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.
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.
We spend a lot of time talking to Techstars founders about focus. We talk a lot about saying ‘no’ to things that don’t matter. We talk a lot about not chasing too many things at once. We try to give founders tools for deciding what’s important. We try to give them a framework for how to get things done.
For me personally, it boils down to three things – my next daily task, my next milestone and my big goal. Let’s call them GMT. Here is what they look like right now:
1. My next task is to send semi-weekly update emails to Techstars mentors. This is something that I do every other weekend during the Techstars program to keep the mentors posted on what’s going on in the program at large.
2. My next milestone is to have a great Demo Day. Not only are Demo Days the culmination of the Techstars program, but they are also significant milestones for me as a Managing Director at Techstars. Demo Days are the stepping stones to my bigger goal.
3. My next big goal is to become great at my job, to become a great investor in New York City. My vision is to help founders create great, transformational, lasting businesses in NYC, have fun along the way, and make a lot of money.
Being really clear about your next big goal, next milestone, and next daily task helps you keep your head straight.
If someone asks you what they are for you, and you don’t know, that’s not great. It likely means you don’t have clarity, and may not be working on things that are important.
Pick your goal first, and then work backwards from the goal while measuring progress along the way.
Work Backwards from the Goal
In my case, the goal is to become a great investor. To do that, I need to keep finding and investing in great startups. The way I do it is to fund them in batches and run them through Techstars program. To have Demo Days as milestones is natural, because the Demo Days are the culmination of the program and the start of the fundraising for most companies.
What makes for a great Demo Day? A bunch of things, but first and foremost, great companies (check out Techstars NYC Winter 2015 class).
Techstars is a mentorship-driven accelerator. We connect each company with a group of great mentors who work with them during the program to help accelerate the business.
The semi-weekly mentor email is just one small task on my list to make sure mentors and the companies are connected. It is a small but important task that is a step towards a great Demo Day.
The daily tasks add up to a milestone, and the milestones add up to the goal.
GMT: One Goal, One Milestone, One Task
If you can stick with the system, it works.
First, you set your goal, and figure out the milestones. Then you are down to the tasks, and it actually gets harder, because there are a bunch of tasks you need to do over time to get to a milestone.
On any given day, I try to be very clear about the single most important task I need to get done. If it’s not in my head, I don’t think I am focused enough. I then go to my to-do list and look through it to get back into the groove.
If you always have your top task in your head, you know exactly where you are going and why.
It’s okay for some days to be muddy and disorganized, but most days need to be pretty clear.
What works for me is a weekly routine. I know what I need to do on Monday, on Tuesday, and all other days of the week. For example, I know that every other Sunday, I send mentor updates. Having a routine really helps me stay organized and keep executing.
The routines can change from month to month, but I use the calendar to chunk my times during the week and that helps me set a rhythm. And that, in turn, helps me focus, prioritize, and know what my next task is.
Don’t Do Stuff that Doesn’t Matter
When you have clarity about your goal and milestones, you also have clarity about what doesn’t matter.
Prioritizing and deciding becomes a lot easier. That’s why for me, if something doesn’t contribute directly to having a great Demo Day, I won’t prioritize it. For example, a lot people want to meet with me, but I can’t take a ton of these meetings before the Demo Day. I am busy helping the companies. So, I explain it to people and ask them to follow up with me after Demo Day.
Also, I have a bunch of tasks and projects related to broader Techstars ecosystem that I will get to after the Demo Day. I simply don’t have the time to do them, and they are not included in my next milestone. This system of Action and Idea lists is helpful for staying organized.
Use KPIs to Measure Progress to the Milestone
I use KPIs and data to measure progress towards the milestone. Using numbers to measure progress is important, because otherwise you can’t tell if you are getting closer to the milestone.
One of the ways that investors, myself included, measure progress is by looking at the value of their portfolio. It is difficult to do for early-stage companies, and by no means is this an exact science.
Still, as long as you have some sort of consistent measurement, it works. For example, I know that the 2014 batch of Techstars NYC companies have raised over 20MM in funding, and I know that this stacks up pretty well historically against other NYC and Techstars classes. While this does not mean that I am becoming great at being an investor, a lack of financing of the companies would imply that I am not doing well.
I also use other KPIs to help me check that I am heading in the right direction. For example, we ask the founders during the program and afterwards to rate my performance. High ratings mean that founders are happy with our help. When they graduate, this would lead to a positive word of mouth, and they will recommend the program to other founders, and that would help me invest in more great companies.
Apply This to You and Your Startup
How can you apply this to you and your startup? Actually, this system works equally well for individuals and startups.
For a startup, you need to start with your Vision. What does the world look like according to you? What does the world look like when you are a successful business?
The Vision leads to the Milestones. What do you need to achieve the Vision? How do you get there? For most startups, the first few milestones are about traction and funding. Typically, the first milestone is to prove that your product is needed, to prove that there is a demand, and to get early customers.
The second milestone is typically funding. Once you’ve proven that your idea has potential, it is easier to raise funding.
You set KPIs and drive to the milestone. Build the product customers want. Do things fast, have hypotheses, test stuff, iterate, be organized and chaotic all at the same time. But at any moment, be clear about your next task – what are you working on and why? What milestone are you trying to hit? What is your big goal?
So let’s try this out.
Do you know what your goal, milestone and next task are? Please share it with us.
This was originally posted on Alex’s blog.
The following post was originally posted on Brunchwork.
