Author Archives: dshen

Betaday 2013 by Betaworks

This last week I was in NYC and attended the 2013 Betaday, put on yearly by Betaworks.
It was a smaller, more intimate event this year, which was more similar to the first few Betadays – only 100 attendees which made for better networking overall and not being overwhelmed by all the people there.
IMHO it also heralded a second coming for Betaworks, on the heels of an amazing Hacker In Residence (HIR) program, managed by Paul Murphy, formerly of Aviary and Microsoft.
Back in January of this year, Paul had told me of his plans for the HIR program. Attract super multi-talented hackers; give them the full support and resources of Betaworks; let them build whatever they want to build. Out of it came a pretty wide (and awesome!) assortment of products:
Poncho – Personalized weather reports
Telecast – Handpicked video, delivered daily
Dots – A game about connecting
Blend.io – An open Collaboration Network for music creators
Giphy – search animated GIFs on the web
And not to mention recent product launches outside the HIR program which were equally awesome:
Rushmore.fm – stay up to date with your favourite artists, show off your current jams, and connect directly with the artists and labels you love.
Tapestry – Exclusive short stories presented in a beautiful and unique reading experience on mobile.
Done Not Done – The to-do list for things you want to do, not the things you have to do.
AND…can’t forget the acquisition of Digg last year and the recent acquisition of Instapaper, both significant additions to the collection of products in the Betaworks portfolio.
Being an investor in Betaworks, I’ve been a part of the family since 2007 when I first met John so many years ago. I’ve watched Betaworks’s evolution over the years, and it seemed that in recent months, they had substantially increased the output and influence of its operations. For this, I am supremely elated, and Betaday was the perfect time to celebrate our recent developments.
Betaday was held at The Foundry in Queens. A very cool spot for an event, it was also quite an adventure getting there and wasn’t sure I would get back home OK.
As always, it was a gathering of both Betaworks family members and notable people in the industry. The witty Baratunde Thurston was our host, and the speaker set was great this year. We saw presentations and talks from:
Ricky Engelberg, Experience Director of Digital Sports at Nike.
Emily Bell, Professor of Professional Practice & Director, Tow Center for Digital Journalism at Columbia.
Marc Ecko, American fashion designer, entrepreneur, investor, artist, and philanthropist.
The Gillmor Gang, featuring Steve Gillmor, Robert Scoble and his Google Glasses, Doug Rushkoff, media theorist and author, Paul Davison of Highlight.
Gilad Lotan, the in-house data expert at Betaworks.
Paul Murphy presenting the fruits of the HIR program.
My personal favorites were the talks by Ricky Engelberg and Marc Ecko.
Ricky gave a great overview of Nike’s thinking and strategy with all their digital products, with the latest being the Fuelband. They see the Fuelband is the beginning of a whole line of digital products that motivate you to greater health and fitness. I’ve always been fascinated and impressed by Nike’s strategic thinking, which is very much aligned with their marketing and advertising. It was great to see them using 3D printing to design their next generation shoes, and someday soon, they will be 3D printing them as well. As a guy who believes that hardware is a huge trend, Ricky’s view of the world is one I share where digital devices can enhance our lives greatly.
Marc Ecko’s talk mirrored his upcoming book, Unlabel: Selling You Without Selling Out. It was an open look into his life and his pursuit of design, influence, and fame, and then seeing it come nearly crashing down into bankruptcy. It made him realize what was most important in life and it wasn’t bowing to the thinking of others, but rather really finding who you are and not compromising that. I look forward to reading his book when it comes out this fall.
Many kudos to Lauren Piazza, Betaworks operations manager, and her team for putting on a stupendous event. I thoroughly enjoyed Betaday 2013 and look forward to many more. As always, it is an honor to be part of the Betaworks family.

Demo Day Tips Volume 2.1: Essential Timing

Two more thoughts on Demo Days:
1. Given the plethora of accelerators out there, the scheduling of the Demo Day is challenging because you don’t want to hold a Demo Day to close to another one. This is because you don’t want to overload investors in their time and attention to give the best chance for the startups to raise money – there is enough competition amongst the numbers in the class; you don’t want to add to the competition across accelerators!
However, they still do tend to clump together because the classes are generally held corresponding to the seasons or months in the calendar year.
The thing to note is that post-Demo Day, you really need to work as fast as possible to close funding because if you don’t, you could end up running up against another Demo Day which could take investors’ attention away from you.
For example, looking at the winter 2013 classes from earlier this year:
500startups Demo Day Winter 2013: February 6, 2013
Ycombinator Demo Day Winter 2013: March 26, 2013
A startup coming out of 500startups has effectively from February 6 to March 25, only about 2 months, before attention shifts to Ycombinator.
So work your magic on investors as fast, efficiently, and effectively as possible before the next Demo Day comes around!
2. This thought is related to Demo Days, but it more broadly has to do with optimizing Demo Day through which class you apply for.
In my previous post, Investment Pacing and The Timing of Fund Raising for Startups, I talked about the fact that the first half of the year is better for fund raising than the second. If this is true, then there are batches of accelerator classes that place you in the marketplace at the most optimal time for fund raising.
This means that the winter classes whose Demo Days end up in the early part of the calendar year have a longer period of time uninterrupted by investor seasonality than those who occur in the second half of the year. It means that the probability of you raising money is also greater if you have no interruptions due to other factors. So it may be worthwhile to work to get into winter classes than for a class in another part of the year.
Timing is everything – competition between accelerator classes and startups for limited investor time, attention, and money is fierce so optimize it wisely through timing.

