Posted by: Dr Pano Kroko Churchill | August 23, 2015

Raising Capital for StartUp CEOs, Business Acumen for Companies, and Financial Metrics for Founders, tempered by the Law of Success

The reality of the Startup Silicon Valley model is very different than the Media might have presented to You.

Sounds romantic to play around but how often do you have an insight that might lead to a Business?

How often do you happen to have deep domain expertise and the innovation prerogative to create a different mousetrap?

And how often does it happen that all of these conditions apply at a time that You are able and willing to go out and launch a StartUp?

Because the Reality is, that there exists a very normal attrition rate of 99.6% of those who start out to fly…

That is 99.6% of the StartUp companies that go the route of start, launch, and pounce… die off.

Many hatch yet very few succeed.

Everyone knows that starting companies–and investing in startups–is a risky way to earn a living.

But few people appreciate just how risky it is…

To spell it out for you who are not good in Maths and Arithmetic: Less than One [1] out of every Two Hundred [200] companies applying to Y Combinator succeed, and that makes for a 0.04% percent success rate for startups… And success rate is nothing spectacular but simply to have a company being worth $40 Million after four to five years of existence.

Thus even if the Y-Combinator system has even a modest ability to pick winners — the odds that a company applying to Y Combinator will be a success are significantly lower than the odds of success of the companies accepted into the program and even lower for companies that don’t even apply to the program because of it’s perceived high competitiveness.

And if only 37 of the more than 10,000 companies that have applied to Y Combinator over the years have somehow “succeeded” this is a staggeringly low 0.4% success rate. And then some of those 37 startups that have survived or “succeeded” by taking on more capital than they are now worth… they are not quite the success story for the investors. So the threshold of success for the Y-Combinator is a rather low expectation setting since they set the benchmark of success at $40M.

To put it differently:  Only 1 in every 200 companies that applies to Y Combinator will succeed. And some of those are sinking have taken more investors capital than they are worth today.

Not Good. No Same person would do that. So who takes that kind of risk?

Me.

The odds of this game are so risky that No Vegas gambler would have taken them — no matter how lubricated through cocktails freely offered by the vixen Casino queens.

Crazy eh?

In case any entrepreneur or angel investor is deluding themselves into thinking that startups are an easy way to cash in, they might want to rethink that proposition.

Think and think again.

So to somehow improve the Odds of this Life game — we are choosing to play better by improving upon the StartUps we choose to work with.

To make things even better — we choose very carefully those we want to play with.

Therefore we are running a feeder mechanism every month via a pitch & demo and then we run monthly clinics with our StartUps, in Seattle and across America, in order to enable them to carry on before we speed them off to the Markets — and we start by prepping them for the Capital Markets because growth capital is the lifeblood of every young and growing company.

We do all this because even if all things remain the same, and the ProductFit, and MarketFit are somehow taken care off, and the team is highly functional — still….

No Capital — No Life.

That is it. No StartUp Life…

No Innovation…

No Wealth Creation…

No New Jobs…

No Prosperity…

Scary Stuff.

Now we wouldn’t want that.

Would we?

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So because we are always fixing startups, and because we know how to work under the hood and start them up — we have accumulated a treasure trove of collective wisdom over the years, that we share with all of our Startups and with all of You as part of the American Angels Growth Capital Network.

Yet to be clear when we work under the hood we have to be real. Real as in not politically correct or afraid to talk like we talk in the garage…. If you are squeamish about this please go back top PC land and focus on reading grannies’ religious posts and Christian magazines about the second coming. This is an adult Reality Check. So going back under the hood of company building…

We share this wisdom in places like here, and in our American Angels sites: http://www.meetup.com/AmericanAngels/ where you can also find these gems of StartUp Company tools, along with all the documents that CEOs need and the opportunity to raise abundant capital. American Angels share  the basic idea that you have pretty much one chance to get it right as a StartUp CEO with the Rocket fuel you’ve got to burn, and this is only a few months time… So its crucial to bring it on fast and furious, when presenting your StartUp company to Investors.

And when you interface with Angels, it’s best to present your company’s team, starting first with the Business opportunity, and the solution to the problem you are solving, before you launch into the Financial Metrics that support your Vision, your Company, and Your Market Attack.

Aside form that — just make sure to inject passion and intelligence as you tell your story, no matter how mundane it might be…

But before you do that it’s best to know WHY you are hanging out there hoping to catch the attention of Investors…

Ask yourself these questions:

Do you really need to raise money now?

And if so — are you ready, REALLY READY, to do this now?

And if all else is Yes — is there a Greenfield opportunity for us to harvest together?

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Angels and VCs are busy folk and rather ornery, so they are not usually the easiest people in the world to get hold off, and they certainly don’t make good friendly companions, to go down to the Local for a few pints…

Everybody hits us for money. And that’s just tiresome. So if you get lucky and happen to find us lounging around knocking back a few — talk to us, about what’s on your mind; but don’t oversell it and try to be succinct. Be succinct because all Investors are people and people need down time too. And there is no better down time than being in the pub with your mates silently reviewing your day.

Keep in mind that our time is the most valuable resource we have, and so you should not waste it. You should not waste our time in wasteful words or thoughts. Every second of our time is as valuable as a diamond — and if we want to waste it we can do it perfectly well on our own…

But if you manage to get our attention — then make it brisk. Make it count for something. Show us your dream, and tell us your story, but also nudge us in the right direction to see clearly the business You are building.

Show us quickly the measurements we need to see when we initially evaluate your business. And this evaluation starts the moment we meet you. Don’t worry that we don’t pay much attention to you — it’s the business we care to hear about.

Old school Angels and VCs often look at GMV, revenue, and bookings first, because they’re an indicator of the size of the business. Yet once investors have a sense of the size of the business, we’ll want to understand growth, scale, and income, to see how well the company is performing. If these basic metrics are compelling — then and only then, the savvy investors might want to look further.

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I meet with many entrepreneurs every year, and in the course of those endless meetings am presented with all kinds of words and numbers. And of course always the talks revolve around numbers, measures, and metrics, that illustrate the size of the market, the promise of their business, and the health of their particular company.

Yet, the various metrics may not be the best gauge of what’s actually happening in the business.

Or the people may use different definitions of the same metric in a way that makes it hard to understand the health of the business.

And, while some of these Metrics may be obvious to the StartUppers and the CEO, who live and breathe these metrics all day long in their company —  we are usually clueless about them since every company is different.

So I compiled a list of the most common confusing metrics, and where appropriate, I’ve tried to add some notes on why the VC and sophisticated Angel investors focus on those metrics.

Just remember though that good metrics aren’t about raising money from VCs — they’re about running the business in a way where founders know how and why certain things are working (or not) … and can address these or adjust their trajectory accordingly.

But the most important Metric for Founders is to be able to realize IF and WHEN its the proper timing to go out and attempt to raise CAPITAL to scale your business.

Fundraising is very much like vivid and lush LIFE and in that it is exactly like the moment everyone screams “I’m coming” both in the comedic and in the dramatic colour of it. Timing in Life is everything. Because of that make sure the Timing of your fundraising must be justified and proper, because for most companies, it isn’t.

And you know how embarrassing it could be if you start screaming “I’m coming” before you are fully cocked. It is downright cannibalistic to scream before you are ready to ejaculate…  So fundraising is exactly like that. Timing is everything. Because it isn’t about the newspaper stories of $100-million rounds and “unicorns” running wild. It’s more about the act of mutual coupling that involves a relationship between the ones who want to build a company and the ones who want to provide the tools to do that. VCs are like Librarians that led you the books at the local library, but they need to have some assurance that the books will be returned at some point back to the Library for other people to use.

And this coupling is often an anxiety-ridden, lonely, frustrating process filled with fear, uncertainty, and doubt. Multiply these feelings and emotions and see where this is taking you. And despite all the stories out there, raising venture capital isn’t easy for Founders, Funders, and Startup Teams either…

So make up your mind carefully before you go out there seeking funding — because each Angel is like a bridge. And each bridge you “meet” and you don’t manage to cross it to get across to the FUNDED-COMPANY-LAND; consider it burned. Burning bridges is part and parcel of the course of startup fundraising.

