Operating in tough times

I think we’re all pretty exhausted. Exhausted from hearing the same things over and over about COVID-19 and people losing their jobs. On top of that, entrepreneurs are probably tired of hearing about how VCs are slowing their investing or are waiting for predatory valuations. These times can be quite frustrating.

Many people don’t know that in November 2008, I left my cushy job at Google to start a company. This was just a couple of weeks after Sequoia wrote their first RIP Good Times memo that we have all seen multiple times at this point. By 2009, it was impossible to fundraise. I went into meetings with investors, and they would all be checking their stocks. It hurt them to see their net wealth drop 50%. It hurt me that no one was paying attention — every investor was so distracted. I wouldn’t be able to raise money for 2 more years. I did odd and end jobs to try to bring cash in the door. I had a whiskey categorizing gig. And critiqued resumes of aspiring MBA students. Among many other things. Of those, the most amusing was the time when Xerox Parc paid me to have one of their user experience researchers follow me around for days.

Photo by Pixabay on Pexels.com

Although 2009 was a frustrating time, in retrospect, it was actually a good thing I couldn’t raise, because I had no idea what I was doing. And the school of hard knocks taught me how to really build a business — to the point of perhaps too much confidence. These days, I don’t ever worry about not being able raise money from others or find a job again. Even if my VC fund partners kick me out, the rough days in 2009/2010 taught me *how to make money*.

That is an amazing feeling that only comes about from being stuck with the unfortunate luck (or fortunate luck) of starting a business during dark times. And that is my wish for all of you — that you, too, can find that even if things feel rough this year.

Though it might not seem like a blessing in disguise, tough times force you to focus on what is really important and to track your cash carefully. All too often in the last two years, we’ve seen businesses that don’t make any sense rise in valuation to enormous levels.

During these times, I’m going to move my next blog posts away from fundraising and back to fundamentals. How do you bootstrap a company? How do you get customers when you have limited cash? How you keep the lights on? Basically — how do you BUILD a company.

Faster sales cycles

One of the biggest mistakes at the beginning of my entrepreneurial career was that I spent too much time building and not enough time selling. After making this mistake over and over with failed side projects, I ended up getting incredibly frustrated that I was wasting weeks or months only to come to the conclusion that I didn’t have a great product to sell.

This frustration forced me to think about selling product immediately even before building anything. So when we started building out LaunchBit (which was basically our 8th side project), the very first thing I did was to sell without a product. I did so with my personal PayPal account. There was no website. No product. I cold emailed a bunch of ppl with my value proposition and started charging. And guess what – they sent me money to my personal PayPal account. I was shocked that anyone would do this.

What does it take to operate in this market?

This is a chaotic time but also an exciting time, because incumbents are easily dismantled in times like these. As I wrote to my portfolio companies the other day, you’ll see large brands / companies get purchased for pennies on the dollar, because they won’t be able to slim down to a skeleton crew fast enough and act nimbly. Small companies – with even 2 or 3 people — may even be able to acquire some these companies! Or win their business. What wins in a good market doesn’t always win in a bad market. And understanding this is key.

So what does win?

Fast sales cycles win. Now is the time to find out if you have a fast sales cycle. Can you pre-sell what you have even if it’s not built? Can you continue selling what you do have? Are people buying? And if they’re not buying, do you think they will buy in 12 months when this is all over? Or is your market dead going forward?

Photo by Andrea Piacquadio on Pexels.com

These are questions to ask yourself.

If you have no business today, there are going to be two camps of companies — 1) ideas that will be viable in 6-12 months and 2) ideas that won’t be viable at all post COVID-19.

If you’re in the former camp, then maybe you need to get a job or a consulting gig and wait out the market. There is no shame doing that. Desperate times call for desperate measures. Maybe this is a good time to refactor your code business and optimize your product and processes.

If you’re in the latter camp, you need to rethink your company. People don’t like change. They don’t like starting over. They don’t like starting new business ideas. But you have to be honest with yourself and make a hard pivot if you think this is not going to work.