Demo Day Tips Volume 2: From Day One to Winning the Pageant

A while back I was part of the short lived mentor program at YCombinator and wrote this post in response, Tips on Demo Day and Afterwards for YCombinator Startups. It was in reaction to easy to fix mistakes that all their crop make come the days before, during and after Demo Day.
Over the years after I wrote that post, I have mentored many startups, most recently at 500startups and ImagineK12. It seems that each startup, even at the beginning of the accelerator class, worries about their performance at Demo Day!
The previous post was more about the days closely surrounding Demo Day. However, I think there are more things to consider now that begins through the entire time in an accelerator program. To perform well at Demo Day, you should start thinking about Demo Day from Day One the moment you get there….
Day One to 1-2 Weeks Before Demo Day
In past accelerator classes, I always knew that there was friendly competition between the startups to give the best presentation possible on stage, over that of the others. However, startups sometimes don’t realize this at the outset.
It is important to know that intelligence gathering on your fellow startups in the class should begin as soon as possible. What should you look for?
1. Who has the most traction and revenue. These will be ones that investors will keep their eye on the most.
2. Who has the coolest product, regardless of traction. These will be stars of the show from an “ooh-aah” standpoint. They will be memorable simply for their coolness.
3. Who has raised a round already. Somehow they wooed investors and may not need Demo Day to do so, or they may be announcing a bigger round then. But it is impressive when someone can get up on stage and say “we’ve already raised our round”.
These will be your biggest competition on stage come Demo Day. You should watch out for these startups and figure out the best way to top them on stage. Rank them all from 1 to X and see where you stand in that list. The ones ahead of you are the ones you need to top – you only have from the beginning of the program to the end so work fast and smart!
Having said the above, and while I think they are your competition for Demo Day results, I also do believe that you will all more likely succeed if you all support each other and work together. So save your high priced service for those outside the accelerator; give your fellow startups a break so that you can all get the best chance to execute well by Demo Day. Support each other through the highs and lows; give advice freely and don’t undermine anyone.
What are the categories to excel at? The basic categories are:
1. Traction, exponentially rising metrics
2. Revenue
3. Product awesomeness
4. Technology – unique? awesome? defensible?
4. Design excellence
5. Customer acquisition strategy, marketing excellence
6. Market size is huge
7. Founders are awesome
8. Previously committed investors, especially well known ones – social proof in action
9. Vision
In general, you should maximize your showing in as many categories as possible, and then better than anyone else in the class. (A good read: Brian Witlin’s 10 Topics To Know Cold for Your Perfect VC Investor Pitch).
At one accelerator, a few startups told me that some had given them some basic numbers in traction and revenue they should hit in order to give them the best chance at getting investment. To me, if this is what someone told you, then you should treat this as the average and fight/execute to exceed these metrics! Everyone else may be attempting to hit this average, but you should try to go beyond it to look better!
Up to 1-2 Weeks Before Demo Day
OK so you’ve spent the last few weeks or months working your butt off to try to be the best of the class. If you’re executing strongly, then you’re off to the races.
But if you’ve tried your best and you’re still lagging, what do you do? DON’T DESPAIR. Work on things that are under your control, like product awesomeness, design and technology excellence, market size is huge, and vision.
While the more traditional way of getting funded is excelling at those previously mentioned categories, I’ve seen startups get funding on much less progress so hope is not all lost. The idea is to NEVER GIVE UP (essential quality of any great entrepreneur).
Peacocking
If you’ve read The Game by Neil Strauss, you’ll know that “peacocking” is what you do if you walk into a bar and try to pick up women. You need to look bigger/better/different/more flamboyant/more whatever than everyone else in there. In doing so, pickup artists have learned that they can pick up anyone!
I believe Demo Day has become about peacocking not for women, but for investors. Demo Day itself has become the pickup bar for startups. It’s full of investors and you want to get their attention. Otherwise, someone else is going to get the attention and you’ll be left at the bar alone with your drink. That sucks! Don’t be that guy and see someone else walk off with the hottest investors in the place!
How might you peacock?
It may be as simple as all of you wearing brightly colored T-shirts, or some gimmick like a sweepstakes, or give away some cool gift (like T-shirts; one startup made Dr. Dre clone headphones to give away to investors who talked to them!).
It may be something amazing in your pitch. This something could be one of the typical previously mentioned categories, or something else entirely different. One startup I know put up a demo so amazing on stage that he generated a murmur of “ooohs” and “aaahs” through the audience, which resulted in a whole bunch of people coming up to him later asking him how he did that!
The Beauty Pageant
Another way to look at Demo Day, since it’s on stage, is that it’s a beauty pageant. All of you are clamoring to be Miss Universe so you better have a great showing across all categories. You’re all competing, trying to look the best against the other contestants. Actual awesome performance in the previously mentioned categories helps a great deal and may be enough; peacocking adds icing on the cake (especially if there is, unfortunately, little cake, if you get my meaning).
The big prize is your two goals – the first is to get investors to come up and talk to you. The close second is to get them to invest in you. But you can’t get the second without the first happening!
Keep that in mind as you’re prepping for your stage debut. Whether it’s through actual excellence in execution, or peacocking, or some awesome demo, or other thing, your overwhelming goal is to get investors to walk to you. You don’t want to be standing around waiting for people to come up to you; find a way to make them all want to talk to you – be Miss Universe with the biggest/brightest feathers!
1-2 Weeks Before Demo Day
Prep as in my post Tips on Demo Day and Afterwards for YCombinator Startups. Make business cards and T-shirts, etc. Get the list of investor attendees and research potential investors who are your number one targets.
Practice your pitch OVER and OVER again until you are reciting it in your sleep and can do it without slides or help. Deliver it live multiple times to friends, mentors, and others until it is fine tuned to nth degree.
At 500startups, there are big blocks of hours dedicated each day and evening to let startups pitch practice. We mentors and others sit in on this pitch prep and give feedback. You should go to each one, get feedback, edit the pitch and then go back to the next session to pitch again and again and again until it is perfect.
Note that it can be a frustrating experience getting pitch feedback from different individuals because each person may tell you completely different things to change. Just gather it all, make changes that work for you, and make it flow the way you want to deliver it – remember that you’re the one pitching and you’ll have a particular style or personality, so you should make it your own. Try our suggestions; see if some fit and if they don’t, toss them. It just needs to be cohesive and flow coherently and there are a thousand ways that can happen. We’re here to help you with our feedback (and maybe confuse you), but YOU own this pitch, not us.
Also, remember that sometimes there is more than one Demo Day depending on the accelerator. If you have more than one pitch to give, think of it as a performance where you have to perform the exact same show every night. That means you’ll need to have perfected the emphasis, the jokes, the words, the dramatic pauses and deliver it exactly the same way each time.
Demo Day
The day of the beauty pageant is here. Enjoy the day, relax, and deliver the pitch in the best way possible. Then get out in the crowd and network (peacock) like crazy! Read my previous post for tips on the day of Demo Day.
After Demo Day
It ain’t over! Now comes the follow ups and communications to get investors on board. Get organized and track your progress. Set up meetings with investors. Read my previous post for tips on post-Demo Day.
Being in an accelerator class is one of the best things you can do to help you make progress and get funding. Make the most of your time, optimize it from day one to Demo Day.

