Friday at 4:30 pm.
David Tisch gave a great talk that covers scheduling meetings and many more basics of communication.

5. Block time for email

This is the most important tip in the whole post. Email will own you unless you own it. To own your email you must avoid doing it all the time. To do that, you need to schedule the time to do your email. It is absolutely a must. In fact, it is so important that I wrote a whole entire blog post just about managing your email. Go read Inbox 0.

6. Plan your exercise and family time

Unless you put it on the calendar, it won’t get done. Well, that applies to your exercise and time with your family as well. Whether you go in the morning, afternoon, or evening; whether you do it 3 times a week or every day, put the exercise time on the calendar. My friend and mentor Nicole Glaros, makes it very clear that her mornings, until 10 am, belong to her. She hits the pavement or the gym, depending on the weather, and rarely deviates from her routine.

I have been guilty of not having regular exercise routine because I am adjusting to my new in-program schedule, but I am jamming exercise in whenever I can, 4 times a week, and actively working on locking in my specific exercise schedule. Without regular exercise, I can’t be productive at running the fast-paced 13-week marathon called the Techstars NYC program.

Same thing goes about planning time with your family and significant others. If you are a workaholic like me, you will end up stealing time from your family, unless you book it in advance and train yourself to promptly unplug. Many people in the industry have talked about planning family time. My favorite is Brad Feldwho talks about it a lot.

7. Actually manage your time

I think about my time a lot. I think about where it goes. I think about where I can get more of it and how to optimize it. When I was running GetGlue, I had an assistant who was managing my time. She was awesome, she really was. But when I joined Techstars, I decided that I will manage my calendar myself. I have to confess that I am super happy about this decision.

I find myself thinking about what I am doing, who am I meeting with and why a lot more. I meet with a HUGE amount of people every week. My schedule is particularly insane during the selection process. Yet, because I manage my calendar, follow a routine, plan meetings in blocks and use Appointment slots, I find myself less overwhelmed and less stressed.

Taking ownership of my calendar and planning my days and weeks made me a happier and more productive human. I hope this post helps you get there too.

And of course, I would love to hear your productivity tips. How do you manage your time? How do you handle your calendar? What tools do you use? Please share in the comments below.

Originally posted on Alex’s blog.




Why Founder Market Fit is So Important

Josh Kopelman, co-founder of First Round Capital, one of the most iconic and successful venture firms, just posted a must-read Tweetstorm.

Josh’s insight is that founders need to be even better pickers than VCs.

Screen Shot 2016-04-27 at 11.00.41 AM

Previously, when asked about First Round’s investment strategy Josh shared these two insights:

1. We think that founder-market fit is very important. I’ve lost a ton of money investing in founders with years of enterprise experience who now wanted to pursue a consumer idea — and vice versa.

2. An initial, compelling and unique insight. We want to understand what about your thesis is contrarian (i.e, why do you think the existing players are wrong) — and why you think a startup (and yours specifically) will win.

So what exactly is Founder-Market Fit, and WHY is it so important?

Founder Market-Fit is literally an indicator of a match between the founder and the problem they are going after.

What compelled the founder to start the business?
What experiences this founder has in the space?
What unique insight does the founder have in order to win?

The reality is that most founders start businesses in the spaces they don’t know much about.

For example, when you ask someone what business they’d start if they could? Most people say they would open a restaurant.

Opening a restaurant is a terrible business idea for 99% of people. Restaurants business has razor thin margins, and a high failure rate. Just because you eat food and love food, doesn’t mean it makes sense to open a restaurant. Most people don’t have founder-market fit to start a restaurant, they don’t get how hard it is to win in this business.

Similarly, we meet a lot of young founders that are thinking about starting a business that helps young people discover nightlife in big cities. The logic is that they had trouble finding what to do, and so did their friends, and therefore it makes sense to start a business helping people discover what to do.

This is not a great business idea and there is no real founder-market fit here either. Yes, this is indeed a problem, but it is not a unique problem, and there is no specific insight that the founders have.

A bit more subtle problem is when you have experienced founders going after the spaces they don’t know much about. As Josh Kopelman said, just because you were successful as a founder of b2b company doesn’t mean you will be successful as a founder of a b2c company. This is exactly what happened to me – I sold my first b2b company to IBM and struggled with my second company, which was a consumer facing startup.

Domain experiences and insights really do matter.

If you are starting in a business in the space you don’t already know, you are literally spending money and time to get educated. It is literally like going to school, except instead of your parents it is your investors who are paying for your education. And the investors typically don’t like that.

Experience is particularly important in b2b space, where domain knowledge is critical. Without strong understanding of the space you can’t identify real gaps and real opportunities.

Founders that start businesses in the spaces they don’t know about typically struggle.

On the flip side, if you do know your space, you can identify real opportunities, go fast and build a great business. Here are some of the examples of Techstars founders who have a great Founder Market Fit:

DigitalOcean is now the second largest hosting provider in the world. The company was started by a team that worked in the hosting space for 10 years and knew it inside out.

GreatHorn is a security company focused on preventing spearfishing attacks. GreatHorn is founded by Kevin O’Brien who was previously part of five security startups.

The founders of ImpactHealth, a direct-to-consumer health insurance company, have over 10 years of experience in the healthcare and insurance space.

Rahul Sidhu, founder of SPIDR, a company that is focused on modernizing police intelligence, was previously a law enforcement officer in a Los Angeles area.

Bora Celik from Jukely, a Netflix for concerts, spent over a decade as a concert promoter.

These founders know their markets and because of that, they are able to identify real opportunities, go faster and build the business.

What about you? Do you have founder market fit? Why are you doing what you are doing? What unique insights do you have that will help you differentiate and win?

Originally posted on Alex’s blog. 




Pin It on Pinterest