Entrepreneurs are always evaluating tradeoffs, such as team size vs burn rate, valuation vs more capital raising, and structure vs loose coalition. But there’s much more, to the bridges, to the toll booths, and to the obstacles & the gatekeepers — so am sharing the list of questions I hear all the time in order to help shed some light on the realities of timing for raising capital and for burning bridges.

So ask yourself this question; When should we start raising capital and how do we time it right — let alone make it right?

You should only raise capital when you’re “ready” to execute a process, but determining when you’re “ready” is the hard part. You’re never actually ready: There’s always another close milestone that’s going to increase your valuation, there’s never enough time to prepare. At some point you just have to push yourself out there and begin.

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In the best case scenario, raise capital when these three criteria are true:

1) You have sufficient cash runway to provide you flexibility in the fundraising process so your back isn’t up against the wall (yes, that old adage ‘raise money when you don’t need it’ is true!). Runway = negotiating leverage.

2) You’ve achieved the necessary milestones to get the valuation you think you deserve.

3) You’re thoroughly prepared to deliver a knock-out pitch and efficiently respond to diligence requests.

What does a typical company raising a Series A, or an Angel round look like, and what are the right milestones we need to hit in order to ensure a successful raise?

There are so many factors that go into pricing a round of private capital, that it’s almost dangerous to draw specific conclusions from other companies. There is no right answer. Every company is different. Every management team is different. And the market conditions are always changing.

Just remember that regardless of size or what a round is called (seed, Angel, series A, B, C, etc.), it’s all about the alignment of capital to milestones. Use that rule to keep yourself grounded. The more traction and the greater the growth, the better.

Should we ask for a specific valuation?

While it’s certainly true that some companies can name their price, the reality for most startups is about taking the best offer the market delivers. Asking for a specific valuation can sometimes be a risky negotiating strategy. If you ask for a valuation of $x and the investors pass on the opportunity because they don’t think the company is worth $x yet, going back to that same investor with a lower valuation rarely leads to a different outcome.

By the way, even if you don’t ask for a specific valuation you’re probably providing valuation signals without even realizing it. When assessing a “valuation ask” by an entrepreneur, investors also consider implicit signals like the proposed size of the raise, the price of the last round, the total amount of capital raised, and the number of rounds of capital raised.

How much capital should we raise?

Of course you want to be strategic about the amount of capital you raise, not least because of sensitivities about dilution. As such, you want to size the round in a way that gives you sufficient cushion to get to the next set of milestones and valuation inflexion points.

What you do not want is to end up a “tweener” caught between rounds! In investor jargon, “tweener” is a polite way of saying your valuation expectations are too high for the financial or operational traction you’ve achieved so far. To get yourself out of this position, you can (1) lower valuation expectations or (2) improve execution and grow into those valuation expectations. Neither are optimal in the middle of a fundraising process.

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What type of investors should we target?

The most important thing to focus on here is finding investors that are appropriate for the stage of the company: e.g., an early-stage company should focus on early stage investors. And if the startup is still in “company building mode”, then focus on targeting investors that are company builders.

You can always move onto later-stage investors as the company matures, but it’s hard to go back to an early-stage investor after bringing in a later-stage investor.

What are ‘crossover’ investors?

Crossover investors typically invest in the public markets, such as mutual funds and hedge funds, but also invest in private companies.

An increasingly important group of investors, crossover investors can be very valuable partners to a startup — particularly as it approaches the IPO stage. They can help a startup start transitioning to life as a public company and make the IPO process less jarring.

Should we include ‘strategic’ investors in our round?

A simple way to think of strategic investors is as ‘corporations that invest in startups’ — everything from corporations with large, dedicated investing organizations (with significant amounts of capital allocated just to investing in startups) to those who have made only one investment in their history (using cash straight from their balance sheet). Strategic investors can be valuable partners.

The advantages of strategic investors include expanded distribution, implied credibility, and technology sharing. On the flip side, choosing some strategic investors over others could mean closing off potential distribution channels. Understanding how a strategic investor seeks to work with its portfolio companies is an important ‘reverse diligence’ step entrepreneurs need to take before deciding whether to work with one.

How many investors should we approach? Can’t I approach just a select few?

You’re always striking a balance between efficiency and optimizing for probability of success when fundraising. Especially because you just want to successfully raise capital so you can get back to growing the business.

This is why you don’t want to talk to so few investors that you end up running a fundraising process multiples times — i.e., starting from scratch each time. That kind of ‘serial processing’ is exhausting. At the same time, you don’t want to cast such a wide net that you can’t deliver the personal attention required to identify the best partner for your company.

Can’t I just have a conversation with the investors? Do I really need to prepare a full slide deck? Most companies — again, not just focusing on those few big-name stars or ‘unicorns’ — get very few opportunities to make a strong impression with potential investors. So treat each interaction as your last. Make those interactions count.

Don’t leave anything to chance. Take time to prepare a full deck and practice, including creating a script and doing dry-runs.

How long does it take to raise a round? Some companies can get it done in a matter of days. For others it takes many, many months. Either way, be prepared for the process to take longer than you expect. Also give yourself plenty of cushion when assessing your cash runway.

To maximize your probability of success, the most important thing you can do is spend a little extra time upfront preparing for a process; remember, you don’t want to run the process twice in a short amount of time. In fact, the strongest leading indicator of successful financing — flawlessly executing on the businesshappens before you talk to investors. Companies that consistently deliver strong revenue growth and attractive profit margins rarely have problems raising capital.

I’m worried about sharing confidential information. How much information should we share — and when should I provide customer references? The venture capital community is built on trust and reputation. The most important thing for VC firms is their reputations and the easiest way for them to impair those reputations is by not honoring your trust. That’s why high quality venture capital firms will respect the confidentiality of your private information.

One of the potential risks of not sharing sufficient information upfront and waiting until after signing a term sheet is that the investor may change their mind after signing. You want to derisk this scenario by leaving only confirmatory (vs. discovery) diligence to post-term sheet signing. At the same time, don’t be naive: information occasionally leaks out, even unintentionally. So trust, but use common sense.

What kind of financial model should I provide to investors? Every company should be utilizing some sort of financial model or set of financial projections. Even if you’re at a super early stage, you should be managing to some sort of budget in order to understand cash burn and optimally time raising capital.

Understanding cash burn is one of the most important components of a financial model, and a robust model of cash burn includes detailed headcount-driven expenses. Understanding the unit-level drivers of revenue is also critical once a company crosses into the revenue generation stage. Just remember that precision is not necessarily an indicator of accuracy.

Should we raise debt instead of equity? Debt can be a great source of capital when used appropriately. It can dramatically lower the overall cost of capital and provide a lot of financial flexibility.

But, it should be used judiciously because borrowing means you ultimately need to repay that debt … and the consequences of not repaying it are severe (i.e., bankruptcy). Remember: debt is a complement to, not a replacement for, equity.

Should we use an advisor to help us raise the round? Investment banks or other types of advisors can add a lot of value when raising a round of capital, particularly at the later stages. Such advisors can help streamline the process by front-loading a lot of the diligence and preparation, allowing you to focus more closely on running the company. They can also help provide access to a broader set of investors.

That said, not every company needs an advisor, and the decision to use an advisor should be made in the context of the specific situation. For example, companies that receive multiple unsolicited term sheets at compelling valuations have the luxury of choosing their investor without the assistance of an advisor.

Should I sell some secondary stock? Selling stock early in a company’s life can be interpreted by potential new investors as a negative signal from the selling shareholders: What do they know that I don’t know? Is the company already fully valued?

However, selling stock may also alleviate pressures on some employees to make their ends meet and even allow them to remain committed to the company longer. As with everything here, the answer to this question depends on a set of factors unique to every company: How much stock in absolute dollars is being sold; what percentage of total ownership is being sold; what stage is the company at; has a predictable revenue stream been established; and so on.

What happens if I come up empty after running a process, or if the market conditions turn against me? Successfully raising capital is never a certainty, so always have backup plans in place.

