There’s a new person in your life. It’s probably a guy. He probably wears chinos with a blue shirt. He’s probably standing awkwardly next to the coffee machine in the kitchen of your startup trying (and failing) to make small talk with your backend server team.
The primary reason startups take venture capital is because of just that – the capital. But entrepreneurs should expect their investor to bring a whole lot more than just money to the table.
Every entrepreneur can expect their venture investors to bring seven main benefits to the table. If you already have venture investors, you can use this article as-is. If you are currently considering fundraising, reverse it and ask prospective investors if they are able to support you in these key areas. If not, ask yourself if you’re talking to the right people.
- The Long Haul – Mileage may very, but you can assume that your Series A venture investors will be on your board for five to nine years. That’s about the same length as the average marriage in the US. In other words, it’s a long time. This means you need to build a relationship.
Like any relationship, you need to start with a positive attitude and work to dispel any niggles in the early days. I’ve seen entrepreneurs immediately slap a new investor with unexpected terms after a term sheet is signed. I’ve seen investors turn up to the first board meeting and demand that every aspect of the business is run a different way, before they attempt to understand the company’s current cadence.
My advice to both is: go slower; there’s plenty of time, you should take it.
- The Network – Venture capitalists tend to be networking machines. Their success often depends on it, and the day to day reality of their work means that they meet up to 10 new people every day. In addition to this sheer level of ‘exposure’, VCs occupy a unique position as a ‘gateway’ to new technology and cutting edge industry trends. This means that they are usually able to lean on people they don’t know and often get a meeting if needed.
Before every board meeting or conversation, think of who you need to meet. Use LinkedIn and discover who your investor knows, and ask them to put you in touch. As an entrepreneur, you should exploit this network unashamedly!
- The Next Round – It may seem early, but at some point, you may have to raise another investment round. This may be another private, venture round or a public offering. As most investors focus on particular ‘stages’ of investment (seed, Series A etc), they are likely to have worked with companies at a similar stage to yours, who went on to raise additional funding.
Use that experience. Ask your investor what your next investor is likely to look for. Ask for access to presentations that worked well in the past (assuming confidentiality can be lifted or sensitive information redacted), and – most importantly – before you start your next fund-raise process, ask to present to your existing investors. Their feedback will be invaluable. I’ve had a couple of portfolio companies miss this opportunity, and I won’t let another make this mistake.
- The Critical Hire – The typical venture investor usually has a slightly higher level understanding of any given company. Therefore, venture investors are genuinely rather good at painting the big picture of the company. This can be super-useful when convincing that critical, senior hire to join your company. This is one of my personal favourites. I’ve helped a number of CEOs on this, and nothing feels more awesome than knowing you’re helping build the team.
- The Critical Sale – Similar to above, sometime you will have a large potential customer that needs some extra reassurance from someone who, ultimately, has your company’s (financial) back. I have found this to be especially crucial for enterprise software companies. As you can imagine, if you’re selling your solution to a large corporate customer, they often need convincing that you are not going to go bust in the next year. Your investor is often the most authoritative voice on this topic.
- The Counsellor – No investor or board member can tell you what to do. That is the great (and also terrifying) thing about being a CEO. The buck, ultimately, stops with you.
However, a good investor is an experienced soul, and will have been through many similar trials and tribulations that you find yourself battling against. Some will have done it all before themselves – which is one of the reasons our firm has always had a healthy balance of entrepreneurs on the team – and others will have seen it as an investor with other CEOs. The good investors spot the patterns, and are able to be a thoughtful and engaged listener as you talk through an issue and decide how to deal with it.
On a human level, this can be a rewarding part of the investor/founder relationship – of course there are many conversations on things like pricing strategies, marketing ideas or human resource issues, but the most memorable conversations are always personal. Dealing with an employee who is facing a difficult situation at home, working through the tough steps that need to be taken when a founder exits a company, and confronting failure – whether this is of a person, a team, a product or even the whole company. These things are tough, but they all happen, and a good investor will be by your side when you confront them.
- The Exit – whether you’re selling to another company or taking your company public (which may or may not really be an exit in itself) good investors will have experience of this. Again, the best firms will have a mixture of people who have done it with others, and those who have done it themselves. I took my company public so I can talk people through my experience on a personal level, but one of my partners advised on over $500B of IPOs and M&As over his career as a banker which gives him an entirely different perspective on the process. Great firms will have investors with deep experience in this area and be able to bring it bear when you hit that point of your company’s progression.
The best entrepreneurs are resourceful beings who pull in whatever they can from those around them. While that has to be balanced in the case of, say, employees, where there is an obvious power differential, I always encourage CEOs to exploit their venture investors. Let’s be honest, we are perfectly capable of taking care of ourselves!