And I’m going to be brutally direct here. If you’re in either of these camps — whether this is a temporary or permanent shift — it’s not worth fundraising now. I see all these companies pitching travel ideas and retail ideas and other ideas that have been dramatically affected by COVID-19, etc.

THERE. ARE. NO. BUYERS. IN. THESE. MARKETS. RIGHT. NOW.

Don’t waste your time working on something that you literally can’t sell to anyone. The truth is would-be investors want you to be able to put their money to work right away — not to sustain your livelihood for 6-12 months until your market comes back.

Scrappy founders win. Being lean and nimble to be able to pivot – even if just slightly – is really critical in these markets.

If you realize that you need to make some drastic pivots / changes to your business, the good news is that there ARE a lot of market opportunities — both short term and long term that you can get started in right away.

If you need some ideas on getting started again, Noah Kagan starts a business LIVE here: https://okdork.com/how-to-start-a-business-from-scratch/

This is something that large companies burdened with big teams cannot do. Wield your strengths.

Frugal founders win. Lastly, it’s frugal founders who win in this market. A year ago, if you had raised a lot of money, that would’ve been considered a strength. And if you still have that money, it is still a strength – cash is king.

But if you have a high burn rate — that has quickly become a huge liability and a big team also prevents you from being scrappier, because coordination amongst many people is hard.

So the tables have a turned a bit. This is a natural advantage for teams who struggled to raise money and were forced to become ramen profitable over the teams who may have raised millions of dollars. The latter teams can still win, but very few of these founders will be able to make the right decisions to cut down to becoming frugal.

Need help with cash management? I’m holding an AMA on cash management on Wednesday April 15th at 4pm PT. It’s completely FREE but we are capped at 1000 participants.

Sign up here: https://cashflowmgmtduringtoughtimes.splashthat.com/

Finding purpose and mission in bleak times

This past week was particularly exhausting. I think I speak for almost everyone when I say this.

And the prior two weeks were rough as well.

It’s hard to find comfort in times where people all around the world are getting very ill (COVID-19) and in some cases, dying a slow horrific death. Our medical professionals on the front lines have no equipment. Everything is basically shut down – wall street is falling and main street is crumbling. Panicked people are hoarding. The news is infuriating. And being cooped up inside with small children all day is not easy. For the better part of the last few weeks, I’ve felt helpless about everything going on around me.

It’s during times like these that it’s important to dig deep. A question I’ve often asked myself over the past few years is “Why do you do what you do?” And this is the question I ask of you today.

And, if the world were to end tomorrow, what do you wish you would’ve done differently? What do you want to be remembered for?

For many years, I didn’t know the answer to any of these questions. But in the last few years, it really clicked.

One thing that I noticed in the past few years is that the best entrepreneurs are very often overlooked in the beginning, and it’s hard for them to get access to resources. Certainly, well-connected people who went to certain schools or worked at certain places may often be an exception, but in large part, this is true (and even for many well-networked people). I believe that people who are “great hustlers” – as defined as people who execute with speed – ought to be able to get access to resources even in the very beginning their journeys.

And so, two years ago, armed with this mission, I started Hustle Fund with two friends of mine: Eric Bahn and Shiyan Koh. We have a long ways to go, and right now, we can only chip at the problem little by little and are not able to help every great hustler today. But we’re working on this mission over the next 30 years or so.

Your mission may be different.

Img courtesy: motivationaltwist.com

I am fortunate that my mission carries over professionally as well as personally. I am paid (a little bit) to follow my mission. But, your work doesn’t have to align with your mission – that’s ok. For many people, a job pays the bills to allow you to follow your personal mission outside of work. But always remember your mission even if it’s not your livelihood.

In times like these, it’s especially important to remember what your mission is so that you can dig deep and find the courage to do the hard things that these times may require of you.