Seasoned entrepreneur and investor Alex Iskold recently spoke at brunchwork. If you are involved in the startup scene, especially in New York, you probably already know Alex from his position as a Managing Director of Techstars, the leading accelerator. Before Techstars, he founded and sold two startups: Information Laboratory, which was acquired by IBM in 2003, and GetGlue, which was acquired in 2013.
Now an investor in over 40 different companies, Alex shares his advice for early stage founders:
1. Know your market.
Entrepreneurs should be well equipped with expertise in their industry. In fact, founder/market fit is one of the main criteria that companies need to be selected by Techstars.
“Don’t start companies in the spaces that you don’t know anything about. Your parents are willing to pay for you to learn in college. Investors aren’t willing to pay for you to learn something you don’t know.”
If you don’t have the necessary expertise and are still itching to create your own business, attach yourself to other early stage companies, learn from them and gain the experience needed.
2. Think about revenue early on.
The mistake that many early startups make is that they are wrapped up in the problem and their solution. However, they don’t have the numbers to support them as a viable, revenue-generating business. These numbers are paramount to investors.
“The definition of business is revenue that can support itself. The best dollars are not venture capital dollars. They are customer dollars.”
3. Be strategic about what metrics and KPIs you track.
Big data allows businesses to keep track of practically everything, but that doesn’t mean that they should. In fact, Alex said, “When you have too many metrics, it is as good as having zero metrics.” Entrepreneurs need to focus on and understand “which numbers drive [their] business and why.”
“There are no universal KPIs, but there is a universal system of applying KPIs to every single business.”
At Techstars weekly KPI meetup, companies are organized into groups depending on their business model.
4. Start pitches with a hook.
A common mistake founders make when pitching is they begin by talking about the problem they are solving.
“People want numbers, data, some sort of facts to latch onto.”
Entrepreneurs can grab investor attention by first highlighting their expertise in the space, their number of paying customers, or their existing investors. When companies lead with the problem, “people tune out and that is because, unless they know that you have some sort of traction or you are qualified, it’s just abstract words,” Alex said.
As the Managing Director of Techstars NYC, Alex Iskold has helped dozens of young entrepreneurs and businesses develop their strategy, build their brand, and receive the funding they need to realize their potential. He is also an avid blogger, so if you want to learn more valuable insights about starting a business, check out his blog here.
Only serial founders with strong domain knowledge, track record and traction get funded quickly. For most founders, raising a seed round is a lot more work, but there is a method to the madness.
We often write here about raising capital. Capital allows startups to go faster and generate growth. However, raising capital is not simple, at least for most founders.
Let’s start with what is probably the worst case scenario – you are a single founder, right out of college, with an idea in a space where you have no domain expertise. That is, you have no team, no product, no traction, no experience in general, and no experience in the space specifically.
This extreme case illustrates the reasons why investors are skeptical – this is a very risky investment situation. That is, you may be brilliant, and you may pull it off and build a massively awesome business, BUT this is clearly a very risky bet.
Investors, particularly angel investors, look for ways to reduce the risk when they are funding a company. That’s why the founders who get funded the fastest are the ones that REDUCE INVESTMENT RISK.
Below we discuss the profiles of founders that investors gravitate to and tend to invest in.
1. Serial founders
You already know this, but I will say it anyway. The world is not fair.
Serial founders who’ve been successful are MUCH MORE LIKELY to get funding.
I’ve met many investors who simply would not fund first-time founders. They are not bad people. It is just not part of their fund strategy.
When these investors raise money from their LPs (limited partners, i.e. investors who give money to investors), they promise them in their decks to only focus on serial entrepreneurs. This is no different from an investor saying they will only focus on healthcare or they will only invest in NYC companies. It is fund strategy, and while I personally do not believe in investing that way, I recognize that it is a perfectly legitimate strategy.
Investing in serial founders with domain expertise makes sense.
First, serial founders avoid making silly mistakes in just about every single aspect of the business that first-time founders make. Serial founders intuitively know what NOT to do.
They know what WON’T work. Because of that, they tend to execute better, grow companies smarter, and get to revenue faster. Not always, but that’s the perception of the investors.
2. Founders with domain knowledge
When you are starting a business in a space you don’t know much about, you are at a MASSIVE disadvantage.
Think about it, when you don’t know something, you have to study it. For things like physics or international affairs, you go to college. You spend years learning, and you have to pay for your learning.
When you start a business in a space you aren’t familiar with, investors feel that they are paying for you to learn the business. That is, you aren’t executing right away—first, you are learning.
Investors aren’t your mom and dad; they don’t want to pay for your education.
Investors are attracted to founders with domain knowledge. Investors talk about so-called founder-market fit.
Why are these founders doing this business? The answer investors are looking for is—the founders know a ton about the space and have identified an opportunity. The founders know that there is an opportunity based on their strong domain knowledge and years of experience in the space.
3. Founders with Traction
While your business is just an idea, investors will come up with 1 million reasons why it won’t work. But if you keep growing week-over-week, month-over-month, and grow your revenues and customers, eventually all objections go away.
Investors can’t resist funding growth. Investors can’t resist funding traction.
Growth and traction are indicators of a product market fit.
They are indicators that the business is really working. Whether you’ve done a startup before or whether you know the space or not no longer matters. Growth and traction mean that you have figured it out and it is working, so the investors want to jump on board.
4. Founders with Experience and Network
If you aren’t a serial founder and don’t have a ton of domain expertise or traction, you can still get funding, but it is A LOT HARDER.
There is a pattern in the industry where founders coming out of top tech companies like Google and Facebook get funded. If you spent years and proved yourself in a product or engineering role at one of those top tech companies, potential investors tend to take you more seriously.