Of course the investor starts by providing the capital your company needs to grow, but the right kind of investor should deliver a whole lot more too.
Welcome to Mentor Mondays! Today, Suranga Chandratillake is back sharing his wisdom on why founders need to sell. Suranga is a GP at Balderton Capital, the founder and former CEO of blinkx, and a mentor with the Techstars Berlin Accelerator.
Some roles at a startup attract a lot of attention.
It goes without saying that everyone wants to be a ‘Founder’ and, whether a Founder or not, other jobs high on the hip list include CEO, Lead Engineer, Head of Product, and any job title that includes the term ‘Growth Hacker.’
However, a role that is consistently under appreciated is that of sales. Too often the ‘Head of Sales’ is given a lowly status that carries a slight whiff of pariah.
This is a huge mistake.
Speaking as an entrepreneur: selling is the single most important thing that a Founder must be able to do.
Speaking as a VC: I couldn’t consider backing a team where there wasn’t at least one natural-born-killer salesperson on the founding team. In fact, on many of the best teams, there’s more than one.
What Selling Actually Means
In my mind, there are three key components to sales in the broadest sense of the word:
- First, is the creation of a narrative that enables an audience to instantly connect with and understand the values and journey of a company, while providing a basic introduction to the product (or to whatever is being sold).
- Second, there’s the actual delivery of this narrative in a variety of contexts to a variety of people – from during an elevator ride to a crucial new hire or during your three week IPO roadshow to detail-oriented investors.
- And, last but not least, there’s the closing – asking for and getting engagement as a result of your delivery of your company’s narrative.
And by engagement I mean anything like making an actual sale to a client, securing investment from a VC, persuading a top-level hire deciding to join your company, or something completely different. Just anything where you’ve had to sweat to persuade a valuable party to choose you ahead of the competition.
How Selling Fits into the Job of a CEO
One of the things that makes selling so important (and therefore so useful) is that it is critically important to multiple stages of a company’s growth.
1) Early days – hiring
In the early days of most companies, one of the hardest things that any Founder faces is hiring. Chances are that you can’t afford to pay big bucks – or even average bucks. And you don’t yet have a successful company, brand or product that people want to be part of. All you have is your ability to sell the vision.
I have met many aspiring Founders who have a great idea, and ask us for initial funding so they can hire a technology person to implement it. To me, anyone who has to have money first doesn’t get it. A great founder convinces someone great who already has a well-paid job to give it up, and start a new madcap adventure. I want to see that a founder has already convinced someone to make an irrational decision – as behind every irrational decision, there tends to be a great salesperson.
2) As you grow – raising capital
This is the point of the story when you come to see me, or one of my peers. Most successful technology companies take at least one round of funding during their growth. Even if a company could be bootstrapped throughout, the competitive nature of their market often means that extra resource allows them to grow more quickly, and to win the race.
Selling is key in raising capital both because you have to sell the investor you are trying to land (obviously!), but also because any good investor is going to be closely watching your ability to sell. The fact is, most investors know that you will have further rounds of investment in the future, and/or an exit of some sort. They will also know that Founders with great selling skills will be better at doing those things, and will get a premium on the company when it sells (no, that isn’t fair, but such is life…)
3) As you grow – actual selling
Whatever the model, if you run a for-profit business, someone somewhere pays you money.
In the long run, you will employ a large, well-trained sales force to run this process, presided over by Sales VPs and Chief Revenue Officers. Alternately, if you offer an entirely self-service product, you will develop a complex system that allows people to manage their spending on your platform. But, before any of that, someone (read: you) needs to figure out exactly who is going to buy, what they are going to buy, how much they can be charged and, most importantly how they will be sold.
To hone in on this, ask yourself this question:
What is the core driver that gets a sale done in your business? Without understanding that, you have nothing. The task of identifying and crafting this core proposition is a key responsibility of the CEO and other commercial founders.
The best way to begin to understand your core driver is to get out there. Knock on doors and pick up phones, and try to sell a bunch of different things in different ways. Warning: most of your methods will fail. There will be embarrassing meetings where people say no (or, more likely, they just avoid following up). There will be hours wasted in Starbucks and corporate reception areas, waiting for someone to turn up, only to get an email an hour late saying they can’t make it after all. Suck it up – you wanted to be a Founder, right?
