I recently recorded two free courses with LinkedIn Learning. They are each under an hour long and broken up into a bunch of small segments.
The first one is on Raising Venture Capital and is based on content from the book Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist that I wrote with Jason Mendelson. Amy tells me that this is her favorite shirt from my current rotation of Robert Graham shirts.
The second one is on Validating Your Startup Idea which based on the book Startup Opportunities: Know When to Quit Your Day Job which I wrote with Sean Wise. Same recording studio (an Airbnb in Rancho Santa Fe) but a different shirt.
The team I worked with at LinkedIn Learning was dynamite. They reached out to me about this and I was happy to give them a day of my time to see how it worked. My goal was that in the worst case I’d give them some useful content to do something with.
While there have been many words written about gender bias in the context of entrepreneurship and funding, I thought the following TED Talk from Dana Kanze presented one of the best frames of references, supported by a real research study, that I’ve seen to date. In addition, she has some clear, actionable suggestions at the end of the talk to help eliminate the bias.
Her research emerges from her own exploration of a social psychological theory originated by Professor Tory Higgins called “regulatory focus.” This theory explores the different motivational orientations of promotion and prevention.
While listening to Dana’s explanation and examples in the video, I had a deep insight – around how to ask questions of an entrepreneur – that hadn’t occurred to me before. Here are her direct definitions of promotion focus and prevention focus.
“A promotion focus is concerned with gains and emphasizes hopes, accomplishments and advancement needs, while a prevention focus is concerned with losses and emphasizes safety, responsibility and security needs. Since the best-case scenario for a prevention focus is to simply maintain the status quo, this has us treading water just to stay afloat, while a promotion focus instead has us swimming in the right direction. It’s just a matter of how far we can advance.”
Dana’s punchline is that investors approach female entrepreneurs with a prevention focus and male entrepreneurs with a promotion focus. Interestingly, she finds this is consistent regardless of the gender of the investor!
The talk has a clear recommendation for female entrepreneurs in it. Basically, if you get a prevention question, reframe the answer in a promotion context.
“So what this means is that if you’re asked a question about defending your start-up’s market share, you’d be better served to frame your response around the size and growth potential of the overall pie as opposed to how you merely plan to protect your sliver of that pie.”
Dana also has a suggestion for how investors (both female and male) can help eliminate this implicit bias.
“So to my investors out there, I would offer that you have an opportunity here to approach Q&A sessions more even-handedly, not just so that you could do the right thing, but so that you can improve the quality of your decision making. By flashing the same light on every start-up’s potential for gains and losses, you enable all deserving start-ups to shine and you maximize returns in the process.”
Her talk is only 15 minutes long and well worth it. Or, if you are a fast reader, take a look at the transcript.
When we led a $9 million financing in Glowforge a little over a year ago, we were excited about the potential to do to the subtractive 3D printing world what we did with MakerBot in the additive / FDM 3D printing world. We were also fired up by the beautiful and practical stuff that the team made us to show what the product could do.
In June 2015, Glowforge had a prototype and a plan. A few months later, Glowforge ran a 30-day crowdfunding campaign, which ended up raising $27.9 million and is still the #1 30-day crowdfunding campaign ever.
By the time the 30 days were over, it was unambiguous that we had found the ever-elusive product market fit. We knew that all kinds of designers, crafters, artists, and makers wanted a 3D laser printer in their home. The feedback around what we were doing was incredible and awesome. Oh – and lasers are super cool.
It has been less than nine months since the pre-order campaign and I’ve seen the product and the company move at a lightning quick pace. In Q2 they brought a full beta unit to our office in Boulder and it blew our mind.
My partner Ryan’s son Quinn (who is 12) was in the office so we sat him down in front of the Glowforge, gave him an iPad with the Glowforge software on it, and he went to town making stuff in our conference room. After 30 minutes the grin on my face was so huge I had to go sit quietly in my office for a few minutes to calm down.
Units are now coming off our US manufacturing lines and we are starting to get them into beta user’s hands each week. We are trickling them out slowly to make sure that we’ve got the manufacturing process nailed for the hardware. The software is continually improving, so a short passage of time as we dial in the manufacturing before scaling just results in an even better end product.
Dan Shapiro (the CEO) and his team is obsessed about having the highest quality possible product. While they didn’t need any additional money at this point, they were willing to let us do a financing to have major cash on the balance sheet that would allow them to weather any challenges. Given the extreme demand we had from the pre-order campaign, we are expecting this to accelerate once we start shipping, so it made sense to raise more money right now to support growth so the company could focus 100% of it’s energy on customers and product.