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Backup plans can include doing a bridge from insiders, tapping debt lines, and reducing cash burn. In general, having alternatives provide you leverage in the fundraising process.

There’s been a lot of discussion lately (see for example this, this, this, this, and this) about what happens when founders who don’t have “muscle memory” — from having been through a down market — meet a market where capital is so readily available.

We thought it would be worth sharing more of what we tell our founders about how to think more strategically and take a long-term perspective when raising (and budgeting) capital. And while we go into some detail below, our advice to founders is actually very simple: Whenever you’re raising capital, think about constructing the round in such a way that you’re strongly positioned for the future. This means raise enough money to put the company in a strong position to achieve the necessary operational and financial milestones and maximize the probability of raising future capital — even if you don’t think you’ll need to.

Because building a company is hard. To quote serial entrepreneurs on valuations: “If you’re doing something ambitious… where you know you’re going to consume a reasonable amount of capital on the way there, you want to make sure you’ve got access to capital the whole path.” As cliché as it sounds: Raising Capital for a StartUp is a 26K Marathon Run — not a 100 meter Sprint.

And based on weather conditions and storms and lulls, one has to ask this: Why is capital so readily available right now? Besides larger factors at play, some of the reasons capital is so readily available right now is due to the following trends coming together at once:

1. For various reasons, companies are taking longer to transition to the public markets. Most of the growth and subsequent investment returns are also now being realized in the private (vs. the public) markets.

2. As companies stay private longer, the dollars raised per company has sharply risen — see below chart — which has created a perceived if not actual funding gap in the private market.

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[The total private funding raised by companies in the 2000s is in the billions (compared to millions for companies in the 1990s). While the numbers above reflect aggregate funding, single funding rounds have also often exceeded $1 billion. sources: Capital IQ, Pitchbook, company filings]

3. The funding gap is now being filled by new market entrants or existing players assuming a larger role — including corporate investors and sovereign wealth funds — as well as traditional public market investors such as hedge funds, mutual funds, and private equity funds.

But in my mind the Unicorns are set for a major downfall because their valuations not being Public [Since No IPO] they cannot be supported and they will inevitably blow up as the “balloon” comes calling.  Their erroneous choice to not take the road to the Public Markets as a conduit to Liquidity and to the Capital Markets is only a means to a nasty end. Their flat out greedy choice to remain losing vast amounts of money and to not run for an IPO yesterday only compounds the problem. So they now have to face the piper… The Big Liquidity crisis up ahead is that of the UNICORNS.

Old School Economics still apply: “If you are running a business that’s losing money & needs investments to survive, you’re coming up to hard times.” The SILICON VALLEY UNICORN BUBBLE IS THE NEXT ASSET CLASS TO BURST IN A BIG WAY because when a private venture capital (VC) backed start-up successfully raises a round of funding at an implied valuation that equals or exceeds $1 billion – it becomes a “unicorn” company — and as we all know Unicorns do not really exist. They are surely figments of our imagination and Hollywood dreams… so beware when you see large Institutional Investors pouring money into Unicorns because some con-job is in the offing…

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Currently, the largest US unicorn is Uber, which now has an implied valuation of $50 billion. Uber is estimated to have trailing annual revenue of only $415 million. This values Uber at an insanely high multiple of 120X revenue!

The unicorn with the highest valuation/revenue ratio is Snapchat, a company that is currently worth $16 billion, despite estimated annual revenue of only $1 million. Snapchat is being valued at a shockingly high multiple of 16,000X revenue!

America’s 15 largest unicorns are currently worth a combined $189.9 billion, despite these 15 companies having total trailing annual revenue of only $4.54 billion. As a whole, the top 15 largest US unicorns are being valued at an unjustifiably high multiple of 42X revenue!

Separately, it becomes very apparent and undeniable that unicorns have become America’s #1 most overinflated asset bubble! America’s top 15 largest unicorns are now being valued at a dangerously high median multiple of 69X revenue!

The National Inflation Association of professional Money Managers bears me out on this because they are also very concerned that Silicon Valley could soon face a major liquidity crisis that will blow the cover of all of these high priced Unicorns… and reveal them to be what they have always been: Donkeys masquerading for horned white horses…

unicornbubble1Snapchat not only has the highest valuation/revenue ratio of 16,000 – but it also has the highest valuation per employee with an amazing $400 million per person! America’s 15 largest unicorns are currently receiving an unprecedented median valuation per employee of $17.5 million!

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There is now a new record high of 76 unicorns that have their headquarters located within the US. America’s unicorn count has increased during every single month of 2015 – with a total year-to-date net addition of 27 unicorns, up 50%from a net addition of 18 unicorns during the comparable year-ago time period of January-August 2014!

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US based unicorns are currently receiving a total implied valuation of $285.5 billion! This is up an amazing 102.63% on a year-over-year basis from their total implied valuation of $140.9 billion at the end of August 2014! The average unicorn is now worth $3.76 billion, for a year-over-year increase of 25.33% from from an average valuation of $3 billion at the end of August 2014!

unicornbubble6It will be interesting to see just how badly unicorn valuations are negatively affected by the recent dramatic decline in publicly traded US stock valuations. Although VC funded start-ups are remaining private longer than ever before – as a result of their easy access to venture capital – most unicorn shareholders still plan to eventually exit through IPOs!

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On average, VC backed companies sell 20% of their total shares outstanding in IPOs. Therefore, the 76 US based unicorns that are worth a combined $285.5 billion, will need to attract $57.1 billion in IPO investment capital from Wall Street.Over the trailing twelve month period, VC backed IPOs raised a total of only $11.91 billion!

It will take approximately 4.79 years for VC investors in America’s 76 unicorn companies – to exit their investmentsthrough IPOs. The estimated time needed for all US unicorn firms to exit through IPOs is now 3.71X longer than in January 2014!

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The recent NASDAQ downturn will certainly make matters worse. The National Inflation Association of professional Money Managers is very concerned that Silicon Valley could soon face a major liquidity crisis that will blow all of these high priced banana boats out of the water!

The coming Unicorn Market Carnage will not only destroy these new Economy Unicorns but it will wipe out many Venture Capital firms that felt as though they were invincible.

Gone with the Wind will be the likes of those Unicorn lovers that we know and respect today.

Alas … those are the vagaries of history.

Who remembers King Midas today?

But for now that the music has stopped playing — with the rest of the fallout of the Nasdaq — methinks the Unicorn party must come to an end and the “Cleaners” must be summoned to clean up the mess.

I can hear the buzz of the vacuum cleaners already…

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Unicorns have been the darlings of the large scale VCs in the valley and beyond but as the party has ended — the rest of us the sane folks out there — we still have to think rationally about our Investments.

So we need to prioritize and teach our StartUps how to think about valuation and deal structure correctly…

So the easiest way to think about valuation is the tradeoff it provides relative to dilution:

As valuation goes up, dilution goes down.

This is obviously a good thing for founders and other existing investors.

But don’t take it to an extreme.

Because same as with all other things — the Middle Path is the Golden path.

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However, for some startups there’s an added wrinkle; they may face an additional tradeoff, of valuation versus “structure” which reminds us of the old adage of the CEO entrepreneurial position negotiations over Capital infusion with the Angel Investors and VCs, that goes something like this:

You set the price, I’ll set the terms

or

“You set the offer and I get to choose”…

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But what is structure?

Think of it as terms and conditions that appear in a term sheet below the headline valuation number.

All venture capital deals have some sort of structure. The question is what happens when those terms get more complicated, and what implications those terms have in the future in both good times and bad times for the markets and for the company.

In some situations, the goal of additional structure is to preserve or achieve a high valuation by altering the traditional risk/reward profile for both the investors and early shareholders. Some examples of more structural terms include:

Multiple liquidation preferences, where preferred investors can realize a return of multiple times of their investment (i.e. 1.5x or 2.0x) upon liquidation (rather than the traditional 1.0x) prior to common stock receiving any consideration;

Senior liquidation preferences, where new preferred investors receive a return of their capital prior to earlier preferred investors (rather than “pari passu” with earlier investors);

Participating preferred, where preferred investors can realize both a return of their capital while also participating in the upside after their capital is returned as part of the preference;

Full or partial ratchet, where preferred investors will reset the price of their shares (by receiving more shares) if any subsequent financing round is completed at any price below their investment valuation; and

Redemption provision, where preferred investors have the right to force the company to buyback their investment on demand.