For many of my entrepreneurs whom I’ve backed, as well as broader main street, these tines are going to really test their leadership. Most of them will have to lay off a lot of people in order for them to keep going to fulfil their missions. Many of them will see significant drops in their revenues as consumers are not able to spend as much money — or at all — at home. Many of them will feel like they have spent the last 2 years working so hard a building traction only to start anew — an incredibly frustrating experience. The decisions we will see our entrepreneurs make over the next few weeks or months will not be easy.

Lack of morale makes it hard to get out of bed in the morning. But it is during these times, you actually have to do the exact opposite of what you naturally want to do in order to succeed. You must find courage to embrace these tough challenges and inspire others to help you achieve your mission. And this is where mission comes in — when everything else around you is falling apart, other people are no longer motivated by money or traction or achievements — because all of these things are gone or have dropped considerably or are unstable. People are motivated by what the future looks like and the mission you want to achieve not the past.

In some cases, missions are really easy to convey. For health companies, for example, they can say their mission is to “find the cure to cancer or whatnot”. But for most companies, missions are a bit less clear. My former startup was an advertising technology company. I can tell you that most people don’t find it inspiring to work at an ads company. “To show as many ads as possible” would just not be a mission that many people would sign up for. (nor would I) And yet, there are often great missions behind companies without obvious missions. Zappos is a great example of a company that conveys their mission well. They want to provide the best customer service and just happen to sell shoes. Google is actually an ads company (which so many people don’t think about including Googlers themselves), but they want to organize the world’s information to make it accessible to all.

Remembering your mission helps you focus. It’s also makes it easier to make tough decisions – such as layoffs. If you remember your mission and why you’re doing what you’re doing in the first place, it’s often clear what the path needs to look like even if it’s a tough one to go down. The right sacrifices in the short term are often beneficial in the long term.

In addition, if your mission is really clear, many people will want to rally behind it. I was talking with a fellow fund manager the other day, and I was beaming about my amazing team. He was a bit confused how I even found all these kickass people (let alone pay for them). I told him that most people on our team could be making way more money elsewhere, and as a small microfund, we have no budget. But it’s the mission that everyone rallies around. Building a microfund is in fact not the best or easiest way to make money — there are much better and easier ways to do so. But at Hustle Fund, we are constantly selling as many people as we can on our mission — whether they are potential team members, investors, startups, or partners. People who join forces with us want to change the world and invest in the best hustlers even if they didn’t go to MIT or live in the middle of nowhere. Mission can often compensate for many things — even if you have near zero cash or resources.

Missions extend beyond companies. In fact, companies often start out as personal missions that rally up other people who also believe in the same cause. If you don’t already have a mission, that’s ok! This is a good time to come up with one or join someone else’s.

People often hesitate in thinking through their personal missions, because we’re all so busy. Almost too busy to think. And too busy to do or too busy to help. But one of the things that I’ve learned over the years is that there is no amount of help, thought, money, time, etc that is too small. In fact, what I’ve learned is that the secret to the success of the Silicon Valley is lots of bits of small help here and there. There are so many angel investors here who run around town investing $1k into startups here and there. $1k as a startup investment sounds incredibly small, but these all add up. Small bits of capital combined with new connections to larger checks and more resources — this is how you get momentum going. On our own Fund 1 for Hustle Fund, we had some investors write us $10k or $25k checks in the beginning — that doesn’t get you very far in raising $10m, but it does get you a lot of credibility and momentum. And I am so grateful to those small check writers who supported us on Day 1 and believed early and helped us get others rallied around our cause. Generalizing this, in a crisis, if you want to set out to help small businesses, even buying a $5 gift card is helpful. That sparks momentum. AND, if can you leverage your social capital on social media to turn $5 into friends putting in $100 and they in turn promote this which turns into $1000, that’s valuable. A $5 donation quickly gets leveraged to $1000s. I have seen this happen time and again. Small actions go a long way.

Going back to my mission, my mission doesn’t just apply to Hustle Fund. In my personal life, I ask myself what resources can I help procure (either my own or rally others around)? And who are the effective stewards (hustlers) of those resources to have the biggest impact? Although at Hustle Fund, we currently only apply this mission to venture backable startups, on a personal front, I think about all the other groups where this thinking can apply.

