All posts tagged with Fundraising

Is This VC a Good Girlfriend or a Good Wife?

I’ve been using this slightly chauvinistic metaphor a fair bit recently, so please forgive me :)

It’s always interesting to me to watch how entrepreneurs evaluate VC investors.  If you are in the luxurious position to be able to choose your investors, I really recommend going through the extra couple days of work that that would entail.  In a world of highly competitive financings, entrepreneurs are sometimes presented with the “opportunity” to “get a deal done” quickly.  What they don’t realize is that on the VC’s side, they are being encouraged by their partners to “lock it up” quickly, which, when you put it that way, actually doesn’t sound too great at all.

Some investors are what I’d call bad girlfriends but great wives.  They may be hard to get a hold of initially, tough to schedule with, deliberate with their process, ask really blunt and hard questions, etc.  This can be off-putting, and I don’t advocate for this, but I think the entrepreneur should keep in mind that pre-investment behavior is not always indicative of post investment behavior.  I know some investors that are pretty tough on entrepreneurs as they go through the fundraising process, but go to enormous lengths for the entrepreneurs after an investment as been made.  

Conversely, there are other investors that are sweethearts in the dating phase, but not great after the investment.  I’ve seen this myself - some investors are very charming and easy to work with during the fundraising stage, but don’t contribute much after the investment is made.  Entrepreneurs quickly realize that the friendliness of the investor during the partner meeting doesn’t really mean squat when you can’t get him or her to hustle for you. 

Ideally, you want an investor who is both a good girlfriend and a good wife.  Some of the best do behave this way.  But you can always catch a great investor in an “off” period.  Much of VC is about managing your time so that you can be as helpful as possible to the entrepreneurs that you are in business with.  So sometimes that means some annoying encounters early on.  Also, at the seed stage, some investors might do very little due diligence and be very easy to deal with to get a very small check that they view as a option for the future. On the flip side, an investor that takes a seed investment very seriously and will devote their full efforts towards a company will probably be more methodical and rigorous in the evaluation process.  One of these hypothetical investors may be considered a better girlfriend, but who will be the better wife?

All this can be addressed with a little bit of VC due diligence.  Some specific thoughts:

1. Call some of the entrepreneurs that this VC has backed before.  Most VC’s will say “feel free to talk to any of the CEO’s of my portfolio companies”.  Take them up on it.  You don’t need to go overboard - find a cross section of a) CEO’s that seem similar to you or lead a company that is in a similar stage as yours b) The CEO of a company that is not doing so well or where the person was replaced.

2. Use LinkedIN to accomplish #1 if asking directly might be challenging (which may be a negative signal in and of itself).  I find that raving fans love talking about people that they are enthusiastic about, so don’t feel like you are disturbing them of it’s out of place to ask.  Also, no answer is a datapoint (although take it with a grain of salt in case your email bounced or the entrepreneur is crazily busy).  For the sake of all entrepreneurs and investors, only do this is you are very very serious and the VC has indicated very strong interest in investing in your company.  

3. Ask for specifics. “What did they do specifically to add value in x, y, z situations” (when x, y, or z are the most critical areas that you need help).  ”How did this investor behave during your follow on round of financing?”.  If the entrepreneur has a couple investors, ask “what does investor X bring that investor Y did not?”.  

For additional thoughts on this, check out my partner Dave’s blog post on doing due diligence. Also, read the book "Who" that has some great tips on conducting diligence calls. 

Kissing Frogs

A common phrase in the venture business is that you have to “kiss a lot of frogs to find a prince”, meaning that you have to look at a lot of companies to find the real gems.

I think folks outside of the venture industry think that it’s very obvious when a great company comes along for investment.  But the truth is, it is not.

It is generally pretty easy to filter through 90% of investment opportunities and figure out quickly that it is not a fit.  But the remaining 10% is very difficult to evaluate.  There is usually a lot to like about these companies, but even the best are not sure things.

If you see a company at the early stage, you wonder about the viability of the product, whether end users will like it, how well it will monetize, etc.

If you see a company a little further along, you wonder about the scalability of the team, the threat of larger and smaller competitors, the durability of the early economics, and so forth.

Very early companies have tons of uncertainty.  But even companies that are showing great traction are not that easy to invest in.  Usually, the market is sufficiently efficient such that competition drives the valuations of investments to the point of uncertainty and discomfort.  I remember when I was at Spark looking at the series B for Twitter.  In retrospect, it was a brilliant move for the firm to invest, but at the time, there was a lot of head scratching - wondering if it made sense to pay what seemed like an insane price for a very speculative service that had major stability issues. 