There are multiple flavors of each of the above, and other forms of structure as well. (The opposite of structure, by the way, is a “clean” term sheet where investors take on more equity risk and have less protection if the company fails, but get to fully participate in the returns — along with the founder and startup employees — if the company does well.)

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What are the areas the StartUp CEO needs to optimize for, when raising capital?

Besides valuation and structure, there are many other things to consider when raising capital. As our founders evaluate the tradeoffs, a simple framework breaks the decision down into two primary categories: deal and source.

Deal includes all of the key components and terms of the proposed deal. Some of these you can quantify — such as valuation, dollars raised, and option pool refresh. Other components may include items that are difficult to quantify because they depend on an uncertain future, such as the structural terms discussed above.

Source includes the key components related to the provider of the capital. For example, firm resources, reputation, and precedents; partner experience, chemistry; available reserves in the fund, and so on.

So what should founders optimize for when raising capital?

Because each company and every stage is different, different founders face a different set of circumstances and challenges. They should therefore choose to optimize for different things. The challenge is that not all the available criteria are quantifiable or objective. In fact, some of the most important criteria, such as boardroom chemistry, may be very subjective.

Some founders may feel tempted to aim for the highest short-term valuation, and that may be the optimal strategy in some situations. However, in other situations, founders may have to prioritize other considerations — such as choosing a partner with a very specific and highly relevant skill set that can help the company execute on their strategy.

Ultimately, the key is to optimize for the full relationship over time by focusing on partners whose goals are aligned with the founder’s and whose investment will enable the startup to realize — not hinder — its potential.

This decision is especially important for younger companies still in the formative stages. Why? Because having a high valuation hurdle too early, restrictive terms imposed by investors, or a problematic deal structure can inhibit the ability to raise more money just when you need it the most.

Furthermore, terms agreed to in an earlier financing round tend to become the starting point for the terms negotiation in the next financing round; subsequent investors will naturally want at least the same terms. Disregarding deal structure at the early stages (Series A, B, and even C rounds) also creates complexity in the cap table or “who owns what”.

If everything goes well, then the downside of more structure is limited: The company grows into a successful behemoth and everyone, from the founder to startup employees to investors, wins.

The question is what happens when things don’t go according to plan or take much longer than expected: Someone else releases a competitive product, an incumbent decides to enter the space, launch is delayed, key hires leave the company, etc. Things can also change course for very good reasons: We want to GO BIG; growth was faster than expected; early customer traction was great; we have the opportunity to hire some really awesome folks that will position us well for the long term; etc. (In that sense, spending capital isn’t a bad thing; as we’ve argued before, today’s startups have a chance to be a lot bigger due to potentially larger end-user markets.)

Regardless of whether it’s for unexpected or planned, good reasons, the company will need to raise more money regardless of market conditions. This is where getting the right valuation, with the right set of terms, and with the right capital provider really matters.

How should founders go about all this?

The key is to run an organized fundraising process that’s aimed at creating competition.

If investors compete, founders are more likely to get the best set of terms and have a better set of alternatives from which to choose: They have all the leverage in the negotiation. The tradeoff that founders need to balance is that time spent away from the business while fundraising can have significant negative impacts on that business. Founders therefore need to strike a balance of targeting a broad enough group of capital providers to create competition while focusing on a group of capital providers that are highly likely to transact, so time isn’t wasted.

Founders should foster competition amongst potential investors to ensure the best terms — not just the best valuation — because potential investors will compete against each other to win a deal by offering either a higher valuation, or more company-favorable terms … or both. (By the way, savvy investors also want to avoid competition, and will price and structure deals competitively from the outset to avoid founders having to seek better offers).

Note, once the company signs a term sheet and all other potential investors fall away, the leverage flips from the company to the investor. Not completing or renegotiating the deal at this point could put the entrepreneur at a disadvantage: Those who were previously interested may assume the deal wasn’t done because something negative was discovered during due diligence.

Some Financial Metrics presented to VCs and Angel Investors 

Bookings vs. Revenue, is a common mistake when people use bookings and revenue interchangeably, because they don’t know that these two are not the same thing.

Bookings is the value of a contract between the company and the customer. It reflects a contractual obligation on the part of the customer to pay the company.

Revenue is recognized when the service is actually provided or ratably over the life of the subscription agreement. How and when revenue is recognized is governed by GAAP.

Letters of intent and verbal agreements are neither revenue nor bookings.

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Recurring Revenue vs. Total Revenue is a good example:

Investors more highly value companies where the majority of total revenue comes from product revenue (vs. from services). Why? Services revenue is non-recurring, has much lower margins, and is less scalable. Product revenue is the what you generate from the sale of the software or product itself.

ARR (annual recurring revenue) is a measure of revenue components that are recurring in nature. It should exclude one-time (non-recurring) fees and professional service fees.

ARR per customer: Is this flat or growing? If you are upselling or cross-selling your customers, then it should be growing, which is a positive indicator for a healthy business.

MRR (monthly recurring revenue): Often, people will multiply one month’s all-in bookings by 12 to get to ARR. Common mistakes with this method include: (1) counting non-recurring fees such as hardware, setup, installation, professional services/ consulting agreements; (2) counting bookings (see #1).

Gross Profit

While top-line bookings growth is super important, investors want to understand how profitable that revenue stream is. Gross profit provides that measure.

What’s included in gross profit may vary by company, but in general all costs associated with the manufacturing, delivery, and support of a product/service should be included.

So be prepared to break down what’s included in — and excluded — from that gross profit figure.

Total Contract Value (TCV) vs. Annual Contract Value (ACV)

TCV (total contract value) is the total value of the contract, and can be shorter or longer in duration. Make sure TCV also includes the value from one-time charges, professional service fees, and recurring charges.

ACV (annual contract value), on the other hand, measures the value of the contract over a 12-month period. Questions to ask about ACV:

What is the size? Are you getting a few hundred dollars per month from your customers, or are you able to close large deals? Of course, this depends on the market you are targeting (SMB vs. mid-market vs. enterprise).

Is it growing (and especially not shrinking)? If it’s growing, it means customers are paying you more on average for your product over time. That implies either your product is fundamentally doing more (adding features and capabilities) to warrant that increase, or is delivering so much value customers (improved functionality over alternatives) that they are willing to pay more for it.

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LTV = Life Time Value not Library Time Value…  Lifetime value is the present value of the future net profit from the customer over the duration of the relationship. It helps determine the long-term value of the customer and how much net value you generate per customer after accounting for customer acquisition costs (CAC).

A common mistake is to estimate the LTV as a present value of revenue or even gross margin of the customer instead of calculating it as net profit of the customer over the life of the relationship.

Reminder, here’s a way to calculate LTV: Revenue per customer (per month) = average order value multiplied by the number of orders.

Contribution margin per customer (per month) = revenue from customer minus variable costs associated with a customer. Variable costs include selling, administrative and any operational costs associated with serving the customer.

Avg. life span of customer (in months) = 1 / by your monthly churn.

LTV = Contribution margin from customer multiplied by the average lifespan of customer.

Note, if you have only few months of data, the conservative way to measure LTV is to look at historical value to date. Rather than predicting average life span and estimating how the retention curves might look, we prefer to measure 12 month and 24 month LTV.

Another important calculation here is LTV as it contributes to margin. This is important because a revenue or gross margin LTV suggests a higher upper limit on what you can spend on customer acquisition. Contribution Margin LTV to CAC ratio is also a good measure to determine CAC payback and manage your advertising and marketing spend accordingly.

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Gross Merchandise Value (GMV) vs. Revenue in marketplace businesses, these are frequently used interchangeably. But GMV does not equal revenue!