This is because you are likely to come recommended from a strong network of alumni from those places who can vouch for you and introduce you to the investors. For example, you worked with a founder whose company got acquired. When this person is introducing you to their investors, the investors will be paying attention.
In a way, this dynamic is not very different from graduating from a top-tier school. You lean on a strong network and leverage your connections to get an introduction to investors.
5. Mission Driven, Intellectually Honest Founders
Some founders clearly stand out from the rest. You can tell how obsessed they are. These founders won’t go away and won’t give up no matter what. Investors often refer to these founders as mission-driven.
In addition to being mission driven, these founders are deeply self-aware and intellectually honest. They are socratic and introspective.
Mission-driven founders are on a journey of discovery. They have a true north, but are flexible about the specific path that gets them there.
They radiate power and awesomeness, and although they may be young and inexperienced and early, they manage to convince investors with their mix of enthusiasm and knowledge. Mission-driven founders have infectious energy that attracts investors. Investors decide to roll the dice alongside these founders.
When raising capital, think about the types of founders that tend to get funding. Which one of these founders are you?
So you decided that an accelerator is appropriate and helpful to your company. You read 10 Reasons to Join (or not to join) an accelerator post and decided to go for it. Filled out the application, researched different kinds of accelerators, applied, and got in.
Congrats! Now the work begins. Here is how you can maximize what you get out of the program.
1. Work Backwards From Your Goal
Most companies join accelerators to catalyze the funding, grow and build their network. Whatever your goals are, work backwards from the goals. Set the goals (or even better just 1 goal) for the entire program, then for each month, each week and every day. See my post about GMT on how to do this effectively.
Recognize that unless you work backwards from the goals, you may not achieve them. Accelerator programs are known to be noisy, chaotic, serendipitous, competitive, and often distracting.
There is a lot going on and there can be a lot of noise. To stay the course and avoid being pulled into different directions and wasting time, decide on the goals and make them your true north.
2. Go Fast
The Techstars mantra coined by Brad Feld and David Cohen is Do more, faster. The idea is to accomplish in 3 months what typically would take years. During Techstars programs, we accelerate companies by pairing them with amazing mentors and letting them tap our network. The feedback from the mentors, their experience and advice, allows the companies to go faster. By tapping into the network the companies are able to shortcut biz dev, funding, sales intros — all the things that typically take weeks and months only take days during Techstars.
But in addition to the mentors and the network, it is the rhythm; the culture of doing things quickly that defines an accelerator. Realize that you are on the clock. This means you can’t afford to waste time. Don’t write extra code.
Don’t waste time chasing customers that take too long to close. Instead, quickly decide what is important, prioritize and go fast.
Read my post on Action and Idea lists for how to prioritize and execute effectively.
3. Look for Shortcuts
This is a simple tactic for going quickly – try to always ask how can something be done faster. Look for a shortcut. Do you really need to build the app to test the market or could you test it using a text message? Do you really need to have the full database in place or can you just enter a few rows. Do you really need to build the product before you get your first customers? Why not sign them up in advance, sell them on the concept?
Shortcut mentality can help you go faster during the program. Always ask — is what I am doing simple? Can I do this faster? Am I making it too complicated and grandiose? Am I doing more than I need to do? More often than not, you find a simpler, better and faster solution to test a hypothesis, to get to a customer, and to validate the market.
Since you are on the clock during the program, doing the least amount possible for maximum results is what makes sense. Note that in no way am I advocating that you compromise the long term quality of your product. Quality is absolutely important, but if your MVP is successful and sticky, you will get funding and the chance to refine and make your product better.
4. Focus on Growth & Revenue
The most important thing you can do help financing is to find a product that resonates with the customers/users and generates revenue/growth. The whole point of acceleration during the program is not to accelerate your financing, that’s not really possible. What gets accelerated is your business, which in turn leads to acceleration of financing.
If you already have some initial product market fit, then your goal is to grow as much as you possibly can during the program. You set up KPIs (key performance indicators or metrics) and work hard to drive them up and to the right.
Ideally, your number one metric is monthly recurring revenue (MRR). That would make your company the most attractive to prospective investors. If that’s not possible, then growth in beta customers and/or users is another good metric. Basically, if you are not growing during the program, it means that there is no demand for your product, and in turn it means there is no product market fit (PMF), and that in turn signals to investors that you don’t have proof that your business will work.
On the flip side, it is hard to argue with revenue and customer growth. Techstars companies are known to make a lot of progress and grow a lot during the program, and that typically results in successful fundraising around Demo Day.
5. Iterate & Pivot
Next, let’s talk about Pivots. To me, fail fast has become a cliche that some people take too far. The point is that, yes, you do want to pivot if your business isn’t working. But you need to also give it a fair shot. The thing to do during the program is to iterate weekly, where each week you are trying to grow. Initially, you are iterating and refining your original concept. And then you measure, does it work or not? If you feel that week after week you can’t generate growth, then it may be time to pivot.
Once you decide to change direction, apply the same idea of iteration. Before you write a lot of code, or any code really, go and validate that the market is there.
Do customer discovery, make sure you test and and learn as much as possible using all kinds of unscalable tactics and prove that the new idea will work before rushing to write a lot of new code.
6. Maximize the Mentor Whiplash
Most accelerator programs are known for their Mentor Whiplash. This happens when founders get conflicting advice and feedback from different people. It is a really frustrating and mind twisting experience (as many founders told me). The key thing is to turn this into a positive, an increasing returns and acceleration experience for your company.