Corporate Due Diligence Fast and Easy

In two past posts, I talked about doing due diligence on startups. The first one was The Lack of Due Diligence is Appalling and Foolish where I lamented that most investors I met out there did virtually no due diligence whatsoever. Then I talked about how simple and easy doing The Due Diligence Customer Call was, and some suggestions on what to ask. There are two more topics I would like to tackle in the due diligence area. Last year, John Lanahan in our research team tackled research due diligence in Efficient Research: The Lean VC Way. The last part of due diligence that I will post about today is corporate due diligence.
In my Lack of Due Diligence is Appalling and Foolish post, I give a short list of documents I ask from the startup before investing. I have expanded that list slightly, adding debt obligations, business contracts, and then I modify it based on the situation and startup in question, but it has essentially been the same over the years. Most of the time I collect all this into a Dropbox folder and send it to my lawyer for review. It has always amazed me that it takes him only 1-2 hours to go through this- I guess when you look at a lot of this stuff, you get used to reading it and picking out specific stuff to look for. Every now and then, I get the opportunity to do corporate due diligence myself and yes I can definitely say it can take you only an hour to do this!
Generally, the corporate due diligence step I leave for the last step, after doing customer calls, reference calls, and research on the market. I don’t want to ask for corporate documents unless everything has checked out up to this point, since those documents are confidential to the company and I want to respect that.
Note that I am ONLY talking about early stage startups: companies that have been only in existence for less than a year and have not had many business operations. Corporate due diligence can grow exponentially when the company has been in operation for years and then there are tons of documents and contracts, which can take teams of lawyers weeks to review. So feel lucky that at early stage, you don’t have much company history to go through! But sadly, there could be a lot still to worry about….
So yes it can take only an hour! Just a few months back I did just this with a startup and zinged a bunch of questions back to them for inconsistencies and missing items. How does one do this? Some tips:
1. Do this often. Get used to reading legalese and understanding it quickly.
2. Learn to recognize standard legalese in corporate documents and when they diverge.
3. Learn to read and scan text quickly.
4. Take notes in a separate notepad or document while reviewing, so you can come back to important points or questions.
OK those are the preliminaries; now what to look for? Some common things I’ve learned to look for are:
1. Which items in the list are missing and why?
2. How many shares are authorized in the Articles? It is better to see 5M or 10M authorized. I would raise a flag if only 10K or similar shares were authorized. Lower numbers authorized also can indicate that someone incorporated by themselves at some online easy incorporation website – not the best option.
3. Scan through the board meeting minutes, assuming they exist. Identify any inconsistencies in personnel, consultants hired, stock granted to individuals and why, business dealings, operating directions, and information in the minutes and the other documents.
4. In the stock purchase plans, are people vesting or do they own stock?
5. If there have been previous financings, what do the terms of those financings look like? Do any have any effect on your money coming in at this time?
6. If there are any contracts, are there any problems with those contracts relating to future business?
7. If there is any debt, are there any liabiltiies to be aware of? Any liens on the assets of the company? Who gets paid back first and when?
8. Who is the lawyer? Be wary of lawyers who are not familiar with early stage startup work. Their lack of experience can cause all sorts of unwanted trouble – doesn’t mean they aren’t good lawyers, just means that lack of experience on what is acceptable and what is not can be a barrier to getting things done.
9. How much is owned by founders, employees, and, if any, previous investors? Is this acceptable to you?
10. Go to the site of the state in which they are incorporated and search for them in the incorporation database. Make sure they really exist there!
11. Write down all people and companies you encounter in the documents. Did they get money or stock? Or were there contracts that were entered into? Are they accounted for in other documents? Check the cap table – is anyone missing? Check on why anyone would receive money from the company.
There are many more that come up, but those are ones that I’ve encountered in previous deals. I also asked my lawyer for a broader set of Top 10 things to look out for, from his perspective, listed here:
1. No Organizational Resolutions (after Articles, to set up the company, appoint officers, etc.), or they are incomplete.
2. No qualification filed in state of domicile (e.g., DE company located in CA, no filing made in CA).
3. Docs are provided, but they are unsigned.
4. Company is set up by an Incorporator, but there is no Action by Incorporator adopting the Bylaws and appointing the initial Board.
5. Stock Options granted, but a Stock Option Plan was not adopted by the Company.
6. More stock issued than is authorized by the Company’s Articles/Certificate of incorporation.
7. No Board Consent or Minutes approving the current financing.
8. Notice of Stock Transaction (in CA, a 25102(f) Notice) not filed with the State for the sale of stock.
9. No Cap Table.
10. Founders acquired stock but did not sign a Stock Purchase Agreement.
My list and my lawyer’s list provide a great starting point. These lists are not, by any means, exhaustive. My best recommendation is always to collect the information and then send it to your lawyer for review and spend the money for it to be done by a professional. In lieu of that, it is always educational and interesting to go through these documents by yourself and try to spot potential problems. I always scan the documents, even when I send them to my lawyer, for practice, and also to double check his work because sometimes I may find something that he may miss, or I may care about something due to the nature of the company and situation but he won’t know it’s important since he isn’t as close to the deal as I am.
The next step is to then decide whether you’re OK with what you found or not. At early stage, it is common to find lots of corners have been cut to get to where they are now. Many early stage rounds are completed with big discrepancies in the corporate documents unfixed. If an institutional investor comes in, they will most likely demand clean up. I have often asked to clean up, even at low levels of investment. Rarely do I find that an entrepreneur won’t clean it up; most of the time he/she knows it has to be done anyways, so why not now?
Other red flags:
1. I have asked for corporate due diligence documents and the entrepreneur has refused to provide them.
2. The entrepreneur doesn’t want to clean up the documents, or constantly backpedals when you ask.
I have walked away from deals, after doing all sorts of other due diligence and then got to corporate due diligence and either one of those red flags pops up or I find something that I cannot live with. Do not skip this step!
Doing corporate due diligence is a necessary step no matter what the level of investment. It is best done by spending a little bit of money getting a professional eye to look them over. And it can be done on the cheap by doing it yourself.
Thanks to Mark Edwards of Edwards Law Group for contributing to this post.