To that end, here is a running Google Doc of the activities I think are worth promoting – activities that I’m personally getting involved with on some basic level. I won’t ever be effective on the front lines – I have zero medical knowledge. I know nothing about main street. But I can help as a connector. Connecting resources to hustlers is what I do. That is what I want to be remembered for.

I challenge all of you to think through your personal mission. Dig deep. Then roll up your sleeves to start to build or rebuild towards it. In these challenging times, we will need all hands on deck in a whole variety of ways — in health, in business (your own or others), etc. No amount of thought, time, money / other resources, or help is too small.

Let’s go make some dreams come true.

The rise of the global first startup

In the past 5 years, there have been a lot of changes in the startup ecosystem. One of the big changes is in geographical activity. 

At Hustle Fund, we invest in early stage startups that are in the United States, Canada, and Southeast Asia. We do this all with one fund. And often we get asked, why don’t we start regional funds?  To be honest, this is something that we had thought about very deeply. But what we are seeing in the startup ecosystem today is that startups are global from day one. And that the concept of a “regional fund” doesn’t make much sense anymore or at least is too nebulous.

5 years ago, if you were building a startup, you would be crazy to try to be “global first” startup. If you were building your team in other countries or even other cities, that seemed like a bad idea. If you were trying to sell a product to customers elsewhere, that also seemed like a bad idea. Specifically, the reason why this seemed like a bad idea is that it seemed like the logistical challenges in coordinating with other people would just be so cumbersome that it would negatively affect your business. These days, I would argue that you’re at a disadvantage if you are not a “global first” startup.

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Photo credit: Giphy

Most 2019 unicorns are in the United States and China.  And, these companies were largely started in the United States and China and grew up in these places. I believe that we will continue to see this trend. But, if you look at say the the up-and-coming San Francisco based companies that will become unicorns in the next couple of years, many of them were not started in San Francisco.  Many of them were started elsewhere OR have significant offices elsewhere. If you dig into this list of up-and-coming unicorns, not only do you see a number of companies that are based elsewhere, but you see companies like Front or HackerOne labeled as San Francisco companies though they started got their foothold elsewhere. 

This matters, because how startups get their foot on the first rung of the ladder is what enables them to get going. If you can reduce your costs on engineering talent and manage teams well from the beginning, you can take your company a lot further for the same amount of money.  I recently caught up with two past portfolio companies, and I was floored that both of them were doing $5m ARR with fast growth and had raised very little seed funding. If you were to look at their cap tables, one had sold less than 10% of their cap table on a fully diluted basis and the other had sold less than 10% of their business fully diluted. Their next raise will probably be mega series B or C equivalent rounds and will have experienced much less dilution than your typical fast growth startup that starts and grows up in San Francisco. I asked them, “How were you able to build and sell so much with so little?” That’s when I learned that both companies had engineering teams elsewhere. Their engineering teams were in Vietnam and Argentina respectively. Both teams had a technical co-founder leading product outside of the United States. And both teams had customer acquisition teams based in the United States – sales, marketing, and business development.

When I look at my Hustle Fund portfolio, which is newer, I also see the same trend. Even if not hiring abroad, my companies are hiring outside of San Francisco. One of my current portfolio companies who has actually raised a lot of cash and is based in the San Francisco area has more employees in Dallas than here. You would not know that by just looking at the company as an outsider.  To most people, they seem like a regular, ordinary San Francisco-based company. I have other portfolio companies that are also on a fast-growth trajectory who from day 1 started building teams elsewhere as well. One of my fast-growing B2B companies has more employees based in Nepal than here in the San Francisco Bay area, and they are a SF-based company. We have portfolio companies who have engineering and operations teams in places like Bulgaria, Canada, and Nigeria. By hiring talent and managing talent outside of San Francisco, companies can see a 3-5x difference in cost than hiring in San Francisco.  Roughly speaking, this means that you can extend your runway 3-5x longer which is huge when you are trying to find product-market fit or make a big enterprise sale that won’t happen for 2 years. 