GMV (gross merchandise volume) is the total sales dollar volume of merchandise transacting through the marketplace in a specific period. It’s the real top line, what the consumer side of the marketplace is spending. It is a useful measure of the size of the marketplace and can be useful as a “current run rate” measure based on annualizing the most recent month or quarter.

Revenue is the portion of GMV that the marketplace “takes”. Revenue consists of the various fees that the marketplace gets for providing its services; most typically these are transaction fees based on GMV successfully transacted on the marketplace, but can also include ad revenue, sponsorships, etc. These fees are usually a fraction of GMV.

Unearned or Deferred Revenue … and Billings, in a SaaS business, this is the cash you collect at the time of the booking in advance of when the revenues will actually be realized.

As we’ve shared previously, SaaS companies only get to recognize revenue over the term of the deal as the service is delivered — even if a customer signs a huge up-front deal. So in most cases, that “booking” goes onto the balance sheet in a liability line item called deferred revenue. (Because the balance sheet has to “balance,” the corresponding entry on the assets side of the balance sheet is “cash” if the customer pre-paid for the service or “accounts receivable” if the company expects to bill for and receive it in the future). As the company starts to recognize revenue from the software as service, it reduces its deferred revenue balance and increases revenue: for a 24-month deal, as each month goes by deferred revenue drops by 1/24th and revenue increases by 1/24th.

A good proxy to measure the growth — and ultimately the health — of a SaaS company is to look at billings, which is calculated by taking the revenue in one quarter and adding the change in deferred revenue from the prior quarter to the current quarter. If a SaaS company is growing its bookings (whether through new business or upsells/renewals to existing customers), billings will increase.

Billings is a much better forward-looking indicator of the health of a SaaS company than simply looking at revenue because revenue understates the true value of the customer, which gets recognized ratably. But it’s also tricky because of the very nature of recurring revenue itself: A SaaS company could show stable revenue for a long time — just by working off its billings backlog — which would make the business seem healthier than it truly is. This is something we therefore watch out for when evaluating the unit economics of such businesses.

CAC (Customer Acquisition Cost) … Blended vs. Paid, Organic vs. Inorganic

Customer acquisition cost or CAC should be the full cost of acquiring users, stated on a per user basis. Unfortunately, CAC metrics come in all shapes and sizes.

One common problem with CAC metrics is failing to include all the costs incurred in user acquisition such as referral fees, credits, or discounts. Another common problem is to calculate CAC as a “blended” cost (including users acquired organically) rather than isolating users acquired through “paid” marketing. While blended CAC [total acquisition cost / total new customers acquired across all channels] isn’t wrong, it doesn’t inform how well your paid campaigns are working and whether they’re profitable.

This is why investors consider paid CAC [total acquisition cost/ new customers acquired through paid marketing] to be more important than blended CAC in evaluating the viability of a business — it informs whether a company can scale up its user acquisition budget profitably. While an argument can be made in some cases that paid acquisition contributes to organic acquisition, one would need to demonstrate proof of that effect to put weight on blended CAC.

Many investors do like seeing both, however: the blended number as well as the CAC, broken out by paid/unpaid. We also like seeing the breakdown by dollars of paid customer acquisition channels: for example, how much does a paying customer cost if they were acquired via Facebook?

Counterintuitively, it turns out that costs typically go up as you try and reach a larger audience. So it might cost you $1 to acquire your first 1,000 users, $2 to acquire your next 10,000, and $5 to $10 to acquire your next 100,000. That’s why you can’t afford to ignore the metrics about volume of users acquired via each channel.

Active Users: Different companies have almost unlimited definitions for what “active” means. Some charts don’t even define what that activity is, while others include inadvertent activity — such as having a high proportion of first-time users or accidental one-time users.

Be clear on how you define “active.”

Month-on-month (MoM) growth: Often this measured as the simple average of monthly growth rates. But investors often prefer to measure it as CMGR (Compounded Monthly Growth Rate) since CMGR measures the periodic growth, especially for a marketplace.

Using CMGR [CMGR = (Latest Month/ First Month)^(1/# of Months) -1] also helps you benchmark growth rates with other companies. This would otherwise be difficult to compare due to volatility and other factors. The CMGR will be smaller than the simple average in a growing business.

Churn: There’s all kinds of churn — dollar churn, customer churn, net dollar churn — and there are varying definitions for how churn is measured. For example, some companies measure it on a revenue basis annually, which blends upsells with churn.

Investors look at it the following way:

Monthly unit churn = lost customers/prior month total

Retention by cohort…

Month 1 = 100% of installed base

Latest Month = % of original installed base that are still transacting

It is also important to differentiate between gross churn and net revenue churn —

Gross churn: MRR lost in a given month/MRR at the beginning of the month.

Net churn: MRR lost minus MRR from upsells in a given month/MRR at the beginning of the month.

The difference between the two is significant. Gross churn estimates the actual loss to the business, while net revenue churn understates the losses as it blends upsells with absolute churn.

Cashflow and Capital vs Burn rate is key here.

And that’s the bridge over the cleavage one has to cross… to get to the promised land.

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Burn rate refers to the rate at which a company uses up its supply of cash over time. It’s the rate of negative cash flow, usually quoted as a monthly rate, but in some crisis situations, it might be measured in weeks or even days.

Analysis of cash consumption tells investors whether a company is self sustaining, and signals the need for future financing. Be careful around companies with high cash burn rates. These investments can turn to ashes real fast. And all of today’s Unicorns have huge Burn rates.

It is easy to get burned by the runaway Burn Rate so be ware of the early signs: If a company’s cash burn continues over an extended period of time, then the company is operating on stockholder equity funds and borrowed capital. When a business like this seeks additional investment capital, investors need to pay close attention to the rate at which it’s burning cash.

Burn rate is mainly an issue for newer, unprofitable companies in exciting growth industries. As it takes a while for many young firms to generate cash from operations, their survival depends on having an adequate supply of cash on hand to meet expenses. Many IT and biotech companies face years of living on their bank balances.

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But burn rates are important also for mature companies that are struggling and burdened with excessive debt. Think of airline stocks. In 2001-2002, escalating competition combined with major crises placed the largest air carriers in a cash crunch that threatened industry collapse. United Airlines, for instance, suffered a daily cash burn of more than $7 million before seeking bankruptcy protection.

Cash burn is a worry. If companies burn cash too fast, they run the risk of going out of business. That said, if they burn cash too slowly, they risk falling behind in the competition to innovate, expand and gain market share. Good management manages cash well.

Burn Rate is key because I fund my early stage startups through monthly allocations that allow them to control their spend and their burn without requiring any management time or executive and adult supervision from me — besides my banker releasing a set amount each month to cover their burn rate.

Burn rate is the rate at which cash is decreasing. Especially in early stage startups, it’s important to know and monitor burn rate as companies fail when they are running out of cash and don’t have enough time left to raise funds or reduce expenses. As a reminder, here’s a simple calculation:

Monthly cash burn = cash balance at the beginning of the year minus cash balance end of the year / 12

It’s also important to measure net burn vs. gross burn:

Net burn [revenues (including all incoming cash you have a high probability of receiving) – gross burn] is the true measure of amount of cash your company is burning every month.

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Gross burn on the other hand only looks at your monthly expenses + any other cash outlays.

Investors tend to focus on net burn to understand how long the money you have left in the bank will last for you to run the company. They will also take into account the rate at which your revenues and expenses grow as monthly burn may not be a constant number.

Burn rate in case you don’t know is the amount of money a company is either spending (gross) or losing (net) per month. Burn Rate is important to get a sense of perspective on the reality warp that is startup world and the Timing that dictates our Life and Times especially during a frothy market like it is now and getting similar to such crazy times as 1997-1999, 2005-2007 or 2012-2014, and giving us a new perspective setting of just how crazy times are again.

Gross burn is the total amount of money you are spending per month. Net burn is the amount of money you are losing per month. So if your costs are $500,000 per month and you have $350,000 per month in revenue then your net burn (500-350) is equal to $150,000. The reason that most investors quickly zero in on net burn is that if you have $3 million in your bank account and have a net burn of $150,000 per month you have more than 18 months of cash left provided your net burn stays constant. Conversely if you’re burning $600,000 per month (yes, some companies do) then you only have 5 months of cash left.