To do that — open your mind, listen, take notes and say thank you. Remember, you don’t have to do anything that other people tell you. This is your company, and you will not be measured or judged based on how much advice you did or didn’t take. You will be judged and measured based on your KPIs, revenues and growth of your business.
So take all the feedback that comes your way – the good, the bad and the ugly. Synthesize and process it. Combine it, distill it. Hear mentors out and then decide for yourself and execute. Don’t be neither too rigid and stubborn, nor too twistable and flexible.
The point is to realize when a lot of people are telling you the same thing — pay attention, don’t ignore. At the same time, have the gut to follow your vision when you really believe it and have data to back up your belief.
7. Network, Network, Network
Regardless of whether you take someone’s advice or not – be super thankful, respectful, always shake hands and connect. Become a networking machine. Other founders, mentors, investors, customers — all of them should become nodes in your network. Obsessively collect people and connections. The network will help accelerate your company after the program. It will help you with this business and all your next businesses. It is your resource and your set of shortcuts around the business world.
If you don’t obsessively connect, you are missing out. You will literally be at a disadvantage compared to other founders who are doing this correctly.
Networking is the basics of the business since the first business was conducted, and an accelerator program creates a very fruitful soil for you to rapidly build out this amazing professional asset.
Follow these 7 things and you are likely going to get the most out of the program. Remember that funding is not guaranteed and doesn’t just happen. An accelerator is not the end but the beginning. Other people have good ideas and experiences. Be thoughtful, make the most out of the program and win.
Originally posted on Alex’s blog.
‘Chance favors the prepared mind.’ – Louis Pasteur.
One of the objectives of the companies going through Techstars and other accelerators is to secure financing. Most companies are coming in focusing on accelerating their business and then securing capital to continue to accelerate growth. As the common shareholder in the company, Techstars is completely aligned with these objectives.
The reality is most startups need to raise funding to grow and to become real companies. It’s not typical that you or your accelerator can make money if you don’t fundraise, and certainly very unlikely that anyone will make any money if your company does not grow.
So we love it when companies get funding.
But we’ve seen a clear pattern with the companies that rush into funding too early — they actually have more difficulty closing the financing. Why? Here are the 9 gotchas of seed funding that will help you understand what goes wrong.
1. Lack of Preparation
To be ready to fundraise, you need to have strong knowledge of the problem you are solving – why did you start this business; your business ecosystem – customers, market opportunity, competition, go to market, distribution channels, pricing, burn, and many other things. You are going to be asked a whole lot of questions and then some by potential investors. If you are not prepared it will come through and will be a big turn-off.
2. Lack of Traction
Very few companies get seed funding without some kind of traction. Unless you are a team of successful serial entrepreneurs, and even then, investors expect customer/user traction. This does not mean perfect product market fit. It means early evidence that there is a problem and your solution / product is going to have a shot at addressing it.
3. Being Pulled Into Fundraising
So you weren’t thinking about raising money, but you met a bunch of investors, and they said that you really should. Other founders around you said you should do it too. You then decide what the heck, I will give it a shot. It is a mistake. You are not ready – you didn’t prepare, you didn’t plan it. Don’t fundraise on other people’s turf and time. Control your destiny by preparing, checking the boxes and then going out and raising. No one is going away, and investors will not say no to a meeting with you later if you said no to them when you were not ready.
4. Chasing the Wrong People
This is a big one, and it is bad. All investors are different. They like different verticals. They write checks of different sizes. Just because they are an investor does not mean they are the right investor for you. Doing research, understanding what a particular investor likes and why you might be a fit is important. It is equally important to get an introduction from someone who knows you and knows the investor.
5. Not Pitching Angels & VCs Correctly
Angel investors, micro VCs and VCs are all very different in terms of their objectives and styles and consequently how they need to be approached and pitched. An angel investor who writes 25K-50K may want a couple meetings and a micro VC that writes 100K-250K checks will be engaged for a month and may or may not lead. VCs take the longest, write the biggest checks, and like to lead rounds and take board seats. If you don’t understand how to engage each category of investors correctly, you will waste time and may not get the desired result.
6. Not Having An Overall Strategy
Even if you know who you are going after and why, you still need a strategy. A strategy would entail planning the entire fundraising process, who to meet with first, and who to meet with later. Do you start by raising a few hundred K from angels first, or do you go straight to VCs? Making the right decisions about your financing strategy, especially if you are a first time founder, is really important. Not having a plan increases the chance of not raising the capital you need to grow the business.
7. The ‘I Am Special’ Problem
But of course you are! Me too. Aren’t we all When you go to a casino and gamble, you think – all these poor suckers around me, they are going to lose, but me? No, no, no. I am a winner. And this is sad, because as an entrepreneur you actually are special. All of us are. We are this crazy, courageous, relentless, unstoppable breed. But the reality is that it is not a good bet to make when it comes to seed funding. You are better off being prepared and winning because of that.
8. Not Realizing You Are Running A Race
When you are fundraising, the word travels around. Investors are people, and they talk. Not because they are bad or against you. It is natural to compare notes in any industry, and VCs are no exception. When you are going out to raise, you need to do it quickly and get all the conversations aligned. Once you start raising, you have to run the race until you are done or you decide to stop because it just isn’t coming together. Realize that this is the race before you enter it.
9. Running Out Of Bullets
It may be a funny analogy, but it makes sense. In the beginning of the process, you have a loaded gun and you start firing shots and have all of these great conversations. Then at some point, especially in a smaller ecosystem, you find that you’ve talked to pretty much everyone. There is no one left. You just fired all your shots, and your gun is now empty.