Metrics for Series A

Over this last year, I have been watching a whole group of startups attempt to land their series A. One aspect that has been shown to be incredibly important for sophisticated and series A investors is showing superior metrics and your knowledge surrounding them.
Why Metrics?
With internet startups, practically everything has been shown to be measurable.
Showing that you are tracking the right metrics means that you have experienced personnel in tracking the progress of your business.
Showing exponentially rising metrics means that you have found a way to grow and capture share that is grabbing customers in ever rising, large numbers, and that is hopefully growing faster than your competitors. Investors love startups that are growing exponentially in a short amount of time; for startups, time is your enemy and showing that you can get big quickly is critical.
Exhibiting metrics that are not only growing exponentially, but large in magnitude helps a great deal. But at series A level, the magnitude of the metrics may or may not be enough to land your next round.
Metrics on Demand
We have seen that investors demand that whomever is pitching should know every metric by heart and memorized. This shows that the team members are living and breathing metrics day in and day out.
If you cannot spew metrics on demand, you substantially reduce your ability to grab that series A. Investors are seeing too many pitches where the people pitching can recall detailed metrics from memory; it shows an obsession with tracking and deep knowledge of your business. If you don’t show an equivalent grasp of the metrics, then investors may get skittish and think you don’t know enough of about your business, thereby increasing the chance that something unknown might sink it.
You must also show proficiency with metrics, showing not only that you are tracking the right ones but that you are using them effectively to grow your business, and methodologies to improve and test them and also make them better over time.
Which Metrics?
As I sit down with startups, many need to track the same metrics. But different types of startups will have different metrics, and some will have different metrics they will focus on given the situation.
The topic of which metrics to track is too broad to cover in this post. Suffice to say there has been written on the topic of metrics, many of which can be found on the KISSmetrics blog. This book is about to be released: Lean Analytics by Alistair Croll and Ben Yoskovitz. You can buy the pre-release PDF at the O’Reilly site if you’re impatient to wait until March.
Some great articles and posts to read:
Single Startup Metric – this is also discussed in Lean Analytics. It is about focusing on one metric at early stage to drive the success of your business and not getting overwhelmed with too many metrics.
9 Metrics to Help You Make Wise Decisions about Your Start-Up – A great list of common metrics used to drive startups’ businesses.
Cohort Analysis – Measuring Engagement Over Time – Cohort analysis is very important. Showing increasing engagement across cohorts and over time is critical. Setting up the same graph with other metrics like LTV, which arguably is a measure of engagement, can be very valuable and worthwhile for an investor to see.
Ecommerce is a slog — what’s your angle ? – Fred Destin has an easy discussion on ecommerce metrics.
E-Commerce: What are the most important metrics for e-commerce companies? – A broader discussion on ecommerce metrics via Quora.
SaaS Metrics 2.0 – A Guide to Measuring and Improving what Matters – Written by David Skok of Matrix Partners. Great overview on metrics applied to SaaS businesses.
Many more great posts exist out there. Search on “ metrics” on Google and also in Quora.
By the way, toss Vanity Metrics. Save those for the press; don’t waste investors’ time with them. Definitely don’t use them for tracking the growth of your startup internally; they can lead you down the wrong path to death!
Are My Metrics Good Enough?
When you meet with seed investors, they may overlook the fact that you have metrics that are miniscule or non-existent. Seed investors often don’t have traction for proof and need to invest on the dream more than concrete proof.
When you get to series A, the bar gets raised significantly. Very few startups get series A on the dream today; we can always find the example startup or exception – but that’s the point – it’s the EXCEPTION not the rule. Much better to have shown that you have a good handle on metrics and the metrics themselves are great.
The elements of great metrics are easy. You need ideally all four of:
1. Show that you operationally have a great handle on metrics, tracking the right ones, showing that you are applying strategies driven by those metrics, and have on staff the right people doing the right things with the appropriate technology in place.
2. Exhibit metrics large in magnitude, ex. not 100s users, but millions of users (or maybe 10s of millions of users now).
3. Exhibit exponential growth in key metrics. Linear is not good enough for most metrics – an example where linear might be still great is linearly growing LTV over time. Mostly, show a real hockey stick up and to the right!
4. Show that your metrics are greater than industry benchmarks and/or competitors.
If you don’t have all 4, series A can be a real slog, potentially unachievable in today’s Series A Crunch laden market where there are too many early stage startups coming up for their next round. Why? It’s because too many startups have a handle on all 4 items above AND have higher magnitude and exponentially growing metrics than you. You’ve got your work cut out for you!
So the overall goal would be to achieve all 4. The first goal is item 1. Build the dream team for metrics and put in place technology to surface all sorts of metrics that you need. Use awesome tools like KISSmetrics and/or build your own. If you don’t have 1., then other 3 are going to be super tough and you’ll be reliant on luck to get there. Don’t rely on luck! Throw the odds in your favor of achieving the other 3 by being deliberate with respect to metrics, not haphazard.
Once you build the dream team and have the right technology in place, then you need to find the right metrics. Read those posts above. Get the right help – talk to others in your industry who have experience in metrics like yours and get their help in developing the right metrics for you to work with. Replace vanity metrics with better ones!
Let’s jump to item 4. This one is easy. Search Google, look at annual reports of public companies operating in your or similar spaces. Look on Quora for someone who may reveal metrics that you can’t find elsewhere. Search Slideshare for an elusive presentation that may reveal industry numbers. Check industry reports for more. Now you have a target – if you can show that your metrics are better than existing companies out there, that’s impressive!
Back to the hardest of the 4: items 2 and 3. How do you achieve these, and both in magnitude and exponentially growing numbers? Ack!
No magic I can impart on you from this post for sure. I will say that if you’ve got item 1, you’re well on your way to do the right things to get there. This is where the rubber meets the road and now YOU have to make your project shine.
What If I Don’t Have All 4 Items?
If you’ve got all 4 items, then why the heck are you reading this post? Go out and raise your series A!
However, if you’ve gotten this far, you may be one of the hordes of startups which do not exhibit all 4 qualities. What do you do now?
If you still have runway, go out and improve your metrics!
If you need to raise, then here are some suggestions to increase your chances, knowing that there could be hordes of startups with unfortunately much better metrics than you:
1. You probably can’t hire since you are running low on cash and need to raise, unless you can get somebody to sign up on equity. But you should go to investors with someone who at least is tracking and implementing a metrics driven approach in your startup. That person could also be you! Bring that person to the pitch so that they can show uber-expertise in metrics at your company.
2. The most common problem I’ve encountered are items 2 and 3. You either have low magnitude numbers or slow, linear growth, or both. If you have either 2 or 3, you still have a chance to raise on the vision and team. The better one to exhibit is exponential growth, even with low magnitude numbers. If you don’t have growth but big numbers, investors might think that your growth has stalled, or you’re doing something wrong, or both.
Metrics are an important part of the startup process. Investors today demand not only great metrics, but people on the team who understand the critical metrics in the business and can use them to grow the company. Implementing technology and process for metrics in your startup will greatly increase your chances of landing that next round. Don’t wait – do it now!

“I Have No Competition!”