I think five years ago, there was this notion that technical talent in San Francisco was stronger than elsewhere. I think that is only true when you’re talking about the top 1%. It’s not because San Francisco naturally breeds smarter people, but it’s because you have companies like Google and Facebook who are willing to pay $1m+ per year to attract that global talent to the Bay Area in the first place. But, can startups woo that 1% talent away from Google and Facebook? And my hypothesis is that only in rare cases can this happen.  Startups can’t compete with the GOOG on comp or benefits. And, I’m seeing most of this talent either starting their own companies or working for a friend’s very promising company. 

And so most SF Bay Area startups are not able to hire this talent — they are hiring good talent for sure. But you can hire good talent elsewhere too for lower salaries.  I think sometimes we think that the more you are paid, the better you are, but that is actually not true. How much you are paid is largely related to the cost of living of where you are. In parallel, what we are also seeing are two other trends.  1) Knowledge is becoming more and more of a commodity. You can find all kinds of free information on the internet on how to do just about anything. 2) We are also seeing a lot of tools coming up to make development easier or in some cases, allow you to build things with no code.  If you are building a “deeptech” startup, then you do need to hire the best technical talent in many cases, but most say typical B2B startups that are coming up don’t need particularly deep technical knowledge. So, you can get the same level of talent quality for a fraction of the cost in places where the cost of living is cheaper.  

Now, hiring people in multiple locations certainly has a ton of challenges. It is challenging to build rapport with people remotely. And it is challenging just to get people to work together remotely. I think all of these challenges still apply even now but are a bit easier than 5 years ago.

Over 5 years ago, remote communications was a challenge.  Nothing really worked well. I remember Skype and Google Hangouts being just sh*tty.  (They still are) I hired remotely for my startup, and I was one of the early users of Zoom for my startup LaunchBit. Prior to that, we had tried just about every video conferencing software possible, and nothing worked well.  But, with Zoom, we gave everyone an iPad and had everyone just leave Zoom on all day everyday. The calls *never* dropped. And there was never any latency. It was like we all sat in the same room. Today, we also have Slack, which has made communication so much easier.  And a lot of wiki-like tools.  

What I have seen work the best with regard to tight communications, is to build a hub-and-spoke model. For most of my portfolio companies, they have distinct offices in specific places. They build out teams in these places, and there is a team leader of sorts in each place.  Usually a co-founder who had spent time in the US and met the US-based co-founder and then returned home to build the team. And it is the team leaders who need to coordinate the best remotely. E.g. it is the technical co-founder who coordinates really well with the business co-founder to test hypotheses together to get to product-market fit. And they have really quick feedback loops. So then you’re not really talking so much about coordination of many people, but you are talking about the coordination of a couple of people.

Building culture, though, is the tricky part. How do you ensure that each team has the same culture? And that’s hard. I don’t have a great answer for this. even when I worked at a large company – Google – I noticed that the culture was different in the Boston office than at headquarters in Mountain View. This isn’t a bad thing, but it is challenging to have to ensure that all teams have the same culture.

Beyond working with teammates globally, we also have portfolio companies who are doing some crazy global arbitrage things. For example, in Canada, the government offers startups so many grants of all kinds. And that reduces the costs dramatically or reduces the need to take dilutive funding. In contrast, in the US, most software startups do not qualify for any grants.  One of my San Francisco-based teams actually set up a Canadian entity just to take advantage of one of these grants. 5 years ago this might have seemed like a weird distraction. But today, this type of arbitrage can buy you a couple of extra years of runway or reduce your need for dilutive capital.  

On the business side, we have US portfolio companies who are now selling to potential clients in Asia. and we have Southeast Asian companies who are selling globally or to the US market. Five years ago, this seemed impossible but today, this makes a lot of sense for the right business. 

