Category Archives: Angel Investing/Venture Funds

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…

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.
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.

Venture Therapy

As an advisor to startups, I’ve spent a lot of time developing my skills at teaching, guiding, and influencing people. But things aren’t always so rosy for startups – people who have done startups before know that there can be incredible highs but also incredible lows. The tough moments can be extremely challenging to the psyche. But who can guide them through these times?
Lately, I feel like I’ve been playing the role of helping entrepreneurs through tough times, not only with what they do, but what they feel also.

It’s hard being an entrepreneur. Sometimes, you have nobody to talk to. This is why we encourage entrepreneurs to have a co-founder, and to find good advisors. But I’ve found that while many give great advice and are awesome at the “doing” part, and are great problem solvers, they are awful at the “feeling” part.
Therapists have lots of skills – among them are:
1. The ability to listen.
2. The ability to be non-judgemental. What is, is. Don’t place value judgement on what is there in front of you.
3. Be able to practice “tough love.” Don’t be wimpy and only shower someone with good feelings; listen and then guide them to a better place. Don’t be afraid of confrontation – too many people, especially in California, avoid conflict. It’s stupid.
4. To be able to reflect what you heard from them and then guide.
If there is anything I’ve learned in my life, it’s that humans are AWFUL at the above. A good friend said it to me best:
Our society is awesome at creating doctors, lawyers, physicists, scientists. We put them through 12 years of grade school, then another 4 years of college, and then another few years of advanced training. They become AWESOME at what they do. YET we do not train someone to deal with another person positively and for a long time which arguably is just as or more important than your profession.
Those of you who know me know that I am mentor at 500startups, Lemnos Labs, and StartX. I was also mentor to Ycombinator startups when they had a short trial mentor program. And since 2006, I’ve been advisor to 20+ startups, and Venture Advisor at Betaworks. I’ve learned a lot about being a mentor and advisor over the years (see Advising with Influence and Resonance, Advisors for Early Stage Startups Presentation at Yale Entrepreneurship Institute, How Does One Advise So Many Companies at One Time?, The Three Faces of My Schizophrenia, What If I Advise But Don’t Invest?) but think one aspect that has come to the forefront lately is mentor-as-therapist.
So I listen. I hear what they are saying. I don’t be judgemental. I hear the problem or problems.
I can’t get my co-founder to agree!
Why haven’t I got 1 millions users yet? I think my product sucks!
I gotta bridge at a terrible valuation! Depression sets in!
My bank account is at zero! What do I do?
I can’t raise $100M at a billion dollar valuation! The world is so unfair!
Instagram got a billion, why not me?
I’m outta my comfort zone! Panic!

I may suggest solutions, but sometimes I suggest nothing – (in case you didn’t know, suggesting NOTHING is actually an effective way of helping!). Sometimes it can take several conversations. My intuition is fully on – can I actually push a solution now or should I wait? Maybe I can toe one in to see if it will work? I sense their receptiveness or lack thereof. I use a bit of humor. I rag on them to see the absurdity of it all (after all, what’s REALLY important in life – this stupid startup or something else?). If the time is right, I practice tough love. Some get defensive – that’s too bad – some take it in. It can be very taxing on me – isn’t it frustrating when the other party just won’t change or see the light fast enough? I just relax and be very patient because in my experience, the right answer always eventually comes. But ultimately, my hope is that I get them to a more positive place than they are today.
Yep, I’ve got a new job title – just call me “Venture Therapist”….

“Can I get you to Series A?”