On the opposite side, the reasons why investors pass on the 10% of deals that seem like a potential fit is quite varied and somewhat random.  It may simply be that the investor is preoccupied with other things at the moment (a struggling portfolio company, another deal that is closing, a major transaction, personal things at home, etc).  It could also simply mean that for whatever reason, an investor just doesn’t have much intuition about a space to have great conviction to make an investment, or spend the time necessary to develop that conviction. 

It also doesn’t mean that a company that has an easier time fundraising is necessarily worse than one that struggled.  If both were in that top 10% of opportunities, whether they could get over the finish line may have just as much to do with luck and timing as anything else.  I’ve seen some companies that I thought were not that strong raise seed or series A rounds very quickly, while others slug it out for a long time before having the round come together.  If that sounds fickle, it’s because to some degree, it is.  It’s just not as objective as folks on the outside would think. 

A couple practical points for entrepreneurs:

1. Try to figure out quickly if you are in that top 10%.  Not all “no’s” are created equal.  If an investor has you meet other members of their team, clearly does some diligence in between meetings, and ultimately passes, it at least means that you cleared the “I think there is something there” bar.  It doesn’t take too many meetings to figure out if you are consistently clearing that bar, and if so, I’d say don’t be discouraged by “no’s”.  Take the feedback, adjust, but keep pushing forward.  

But if you are not getting that kind of traction, that’s probably a signal.  Although investors differ quite a bit at how they evaluate the top 10% of opportunities, I’ve found they are pretty consistent about figuring out if a company is in the top 10%. 

2. You are kissing frogs too.  I’ve never really liked the “kissing frogs” metaphor (does that mean that entrepreneurs are frogs and VC’s are princesses?).  Entrepreneurs are evaluating investors too - you want ones who see the world the way you do, or can engage with you in a productive way about the challenges you face. I think that if you can find yourself in the position where you are in the top 10%, you should have confidence that you will get the funding you need.  So the exercise is more finding the right investor at the right time, vs. just getting people to say “yes”.

"It’s Too Early"

Sometimes, early stage companies hear investors say that it’s “too early” for them to invest.

It’s a puzzling response when most VC’s are considered “early stage”.  The definition of “early” seems to be inconsistent, and the very same investor might turn around and invest in something that seems just as “early” later.

Couple thoughts on this:

1. Consumer internet investors tend to fall into two camps.  Those who generally invest before product market fit, and those who invest after (I think Dave McClure put it this way first). It’s fairly obvious who you are talking to when you look at their portfolios and do a little research into what stage the companies were in when they invested.  Even if a VC is intrigued by your company, if they aren’t used to investing before product-market-fit, they will be very very hard to convince, and might send you on wild goose chases for directional (but largely irrelevant) data. The best investors are pretty transparent about what they are looking for in specific markets. The best investors also know that the priorities of a company are very different at these stages, and are able to provide the right kind of help at the right time. 

2. Most investors have made exceptions to their baseline behavior.  So I find that “it’s too early” is usually code for one of two things.  1. I don’t know the founders, and their backgrounds aren’t so amazing that I feel like I absolutely must invest now. 2. This doesn’t fit into the short list of companies I’m specifically looking for. On the first, the thought is that certain entrepreneurs as so good, that they will find PMF even if it doesn’t exist today.  "Heat Seeking Missles" as Josh Kopelman calls them. On the second, it’s usually easier to convince an investor about the potential for PMF when they think in part that it’s their idea.  This is a difficult needle to thread, so I don’t recommend necessarily trying to find this pro-actively.  But investors will sometimes have such strong points of view on a market or a problem that they are willing to take the “leap of faith” with entrepreneurs prior to PMF.  The further away you are from an investor’s ideal team and core thesis areas, the higher the traction bar. 

Final thought: I’m observing increasingly that there is some confusion between traction and product market fit.  Similarly, I think there is some confusion about a successful product that has achieved PMF and a successful company.  But that’s a post for another day. 

Go Big or Go Home - Do Micro VCs Promote More Quick Flips?

One of the supposed drawbacks of more seed stage funding in Silicon Valley is that it encourages more “quick flip” exits.  Max Levchin wrote an excellent post on this observation, and my friend and old colleague Bijan Sabet shared his thoughts on this as well. 