It’s what signals to existing investors how quickly their teams need to be fund raising and the level of risk the company is facing and also it signals to potentially new investors both how quickly you need to raise (ie you have less leverage if you’re in a rush) as well as how much cash you’ll need if they fund you.

I often see companies burning $100,000 per month (net) looking to raise $6-8 million. My first question is, “If you’re only burning $100k / month why on Earth would you raise so much money now?” Whatever answers they have manufactured the only thing I hear is, “Because we can.”

By the way, “because we can” doesn’t always mean you should. There are many times when being overly capitalized before you’re ready is a negative.

At a minimum I encourage you to spend some time preparing for that question, which phrased another way is, “What do you plan to do with $6-8 million when you raise it.” The following are not really acceptable answers to potential investors (all of which I hear often):

  • We’re going to ramp up the team (with no detailed explanation of how and whom)
  • We’re going to start aggressively spend money on marketing our product
  • We want a strong balance sheet (um, ok. but that’s our firm’s money on your balance sheet. if you have a good use for it and we’re excited about your company – fine. otherwise I prefer to invest less and risk less)
  • We want money to make some acquisitions (investors would prefer to fund M&A if they know specific deals – not to encourage bad behavior. Plus, most early-stage M&A fails so this isn’t likely a good use of capital for a young company)

But while Net Burn is the more critical figure at first blush and what most investors will focus on, Gross Burn is not irrelevant.

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In a world where the economy only heads in one direction (read: 2009-2014) most investors & entrepreneurs forget to pay attention to gross burn. But those of us with longer memories remember that the revenue line can move south very quickly when the market overall turns south. You are particularly vulnerable if:

  • You have revenue concentration (few customers each providing a large total of percentage of your revenue)
  • You have a large number of startup customers (because when markets crash they have a funny way of going bankrupt quickly or cutting burn precipitously)
  • You are reliant upon ad revenue (this is a variable spend which corrects quickly during a market correction)
  • You are discretionary spend (aspirin) versus necessary spend (prescription medicine)

This is why investors really like SaaS software companies where you have recurring revenue and your largest customer accounts for < 5% of your revenue and your renewals rates are > 90%. That is why these businesses are often valued more highly than other types of businesses.

So it always comes down to Growth vs. Profitability…

The answer is more complex than just Gross vs. Net Burn. I have long tried to raise awareness of the trade-off between growth & profits as outlined in this much read blog post on the topic (and please forward to your favorite journalist who often simply report that companies that aren’t profitable are bad).

In that article I linked to I outline the difference between gross margin & net margin. Gross margin (GM) is the amount of profit you make per sale of your product or service taking into account your total costs of selling that product or service. If you have a very low gross margin (10-30%) it can be very hard to build a large, scalable business because you need to make a lot of sales to cover your operating costs. Some industries work well with players who have low gross margins but these tend to be industries with very large, well established players and hard for new entrants to compete. In startup world low GM almost always equals death which is why many Internet retailers have failed or are failing (many operated at 35% gross margins).

Many software companies have > 80% gross margins which is why they are more valuable than say traditional retailers or consumer product companies. But software companies often take longer to scale top-line revenue than retailers so it takes a while to cover your nut. It’s why some journalists enthusiastically declare, “Company X is doing $20 million in revenue” (when said company might be just selling somebody else’s physical product) and think that is necessarily good while in fact that might be much worse than a company doing $5 million in sales (but who might be selling software whose sales are extremely profitable).

But the biggest thing to know is this: Companies who are scaling quickly in revenue and with a high gross margin often should invest as much capital in growth as they can manage responsibly because when you find a product / market fit and your company is growing at a very fast scale you want to capture market share before competition sets in. Think DropBox, Airbnb, Uber, Maker Studios. Your goal is to invest in engineering (to maintain your product lead), new offices / locations (to capture markets before others), marketing (to capture consumer attention before others do) … all of these activities consume cash often in advance of the revenue they generate.

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Growing > 100% / year compounded is a good thing and worth the salt. Bellow that — not so much. But this strategy greatly depends on the availability of Capital.

What about Availability of Capital?  The simple truth is that there is no one answer to the question “how much should a startup burn” which is very valuable if you’re at the proper stage and have raised capital in they way that works for you and not against You. The answer is another question that is really “how much should a startup without a strong VC lead, and without a strong balance sheet, and without a lot of cash in the bank, burn?

In these kinds of businesses I’m imply advising “Ring the Freakin Cash Register.” Stay lean and only raise a big round if you do find product / market fit at which point you want to loosen the belt quickly, increase the burn rate, and raise the capital neccessary to be able to do so.

Yet if you have strong VC support now and a lot of cash in the bank, you may be willing to accept a higher burn rate (say $300k or $400k per month) than a company with angel money and less cash in the bank. If you’re growing very, very fast and you’ve raised $40 million it is not crazy to think you might burn net $1 million / month (> 3 years of cash remaining) providing you are growing fast enough to justify burning $12 million / year.

Your value creation must be at least 3x the amount of cash your burning or you’re wasting investor value. Think: If you raise $10 million at a $30 million pre ($40 million post) that investor needs you to exist for at least $120 million (3x) to hit his or her MINIMUM return target his or her investor’s are expecting. So money spent should add equity value or create IP that eventually will.

If you have a strong relationship with your investors, if you have a strong balance sheet (lots of cash), if you have a business that is growing nicely and if your performance is super strong and you therefore believe you can raise more capital quite easily then you simply can tolerate a higher burn rate than somebody who can’t tick off all of these boxes. Of course a lot of this also comes down to investor trust. The more you burn the higher your investor’s leverage relative to you is if you start to run out of money and don’t have options.

What about Valuation? I wanted to call out special attention to valuation in this debate. I have long advised startup companies to raise capital at the top end of normal and by that I mean it’s ok for founders to want to raise at a high price (and thus minimize dilution) but if your valuation is completely out of whack with your underlying performance and if you ever need to raise more capital it becomes VERY difficult to raise more cash. Simply put – down rounds are very hard to achieve psychologically because insiders fight against them (rightly or wrongly) and outsiders have a mental gap that if your valuation is going down your company is forked up and they often just pass.

So a large part of your personal assessment on how much you can afford to burn also has to be your current valuation. If you were able to raise at a $50 million post-money valuation and have $2 million in the bank and the markets turn you better be sure that your valuation warrants raising at at least $50 million even in a tough market or I’d be more cautious about a higher burn. If you’re raised at $250 million+ valuation even more cautious.

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Here is a Framework to Guide You: Putting it all together, you should always be mindful of your personal circumstances and market conditions. There is no “right” amount of burn. Just make sure to pay close attention to your runway. Be careful about ever dipping below 6 months of cash in the bank. Take cash balance plus the net of your receivables & payables to get “net cash.” Divide net cash by your monthly net burn rate as an approximation of how many months of cash you have. You really need to subtract the final month. It’s like when the red light comes on in your car. You technically have more gas left but you never know if some unexpected circumstance causes you to run out of gas. And you risk “trading while insolvent” which has legal implications.

Understand how venture debt might shorten your projections: If you have raised venture debt you might have even less time. Many venture debt lines have “covenants” that restrict you from going below a certain amount of cash in the bank (in normal times they are more common – in better times they are less common). Obviously if you have venture debt your runway would be longer provided you haven’t called it yet while if you have spent the venture debt you have a much bigger obligation as cash winds down.

Please also note that many VCs will feel very uncomfortable with you spending venture debt towards the end of your cash balance unless they have already decided they would be willing to bridge you. The reason is that no VC wants to see the venture debt provider get burned if you become bankrupt. So while the VC might not have a financial obligation to cover the debt lost they would feel a moral obligation and/or recognize that if they do allow the less then their next company might not be able to raise venture debt.

In short – it’s complicated and make sure you talk openly with your investors about how they feel. I have been relatively supportive of the companies I invested in taking venture debt (on a case-by-case basis) while other people feel less comfortable. Best to make sure you’re aligned closely with your investor on this topic.