This must be the favorite sentence uttered by entrepreneurs. But who can really lay claim to this statement being true? Could someone truly have no competitors?
Usually what happens is, after the pitch I go back to our research team and after their digging, we find a mass of competitors. How could that be?
In thinking about competitors, I find there is generally a difference of opinion between me and the entrepreneur that is driven by the different types of competition, and whether the type of competitors that exist matter to us investing or not. Then add to that how market forces shape competition and this all gets pretty complex.
The Different Types of Competition
What are the different types of competitors? Looking out on the Net, I found these categories of competition:
Direct/Existing Competitors – usually the easiest to find, these are companies with products who are the same are very similar to yours, and attempt to serve the same need.
[source: Different Types of Competitors by Peter Halim]
Entrenched direct/existing competitors are those who have been around for a while and have grabbed a lot of market share before you showed up.
Indirect or Mindshare/Category Competitors – these are companies who provide alternatives to the need your product solves or the resources that your using your product would occupy, but it may not be obvious that they are taking away share from you.
“Just because your offering is unique, doesn’t mean it is unique in the mind of your prospects. To a prospective customer a marketing strategist, web designer, direct mail specialist, graphic designer, video producers, and print shops may all provide “marketing”.”
[sources: 4 Types of Competitors, Different Types of Competitors by Peter Halim]
Potential Competitors – these are companies who have the capability and the will to enter into the marketplace with a product and become a direct or indirect competitor to you.
[source: Different Types of Competitors by Peter Halim]
Replacement Competitors
“A replacement competitor is something someone could do instead of choose your product, but they’re using the same resources they could have committed to your product.”
[source: Market Competition 101: The 3 types of competitors to keep an eye on by Daniel Burstein]
Budget Competitors
“Even if your products and services are truly unique, you still have to compete for the same budget dollars that other service providers are vying for.”
[source: 4 Types of Competitors]
This also applies to the regular consumers. How hard is it to get customers to part with their money, if there are other choices possible? How many subscription services can a consumer have on their credit card before they say enough is enough? Advertising agencies have set budgets per year; if it all gets spoken for, you may not get access to valuable ad dollars simply because it’s been all committed.
Doing Nothing – In the face of certain situations, it may result in a potential customer doing nothing as a way of deciding. This may result from having too many choices, or too difficult choices, or somehow being prevented from making a decision comfortable to the customer. It is worthwhile to ask, how can you eliminate this type of competition?
[source: 4 Types of Competitors]
What Matters to Us in Investing
You’re probably thinking – Wow, Dave, that’s a big list! Isn’t that being a bit unfair to a fledging startup? Wouldn’t the world be our competitor if we lay this kind of analysis on my startup?
You’re partially right – as investors we like to look at your project from all angles and weigh the odds. What’s the probability that a competitor, or competitors, will emerge and make life difficult or impossible for a startup we’re looking at?
So taking those categories of competition above, we try to see who is there and who is not.
Direct/existing competitors are the worst. You have to come up against them and fight head to head for market share. Some of them are entrenched and thus you could have a tough time grabbing share from them. On the other hand, if they are traditional, slow moving big corporations, you may have an advantage in being a quick moving startup entering with a significantly better product. Competing against other startups – that’s sometimes much harder.
The other categories are much harder to judge. We have to make a personal call as to whether or not we think the risk is too high or low enough to give the startup a fighting chance.
Market Forces Confound the Competition Analysis
The only problem is…there are too many internet startups now. There has been an explosion of entrepreneurism which complicates the competition problem.
Previously, we talked about Mindshare/Category Competitors. This was when your competitors could come from a broader category and those could become your competitors inadvertantly. However, with the enormous number of startups out there, the Category becomes so broad to emcompass all internet, meaning the fight for customers becomes the battle for attention where everyone is your competitor.
The Last Category: Everyone is Your Competitor
While this is probably true to some degree at any time, it jumps to the forefront in times like today. That’s what is happening now; there are too many startups for both consumers and B2B customers to process quickly. If they cannot choose you fast enough, then your growth is stalled, causing you to burn through your cash before you can get to breakeven. Time is the enemy of startups – you cannot wait for people to process too many choices; you need them to use you quickly and they simply won’t. This is why we see startups needing 24-30 months to get to someplace of stability, or to get to their next funding event.
This makes the investment decision much harder to process. What’s an investor to do?
We could wait for times to change. The world moves so fast now – it is possible that within a year or two, the battle for attention may abate. Or it could get worse.
What it does mean is that for now, as we evaluate startups, the best we can do is to acknowledge the battle for attention is very real but we are being very picky now.
At this point, we try only to pick startups that have really no direct competitors, or have only old, traditional entrenched competitors. The world of internet startups has reached to almost every corner of every major industry; however, we are still finding some unturned stones, businesses and markets that have not been touched by internet startups yet. This is where we are finding the last remaining internet startup opportunities that literally have no direct competitors, or at best, competitors that are old, traditional companies which we are betting cannot move as fast, nor have the expertise or innnovative spirit of a startup.
In the old days, investors picked startups who had no competitors. The internet wasn’t around back then and competition was different in other industries. With the internet, competition pops up with great ease and speed. We now look for those rare, few startups that have still no direct competitors and advise them to stay stealth, just like in the old days, to avoid other internet entrepreneurs from creating competitors literally out of thin air.

We Investors are Haunted by Our Past

A few weeks back I met with an entrepreneur who had recently closed a round with a large VC. We got to talking about what it was like to work with that VC, and he mentioned that it was a little strange because the VC was pushing for these really bizarre terms. After he described them to me, I too agreed they were bizarre, but then I said I’m pretty sure I knew why he was pushing for them, which was I bet he had gotten burned on them in the past. The entrepreneur’s eyes lit up and said that was right! Eventually, the VC admitted this to him, talked it through, and they came to agreement on terms.
I can sympathize with that VC. Since 2006 when I started investing in startups, I’ve gotten caught by a lot of unexpected traps and rookie mistakes. These have definitely driven my current thinking on how I like to pick startups and their teams, finance them, and what terms are important to me. I would definitely admit that this was the most expensive education in any subject I’ve ever learned. Where else can you piss away 10s, if not 100s of thousands of dollars on situations that you may have avoided through better experience or forethought? Or maybe lady luck just decided to slap you down this time out of nowhere?
It was one of the reasons why I wrote this post a few years back: More Reasons Not to Invest in Notes. In the notes that I’ve done, I’ve seen many unexpected things happen. And this is why my boilerplate note has grown to include many things beyond the vanilla convertible note that someone might use.
But then, there are investors I’ve met out there who have never had anything bad or weird happen to them. This fact still amazes me that there are those out there like this. Still, it is my belief that the more you invest, the more likely something bad will eventually happen. You can’t avoid everything bad that can happen to you; you can only do so much to protect yourself.
In our attempts to protect ourselves, the entrepreneurs we meet often suffer from our past. We argue for certain agreements and terms, some of which seem downright strange and we can be pretty adamant about those terms. We may even get emotional about them and refuse to back down on them as negotiable items.
Sorry about that. The more we invest, the more we are scarred. The best thing you can do is to be like a good therapist; sit and listen to us rant and rave. Nod with sympathy in your eyes. Let us know you understand. Pat us on the back. And when we calm down, we may actually give…or not. Like traditional therapy, some things can be cured and others…well…probably never…