The bad news is if you already met with all of the investors, and they didn’t write you a check, then you can’t go back to them next month and try again. The good news is that you actually can go back to them in 6 months, show progress, and if you are crushing it this time around, you will get the check. It takes awhile to reload the gun, and the only bullets allowed on reload are the real traction bullets.
How and When to Fundraise
So how do you actually win this and get funding? Two things – preparation and traction. Get all your things in order. Your deck, your pitch, your funding strategy, who you are going to talk to and why, get the intros, etc. Be prepared.
But even if you are prepared, it may not be enough in this day and age. We see less and less people funding ideas and decks. Investors want to see early traction. Some sort of indication that not only is your idea great, but that you talked to customers, built MVP, and have some kind of traction – proof that you can do it and it may work.
And if you find it too daunting and complicated, get help! Talk to fellow entrepreneurs who’ve done it before. Apply to Techstars and we can help you accelerate the business and raise funding. Really think through the funding. Prepare. Be thoughtful. Win.
When thinking about financing your startup, it is important understand different types of potential investors.
Not every wallet is right for you.
Figuring out who to raise money from and why will save you time and yield better results.
1. Friends and Family
Often times the first check comes from a family member or a friend. In theory, it is a lot easier to close them because they already know you. In practice, sometimes this is awkward, and may lead to awkward situations in the future.
For example, if a friend gives you $10K and the company goes belly up — you may lose this friend.
Think carefully before taking money from family and friends. It can be awesome, or it could be bad. Every situation is different.
Another thing is that friends and family members may not clearly understand the risk and how startups work. Take the time to educate them, and if they get it and still want in, then you are all clear.
2. Angel Investors
Angel investors put $10K-25K-50K-100K (lower is more common), and can participate in priced or debt rounds. Angels can be very valuation sensitive. It is important to distinguish between active / professional and occasional angel investors.
Ask them how many deals they do per year and look them up on AngelList. If someone only does a few deals a year, only talk to them if they have approached you, someone gave you a warm intro, or they have relevant experience and background in your space. Otherwise, infrequent investors should not be on your target list. Occasional angels will take longer to close and will be more flaky.
Active / Professional angels will do at least 6 deals per year, and usually more.
Expect to close them within the first 1-3 meetings. It is totally fine, and a good idea, to ask them if they are interested at the end of the first meeting.
Before you meet an angel, understand what they are interested in. Read their AngelList profile or ask via email to make sure it is a fit. Don’t go after people randomly – it will be a waste of your time and their time. Confirm with whomever introduces you that the introduction makes sense. Target well.
3. Angel Groups
An Angel Group, as the name implies, is a bunch of angels investing together and sharing deal flow. Angel Groups can do priced rounds, and if a significant percentage of the angels in a group get interested, they can lead your deal.
Angel Groups meet regularly and have a regular pitch process.
Some do more due diligence than others, but typically several members of the group will be assigned to do the diligence if your initial pitch goes well.
Your check will range from $50K to $500K typically, and you will end up with every individual angel on the cap table. That is, these groups are not syndicates, and unlike AngelList Syndicates, they don’t have carry fees. Angel Groups are also valuation sensitive, and will typically price the rounds lower compared to VCs.
4. AngelList Syndicates
AngelList Syndicates are the most effective way these days to raise money on AngelList. Syndicates are formed by influential angels, and range from a few hundred thousand to over a million.
The key thing is to identify angels who have these significant syndicates on AngelList, and get in front of them.
If you can get such an angel excited, he or she will run the syndicate. For example, the angel might put in $50K, and then another $250K will come via a syndicate for a total of $300K raised via AngelList. Note that the amount raised via syndicate varies and is not guaranteed.
5. Micro VCs
This is either an individual writing $100K+ checks or more likely a firm with $10MM-50MM under management. The individuals are basically angel investors with a bigger sized check. They will commit to invest or will say NO after 2-3 meetings. They may lead and be comfortable doing either debt or equity.
Micro VC Funds will likely take longer, and would not be too far off from a typical VC. You will likely need 3-4 meetings to get to a decision.
Micro VCs in NYC typically do $250K – 500K and can price and lead your round.
Micro VCs do care about ownership and ability to follow on, but to a lesser extent than VCs. They are not looking for 20% of your company, more likely 8-10% and re-up in the next round (depending on the size of their fund).
Like with angels, you need to decide whether a specific Micro VC is right for you. Spend time studying their portfolio. Some specialize in SaaS, some are focused on Consumer, some in e-commerce, some in infrastructure. Not only do you need to understand each fund, you need to understand each partner.
Partners have different experiences and focus areas and they have different preferences for companies as well. Target specific partners in a specific fund. Carefully research their portfolio and see if it is a potential fit.
Traditional VC firms have fund sizes ranging from $100M – 500MM. For seed deals, they would do as low as $250K (atypical) to as high as $2MM. Most likely $500K – 1MM would be their sweet spot. They really care about percentage of ownership, and would likely only do the seed if they think they can do Series A as well. That is, they would want to buy up the ownership to be at 15%-20% after series A.
Another thing that is critical for every fund to understand if they are currently investing: Some funds may not have the capital because they are in between funds, but they would spend the time with you anyway. It is probably not the best use of your time though.
Figure out who will be the partner on the deal. With larger firms, it is not always obvious. Look at how many companies they are involved with and ask them how many companies they typically manage. In a 150MM – 300MM fund, a partner would have 8-12 companies at any given time. 10 is really a lot.
If the partner is already busy, they won’t invest even if they like you because they are at capacity.
Research how many investments the partner has to understand your chances.