In my last trip to NYC, I had breakfast with my buddy Steve Schlafman of Lerer Ventures. I was talking about how many of our startups were going up for series A, and how it was filling my brain and time on how to get these guys there. He replied that they had always thought that way, at which time I thought about how slow I was on that uptake, that our job as seed investors was to help groom our startups for series A!
But as we talked, I also began to think heavily about the importance of series A and it’s now becoming an investment criteria of mine, which is “can I get this startup to series A?”.
The importance of the next round of funding is pretty clear; you need cash to grow and if you can’t get it from some future funding source, it could kill you. However, in order to get your next round of funding, you better exhibit some key characteristics.
So I now look at startups with an eye towards these key characteristics, and I think heavily on whether or not they can with or without my help get to a point of exhibiting as many of those key characteristics as possible. If I decide they cannot, I think I would be less inclined for investment. But if I can see the creation of an environment where the some future investor would look favorably on this company sometime before their runway is over and invest in a series A, then I would be more inclined to invest.
Of course when I meet them at early stage, they rarely exhibit any of those key characteristics. How will I know if they ever will? Some would argue that it’s nearly impossible to predict the future and that smart people will get there no matter what. Unfortunately, I am not sure that is enough any more. Smart people can succeed or fail either way. I am out there looking at startups with an eye to tilt the odds in favor of success and not just betting broadly on the crowd of smart people.
What would make me think that they can get there?
Without diving into the well trodden areas of what makes a great startup to invest in (ie. big markets, no competitors, unique IP, etc.), I think there are some additional things to consider:
1. Is there a larger investor in the round AND who is willing to support their startups after the first round?
All angel rounds used to be OK but I do not believe that is the case any more. This has to do with runway and the inevitable bridge round that comes after. We’ve pretty much bridged everyone of our startups of the most recent vintage. This is because we have been telling startups to raise and survive for at least 18-24 months. But I am not sure this is enough any more since a ton of my startups all need more runway. Thankfully many have had a large investor who was willing to lead a bridge and/or put in a large amount in to give them more runway.
However, it is unfortunate that not all larger funds are willing to do this. I am hopeful that perhaps they will change given the changes in the startup ecosystem. So I am actively searching for seed stage funds to work more closely with who have a true willingness to bridge after the first round.
2. We used to tell startups that they need to ensure their runway was 18-24 months, but now I do not think that is enough – it may actually be 24-30 months now. The evidence is in the bridges that we’ve had to do. Sure they all got to some level of traction by 12-18 months; but it didn’t guarantee a series A. Either they needed to spend more time developing their startup, or developing their series A characteristics, or spending more time raising their round then they thought – or all of the above.
By my observations, there is a series A crunch. There are too many startups all clamoring for series A; it is impossible for everyone to get their next round done – there are many more seed stage startups being formed but the number of series A funding sources has not increased by the same amount.
However, the other issue is, how many series A characteristics are you exhibiting after you come near the end of your initial runway and are they worthy enough for a fund to invest in you?
The battle for attention is fierce; consumers and B2B customers are being deluged by tons of products and services. Traction is much harder to come by. Thus you need time to develop traction which early stage startups typically do not have. Yet another reason for the bridge, when they realize that their traction numbers aren’t good enough for the series A and they need more time to develop traction (and everything else).
The other thing is that there are few startups who can raise a typical $1M round and last 24-30 months without additional funding. This is why I think that most categories for internet startups are moving far to the right on the famous “crossing the chasm” graph and it is getting too dangerous to play as an early stager in those rounds.
3. The round must be big enough. Too often I meet entrepreneurs who only want to raise $200K-400K. Sadly I have to turn them away. There are many reasons why they only seek to raise a relatively small amount. However, if you have a great idea with all the other prerequisites (ie. big market, no competition, great IP, Stanford/MIT grads, etc.) you should go out and raise at least a $1M if you have those attributes! What’s stopping you?
In fact, if you don’t you’ll inevitably end up with not enough traction at the end of your $200K-400K and you could have a tough time raising on mediocre metrics – which means you could die even though you had a great idea to start. The fact remains that it is usually easier to raise money on the promise than afterwards on mediocre metrics.
The basic problem is, in the past, you may have been able to get to your next round with some level of confidence in the past with only that much. In today’s world with the way the ecosystem is, your chance of getting near nowhere is uncomfortably high.
4. Looking at the startup plan itself, I think deeply about it and the ecosystem surrounding it. What will it take to get this startup to exhibit a decent amount of series A characteristics? This will be both subjective and objective; we analyze the plan and do our research as well as put our best guess and intuition against it. Can this startup make it to series A in a reasonable timeframe? Can they do it only with the money they raised? Or should we expect a bridge? Or, given what we know about the VCs who play at series A stage, will this startup get to a place where someone will step up to fund them? Eerily, revenue can play a big role yet again – this is very reminiscent of what happened to investors back in 2008 during the economic downturn; investors starting putting money into revenue generating startups for their survivabiity. I believe this factor will play a major role yet again in today’s world because this lengthens their time to develop series A characteristics.
So if all these factors align positively, then I think the startup has a good chance of getting to the next step which is series A. Still, the world is changing very quickly now and I’m changing my thoughts and strategy in near real-time. In the near term, the ability to create a condition where series A is achievable in the timeframe that a startup has, has now come to forefront of my investment criteria.