If Pre-VC be mindful that in tough times capital can take longer to raise:  If you have raised a limited amount of money from angels, accelerators or seed funds be very careful about having a high burn rate. I am not suggesting these are bad sources of capital – they are not. I am simply saying that these sources of capital often have a harder time bridging you quickly or writing larger checks if / when you run out of cash and especially in hard times. They tend to have many more investments than a concentrated VC and thus can’t cover all their bets as easily. On the other hand, exits at lower prices are easier with these providers of capital.

If you have raised VC make sure you have open communications on funding & plan with your VC the right level of burn & runway: If you have raised venture capital and you feel your runway (number of months cash left) is looking low have a conversation with your VC.  Would they be willing to put a bridge loan in place if need be? Do they think you ought to be cutting back on expenses to give you a longer runway to raise cash? Ask other portfolio companies how your VC acted when / if they got in a cash pinch. Better that you know early.

If you truly are a “growth company” & well positioned then go for it. Just make sure you’re still able to pull the rip cord if need be: If you have a large amount of cash in the bank + an untapped credit line + a rapidly growing revenue line + large, supportive VCs + a reasonable valuation then you may consider keeping burn rate slightly higher than you might normally as a way of expanding your business while your competitors can’t due to cash limitations. I call this “using your balance sheet as a strategic weapon.”

Just know the game you’re playing. Know that if market conditions change you may have to scale back quickly, too. If your costs are mostly variable (ie can be lowered quickly) then you can assume more risks. If your costs are largely fixed (equipment, offices, inventory) then be extra careful because High fixed costs + high debt rates have killed many great StartUp companies in Dot Com 1.0 and in the remaining New Economy years…

Here comes the Burn Rate again to burn you up…

Even whole countries got killed following this recipe for certain and absolute Failure.  High fixed costs + high debt rates killed many great countries in the past and more recently Ireland, Spain, and Greece, all went belly-up, when they assumed that somehow the New Economy Rules applied to them, and forgot prudence and productivity. Greece is a prime example of that method of Failure where everything went pear-shaped, when in addition to the High fixed costs + high debt rates for the Economy, the general economic system was run like a corrupt StartUp team made up of drunken sailors. Add to that the simple fact that all of their financial metrics were skewed and corrupt too.

Should anyone be surprised by the results?

One must avoid these false StartUp Metrics at any cost….

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Another false metric is the number of Downloads (or number of apps delivered by distribution deals) that are really nothing but just a vanity metric because savvy investors want to see engagement, ideally expressed as cohort retention on metrics that matter for that business — for example, DAU (daily active users), MAU (monthly active users), photos shared, photos viewed, and so on.

Cumulative charts by definition always go up and to the right for any business that is showing any kind of activity. But they are not a valid measure of growth — they can go up-and-to-the-right even when a business is shrinking. Thus, the metric is not a useful indicator of a company’s health.

Investors like to look at monthly GMV, monthly revenue, or new users/customers per month to assess the growth in early stage businesses. Quarterly charts can be used for later-stage businesses or businesses with a lot of month-to-month volatility in metrics.

There a number of such tricks, but a few common ones include not labeling the Y-axis; shrinking scale to exaggerate growth; and only presenting percentage gains without presenting the absolute numbers. (This last one is misleading since percentages can sound impressive off a small base, but are not an indicator of the future trajectory.)

When initially evaluating businesses, investors often look at GMV, revenue, and bookings first because they’re an indicator of the size of the business. Once investors have a sense of the the size of the business, they’ll want to understand growth to see how well the company is performing. And if these basic metrics are interesting, then they will compel new potential investors to look even further… and consider betting on this puppy, or not.

Along with all of the above this is what I need to see before I make an investment of capital, time, and energy:

1. Intelligence
Often it seems like there is a fine line between a madman and a startup founder, but we first looks to see that founders not only have an ambitious idea but that they thoroughly understand their product and industry, because this has nothing to do with an entrepreneur’s age or experience, it’s how deep is their understanding of what they’re about to do — so intelligence is key.

2. Energy
Being a founder is brutally difficult and scaling a company requires years’ worth of tireless devotion and an ability to endure and overcome massive difficulties. In the long run, people who succeed are just the ones who persevere.

We look to see if entrepreneurs have any hesitation about their plans, if they’re unsure of themselves and constantly looking for feedback, or if they’re easily upset by a setback, since these are all warning signs that these founders aren’t ready for the long haul.

3. Integrity is important because if you have a very intelligent and energetic founder with questionable morals, what you’ve got is a hardworking, smart crook. This is the hardest thing to judge and typically requires getting to know someone beyond just an introduction, but ultimately looking for a core set of values that rises above and beyond financial incentives.

With time, we’ve learned what to look for. So, for example, if I’m talking to a founder and they offer to do something that is slightly unfair to a shareholder or employee or founder in exchange for making me happy, that’s a red flag.

4. Charisma is not being liked by everybody, and it isn’t required for success, per se, but anytime we consider investments we need to genuinely like the founders.

There’s a chance with any startup that it will fail or that the relationship with the founders will fall apart, but we need to go into every deal with the assumption that the founders will be part of our life for the next 3-7 years.

If meetings and phone calls with a founder are exhausting or difficult, then no amount of money is worth it.

We seek out relationships with founders who will in turn make us also better Entrepreneurs and smarter Angels or more savvy Investors along the way…

My favorite founders are actually the ones who I learn from, so every time they call me up because they need help with something I jump on it because I know after walking around the block with them for an hour I’m gonna be much smarter and much more able to handle the next one…

And the best CEOs out there are serial entrepreneurs that know how to hack a StartUp and how to hack problems to bring our original solutions. These guys and gals are golden because they know that major problems are goldmines of opportunity.

The world’s biggest problems are the world’s biggest business opportunities…

Businesses that are built around those opportunities are great. But still we should curb our enthusiasm. So take the plunge but make sure to always check the vital signs of the company, and then compare to previous estimates of milestones, to make sure things look healthy before you go any deeper. And stay with the process because in the long run we are Problem Solvers and Equity Strategists.

Don’t jump in the bandwagon. Always be Contrarian. Stay well away from the masses…

And in the fringes you will see many worthy CEOs. And you are bound to meet some crazy ones, because the Founders run the gamut of space from the extreme logical sanity to unstable insanity, and everything in between.

So stay with Logic and add some Maths to solve the big problems…

And you shall find many Geniuses, many crackpots and many smart & interesting people along the way…

Avoid the self described geniuses like the plague, because if the mental health of the Founders is uncertain — then it’s best to run. Run far and run fast. Run away…

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These folks need an all white place with soft padded walls to call home, and no matter how smart they might appear their wacked-out convoluted minds never quite manage to built anything that resembles functioning business.

To give you a taste of this; there was the CEO of a groovy Mobile App company who after presenting her company to me, she gave me the heads up that if I didn’t like this startup — she had a bunch of more startup ideas that she could run by me. And she proceeded to awe me with her creative mind’s output. And that was that… That’s a real No. An absolute No-No. Don’t do that. And then we had this CEO who came in to describe his Internet company and then He was telling me unprompted that he had actually invented the pet-rock and someone had stolen the idea from him and that he wanted to take our money and seek justice from the ones who actually brought the Pet-Rock to market… Please don’t do that and don’t be “that.”

Or take the example of the CEO and young girl co-founder who was working on an Alzheimers drug that she herself probably needs to be taking, because after interviewing and talking with my pharmaceutical examiner she got into a real fist cuffs fight with him and I had to physically separate them… And all that because my Examiner challenged her on the possibility that her intention of running  un-opposed drug trials would not result in the same values as if she were running the classic double blind trials. She exploded at the mere mention that she might be wrong… and a fight ensued. This is the type of CEO that beats up on the employees first thing in the morning, in order to get the old Morale boost the people need in her world. Apparently this “Management” technique worked well in the old Pirate times, and it still works in the minds of the disturbed managers, and maybe in the Amazon slave camps, but it doesn’t work well anywhere else today. Yet for now am blaming all the Hollywood Pirate movies that have brought it back in fashion…

And however romantic it seems, this pirate boss dressed in startup executive threads, has got to be avoided at all costs. Better send your money straight to Disney, or even to Nigeria to get in on the bottom floor of the latest scam — rather than funding this nut bag.