4) At scale – keeping it all together
When your company grows, it increases in complexity. Hundreds of people, tens of offices, a thousand different drivers and intentions and agendas. Over time you will have drift. Even the best system for corporate goal management will fail. Even the best designed leadership mechanisms can be undermined by a particularly negative member of the team. At this point it falls again on the Founder to be equal parts ambassador and leader. Move between all the groups equally, listen to the views, take everything on board, juggle competing visions and, ultimately, bring it all together with a clear narrative on where the company goes next and close everyone sufficiently that they put aside previous differences and follow your lead.
Sound tough? It’s tougher. Personally, I think this is the hardest type of ‘selling’ that a successful Founder will have to master as they build an organization. Unfortunately, it is also the most unavoidable and most important.
5) The end game
And then, at the end of it all, you will likely take your company public on the stock market or sell it, or both. Again, you are looking a long and super critical sales process.
You will run into all manner of rules and regulations, you will work with lawyers who will fact-check every word you want to use to sell the business (I remember three six hour legal sessions as we put together the prospectus for the IPO at blinkx!).
Of course, the substantial business that you have grown will speak for itself to a certain extent, but the premium you attract, and the smoothness with which the deal goes off, will both be depend on your ability to sell.
There have been many successful companies who started out with only technical founders. There have also been some that started with no technical founders at all. Other great companies never had a founding marketer, and many more didn’t start life with a lawyer or an accountant on the team.
But what every great company starts with is someone who can sell. If your team has been downplaying this skill, start focusing on it. If you don’t think you’re very good at it, start learning. If you’re leading, you’re probably selling.
I have some 20+ mentoring calls with founders each week. Many of them pitch me B2B ideas. Many of those ideas don’t work for one simple reason.
I think there are three B2B products that make sense.
1. Single decision maker
A single individual makes the purchasing decision. For example to use Buffer to manage social media. Typically these purchase decision are made by swiping a card and expensing it later. The price point here is $10s -$100s per month.
2. Department decision
You sell to a department. Say you are selling HR software. Or IT software. Or finance software. Several people can be involved a senior person / the department head will make the decision. You will send them an invoice and they will pay. The price point here is typically $100s — $1000s per month
3. Company wide decision
Multiple department heads are involved. The MD / CEO will make the purchasing decision. Long drawn out sales cycle and implementation processes are typical. Price point is typically $10,000s — $100,000s per month.
A good B2B business is typically priced in these bands, because the effort to market, sell and integrate the product with the customer means that unless products are priced at this level, they cannot be sold profitably.
So, when founder comes to me and pitches me a product that a CEO needs to approve that costs hundreds per month, then this leads to a short mentoring call where I would advise the founder to rethink what they do.
Do the math — your business is driven by it.
I have several dozen portfolio companies. Most of them send me monthly or quarterly updates. There are three items in the updates that I personally find more useful than anything else. They are:
- Cash flow / P&L top line summary
- Major changes / developments
- Problems the CEO is struggling with and wants help on
A hypothetical example is below. I wish all my update emails were like it. Call it the minimum viable update email.
Last month we burned through $45k. We are on track to turn cash flow positive before year end. We will decide in about three months whether we need a little bit of extra cash for working capital purposes or not.
There were no key changes last month. We have got two good candidates for CMO and will decide this month.
- We have some problems in our tech team. Our CTO isn’t experienced enough to manage through this. Can you recommend a mentor / experienced CTO to come in and help (this can be a paid coaching position)?
- I have been approached by a VC who wants to potentially pre-empt a Series A. How do I best deal with this?
- We have lost two important pitches against a competitor in December. Can any of you spare some time to talk through our positioning statements and sales process?
- I am worried that key competitor X has just closed a $8m Series A round (see here for more info), how shall we best deal with this (if at all)?
We recently published a list of Investors in Europe. I have now been approached by dozens of founders who want guidance on how to best approach these investors.
The best way to think about figuring out which VCs to approach is counterintuitive. Most founders try to pick the right VCs off the list. Given their lack of knowledge about each firm, they typically end up picking all the wrong investors (e.g. they are looking to raise a seed round and are picking famous US firms that are looking for Series A and B deals in Europe).
The right way to use the list is not to pick the right VCs. The right way is to exclude the wrong ones. This is how you do it:
- Make a copy of the list
- Remove all investors who are not investing at your stage (e.g. you are raising a seed round and they only do Series A and Series B rounds)
- Remove all investors who are only investing in specific geographies you are not in (e.g. they invest in Scandinavian companies and you are a US founder living in Germany)
- Remove all investors who are only investing in specific industries you are not in (e.g. you are an e-commerce company and they only invest in cleantech)
That is it. You should end up with a list of ca. 50–100 investors or so. That is your target list. You didn’t pick any of these firms. You just removed the ones that are not relevant to you.