It’s Our Job to Help Prepare You for Series A

Since the beginning of this year, I’ve been helping a number of my startups prepare for series A (you can read some tips I’ve collected in my last post Some Suggestions on How to Prepare for a Successful Series A). This seems to have become a full time job in itself.
When I first started investing as an angel back in 2006, I wanted to be helpful. I offered up my previous experience as a UX/product guy to startups and they were thankful for that. Since 2006, I’ve learned a ton about startup building in and around the product and have broadened my areas to help.
In yesterday’s world, having a kick ass product equalled getting customers which then equalled getting your series A. In today’s world, it’s a LOT more complex.
Think about it. Everyone is out there trumpeting the entrepreneurship horn. Never before has it been so easy to start an internet startup; all the costs and barriers have dropped. But this also means that competition for the next round of funding has grown more fierce. While the number of startups has grown exponentially, the venture funds who fund at the series A level has not grown to match. Some have called this the series A crunch – see Elad Gil’s excellent post Why Fewer Companies Are Successfully Raising Series A Rounds. Others have denied there is one. Still, as I watch my startups start their funding meetings with VCs, it’s obvious that you better be better than the best of the best of the best or else you won’t have a chance.
Startups must exhibit the correct strengths and have minimal weaknesses. But what are those strengths? And how do you minimize weaknesses? Startups without guidance aren’t going to have a great chance at getting their next round. Thus your chances increase when you have help, hopefully in your advisors and investors.
I’ve been involved with over 30 startups now through my angel investing and through Launch Capital. While I started with helping with just product and UX, I find myself now more importantly broadening that help to prepping the startup for their next round. Perhaps this was obvious to those more experienced than me as an investor; however, just this year, I’ve become painfully aware that while I can help on product and UX, it’s much more important that I am helpful with a broader overview of the startup, with the specific aim of successfully landing a series A.
So I sit with founders and drive them to exhibit all the characteristics an investor may want to see. All of those are detailed in my previous post, Some Suggestions on How to Prepare for a Successful Series A. I push them to spend all their waking hours (before their bank account runs too low) to figure out their key metrics, work on whatever their weaknesses are, make money and/or get tons of users, and to put their business in the best light – especially against the competition. I bring them news from the marketplace on what investors might look for, and which ones are the best ones for their market and which ones are not. I watch the calendar and make sure they hit the fund raise trail at the right times of the year. I dress them up for the funding prom and hope that they are the prettiest one there.
To me, preparing startups for series A has become the most important function an early stage investor can perform for their startups now, more than any other function. Early stage startups should strive to not only find key advisors and investors with expertise in the right fields, but also those who can help and are willing to spend time with their startups to successfully land their next round.