How can you sell abroad? I see most of my portfolio companies or past portfolio companies building out their customer acquisition team in the market they are selling to. But even in the beginning when it’s just the co-founders, this is possible too.  Even many years ago, when I was selling ads for my startup, my customers were in India and Israel and Europe . And, I made all of those sales over the phone or over video conference. In fact, those sales were done in the same way that I sold to US customers. The only difference is that sometimes I would have to stay up and make those sales or get up early in the morning.  In fact, some of my current portfolio companies are finding that it is actually easier to sell to customers in another geographical market. Customers in another region of the world may be hungry for technology in a way that local customers may not — especially when you’re building to disrupt old stodgy industries. Sometimes finding product-market fit is tied to to geography.

So when I look at our portfolio, I cannot quite “bucket” so many of my companies. I have companies that are San Francisco-based but have operations or development in another country or another city.  In other cases, we have Singaporean companies that sell to the US. What it means to be say a “San Francisco-based company” is quite nebulous these days.  

In fact, when I previously was running an accelerator in a past life, in one of my batches, I had a portfolio company with a co-founder who was from another country X and had a development team in country X.  But the company was incorporated in the US and both co-founders lived in the SF Bay Area. My past employer also had a regional fund that invested in companies in country X. And, the fund manager for country X was a bit ticked off at me at first for not showing him that deal.  

I was puzzled, “But they are a US company and the co-founders live here — I thought you are investing in startups in country X.” I said. 

“But the founder is from country X and they have a team in country X,” he said. 

That was the first time I started thinking about this issue. My mind raced through all of our companies in the accelerator batch and past batches. It dawned on me that most of the companies in our accelerator were US companies (SF based) who had teams elsewhere and that geography had become blurred.  That was a few years ago, and now it’s even more blurred. 

In this modern economy, if you can navigate hiring and building teams in different locations and selling to customers in other areas, you are at a serious advantage. And in many cases, I think in the next 5 to 10 years, I think this will become not only a nice to have skill set but a necessary skill set. 

What questions will early stage VCs ask you?

I thought it might be helpful to create a live running Google Doc of all the major questions that a VC might ask you.

Go to -> Questions that a VC might ask you.

If there are more questions you think I should add to this list, please comment in the Google Doc, and I’ll add additional ones that get multiple votes.

I’ve highlighted in blue the questions that I care the most about. I’ll certainly ask questions about traction just to get an understanding of what has been done in the company, but as a pre-seed investor, we do most of our investments pre-traction. This will, of course, be different for a seed or mango-seed investor.

What is most interesting to me in looking at all the questions I’ve highlighted in blue is that you can see I very much gravitate towards customer acquisition questions.  It isn’t so much that I care about what your LTV and CAC are today.  In fact, in most cases, your CAC will only go up (significantly) and your LTV will hopefully be worth more in the future, so it doesn’t mean anything to me! But I want to understand how you think about getting customers.

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Credit: Giphy

Most entrepreneurs at the pre-seed stage haven’t thought much about customer acquisition. In my view, this is what separates savvy or experienced entrepreneurs from everyone else.

The savviest or most experienced entrepreneurs will often think through the customer acquisition first before even thinking about the product.

At this stage, no one will have all the answers, but a great entrepreneur will think through things like “is this problem important enough that customers will part with their money for this?” and “what is my wedge into this market to beat out alternatives / competitors?”  The savviest or most experienced entrepreneurs will start pre-selling ahead of having a product and know that these results are more telling than surveys.  These are the kinds of things that I want to understand at the pre-seed stage.

What questions do you think should be added to this list?

When is the right time to approach a VC?

My friend Brian Wang posted an interesting topic on Twitter recently — when should you raise money?

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Like everything else, we hear conflicting advice on when is the best time to start meeting with VCs. Some VCs say that you should start building relationships early. Others say that you should only pitch when you are at the right point in your business. What’s a founder to do?