Ask them what their process is like and how to best follow up. Each firm may have a unique process and you need to understand it upfront so you can know what to expect. Set up clear next steps and follow ups. Be direct, and ask if they are interested in continuing the conversation. Try to avoid the vague state of MAYBE. If yes, then what is the next step – meeting, etc. NO is okay, you will get a lot of those. NO is better than a MAYBE.
7. Mega VC
Mega VCs are firms that have over $1BN under management. These include Andreessen, Khosla, Kleiner Perkins, Sequoia, Bessemer, etc. Some of them do seed investing, but recognize that the seeds for these guys don’t move the needle at all.
Research whether the fund has a seed program. If they do, figure out who runs it and what the process is.
It is likely that there is a partner in charge of seeds and the process is compressed compared to raising more capital.
Recognize that VC funds need to deploy large amount of capital per deal to be able to return their massive funds. Rather than spending time trying to get their attention for your seed round, it may make more sense to start building relationships with them for Series A and B.
This post originally appeared on Alex’s blog.
So, okay, it is finally here, everyone said it, and everyone knows where we are.
We are here now, and I want argue that right now is a great time for YOUR startup, provided you are going after a real opportunity. Here is why.
1. There will be a LOT LESS NOISE.
It seems that seed capital will be more scarce. It seems that it will be harder to raise money from angels and VCs. But maybe not.
Because the markets are cooler, there are will be A LOT LESS FOUNDERS starting companies. Anyone who is doing Tinder for this or Uber for that will now think twice or maybe even three times before jumping in. Most likely they won’t do it.
Less noise will be great for the founders with domain expertise, building businesses with customers and revenue day one.
Less noise will be great for the founders who are going after real opportunities.
Angels and VCs will likely pay a lot more attention to you if you have something real, and that will be an awesome, awesome thing.
2. Capital efficiency is great for baby startups.
One of the traits of great founders is scrappiness. Great founders hack and bootstrap. They find a way to get the company off the ground, to prove that it should exist, all without spending a ton of capital.
Raising a lot of seed capital should not be a pre-requisite for starting 90% of software startups.
When you start with the capital efficiency, it becomes part of your core value and part of your company DNA. That fiscal responsibility will be really helpful as your company gets bigger.
3. Professional angels & VCs aren’t going anywhere.
Accidental or occasional angels are likely to stop investing. Venture funds that haven’t performed will likely disappear. But professional angel investors and VCs will continue to invest.
In fact, here is a little secret. This is their favorite time to invest, because they will be investing in YOU, amazing founder, and the great opportunity you are going after. BUT, they will be able to get into the deal at a more attractive price.
The keyword is “professional” investors. They do it for a living.
Professional investors will not stop or backdown when the market is attractive.
Everyone learned value investing from Warren Buffett, and investors in the downturn will go after great founders and great businesses. Great investors are looking to buy low and sell high.
4. Lower valuations are better earlier than later.
Founders obsess over valuations.
But raising on a lower valuation early in the company lifecycle is not necessarily a bad thing. It is a lot better to take a valuation hit early in the game than to do a down round.
Two things are important to understand for the founders here.
a) You have an option of raising less capital at a lower valuation and end up selling the same percent of your company. Read this awesome post by Fred Wilson for more on this topic.
b) You are betting that lower valuation now will turn into a higher valuation later. It is actually a smart bet when the market is down.
5. What starts at the bottom must go up.
Markets are cyclical. They go up and down. This is a fundamental law of markets.
Jim Robinson IV, General Partner at RRE Ventures, my friend and mentor who has more than 20 years of experience in venture capital, explained it best.
Jim said that startups that rise with the tide make the most money. He said that historically, when they invested in the downturn, returns where significantly better for the founders and for the investors.
It makes perfect sense. If you start on the bottom, grind, and build the business, the tide will turn, and you will end up on the top.
So, really, this IS the best time to start a company, IF you believe that YOUR company is needed, that the business will be profitable and will create wealth.
That’s why we at Techstars NYC are very excited about our upcoming Summer 2016 class.
We know that the founders in this class will be ever more determined, will be more focused on capital efficiency and building real businesses.
If you are one of those founders, we can’t wait for you to apply. We can’t wait to meet YOU.
Originally published on Alex’s blog here.
Accelerators are integral part of the startup ecosystem. For some, especially first time founders, it’s becoming a checkbox — have to go through an accelerator. Serial entrepreneurs, as a rule, would say they don’t need to, because they already know what to do.
Some people say that accelerators are only good for the companies that didn’t yet raise financing. They argue that if the company has raised capital, then it’s too far along for an accelerator and wouldn’t benefit from it.
My take is different — none of the above is universally true. We have plenty of successes at Techstars with companies who raised funding, and plenty of serial entrepreneurs who have gone through the program. Increasingly, we see later stage companies that already achieved product market fit really accelerate by going through Techstars.
Here is a break down of why you would join an accelerator (factoring in that I am a Managing Director at Techstars):
1. You are looking for mentorship & feedback
Quality mentorship is a secret sauce behind a great accelerator. Matching you with a network of top entrepreneurs, executives and investors who share their experience, provide feedback, and guidance can really accelerate your business.
Most often, the focus is the business itself — Is this the right product for the market? How to achieve growth? What is the revenue model? Is this a big business? Is this business venture fundable?
You need to want to be mentored and seek the feedback. If you don’t think other people can add value or give you good feedback, then accelerators are probably not a fit for you.
2. You believe that your idea is an actual business
You believe you have a good idea, and potentially a great business and you want to accelerate the discovery of whether this is true or not. You will do that by via a ton of testing, getting customer feedback, talking to mentors and accelerator staff, and most importantly by setting goals and aggressively measuring progress.