We proactively offered to lead a financing rather than have Dan and team run around few a few months. As part of our overall strategy, we have long described ourselves as syndication agnostic. We are happy to invest with others, but we are also happy to lead rounds ourselves in companies we’ve already invested in. At Glowforge, we already had a great partner with True Ventures and were able to agree on terms with Dan and his team that allowed us to quickly do a round.
As Glowforge printers make their way out into the world, I’m super excited to see what people do with them. Oh, and lasers are super cool.
Mark Suster wrote a great post yesterday titled The Resetting of the Startup Industry. Go read it now – I’ll wait.
Once again, as we find ourselves in the middle of a significant public market correction, especially around technology stocks, there’s an enormous amount of noise in the system, as there always is. Much of it is very short term focused and, like a giant tractor beam, draws the conversation into a very short time horizon (as in days or weeks). And, rather than rational and helpful thoughts for entrepreneurs, it often brings out the schadenfreude in even the most talented people.
Mark’s post is one of the first in this cycle that I’ve seen from a VC giving clear, actionable advice . One of my favorite lines in buried in the middle:
“I’ve heard enough companies say “we simply can’t cut costs or it will hurt the long-term potential of the business” to get a wry smile. We entrepreneurs have been spinning that line for decades in every boom cycle. It’s simply not true. Pragmatic cost cuts are always possible and often productive.”
Many companies have hired ahead of their growth rate because they had the cash to do so. In our portfolio, we generally don’t have this problem because we aren’t big fans of either (a) overfunding companies or (b) escalating burn rates based on headcount. But, occasionally we find ourselves in the position on the board of a company where, as you look forward, you realize you are burning more than you should be for the stage you are at. As Mark suggests, this is a moment when you can proactively make pragmatic cuts. It will suck for a few days but feel a lot better in the long term.
But, more importantly, is another point Mark buries later on, which includes an awesome post of his from 2010.
“If you need to clean up your own cap table first – while very hard to do – it will make outside funding easier”
Again, go read the post now – I’ll wait. It’s so nice there are other great VC bloggers who write this stuff so I can just point at it.
I learned this lesson 127 times between 2000 and 2005. I started investing in 1994 and while there was some bumpiness in 1997 and again in 1999, the real pain happened between 2000 and 2005. I watched, participated, and suffered through every type of creative financing as companies were struggling to raise capital in this time frame. I’ve seen every imaginable type of liquidation preference structure, pay-to-play dynamic, preferred return, ratchet, share/option bonus, option repricing, and carveout. I suffered through the next financing after implementing a complex structure, or a sale of the company, or a liquidation. I’ve spent way too much time with lawyers, rights offerings, liquidation waterfalls, and angry/frustrated people who are calculating share ownership by class to see if they can exert pressure on an outcome that they really can’t impact anyway, and certainly haven’t been constructively contributing to.
I have two simple rules for founders in my head from this experience. First, make sure you know where the capital is going to come from to fully fund your business. You might have it in the bank already. Your existing investors might be willing to provide it. Or you might need to raise it. Until you are consistently generating positive cash flow, you depend on someone else for financing. And, in this kind of environment, that can be very painful, especially if you need to go find someone who isn’t already an investor in your company (e.g. your insiders require there to be an outside lead, or you need to raise much more capital than your insiders can provide.)
Second, keep your capital structure simple. There are three things that will mess you up in the long run:
- Too much liquidation preference: My simple rule of thumb is that if you’ve raised more than $25m and your liquidation preference is greater than 50% of your post money valuation, you have too much liquidation preference. This is a little tricky in early rounds and with modest up-round financings, as you’ll often have a liquidation preference that is high relative to your overall valuation. But, as you raise more money at higher valuations, this will normalize. Then, if you end up doing a down round, it suddenly matters a lot. Don’t worry about this too much, until you do a down round. Then use the down round to clean up your preference overhang.
- Complex liquidation preference: In an effort to keep from doing a down round, or too much of a down round, there will be tension between your old investors and your new investors (if you have them) around your new liquidation preferences. Often, there will be asymmetry between them with your new liquidation preferences having a multiple on them where they participate for a while up to a cap. Or participate forever. If you don’t know what this means, welcome to the world of terms other than price suddenly mattering, which Jason and I talk about extensively in our book Venture Deals. Deal with reality as a founder as well as an investor group and avoid this complexity – just clean up your cap table instead.
- Carveouts: After spending hours working through yet another messed up carveout that I inherited from an old bubble-era deal, I realized I hated carveouts. They are almost always written in a way that doesn’t really hold up, creates misalignment, or is a negotiating anchor in an acquisition situation. When I see a carveout being proposed these days, I know there’s a liquidation preference problem.