Some Suggestions on How to Prepare for a Successful Series A

This year, I’ve got a number of startups all gunning for series A. A lot of us have been working on getting these startups to a point where they can present the best possible chance for getting their next round. Then, on the 500startups discussion board, the same topic came up and I posted an answer there. Rather than having it trapped there forever, I thought I’d repost it here (and edit it slightly) for all to take a look at some of things we’re thinking about as we’re prepping our startups for series A:
So what makes you most attractive to landing a series A? Sometimes it can be infuriating to see a competitor get funded and you not. Sometimes you can’t even tell why.
Here are things to work on for your series A, that can help you land one:
1. Relational – if the VC knows you, has a history with you, or even better has had an exit with you, then they will back you. Go out and smooze some VCs now!
2. Interpersonal – Very few VCs will invest in you if they can’t stand being around you. So work on your interpersonal skills.
3. Show entrepreneurial attributes – This is a given. Don’t let them think you aren’t going for the gold even in the slightest.
4. Big market -If your market is not big, you’re in trouble. Better go find one.
5. Vision – It could mean that your vision is big and strong enough. If you have a small vision for your future, or an undefined one, that is much less attractive than if you had one.
6. Traction, showing large/exponential growth – This one is hard to attain at early stage. but then if you have tremendous traction, then why do you need funding? So make them pay up! For some startups, your revenue path is very unclear so you absolutely need to show tremendous traction before you get funded. If you are making lots of money, that’s obvious although then you have to show how much *more* money you can make – making $1M is awesome but if you can only make $5M max, that’s not so awesome to a series A VC.
7. Understanding of key metrics, even if not large in magnitude – This one is most important if you don’t have 5. For example, for ecommerce, you need to show that you can acquire a ton of customers cheaply, and sell them something that makes you a lot more money than what it cost to acquire them. Show that you can then keep selling them more stuff and you have a lifetime value that is super high. Then a VC can then just think if they spend $X million on customer acquisition, then I will make $X+Y million. If you can show great metrics but not necessarily tremendous traction, then you need to show metrics which will talk about your potential, once you get tremendous traction.
8. Why are you better than your competitors – If you have a lot of competitors, the probability of you getting funded drops. If you have less, the probability grows. In either case you need to show why you are better than the other guys in your space.
9. Exit potential – 10X or better – For series A, they will look to return 10X or better. They will NOT be playing to exit at 3-5X. If you can’t show that in your numbers and potential, you’ll never get your series A. Work on your plan and story to get that. Study M&A data to understand if it’s even possible.
10. Timing and market conditions – Here is one example: after instagram got bought for $1B, that ruined the market for all the other startups out there trying to get their series A; all the VCs started hunting for the next instagram! Talk about herd mentality. However, after 2008’s crash, VCs started looking for revenue generating startups and less those that only have traction. So the market changes regularly.
11. Defensible, sustainable competitive advantage – This attribute has been around since the dawn of venture time. If you have one, a REAL one, then you will be fundable.
Knowing the above, then comes to another part of this puzzle for those raising money now, which is how much money do you need to make a good showing in a large number of the above?
We tell people to raise for 18-24 months now. It could be even longer given the type of startup you have. 12 months or less is definitely not enough in today’s climate. So it could be $500K, it might be $2M – whatever is appropriate for what you are building. Also remember there are two levers to adjust: how much you raise and how much you burn. So it’s not as simple as doubling your raise to get to 24 months – it could mean you should burn half as much.
NOTE: 18-24 months is HIGHLY dependent on industry and market conditions at the time. It was 12 months back in 2006 timeframe; it could be worse in the near future. Or it could retreat back to 12 months. Like it or not, it’s 18-24 months right now.
Should you ask VCs what they look for in series A?