Next, you need to figure out whom you know who can introduce you to these VCs. Use LinkedIn. Use Conspire. Make sure you are connected to all of your current investors, mentors and advisors. Also, ask all of them which firm they can intro you to and then show them the target list and ask them whom they know.
Craft a forwardable email. Send the person who should intro you to the VC that email. They will reach out on your behalf and, if successful, will intro you to the partner.
And that is how you use the list effectively. Good luck with the fund raising.
PS: I wrote a manual on how to best raise VC funding almost ten years ago. This is as valid today as it was back then. It explains all the steps in much detail.
Every time, when I see a pre-launch company that raises a seed round, hires a team and then works six months towards the product launch, it breaks my heart. Typically it doesn’t work out. Then they spend three months to try and fix it, and it still doesn’t work. Then they have three months of runway left and then they reach out to me and ask me to fix their company.
But I can’t. And the reason is the 20% law:
“Whenever you launch a new product, you have a 20% chance of it working out.”
I learned this lesson the hard way at Forward Labs. We used to bring in founders and we would surround them with a team of experienced developers, marketers, designers, etc. Even when you have a team of proven people who are all very, very good at what they do and have done it for many years, your chances of success when you launch a new product is low.
That is the percentage of products that worked when we launched.
Founders, startups and their investors are ruled by the 20% law and they don’t know it.
So here is a solution that we tried and that worked out for us.
Launch, see whether it works, then change drastically very quickly when it doesn’t. And with drastically I mean no A/B testing. When you need a 10x change, no little tweaking will ever get you there.
So — be bold and make drastic changes.
Do the math. When you relaunch your product or pivot your product ten times, you have a combined 90% chance of it working out.
How many rockets did SpaceX blow up to achieve a successful landing? Yes, quite a few…
So would you invest 75% of your cash in the first rocket with a 20% chance of success? Probably not, but many founders still do it with their companies.
It is thus no surprise that most of them blow up. But it still breaks my heart.
We have been busy at work here at the Techstars Accelerator in Berlin. Over the last few weeks, we took at a look at some of the resources we’ve made available to the founders in our Berlin class. And then we thought it was silly to we keep these resources to ourselves. So we have decided to start opening these resources to everyone, starting today.
The first thing we are releasing is a list of 300+ investors who routinely invest in Seed, Series A or Series B rounds in European startups (we have included countries bordering the Mediterranean, such as Turkey and Israel). This list currently totals some €15BN in funds that are available for investment in European startups right now. This list has the most up to date investor information as we contacted each firm to get the right facts and figures.
You can gain access to the full list with lots of information on each investor here.
We also made a little map illustrating roughly how these investors distribute across Europe. Hotspots are easily visible. You can find a high resolution version of map is in the Techstars Berlin Resources space.
The list is already proving popular with founders, despite us having shared it with a very small group of people only. Everybody can contribute to it via comments or by emailing us.
So far, €15BN and counting…lots more to come.
Are you a founder? Want to talk to the Techstars Berlin team? Apply for office hours here. We try to talk to as many founders as we can.
You can pre-apply for Techstars Berlin here.
The list actually has a longer story behind it, you can read more about that here.
The slide I see in many pitch decks is one where the CEO explains the market, how she understands its segmentation and whom the company is selling to. It is frequently some sort of grid where on one axis you find geography and on the other industries or maybe company size.
I would like you to consider two scenarios.
In the first scenario, the CEO proceeds to fill in the grid with full and partial check marks or similar to demonstrate the broad applicability of the product and how significant the opportunity is and how many customers they have in each segment (typically very few in each). She then explains how she plans to roll out the product to all these customers.
In the second scenario, the CEO explains that she has considered and tested various segments, but for now she is focusing just on a single segment. She then says that she thinks the next segment maybe a segment adjacent to the one she is tackling now, but that she isn’t quite sure about it.
All things being equal, which CEO would you rather invest in?
When I hear the first scenario, I tend to lose interest. The second scenario excites me. Here is why.
When you pick just one segment, you:
- Only need to build and maintain features for that segment;
- Can iterate product development faster;
- Only need to market and sell to one segment;
- Can leverage existing customers and their references to sell to very similar customers;
- And, maybe most importantly, you can reach the tipping point in that segment much more quickly.
That last point in particular deserves some special attention.
In a typical adoption curve, you have about 15% of customers who are early adopters. Once you cross 15%, the segment tips in your favour and you can close 50%+ relatively quickly. When you try to sell to a market with 100k customers in it (for example), then it will take 15k customers before you reach the tipping point.
Consider the alternative of picking a tiny market segment with only 50 customers in it. You only need to close 8, and the segment tips in your favour.