Mark’s post has good solutions for each of these, but the best is – as a founding team – to work with your investors to make sure that everyone is aligned for the upside case, rather than focused on protecting their capital in the downside case. For this, like so many other things in life, means “simple is better.” Most importantly, don’t be afraid to talk about it early, well before you have to go through another financing round.
Welcome to 2016. We’ve already heard lots of predictions about the late stage financing market, tech IPOs, and what is going to happen to unicorns this year. And it’s only Monday, January 4th.
Remember that these are predictions. No one really has a clue. And a year is a long time.
My simple advice for 2016 is “control your destiny.” There are lots of different ways to control your destiny. It’s dependent on the stage you are at, the size of your company, and the configuration of your investor base.
Here’s an example from an email exchange I had this morning with the CEO of an early stage company that has growing revenue and a small team.
Founder: “So far we’ve raised $1.2mm and our revenues for 2016 will eclipse that. (All software licenses sold, no services). With status quo, we can become profitable, but grow slowly. I can burn faster, and grow faster, but risk not being able to raise money. There are network effects and winning the market is important. If my end goal is to ultimately win the market and not stay a “nice little business” is there any rule of thumb for how much to burn versus keep in the coffers? Is it better to burn out, or fade away?”
Me: 1. How much cash do you have in the bank? 2. How much are you burning a month?
Founder: 1. $250K actual cash. $250K in A/R. 2. $65k / month
Me: Get profitable so you are self-sustaining. Then raise more money.
Founder: Thanks! I think you are right. Love to know your reasoning.
Me: Control your future. It makes fundraising much easier.
I’ve got plenty of different examples for different situations and stages. Look for more examples like this in the future. If there are specific cases you are looking for feedback on, feel free to leave them in the comments.
I hear some version of this one all the time.
- “We will never need another financing.”
- “This financing will get us to cash flow breakeven.”
- “This is our last financing before we become profitable.”
It’s probably bullshit. There are so many reasons companies raise more money in the future that even making an assertion like this is generally nonsensical. But even if you, as the founder, believe it, you are still probably deluding yourself.
Now, there are points in time where a company doesn’t have to raise any more money. I’m on the board of several significant companies that are profitable and generating meaningful free cash flow. They don’t need to raise any more money unless they want to. And, there are a few reasons they might want to, but we’ll get to that later in the post.
There are also companies, like my first one (Feld Technologies) that bootstrapped and never raised any money. Well – almost no money. We funded the business with $10 (for ten shares of stock) and my dad personally guaranteed a $20,000 line of credit with his bank. We promptly spent the $20,000 on our first few months of operations, realized there was no more where that was coming from, fired everyone, paid back the line of credit over the next six months from our very modest positive cash flow, and then made a profit – and had positive cash flow – every month for the rest of the seven years of the business up until the day we sold the company.
But I’m not talking about bootstrapped companies. I’m taking about angel and VC backed companies. You know, the ones that generally lose money for a while before they make any money. And need money to fund their operations.
Imagine being an investor and being approached by a business SaaS company that has raised $5 million, has $100k / month of revenue, has been growing at about 5% per month, and is doing a $10 million round. “This is the last financing we’ll ever need” is the lead in statement. My first question is “how fast do you want to grow year over year for the next few years?” When the number comes back over 100%, my next question is “Do your customers pay monthly or annually, up front or in arrears.” Unless you are getting paid annually upfront, it’s highly unlikely that your cash coming in is going to outpace your cash going on on a monthly basis for a while. It’s simple math – give it a shot if you want. Sure, every now and then something magical happens (very high price point, very low cost of customer acquisition, zero churn), but that’s a serious edge case.
Now things are working nicely for you and you are growing quickly after raising that $10 million, but you have a competitor that is chasing you from below and a giant public company who is suddenly attacking you from the top. You decide you need to add a direct sales force to augment the self-service / low-touch sales model you’ve been using. Yup – that’ll be more money. Or you realize that you have massive technical debt because you’ve underinvested in scaling and your AWS bills are now increasing non-linearly with your revenue all of a sudden because of the way you’ve architected things. Or you have a major outage and decide you need some redundant infrastructure. I could come up with 100 more items.
You want to do an acquisition, but the seller wants some cash. Your revenue growth flattens out for a few quarters but you didn’t get ahead of the cost dynamic. There is a macro downturn and 25% of your customers vaporize (Don’t think this happens? Ask one of your friends who was a CEO of an Internet company in 2001.)