The Importance of Revenue is Back

Back in 2009, shortly after the 2008 crash, I wrote The Importance of Revenue at Early Stage, Now More Than Ever. Up to that time, we had been on a roll – startup investing was growing well and we had bought into building traffic which allowed us to get to our next funding event. Then, the crash killed all that. Money was hard to come by, and investing in “momentum” or traffic only startups without much revenue was nearly dead. Only revenue generating startups were attractive to investors and a boatload of non-revenue startups died simply because they had none.
Then the startup funding environment came roaring back, we had our Instagram moment, and investing on momentum was in vogue again.
But times have shifted again. What has changed?
1. Tracking M&A values, they hang slightly above $20M [source: Berkery Noyes 2012 3rd Qtr Trends Report Online & Mobile Industry]. This is pretty low in general, and pretty unattractive from an investors’ standpoint when…
2. …Valuations for startups still hang around $6-10M cap or pre-money at early stage for the hotter deals, sometimes even higher. Remember that if you are to exit at the median, you must be doing pretty darn good and be above average. If you are not gaining traction, acquihires are happening at much, much lower values, definitely well below $10M.
Now to be perfectly clear, there are those out there investing on strategies that take into account 2-5X return on money. But our economics don’t allow us to do that – we need much more return.
3. Customers, whether consumers or B2B, are deluged by the exponential growth of startups and growth is harder to come by. In the near past, we used to tell startups that they needed 12-18 months to get to decent traction metrics; that quickly moved to 18-24 months, and now we think it’s 24-30 months. Wow! 24-30 months – this is a direct result of our observations on how startups are growing in the competitive marketplace, the battle for customers’ attention. When we saw them funded with runways of ~18 months or so, many needed more runway and so went to look for bridges, if they could not get series A – so we’re now at 24-30 months!
However, practically NO startup I know raises for 24-30 months at the seed stage – well, practically none. If you go to Techcrunch and other online publications that follow startups, you’ll see a ton of early stage raises at $1.5M-2.0M – what happened? This is smart. These founders, and their investors, have realized that they need more runway and have funded them for that. Startups who raise less than 24 months runway have a higher probabiility, now more than ever, that they will need additional runway to extend them to 24-30 months within a year.
But if you aren’t one of the startup darlings to get $1.5-2.0M at seed, what then?
4. Last, we’ve been in contact with some prominent financial guys who follow the economy like hawks. They process every bit of information that is out there, stuff we all can get and a ton of stuff that we can’t. (If there is anything I’ve learned about the financial industry, it’s this – there are those with the information and those without – those without basically include everybody else including you and me – and yes, the world will continue to have unfair information advantage no matter what we do with regulations). They are fearful that another 2008 is coming. We’ve been digging into this and have found evidence in a potential earnings cliff, and we are concerned as well.
All this means that we think the importance of revenue at early stage is back – one could argue that it never left, but what I mean is that it has risen to the top of the stack.
The world isn’t looking optimal for internet startup investing. That doesn’t mean there aren’t opportunities out there that can fit within the world we see right now – generating revenue is one of those key characteristics that can ensure some longevity even when the world is so uncertain. Once again, we look for that to bolster a startup’s chance for survival and give them maximal runway to achieve their next funding event.

Now that You’ve Got MVP, It’s Time to Think About MVC

Lately, I’ve been doing meetings with young startups in recent accelerator batches and meeting them for the first time. It’s been great to hear that they’ve bought into the iterative method of customer development and most of them have found their Minimum Viable Product or MVP, or they are well on their way to finding MVP.
This is awesome but in today’s world, you can’t raise money on achieving an MVP. Investors demand more than that.
As Steve Blank likes to say:
A Startup Is a Temporary Organization Designed to Search
for A Repeatable and Scalable Business Model