Between crazies, bitches, pirates, lunatics, and So you get the idea of the kinds of people we see daily.

Or the other jerks that tried to woo me for months, and after the preliminary lunch and the second round of meetings — we made an agreement for Myself and my People to lead their First Round. Mutual celebrations ensued… And then they turned around and asked me for my references.

They are still waiting… for my call back.

I’ll probably catch them on their next StartUp.

That is if heaven wants to have me next to St Peters…

Yours,

Pano

PS:
Even the highly Innovative and seasoned Angel and VC investors are always fearful of Change even if it is a subconscious and basic fear of change that exists within all human beings…

That alone You have to overcome especially if You are making a dramatic move towards a “Future” that nobody has seen before…

And although we fully get it that we need and thrive because of Innovation, something that promises to create a Ne Industry and not just a New Way of Doing Things in a settled industry — we are skeptical. We are skeptical because of a primal fear of dramatic change being able to overcome the existing order of things. Because at the core, change means something is going away… Yet it does not portend that which goes away is going to be replaced by something better…

However the “Present” in it’s current form is reassuring even though we know deep in our minds that the current state, will cease to exist and be transformed as our body’s cellular structure does change every twenty-four hours.

Even the best of scientists still adhor the “going away” side of change because it causes distress.

Additionally, the fact that this particular CHANGE has not arrived yet, is scary because the “not yet” aspect of change disquiets the minds of all concerned. Nature doesn’t like emptiness and vacuums, and as it turns out — Change always creates a vacuum until the new elephants replace the old ones.

But it’s still not here — and the combination of  “going away” and “not yet” here is a powerful deterrent for Change and a massive incentive to stay the course and maintain the status quo.

Since the average age of the Angels and the VCs is more mature than that of the Founders and the young teams of StartUppers — one has to think hard and reason carefully about the philosophical nature of other people’s “Acceptance of Change” and “Suspension of Disbelief.”

So try to always think of these things ahead of Investor meetings, and thus attempt to figure out how You are you going to convince the engineering and analytical nature of the savvy Investors mind to suspend their disbelief about what you clearly promise to create; and also how to convince this “generation of Investors” that the Innovation and the Change you are promising to bring about is Good for the People, acceptable to the Marketplace, and suitable for the Investors, for their firms, and for their profit potential.

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Thankfully we have a few ways to do just that:
1) Respect that people must convince themselves to change. Pressure invites resistance.
2) Explore the value of not changing. Why is it important not to change?
3) Create reasons to change and also find people’s reasons for embracing change.
4) Find out why, and explain why the present path is unacceptable?
5) Make the reasons for Change meaningful to the Investors and the People.
6) Always remember that people change for their reasons, not yours.
7) Don’t demonize the Status Quo and the Present course of Life.
8) Keep in mind that the previous generation gave themselves to build the present.
9) Don’t insult them, and don’t insult their intelligence because you can’t antagonize and influence at the same time.
10) Appeal to their values. Take their perspective before pushing yours.
11) Change in small yet significant ways that don’t “bet the farm” can be a fun way to start and run a pilot program, to get everyone onboard.
12) Ask the previous generation for advice. Make them feel heard. Include them in your decision making tree.
13) Speak to the heart, use facts and figures to validate but not to convince.
14) Don’t ask the previous generation to change. Instead ask them to support you as you lead for dramatic change.
15) Lastly you must temper your enthusiasm, your passion, and your vivid & outspoken lush nature that you might have… Keep your inner “bitch” under control cause if she escapes and she comes out bitching and moaning — You are toast.

Be aware that your passion about your new business may be justified because you eat your own dog food, and drink all of your Cool Aid, but it still is alien and overwhelming to all other people.

And perhaps most important of all this,make sure to not get Mad at the skeptics and the examiners who work for us, and who try to investigate the nuts and bolts of the business, in order to brief us — before we get to decide if we are going to spend our quality time with the likes of You.😉

And even if you get upset right about now, and you start losing control and begin looking at them cross-eyed, with full on madness in your mind, and blood in your heart — shut it down and keep it under control. It serves no one to start a fight with our people or with us, when you feel that we don’t “get-it” or that we “don’t-believe” in your business — because that’s the kiss of death in our relationship.

And acting like that you only prove that you are a twat not worth investing our time on Your Sorry Ass. And you can privately remind me of the yoga-bitch who svcked my cok the first time we met in one of my talks [like fans often do] and then when I failed to call her back — she started bitching like a stuck pig that I should be a no good Investor to begin with… because I don’t give a damn about her StartUp.

Go Figure.

All that because I was not — according to her — “responsible-enough” to always be asking, tracking, and supporting her startup rental dream.

How Fvcked is that…

How Crazy.

How much bat-shit madness is flying around in this woman’s old belfry.

What’s cooking up in this woman’s head is anyone’s guess.

As for me I don’t wanna know…

And there are plenty more of where this craziness comes from. Please don’t ever do that. It’s down right ugly. Not cute, Not pretty. Ugly as an unshaved girlfriend who doesn’t believe in French parfumerie and English hygiene — wearing nothing…

Before you start objecting to the use of profane language — please look up in the beginning of this post that I say “We are all Human” and “our Nature” needs to be entertained, loved, sexed up, and rested too.

Simple eh?

We have needs too, and this soft need to relax and hoot the breeze, like mature man in the pub, is just as important as going to the bathroom and taking a crap.

Simple biological need.

Biology trumps everything. Got it?

Now if you are a prude or a puritan left over from the 1600s in the Jonestown settlement of the Pilgrims …  well I don’t know what the fvck you are doing here. Please go back immediately and chase some witches or something — unless your time machine or your mind is broken.

There are better ways to get my attention in order to spend “time” with You than getting mad, and complaining, or shooting from the hip, and offering me proud parent of girls talk, or nasty telephone texts, or passive aggressive invitations that look more like booty calls in the middle of the night — than anything else.

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Capice?

If you don’t get it — I recommend that you come back to my crib and I’ll show you how it’s done…

It’s a Lost Art, and we are here to declare that we need to revive it.

Only the really good professional concubines know how to perform well in that category. And it is a genuine great skill to have for anything you want in Life.

And besides if you learn how to and people know that You know how to give professional grade fellatio, and you also happen to be a comely lass — You’ll go far in Life without much further ado.

I at least, would be falling all over myself to help your “Startup” singing Hallelujah…

Amen to that.

Bill Clinton is a Beaut — Right?

Billie should be the King Felat of “Saudi Arabia”… of Arkansas. Murica still loves him. Incest, moonshine, and all … the Southern Comfort is still here.

In short like everything else in Life getting FUNDED is a Sales job.

And if it rimes with anything that sounds like a B…job, maybe it’s not just an accident.

In California’s La-La land aptly named Holly-Wood they always have this to say: “Give some Head to get A-head”

If you are prudish about this, or afraid to engage in dog sniffing behaviour — Am So Sorry… Hollywood is not place for you. And the same goes for high flying TartUps – StartUps.

But to forestall your objections I’ll apologise in advance for offending you and I’ll also send an email to Charles Darwin to ask him to amend his taxonomy of the Species that has classified human as communal breeders and has set us in the midst of all the other mammalian species as animals.

Pure Animals with a great deal of intelligence. Aspiring to higher things…

The old Charlie must surely change that Classification in the Taxonomy of Species, because the last time I checked — the study of Humans was still called Zoology and we were right there in the Taxonomy of species called Animals… with capital “A” to begin with.

Am not counting on it though because He is retired and resting on his throne in the Museum of Natural History looking down at us poor sods fighting over definitions and forgetting the substance of BEING.

So listen to Darwin because even if you have exalted ideas about yourself — I bet you enjoy the old fellatio when you get it, as he so thoroughly described in the animal observations he wrote about.

Got It?

Or better yet…

Have you gotten any lately?


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