Asking VCs does work but it may also not work. Unless your business is in a category where there are known metrics, like ecommerce, or in an area where the VC has experience in a previous investment, it may be hard to get a good answer. You may get a generic answer like “show more traction”. Well that’s nice, but how much exactly? And is that enough? So find a VC who has experience and investments in a similar industry AND is friendly enough to take advice meetings in their busy schedule and you could get some good answers. But they could also be generic answers.
I think a better path is to find someone in a similar business who can tell you what metrics they track and see if they adapt to your business.
Proving and Showing the 10X Return Case
Another thing you can do is to do some math to show that you can generate a 10X or better return for an investor via comparison with historical data.
First, if you can, look up similar companies in your space. for some this is impossible. for others you may need to look at what a potential acquirer has paid for in the past. and still for others, it could be that you can find some public companies in similar spaces for comparison. google around the web for M&A data. some of that you’ll have to find in a M&A database like or Look also at press releases, Techcrunch, SAI, etc.
Second, if they have revenue, this is most straightforward. Look at typical multiples on revenue or EBITDA. There will be high/mid/low values for typical M&A-ed companies, or easier when a company is public.
If you don’t have revenue, this can be very hard. You may just need to find M&A data on companies that were acquired by a potential of acquirer of you. Gather metrics on those companies, like number of users, etc. to use as comparison.
Next, now you relate the performance of your company at a given exit value. But what is that exit value? Now go back to some scenarios on funding. For series A guys, what would a potential valuation be, for a given amount raised? Let’s say you want to end up at $20M post money. If a series A guy wants at least 10X, then you would have to exit at $200M assuming no more rounds of financing after them (highly unlikely that other rounds may not be required, but let’s start here).
If you have great revenue potential, then take the multiple on revenue and the multiple on EBIDTA and figure out what revenue you’d have to make in order to achieve that $200M, and/or also what your EBIDTA would have to be. Now you have these two numbers – if you can build a believable plan to get to these numbers in a reasonably short amount of time, say 5 years or less is optimal, 10 years is the absolute maximum which is the typical life of a fund, then you have a good chance of getting a series A.
If you’re off building to huge user traction, looking for the Instagram win, then you’ll have to show the traction buildup of similar companies sans revenue.
Remember that Pinterest took 1.5 years of hanging around until they started to hockey stick. Twitter took almost 3 years – those guys could have hung around for 10 years if they wanted to. But once they took off, then the game was on.
There are many out there who are looking for high traction services, either to find the next Instagram or on the assumption that if you have that many users then you’ll be valuable to someone eventually, or you’ll figure out how to monetize them even if with ads.
So all traction based/sans revenue startups have to do is to get to their own hockey stick and survive long enough to do so, but you may have to wait until that hockey stick happens before you get your series A….
Now having said all that, put all those calculations and data into a slide in your deck and get ready to talk through it with a VC. Don’t count on a VC to do that math for you; they may not have enough experience in that industry or sector to do it on the fly.
If you can’t achieve those results no matter how you jigger your spreadsheets and models, then i think you have a pretty low chance of getting a series A. if that’s true, THEN DO SOMETHING ABOUT IT. change yourself. pivot what you’re doing and/or pivot your plan. otherwise you’re going to have to figure out how to survive on just your angel round, assuming that the angels you get also have lower expectations.
Am I Sunk If I Don’t Exhibit Typical Series A Attributes?
While not being able to show typical series A attributes, it doesn’t lower them to zero. There can be so many random factors that can land you a series A.
I would say that most VCs are pretty conservative relatively speaking and want proof points alongside the vision and things that are not yet shown or proved yet. but that doesn’t mean you couldn’t find someone to bet on you even with large sums of money.
The lesson here is: keep trying! Don’t give up! If you have absolute proof that you should change your pitch, then do it. But there also may be somebody out there who will fund you with your current plan. You’ll never know until you pitch as many people as possible. So DON’T GIVE UP.