What this means is that the best market segmentation strategy is to initially experiment with different segments, pick the one that seems to work best and to laser focus on it. Nail it, then pick the next adjacent segment, rinse and repeat.
You will probably find that your company grows faster by focusing on a very small market segment initially, and not on a large one.
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Many first time founders struggle with organizing the areas of responsibility in their company. Here is a simple overview that many founders I have talked to found useful.
The area most founders struggle with is commercial. At its most simplistic level, there are three tasks a company must achieve in order to be in business:
- Marketing: Qualified leads
A qualified lead is an individual who has expressed interest in buying the product and has the budget and authority to make a purchase decision. Marketing’s primary role is to produce and deliver qualified leads.
- Sales: Closing deals
Sales is converting qualified leads into closed deals. This function can be operated by a sales person; it can be operated by the product itself. Somebody or something has to convert leads into customers.
- Customer success: Keeping customers happy & upselling them
Selling to customers is great, but you need to actually deliver what you promised. Customers should purchase again and preferably purchase more in the future. This function is frequently referred to as customer success.
Marketing, sales, and customer success are the three key building blocks of a commercial business function.
Now, here is the trick. Each of these three areas should be owned by one individual. At the same time, any individual should own only one area of responsibility, not two or three. For example, ideally you have one person responsible for marketing, another for sales and another for customer success. Each of those three should report to the CEO. Each may have their own team reporting to them.
This makes hiring for these functions easier. It makes formulating targets easy. It makes incentivizing easy. It makes management easy. It leads to focus on achieving goals. It removes excuses.
As soon as you mix those responsibilities, performance drops. Individuals who are good at marketing are not good at sales. Salespeople are not good at customer success and so forth.
I always suggest to founders to focus on:
- Number of qualified leads produced per day / week (and the cost per qualified lead)
- Percentage of leads closed by sales (and the time to close)
- Churn of existing customers (and overall customer satisfaction)
This is the most basic structure of a commercial team. I find it serves as a good starting point.
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By far the most annoying aspect of fund raising is when investors ‘go slow’ or ‘go dark’ on a company. Meaning the investor doesn’t say yes and they don’t say no. Instead, they respond very slowly to the emails or calls of the founders.
Below is advice I give to founders. The key is understanding the different investor mindsets. You can then act accordingly.
No (Qualified Out)
The investor passes right away or they take a look and then pass firmly.
This is actually great behavior; it saves founders a lot of time.
The only way I have seen that can change that investor’s mind is when another investor/board member gets in touch and says: “You should look again at this company; I think you have read the situation incorrectly.”
Unless you can do this, it is exceptionally difficult to convince investors to take a second look. Instead, accept it gracefully and don’t annoy them.
Upfront significant information request
Sometimes a junior/inexperienced investor requests a lot of specific information upfront. This happens before it is clear whether there is real partner level interest in the company.
This can take up a lot of the founders’ time and should be politely refused. The investor should first establish whether there is real interest.
Going slow or going dark
When the investor is slow to respond, the term ‘Going dark’ is often used. They say, “We are very busy with internal processes and are doing due diligence.” There are three dozen variants of this.
What they actually think is a variant of the following: “I can’t make up my mind about this company. It is not so compelling I feel I need to make an offer. Yet it also isn’t so disinteresting I feel I need to reject them.”
It is highly unlikely that this investor will lead your round. What you can do is to try to either convert them to a ‘soft-circle’ or to qualify them out.
You can go back and say: “It doesn’t feel as if you are interested in leading the round, tell you what, I will keep you in the loop and once I have a lead and there is space left, I will get back to you, how does that sound?” If they say yes, try to crystallize the conditions under which they would say yes to a deal. Get that in writing if you can.
Conditional Yes / The ‘Soft-Circle’
The investor is interested and happy to commit, but their check or interest level won’t crystallize the round. That is fine. Soft-circle them. Try to get them to a ‘conditional yes’. A conditional yes is not a term sheet, but a statement where the investor says under which conditions they would be happy to invest.
There is a scenario where you will have multiple soft-circled investors. You can then issue a term sheet yourself and have one investor do the legal work.
Every time when I have been involved with a fund raising and a firm received a firm yes, this happened relatively quickly. There was speedy and continuous communication. Ideally, you have multiple investors say yes at the same time so you can compare them and then work with the firm(s) of your choice.
Those are the five most typical initial outcomes of an investor discussion. The key for all involved is to get out of time wasting and slow discussions ASAP. Push to either No, Conditional Yes or Yes. And then you can construct your round accordingly.
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This post was originally published on Jens’ blog, Founders View.