I largely share Max and Bijan’s affinity towards entrepreneurs that are trying built long-term, sustainable, and market transforming businesses.  Those companies tend to be the backbone of meaningful economic growth, and it’s just plain fun to be involved with these kinds of businesses. 

But I hope folks don’t get the message that all seed investors are driving towards quick flips.  Frankly, I think very few micro-VC’s (or Super Angels, or whatever) are driving towards quick flips.  And based on the folks I know, I think very few micro-VC’s invest in entrepreneurs who are explicitly going for a quick flip.  For what it’s worth, here are my more nuanced thoughts on this. 

Glimmers of Greatness. This is similar language that Mike Moritz used on stage at Techcrunch Disrupt. Really transformative companies usually begin with a glimmer of greatness.  And as Bijan said, very small amounts of capital can help an entrepreneur begin to pursue greatness. But a glimmer is just a glimmer.  It’s not a sure thing, and most audacious ideas start with something small, confusing, and maybe even seemingly insignificant. I would suggest that almost all micro-VC’s need to see this glimmer to make an investment, and hope that their seed capital gives birth to Thunder Lizards.. 

Prospective vs. Retrospective. Here’s what it gets interesting.  The difficulty in certain sectors of the internet is that often, it’s very very difficult to prospectively know whether a company is going to become great.  The glimmer may be there, but glimmers fade.  You might not get a thunder lizard… you may just get a Kimodo Dragon. There are so many examples of this it’s not worth listing.  The point is that most companies aren’t clearly “go big or go home” companies or “small but sure” companies.  Most companies fall somewhere in the middle, and the likely outcomes are very unce.rtain (and can change over time). 

Alignment and Slow Capital. Because of these challenges, large VC’s are in a difficult position.  They end up passing very often because an idea seemed “too small”, even if the entrepreneur was clearly going to build important value in the early years of the company.  What micro-VC’s are able to do is not worry too much about this.  They are better aligned with the entrepreneur early on because they can do well in both a smaller, capital efficient win, or a big, venture scale outcome.  They can allow the entrepreneur to make progress, build value, and make the decision of “go big or go home” with more information. It’s just a matter of incentives. At the end of the day, anyone managing a fund is just trying to produce meaningful returns.  As a rule of thumb, an exit that produces a “meaningful return” for a VC ~ their fund size, and that’s part of what drives alignment or misalignment. 

Making the Most of Time.  This element is usually overlooked I find.  It takes a lot of time to try to build a big company.  Also, if you’ve raised a lot of money, some investors will try really hard to keep a company alive to try to make their money back - and this also takes a lot of time. But an entrepreneur may get to year 2 or 3 of their company and say “there’s a 5% chance this can be huge but it will take another 7 years, or I could sell now for a good outcome and move on.”  What to do?  5% isn’t great odds, but some investors might really urge the entrepreneur to go big or go home.  I think the answer is: the entrepreneur should do whatever he/she wants.  Those 7 years are valuable, and who knows?  After a mid-sized win, this entrepreneur will just have more flexibility to go for a big home run. Which brings me to my last point:

It’s a Multi-Turn Game.  I think some investors are short sighted and think too hard about optimizing one deal or extracting as much money from one exit.  But it’s a multi-turn game.  Sure, it’s too bad if an entrepreneur decides to sell a bit earlier than an investor would like.   But they will be back, maybe several more times 

Practice Makes Perfect, Even in Fundraising

A lot of folks start their fundraising efforts by targeting their first choice prospect and working down the list.  It’s instinctively the most natural thing to do. 

But unless you are a really good fundraiser and know that the process will be a slam dunk, I think this is exactly the wrong approach. 

Practice makes perfect, and fundraising is no different.

Fundraising unfortunately is as much about how well you tell your story as it is about the content.  And most people only get better at telling their story the more times they do it.

You also can iterate along the way and figure out how to best communicate yourself in a way that is enticing to your audience.  This also requires market testing and can’t be done in a vacuum. 

Instead, I’d recommend actually starting the fundraising process by targeting folks in the middle of your prospect list, or even guys who you know will give you real feedback but are long shots.  It hurts to hear no early on, but it’s important to practice and battle test your pitch when there is little on the line. 

I wouldn’t do this too much, or your story will get stale in the market.  But I think you definitely shouldn’t walk into a meeting with your favorite VC and give your pitch for the first time.  Get your story straight, know the questions you are likely to get and prepare for them, and even create some heat around the investment by getting one or two others excited first.

Rob Go Thanks for visiting my blog! Learn more about me or ask me a question.