[source: Nail the Customer Development Manifesto to the Wall – Steve Blank]
The unfortunate reality is – an MVP is not the above! Yet most of the newly minted entrepreneurs I’ve met think their job is nearly done when they’ve found MVP – they think they can go build a pitch off their early MVP and raise money!
A startup does require MVP but it is much more than just MVP. The problem is that MVP means early adoption of product and its features, maybe even some who will pay. But it doesn’t tell you how many people will do it in the long term and whether this can support the company (the people and operations within) that is behind it.
So startups are much more than MVP and requires thinking beyond just the product. This is where I’d like to coin a new acronym, which is Minimum Viable Company or MVC.
What is a MVC?
First, I would say MVCs only apply to early stage startups – you can’t really talk about achieving MVC status for a company that’s been around for a longer period of time. To be minimally viable as a company, I would say:
1. It has achieved breakeven or profitability, or has a believable and achievable plan to get there.
OR
2. It has achieved enough metrics to reach its next funding event. This includes the first funding event.
Or ideally both.
The Fundable MVC
An MVC must have achieved some sort of MVP, but having MVP doesn’t mean you have achieved MVC automatically. Nor does it mean you’ve achieved the next level of MVC which is a FMVC or Fundable MVC.
Remember that many MVCs can generate cash, but how much exactly? If you reach small or medium business status, that is great; it takes no little effort to make $500K, $1M, or several tens of millions of dollars per year. It is a notable achievement to employ a building full of workers, insuring them pay and livelihood, and providing or shipping product and services to customers. This is a win by many measures.
However, many companies like these, while there is every reason in the world for them to exist, unfortunately are not attractive to investors. This is because while they are doing great work, the likelihood of investors getting their money back and then some is very low or zero. This is the difference between an MVC and a FMVC.
We have not, as an startup/investor community, figured out how to invest in those companies whose trajectory is heading towards small or medium business status. Right now, all startups are being funded as if they are going to exit like any high growth startup. Anybody on a lesser trajectory simply won’t attract the funding it needs unless more effort is done with other funding sources or structures.
Therefore, it is the FMVC that every startup needs to achieve. What are the characteristics of a FMVC? Everything that a seasoned, high growth investor looks for: big market, big vision, lots of revenue potential, world domination plan, etc. This is what will increase the likelihood of funding, not presenting your MVP at a demo day, or even a plan for a MVC, but your plan for a FMVC.
How do you turn your MVP into a FMVC?
First, you must realize that not all MVPs yield a FMVC. MVPs could yield a MVC but not FMVC. Many MVPs have potential to attract some customers, but not enough to create a company and an opportunity large and tasty enough for investors to want to put money in. This is also dependent on the market in general, meaning that 5+ years ago when there weren’t so many startups sprouting up all over the place, you could have achieved an FMVC with your project; however, in today’s crowded startup world, you cannot.
While every project is different, I point you to some suggestions on examining what you are doing now in hopes of turning it into a FMVC:
1. Iterating on MVCs is a good thing to do; keep trying out business models and plans until a FMVC shows up. It may mean giving up on your current MVP and looking for another one. Do not be afraid of going back to the drawing board if you find your MVP does not yield a satisfactory FMVC!
However, your time limit is your bank account. Never forget that. So working rapidly and lean is key.
2. Do you have a World Domination Plan? Is it believable? If you can envision a world where your MVP dominates whatever market and customers it is pursuing, is that big enough?
3. Are you too focused on the solution and not on the problem? Becoming too myopic about their product and forgetting about how this turns into a big company is something that I find happens with many entrepreneurs. They get caught up in the success of finding a MVP, but don’t realize that they not only need a MVP but need to achieve MVC and hopefully FMVC.
4. Following on 3., it would probably be a good idea to pick up some MBA skills and start running models and scenarios to see where a given MVP can become a MVC, or potentially a FMVC.