When an Investment Thesis Moves Beyond You

I’ve been thinking a lot about investment theses and their development and use over these last few months. As I observe some of the theses that I’m investing against now, I find that investment theses move through a cycle similar to Geoffrey Moore’s Crossing the Chasm technology adoption life cycle model:

Source: Powerpoint-Templates on Slideshare
The earlier we develop a thesis, the further left on the graph we are. Thus, we truly are “Early Adopters” of this thesis because practically no one else has spotted yet, or very few. As we invest, we approach the chasm. This is where we find out if our thesis is right or not; if we are wrong, the thesis hits the chasm and falls to a brutal market death (taking our investment dollars along with it). Internet startups in this phase tackle the broad market since it is wide open with almost no competitors.
However if some of our investments start to do well, they gain market notice. Now other investors start jumping on the bandwagon. They too start to fund those startups which fit the thesis. Other (less imaginative) entrepreneurs start to see that startups got funded in a certain category before them, and they join in building startups too seeing that the investor community is beginning to favor these startups and raising money for them is easier. For internet startups, this begins the explosion of startups who start niche-ifying the early companies who tackled the broad market and try to do better by attacking a smaller segment more effectively than someone who is trying to satisfy the broad market. Series A investment rounds start populating the early startups who are still operating. This phase is the “Early Majority.”
Now the early startups have survived and gained a lot of traction and are making money and/or generating excitement by their growing size. Later stage VCs start funding series B and beyond, infusing large amounts of growth capital to companies whose traction has largely been proven. Still, entrepreneurs begin companies that tackle the space; for internet startups, this means not only further niche-ifying but also additional feature development for those things we wish the giants would do but do not have time to build.
At the end of the cycle come the laggards. This can mean simply that there are those who believe that they can still find some startup that can survive the existence of heavy competition that can grow to great heights. It can also mean that the next phase is IPO, as the largest of the companies drive towards the public markets and the stock market takes hold, which usually means there is significant traction and revenue generated. But paradoxically, once companies become big, history has shown that they stop innovating and then it can be a great opportunity for new investment theses to develop in areas where opportunity was disappearing not too long ago.
When I applied this to the theses I had been using up until now, I realized that two of my theses were racing along the graph now. And that was when I also realized that one of my theses was quickly moving beyond us.
What do I mean by that? As an early stage investor, we need certain parameters to fall into place for us to execute a meaningful strategy in selecting investments. One of these is the fact that startups we select must have market conditions maximized for their success. In the case of one of my theses, and when I applied this chasm graph to it, I realized that the market had definitely jumped the chasm a year or so ago and we were racing up through Early Majority and into Late Majority. When this happens, it means that there is still a market opportunity but just that this opportunity is not as viable for us at early stage as it was before. Mostly, this is because companies who emerge in this thesis category require a ton of capital to survive the market dynamics of fast, easy competition and a consumer attention problem of enormous proportions. You essentially need a lot of capital simply to go out and buy users to accelerate the customer acquisition process or else your chances of surviving by utilizing free methods of acquisition are too slow. At early stage, we simply cannot do things to move the odds in our favor any more; these investments become the province of those with a lot more capital than us.
Can you guess which of my theses I refer to?
Developing investment theses has been a fascinating exercise for me. However, now that I had developed some, it is even more fascinating to watch how I apply them to my investment strategy, see them evolve through years (sometimes months now), and then go through the mental and emotional exercise of dropping them when they are not valid for us any more.