You will do all of this with the goal to find product market fit, and then step on the gas to get growth and prepare the business for financing. That is, you compress what normally happens over much longer periods of time down to days and weeks. You essentially force yourself and your company through the process and that is an awesome way to do it.
3. You are looking for business acceleration
If you already have traction and early product market fit, you may benefit from business acceleration. Techstars in particular, is known for its big, world-wide network that can connect your business with potential customers in a matter of hours.
By leveraging the network, you are short-cutting the lengthy business development process and rapidly accelerating your business. If your product is great, you can turn introductions into customers and quickly grow your revenue in a matter of weeks and months, while normally it would take months and years.
4. You are preparing for financing
Whether you are first-time founder or a veteran, raising money is never easy. A good accelerator would prepare you for financing, not just by introducing you to investors — thats the easy part, but by actually working with you to help ensure that you have interesting, healthy and defensible business.
You will work through the questions the investors would ask – What is the value here? Who are the customers? What is your traction and growth like? What’s competition like? What is the market opportunity? What are the costs and revenue projections? What’s the hiring plan? What does this business look like at scale? All of these and many more questions get worked through to prepare you for funding.
5. You clicked with the Managing Director & accelerator crew
Accelerators are people too! Do you like the Managing Director and accelerator staff? If not, how are you going to spend 3+ months together?
Every VC would tell you how important the match is between the CEO and VC. This is because they get to work together in the boardroom for years. Now let’s do the math. If you do a board meeting every 6 weeks for 5 years, that’s 43 days of half-day meetings. Assume you spend another 43 days together over 5 years (thats a big over-estimate, but that’s fine). Thats 86 not even full days — still less than the time you would spend with the Managing Director and staff at an accelerator.
Make sure you know and like the people you will work with.
6. You are clear on the value
Just as not all universities, high-schools and kindergartens are the same, no two accelerators are alike. Not saying good or bad, just saying different. How different? Well that’s the whole point — do your homework and find out.
The last thing you want is to go in thinking you are going to get something and then come out without it. Be direct and specific — whatever you are looking for, ask during the interview process, would I get X out of your accelerator?
Remember any interview is a two way street. And if the accelerator is not willing to answer your questions during the interview process — well, it’s probably not a great accelerator for you.
7. You understand the offer terms
The transactional part of going through an accelerator is really important too. What are the terms? What do you get, and what do you give up. How much money are you getting? Is it equity or debt? What percentage of your company are you giving up? Is it common stock or preferred? What rights will preferred stock have?
If the accelerator does not take any equity, it’s fine, but it does create a looser relationship. On the other hand, some accelerators ask for too much equity, and it then harder to further finance the business. Some accelerators have aggressive preferred stock asks, including senior class of stock and control terms. That’s not really market, but you might decide that you are okay with that. The key point is — understand what you are getting and what you are giving up.
8. You enjoy intense environment and coopetition
Accelerator environments are typically really intense. At least at Techstars, the companies really Do More Faster, and it is amazing how much they accomplish in a short period of time. If the accelerator is laid back, well, then its not likely to accelerate you. Figure this out before you join. You do want super intense, fast-paced environment that will leapfrog your company.
And you have to want to go through this experience with other startups. You learn a ton from each other and you also naturally compete. Whose made the biggest progress this week? Who landed the biggest client? Who has the most users? Who has the best pitch? It is a great natural competitive environment, but it is also the place to get friends and business partners for life. Nothing else bonds founders like going through an accelerator together.
9. Alumni say it is AWESOME
Do your homework. Talk to the alumni. Did they enjoy the experience? If all of them say yes, ask what did they get out of it? Why did they think it was valuable for their businesses?
If most alumni said it wasn’t a great experience, well, maybe you can then save yourself time, and find a better accelerator.
10. Some of the reasons not to join an Accelerator
You are looking for immediate funding. Better accelerators give you around $100K, and while not a meaningless amount of money by any means, should not be the sole reason for going to accelerator. It is like taking a job you don’t love just to get paid – it’s fine to do it, but not likely to make you happy.
You are looking to get into any accelerator. It is a bad idea for all the reasons we talked about above. Any accelerator won’t help you accelerate the business. Be deliberate, know why, do not settle.
You are looking for co-founders. Not really the place for this. It is very likely that you would be wasting the opportunity unless you have the right team already in place. Of course things happen, teams fall apart, and then you deal with it, but its different from deliberately going to accelerator to just find a co-founder.
You are looking for free space and free beer. Again not a great idea (although I hear you on the free beer). You won’t be maximizing the value of the program without having a specific set of goals and objectives.
Hope this helps. If you have specific questions about your company and whether you would benefit from an accelerator feel free to leave a comment or email me at alex dot iskold at techstars dot com.
Want to apply to Techstars? Next deadline is March 20 for Atlanta, Chicago, London, Mobility (Detroit), New York City, and Retail (Target). Apply today!
This post was originally posted on Alex’s blog here.
In my capacity of the Managing Director at Techstars NYC I spend a lot of time with founders on getting funding. Raising money is a complex and rigorous process. It requires preparation and precision.