5. A good measuring stick I use with startups is to ask what the $100M/year revenue scenario looks like. Generating $100M in business per year is no small feat – you get there and you’re well on your way to becoming a big business. So can we imagine a world where your startup is making that much and believe it?
6. The weird thing about some startups is, that some break into such new territory that it is very hard to model or you can’t model anything. New industries, new markets, or products and services that customers cannot imagine having or using are like that. So the FMVC you could create is purely via pitch, arrogance, confidence, etc. – whatever it takes to woo an investor to write a big enough check on what you plan whether you have product or not. In order to accomplish this kind of FMVC, your credentials must be unique: you must be well-known to the investor, you must be trusted. Ideally, you would have had an exit or more for that investor. You must show “extreme” entrepreneurial traits: be able to employ persuasive language, compelling/grand planning, superb salesmanship skills and technical skills, among others. These are the people who can get funding on a powerpoint when others flounder even with revenue.
This can be enough to win you funding and survivability.
In short:
1. An MVP is great but not enough in today’s market to win funding.
2. An MVC generally means you have MVP, but an MVP does not guarantee MVC.
3. An MVC can yield a small to medium business, or a big world dominating one. There is nothing wrong with building any of those types of businesses and the world is big enough for all kinds.
4. However, we do not know how to properly invest in small to medium businesses. Our money may not be returnable from such businesses using the current equity structure of our investing. Thus, we want to invest in FMVCs.
5. As someone who is trying to build a real high-growth startup, therefore, MVPs or MVCs are not enough. You must search for a FMVC.

My Favorite Method for Naming Startups

On the 500startups forums, someone asked about how to name their startup. I thought it would be worthwhile to repost my response there, which was to detail my favorite process for brainstorming a new name for a company, product, or service. Here it is, with some embellishments:
Before you begin, some good tools to have: thesaurus and dictionary. Creative people, advertising copywriters are the best. An open mind to the nutty and weird.
1. Brainstorm related words, or perhaps unrelated words if you want something interesting and fun that may not be directly descriptive of your business.
2. Check synonyms of those words, and reference dictionaries for words that you might use, or might not have thought of.
I also just found this great list on Wikipedia for product naming language techniques. Use these to generate more words besides just the above.
3. Employ these words as prefixes and suffixes, and use both standard and non-standard. For example for suffixes, a standard suffix would be something like “-ly”. A non-standard would be to just use a word in place as the second half of the name.
4. Mix and match the above multiple times. Create lists of possible names and even those that are a bit crazy. Don’t reject anything at this stage – you are bstorming! Put them up on a wall so you can see them all at once. Continue putting words together and creating new combinations.
5. Pick favorites, then throw into a domain name search to see if available. <-- this is usually very depressing - not many domain names are left out there. NOTE: be careful - I'm sure that some people are tracking what domain names people are searching on although i can't prove it. but I'm a paranoid guy ;-). So only check names that you are absolutely sure of because if someone believes you are interested in a name, they may buy it before you and try to sell it back to you. 6. Do informal or formal testing of name against customers, friends, family, etc. Check for unintended or alternate meanings. Check foreign language dictionaries to make sure your name doesn't mean something you don't want it to mean in another language, ie. Chevy Nova, where nova means "doesn't go" in Spanish. 7. Repeat above until you find a name that you like. 8. After you pick a name, then search your state's database of company names. BUT I would highly recommend that you pick a company name that is completely different than your product/website name. To me, staying stealth in today’s world for most startups is critical since things get copied all the time and easily.
9. As for trademarking, you can do your own trademark search at the USPTO website.
You can also file your own trademark application there so i think you can probably get away with not paying a lawyer to do it.
More on general information on trademarks can be found at the USPTO website.
Some online guides to naming:
How to Name Your Business – Entrepreneur.com
How to Name a Business – SBA.gov
The 8 Principles Of Product Naming – FastCompany.com