Revenue or No Revenue: Stop Hating and Just Enjoy the Ride

Richard White CEO of Uservoice posted a great read entitled Revenue could be fatal: 3 reasons your startup should consider waiting. Check out the comments and see a snapshot of the emotions that are stewing around the net right now (see more on Hacker News). All of this is on the heels of Instagram being purchased for $1 billion by Facebook. How is that fair? How can that be? A startup making no money being purchased for $1 billion! That sucks right?
I feel for you. Some of you are truly toiling away at a startup that makes real money. Some of you are trying to build “Instagram, the Sequel”. Some of you get a lot of VC love and are showered with money while others can’t get a dime. It’s not fair, right?
Let’s not forget investors. So many are quietly or noisily looking for the next Instagram now. Many are bemoaning the fact that they missed that investment and now they shift to go looking for the next one. Darn it, my previous investment strategy made perfect sense – how crazy is it to see that lucky set of investors make off like a bandit on a bullshit company that doesn’t make any money!?! Life blows!
Well, here is some perspective. First, read this post, Mark Fletcher at Startup2Startup and the Evolution of Startup Business Strategy. It was at that Startup2Startup that I had that first AHA! moment about how the broader market can affect an entrepreneur’s strategy on creating a company.
Then I met James Robinson at RRE Ventures who has been investing WAY LONGER than I have and through many market cycles. This prompted this post, Time Diversification: Strategy for Investors and it showed how important it was for investors to watch the market and adjust investing strategy accordingly.
So put the two together and you have a marketplace for startups and investors that can vary widely over the years.
It makes sense that you should just build a company with real revenue. In fact, in the hyper-risky world of startups, this is the conservative approach. Find a great idea, build it, make money, we all get rich. That works fine every time.
But the markets can be really nutty. There can appear times in the markets where it makes sense to build a company for other reasons, potentially not for revenue. As Mark Fletcher had noted, there were times in the past when it made sense to build for acquisition. Pre-2008 most of us were investing in startups whose goal was to get a million users before their money ran out and raise the series A; this seemed to be the norm amongst startups at that time. Thus, a bunch of my startups that raised money right before 2008 and whose money ran out in late 2008/early 2009 were sunk. The economic crisis of 2008 hit and it was nearly impossible to raise money unless you had revenue. A bunch of my startups died during those years which totally sucked. Now the markets have changed again.
As Instagram has shown, tremendous value has been created in a company that makes virtually no money but then became a threat to another company and thus got bought for an exorbitant amount of money. There have to be buyers with the appropriate resources and reasons, competitive conditions which drive those purchases to be made, and sometimes a lot of luck to be an employee or investor in the acquired company. Market conditions were right for this happen; they may have had this fact in mind, or maybe they just fell into it when Instagram took off.
Try this in 2008-09 and you probably would have failed to get funding. Could Instagram have survived through those few tough years? Maybe they could have; maybe they would have died.
So now I’ve been hearing word that investors are out looking for Instagram-ish investments. Doesn’t make those companies raising money with real revenue feel any better when they don’t fit the “momentum play” mold. I would, however, say that feeling hatred and jealousy is natural but it’s time to let go and learn from this.
You need to watch the markets like a hawk. Like Mark Fletcher, he adjusted his startup building and fund raising strategy according to what the markets were like at that time. You go out and try to raise for one type of startup when the markets are looking for another type, right or wrong, and that means your chances of raising a round could actually be much less! (We pesky investors just love to follow the herd and be ultra-risky.) So much luck is bound in this business that the timing could just shift on you and you’re dead in the water – or you just hit the jackpot by raising at a momentum level valuation.
For us investors, we need to also watch the macro conditions and decide how we’re going to invest. Some investors will look at their strategies and available funds and go for what is hot now. Others will stick to their guns and be more conservative. Higher risk = higher potential return…or higher loss. Losing all your money in bad investments is bad enough when it’s your own money; it’s career ending when you lose your LPs’ money. Or you could be one of the investors in Instagram and now you’re a hero. Which one will you go for?
But for each of us, getting cranky, jealous and hateful isn’t productive. For me, this is whole ecosystem is fascinating and why I enjoy being an investor. It is a huge challenge to me to play in this topsy-turvy, ever-shifting world. Will I be right? Will I make the right decisions? Or will I lose everything? How can I be smarter and better than everyone else? Will I be lucky? Have I created enough luck? By the way, these decisions I make today may not have results, good or bad, for months, maybe even years. Timing is nearly impossible. Never hating, always learning and improving.
The pace of change is incredibly fast now. Launch Capital’s research into the megatrends revealed that the speed of these changes is only going get faster. It can be bewildering to think that investing in revenue generating startups was in vogue only 2-3 years ago and now people are chasing startups that have momentum in users, revenue or no. It could be mere months when the next big shift happens.
I, for one, am enjoying the ride on this rollercoaster and patting those on the back who manage to make money no matter what the market conditions are at that time.