I’ve been writing extensively on the topic here on my blog. I’ve been also collecting the best articles I find around the web. In this post, I’ve compiled the best writing I found on the topic with brief commentary about each post.
by Elizabeth Kraus of Merge Lane
Having solid metrics is a huge benefit for a seed round and an absolute must for series A and beyond. If the founder can’t articulate metrics & numbers around the business, investors are very likely to pass. Read this post to know what metrics matter.
by Jeff Jordan of A16Z
Team at A16Z pulled together an awesome post on metrics that matter. If CAC, LTV, GMV aren’t in your vocabulary yet, jump in.
by Trevor Blackwell of Y Combinator
Trying to figure out how much capital to raise? When you will raise profitability? Use this awesome tool from Trevor. Super helpful. Also check out my post on How Much Capital to Raise.
by Alex Iskold of Techstars
First time, and even serial founders make mistakes during fundraising. Most typical? Not being prepared. Other mistakes are doing it too early, or without traction. Read this post to learn what may go wrong in the typical fundraising.
by Lili Balfour of Atelier Advisors
In this fun, and spot on post Lili outlines things that drive investors crazy. Some include lies, stupidity, cluelessness. Read on.
by Mark Suster of Upfront Ventures
Founders and Venture Capitalists have a different view of the fundraising process. Founders want checks fast, while VCs balance strong inclination towards a no with FOMO. In this classic post, Mark explains that the key to fundraising is building a relationship. Check out the related post I wrote about avoiding Happy Ears.
Fundraising is a little bit like dating. Go too fast or too slow and it won’t work. What to do and what not to do is illuminated by Joanne Wilson, a prolific angel investor in NYC in this Wall Street Journal post.
by Alex Iskold of Techstars
Raising VC is difficult. A lot needs to come together. But what are some of the less obvious things? In this post we talk about things ranging from venture-backable businesses to partner dynamics and fund cycles.
by Shaun Abrahamson Greatest Good
Micro VCs are a new type of venture capitalists. They typically right smaller checks compare to VCs but bigger than angels do. Micro VCs play critical role in both seed and series A stage companies. Shaun’s epic post demystifies and breaks down all you need to know about Micro VC.
by Steve Schlafman of RRE Ventures
An epic deck that walks you through what you need to put together to raise a seed round. A ton of awesome information, with bonus material for NYC founders. For additional info on the topic read my post on putting together a Perfect Deck for Seed Round.
by Scott Walker of Walker Corporate Law
Ah the convertible debt. Hated and loved by everyone. It’s quick to do but what are the consequences? Scott talks about the good, the bad and the very ugly of convertible debt. For more on the topic read these excellent posts by Mark Suster and Brad Feld.
by Shane Jones of The Press Box
Fundraising is as much art as science. When founders meet investors they show them decks and talk about the business. But the deck is not the only thing investors look at. They read founders body language and pay close attention to their emotions. This fascinating post eliminates what not to do during the pitch meetings.
by Bo Yaghmaie of Cooley
Liq prefs. They are no good, right? Well some are and some are okay. Read this excellent post by Bo to learn all about Liquidation preferences and how they impact your outcome as a founder.
by Fred Wilson of Union Square Ventures
Option pool is a tool for you to attract talent and give them skin in the game, right? Sure. It is that a lot more. Investors ask that option pool is plenty and comes out of so-called pre-money valuation. What does that mean and why? Read this excellent post by Fred to find out.
by Mark Suster of Upfront Ventures
Founders fixate on pre-money valuation. Investors are all about % of ownership. There are tricks to every single negotiation and VCs know the tricks. Mark Suster opens up and tells you like it is.
by Brad Feld of Foundry Group
The exact calculations of any funding round are kind of like voodoo science. Well not kind of, it is that. Complex spreadsheets, army of lawyers, and a ton of back and forth. Brad sheds light on how the calculations actually work. While at it, go read another excellent post by Brad on what he thinks about seed investing.
by Bilal Zuberi of Lux Capital
Got a call from an Associate – take it or pass? Who are these Associates and what is their agenda? Read this great rant on the topic from a former associate and now partner.
by Micah Baldwin of Amazon
Founders are obsessed with valuation, while VCs are focused on ownership. Micah explains in this fantastic post why it makes sense to raise on the lower valuation in the earlier days of the company vs. raising high early and then struggling to grow into the valuation. For another excellent take on this, read Fred Wilson’s The Valuation Trap.
by Albert Wenger of Union Square Ventures
How investors think about post-money and why it is important to keep it as low as you can. Sage advice from Albert. Fred Wilson also comments.
by David Cohen of Techstars
Beware of competitive dynamics when you raise. There are plenty of bad actors out there. David Cohen puts it eloquently in this post.
by Paul Graham of Y-Combinator
Got 6 months or less in the bank? You are running out of money and it is not a great place to be in. Actually it is much worse than you think. Read this dark and sober post by Paul Graham to find out what your real options are.
by Tomasz Tunguz of Redpoint Ventures
When Winter is here, how do you think about capital and financing of your startup? Read this excellent, short post by Tomasz.
by Mark Solon of Techstars
Should you raise more or less capital? Mark Solon, Managing Partner at Techstars argues that it makes sense to raise more capital if available. Given current cool climate and series A crunch this is a sage advice. Also read my post on this topic – Why it makes sense to raise more capital when you can.
by Josh Kopelman of First Round Capital
Raising Series A is a lot harder than raising a seed round. Seed capital is abundant, while series A bar is really high. In this awesome, nuanced post Josh Kopelman, Founding Partner of First Round Capital gives the founders advice on how to think about the Series A funding landscape.
by Chris Dixon of A16Z
Why do VCs obsess with Unicorns? How do VCs make money, anyway? Chris illuminates the rise of large funds and the dynamic of venture capital and puts it in a simple and accessible form. This post is likely to bring you closer to understanding why VCs say NO to so many opportunities.
What are your favorite posts on fundraising? Please share with us and we will update the post in coming weeks.