A few thoughts on this:

1) Founders are not treated equally

I’m just going to go ahead and call out this inequality — there are a lot of VCs who are looking to fund people with a particular background. Such as founders who are based in the Bay Area, who come from product or engineering backgrounds, and did really well at a great tech company like Google or Facebook (or now Uber / Pinterest / AirBnB et al), went to a particular school, and perhaps, is of a certain demographic in terms of gender and race. For these founders, a lot (not all) VCs want to start building relationships early so that when these founders hit upon a great idea, they can swoop in and fund the deal.

If you fall into this category, I would definitely meet with many VCs early and start building relationships and then continuing those relationships with the people you like. “Hey, I’m testing ideas in the area of problem X, and I would love to get to know you and see if this is a general area of interest.” VCs will give you lots of time of day if you fit this profile.

If you do not fall into this category — and most of us do not –unfortunately, VCs will really only give you one shot on goal to get your pitch right, and so timing is everything.

(Note: I’m not saying this inequality is right — it’s definitely not. But, this is the state of affairs and I think it’s important to just address that plainly and openly.)

2) Know which VCs fund which stage

If you are in the latter category, it will be really important to do your research on which VCs are funding which stage (as well as obviously verticals / geography / etc). If you are in the post-seed / mango seed stage, then you should pitch investors who fund this stage. We at Hustle Fund, for example, would not be a good fit. (We do pre-seed.)

Seed is a huge range these days — know where in seed you are and where investors are investing and target your pitch to that stage of investor.

3) Get the timing right

Within each stage, it’s important to get the timing of your pitch right. At a high level, all VCs want to invest in startups that:

  • Have a strong direction
  • Have positive momentum
  • Have a clear set of milestones for funding

It’s important to have all 3 of these components.

A) Strong direction

VCs want to see a strong direction. It shows leadership and a goal. Now, you might be thinking, who doesn’t have a goal? Who doesn’t have a direction? There are lots of reasons a startup may not have a strong direction at a given time. For example, if you are still deciding what to build. Or if you are mid-pivot — i.e. you were working on one thing before but are exploring a new thing, that’s not a good time to raise. It’s ok to be in either of these situations, but these are not good times to be meeting with VCs.

If you pivot, you need to test quickly and have conviction to go all in. This is especially hard, because usually when people pivot they already have some momentum on something else, so it’s hard to want to abandon that past work completely in order to take the chance in going after a better opportunity.

Strong direction also means having a plan. You need to do A, B, and C. This is hard in running a startup, because it’s never really clear what you should do. It’s your job to find that clarity and run with it.

B) Positive momentum

Obviously, you want to have positive momentum as well. So, meeting VCs when you are on upward trajectory — e.g. posted your best traction-month ever. Or received a lot of press recently. Or made some key hires. Or onboarded a marquee customer brand. Or are shipping quickly. All of these things are times of positive momentum and good times to be meeting with investors.

On the flip side, if your revenue is decreasing / flatlined, or your unit economics are getting worse or you are getting bad reviews, these are all bad times to raise.

You also need to be having *significant* momentum. For example if you are surveying customers and then you start designing mockups for a prototype, that would be momentum but not significant.

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Courtesy of Giphy

C) Clear milestones

The founders I speak with often don’t have a clear set of milestones when they raise. I often hear founders say they are raising X for 18 months of runway. Investors aren’t interested in funding runway. They want to know what you will achieve or are hoping to achieve with this amount of money. Obviously you may end up missing the mark — and that’s ok, but at least have a clear plan of what you are going after with this amount of money.

You’ll want to paint a story around, “I am raising X because I will use the money to do A, B, and C.”

Applying this to pre-seed, seed, and post-seed stages

Let’s apply all of this more concretely to the various stages of seed.

The three stages of seed these days is roughly: pre-seed, seed, and post-seed.