Where there is a wonderful fantasy about never needing to raise more money, and it does occasionally turn into a reality, I recommend you not lead with it when you are out raising money. It simply undermines your credibility.
Today, Rover announced that Menlo Ventures has led a new $12m round of financing. As is our style, we participated, but we’re excited to have a new partner to join us, Madrona, and Petco in this fast growing adventure.
Lots of VC firms are once again talking about online marketplaces. Some get it; many don’t. Being systematic about what it takes to build and scale a marketplace effectively and make it an enduring enterprise is difficult.
We learned this dynamic in the early 2000’s with our investment in ServiceMagic. We invested in the company in 1999 during the ascension of the Internet bubble. We loved the two founders, Michael Beaudoin and Rodney Rice, but knew very little about marketplace businesses or the home improvement category. But a lot of people were funding marketplaces and other online “things” in this arena – well over $500 million of VC capital went into the home improvement market alone.
It was an unmitigated disaster for almost every company except ServiceMagic. In 2000, Michael and Rodney cut the business drastically, changed the business model to a lead-fee system, which they pioneered online. By 2003 nearly all of their competitors had failed, the companies that went public pre-bubble were trading sub-$1 / share, but ServiceMagic was growing like crazy and was very profitable.
Before ignoring vanity metrics became trendy, ServiceMagic ignored them. Michael and Rodney were data obsessed, getting hourly reports with key metrics. They understood the different dimensions of the business and were laser focused on drivers of supply and demand in each market they operated. They eschewed slick marketing, were systematic about growing headcount, learned how to master local expansion models, and stayed obsessively focused on the quality of transactions, instead of simply the quantity, moving through the marketplace.
We invest early in the life of a company. While we weren’t the first investor in Rover, when Madrona partner Greg Gottesman called and told me that I had to meet Aaron Easterly, the co-founder of Rover, I happily obliged on my next trip to Seattle. In ten minutes I knew I wanted to back Aaron as he had the same characteristics as Michael and Rodney. And, while after 10 minutes I knew nothing about the dog sitting market, as a dog owner I instinctively understood and appreciated the problem.
So – our first order sort in the case of Rover was Aaron and the team. We loved what we saw. No bullshit. Total quants. Deep domain love. Complete lack of interest in marketing nonsense and overpromotion.
And yes – after a little more exploration it was clear that Rover had a huge addressable market. Current commercial solutions are generally despised and the opportunity for a two-sided marketplace is enormous. Best of all, there are very obvious RAM (remnant asset monetization) dynamics to the marketplace.
Sure enough, a year after our initial investment, our premise for the investment in Rover shows clearly in the data. All of the underlying marketplace metrics – including activation, fill rates, and repeat usage – are accelerating rapidly. Dogs owners trying the service now will spend twice as much monthly as those trying the service 18 months ago. Sitters joining the marketplace now will earn 50 times more money in their first three months than those signing up 18 months ago.
Oh – and Michael Beaudoin from ServiceMagic joined the board last year as one of our outside board members.
If you are a dog owner, or want to be a dog sitter, try Rover out today.
I’ve been using Yesware since the first alpha release. While I’m theoretically not a salesperson, I believe every CEO and professional plays the role of a salesperson. And many people, especially in young, fast growing companies, are salespeople even if that’s not their title. As far as I’m concerned salespeople are the unsung heros of most US companies.
The brilliance of Yesware is that it was conceived and built by salespeople, for salespeople, from the perspective of living in email. Most salespeople I know live in email, hate their CRM system, and are constantly switching between the two while bemoaning the idiocy of the whole thing. The whole CRM thing is for sales managers who want to actually track what the salespeople are doing. But it’s all about email for the salespeople. And that’s what Yesware is focused on.
As a seed investor in Yesware, it has been pretty awesome to watch the product evolve and and the user growth spread to over 40,000 users through word of mouth only. As a result of our word of mouth approach, the product has to be great and responsive to the users.
As an investor, I’ve encouraged the team to push a new release once a week, focus on both registrations and daily active users, and instrument every aspect of the product so we can see what’s happening at a very granular level. While Yesware is only available for Gmail, it’s been an outstanding platform to iterate aggressively on and get this kind of feedback. Now that Yesware has nailed the use case with the seed financing and has a serious user ramp happening, it’s time to go after Outlook.
I’m psyched for the Yesware team and proud to be involved with them.
For all of you out there who are wondering, Amy is doing fine. We’re in Boulder, she’s happy, in some pain, but enjoying the delightful impact of Percocet, and making her way through MI-5 Season 8. Thanks for all of the support, emails, and kind words.
I’m about to head out for a five hour run (broken into three separate segments) in preparation for the 50 miler I’m doing in April after I help her take a shower (which ordinarily I would be excited about), but first I thought I’d write some thoughts about a call I had with an entrepreneur yesterday.
The call was about a potential financing he is considering. I’ve gotten to know him some from a distance over the past year and am impressed with what he’s created. He originally just called me for advice on his financing strategy but I started the call by telling him I was interested in exploring leading a round, would be willing to give him advice also, and would quickly tell him if I was dropping out so he could flip me into “advice only mode” if we weren’t going to end up being a potential investor.
We had a wide ranging conversation over an hour about the current state of the business and how he’s thinking about the financing. Several times over the course of the hour he sounded defensive about a particular issue – well – not defensive, but uncertain. He’d frame what he thought was a negative in the context of the way he’d heard it from a previous potential investor (let’s call them BucketHead Ventures) who hadn’t gotten to a deal with the company in the past.
One of these was around churn – he asserted that one of the clear weaknesses of the business was the high churn rate. I pressed him on what he meant and we went through some numbers. He didn’t have a high churn rate at all – in fact, his churn rate after a customer was paying for three months was minimal. The problem – described by BucketHead Ventures as “high churn” – was a combination of what happened in the first three months and BucketHead’s inability to do cohort analysis, so BucketHead looked at absolute churn on a monthly basis rather than on a cohort basis.
In my head, I thought to myself “bucketheads – they pretend to understand businesses like this but have a total miss at a basic level.” The entrepreneur understood the miss, but had internalized BucketHead Ventures feedback and was letting it color his view of his business. And, more importantly, it was making him gunshy. Instead of articulating a powerful story about low customer acquisition costs with minimal downstream churn, he lead with “the worst problem with the business is our high churn rate.”
I see this all the time. While some entrepreneurs think all VCs are bucketheads (they aren’t), other entrepreneurs think all VCs understand this stuff (they don’t). Even ones who seem to be experts, or should be experts, or claim to be experts. Especially the ones who claim to be experts. Often, they are just bucketheads. Listen to their feedback, but don’t let it make you gunshy if you think they are wrong.
I’ve always had mixed feelings about the importance of a company announcing a financing in the absence of any other activity. “Dear World: We Just Raised $X From Investors A, B, and C.” Ok, but so what?
In my book, there is only one real reason for this – to attract new potential employees: “We’ve just raised $X and are hiring 20 people including types A through types Q – see our jobs page at jobs.companyname.com and apply now.”
Unfortunately, very few funding announcements are focused on this for two reasons. The first is the stupid one – many entrepreneurs get tangled up in the ego dynamics of a financing (“look ma – we raised money’) and lose sight of the notion that raising money is just one tiny step on the path to success. In my book, once you’ve completed a financing, take a deep breath, tell everyone in the company so they know how much money is in the bank, and then get back to work creating amazing things for your customers.
The second is less stupid, but is something I see over and over again, even with companies we are investors in (and we know better). When you do a financing, you file something called a Form D with the SEC. This process is fully automated which means it is easy for our friends like Dan Primack at Fortune to see any new filings that are made. Dan was one of the first people I knew who regularly published Form D info – it’s now spread widely across most of the VC-based publications, but I’ve give Dan credit for being the most diligent with this (and with many other things he reports on.)
Once you’ve filed your Form D, the data is available on Edgar with a simple search. There are other ways to get it as well since there are plenty of services that republish Edgar data with a better UI for searching. Regardless, the info on Form D is out there on the web.
Some VCs I know claim that you don’t have to file a Form D. Having researched this, I think it’s a dumb move. Most credible attorneys that work with corporate securities, especially those in the VC industry, will insist that you file a Form D if you have more than one investor, or if you have investors in more than one state. In our world, we just tell companies we invest in to file it and not worry about it.
This takes us back to the beginning of the post. For some reason, some companies want to keep their financings quiet. That’s fine – just file your Form D and say nothing about it. It’ll get picked up in the daily VC publications, like Term Sheet and VentureWire. Maybe it’ll end up on TechCrunch if you’ve got some famous investors that they like to write about. And, if your local paper is on the ball, it’ll show up there also. But it’s meaningless – “Joe’s Company Raised $X From Investors A, B, and C according to a filing with the SEC.” Next.
But if you are going to announce your financing, do it right – in conjunction with your Form D filing. Have your jobs page up. Make it clear that you are hiring. If you have substantive stuff to announce around the financing, say an acquisition, a major strategic partnership, or a new product release, announce it at the same time. Substance matters here – the more the better.
Make your noise for a day – and then get back to work creating amazing things for your customers.