A) Pre-seed

For pre-seed, you need to have a clear direction and understanding of the problem you are solving. You need to have built a product at a minimum in many cases and in some cases, done some level of customer validation — ideally with real users or revenue traction.  (If you are in a regulated industry such as health / fintech or are building hardware, this is less applicable but you still need to show that you’ve done something rather than just thought up the idea yesterday)

If you are still surveying people or doing customer discovery, you are probably too early to be meeting with investors. Momentum — you need to be shipping fast and getting new customers or leads each week. You should really feel like the ball is moving fast at this stage. I’ll give you an example of what fast looks like at this stage — I chatted with a startup founder in November of last year. They were working on an idea I didn’t find interesting, but the founders seemed impressive. I was very candid and said that I didn’t have conviction on the problem they were working on but if they ended up pivoting, I wanted to take a look at the new idea. The team ended up pivoting in the next month — going all in on their new idea and built the product quickly, and by end of January, they had gotten 2000+ users already. That is what speed to pivot and momentum looks like — new idea, new product, and thousands of users within 2 months. I invested.

B) Seed

For seed, you definitely need to have direction and momentum already. At this stage, investors are typically looking for 30%+ MoM growth (the numbers are small so sometimes even higher). And at this stage, you are starting to form a growth story. This is still a scrappy stage, but you should be focused on painting a picture around how a business is built around your product. Milestones: Based on whatever unit economics you have, can you paint a picture around how you can put money into certain customer acquisition channels and get customers profitably? I would try to get this answer before you meet with investors — even if it’s on a small scale, you need to show the path to how this becomes a big business assuming the channels continue to work (which they won’t).

C) Post-seed

Definitely, by this point, you should be able to articulate what your current unit economics are and in which channels you acquire users / customers and show how if you take X in investment, you can pour it into those channels and turn it into a $2-$3m net revenue runrate business, which are roughly typical series A metrics for a software company. If you don’t have that level of conviction or knowledge on how to do that, then you need to figure that out before you pitch.

Unit economics also matter a lot on customer acquisition spend — if you are wildly unprofitable, you need to figure out how to get closer to the break even point in acquisition. Maybe you need to upsell more to make your customers more valuable. You don’t need to be profitable, but you need have a clear story to growth and profitability before you meet with VCs.

Caveats

As alluded to above, if you are in a regulated area (fintech / health) OR are in hardware / non-software OR ad-based revenue models, then your milestones will be different. But, at a high level, this is still how I would think about whether you have a good raise story before you meet with investors.

After all, unfortunately, most entrepreneurs only get one shot on goal.

How to close angel investors

Last week I spoke at the LAUNCH Festival Sydney in Australia. Huge thanks to the entire LAUNCH team for bringing me down and for their fantastic event / hospitality; it was an awesome experience and I had a great time!

talk_sydney

Photo courtesy of someone on Twitter – apologies, I didn’t write down who took this — thank you! (Email me and will credit you)

Most of my posts are about raising money from Silicon Valley VCs. But, the world is filled with all kinds of investors. And most businesses are not backable by most Silicon Valley VCs because:

  • They are not software-enabled ideas
  • They are not deemed to be in a large enough market for a VC to invest
  • The founders don’t want to build a “Go big or go home” business
  • Etc…

But these are not bad things. There are going to be plenty of big winners in say e-commerce / direct-to-consumer products that VCs will not back. Or in real estate. Or all kinds of other things. And it isn’t a bad thing if a founder wants to build a business that gets to say $10m per year and sells for $40m. That’s a fantastic outcome for founders. But, most VCs will not back any of these things.

So who do you pitch for money?

The good news is that the world is filled with money. It may not seem like it, but it really is. Your job as an entrepreneur is to find it and unlock it. So, I wanted to share some new material I created for the LAUNCH event on how to find angel and close investors. Here are my slides:

The overall takeaway from these slides is:

  • There are lots of rich people worldwide — they don’t even have to be super rich. There are lots of angels who can write you a $1k-$10k check.
  • Angels may not know they are angels. It’s your job to plant the seed in their heads that you are open to an investment from them!
  • Angels are motivated by many different things; figure out how to tie your story to something that they want; getting an investment – much like sales – is about solving for their needs not yours
  • It’s a numbers game — pitch many many people and don’t give up

Go out and pitch your eye doctor!