I’ve graduated 14 StartUps this last month through the American Angels Seattle StartUp Weekend and now groom them for a Venture Capital Roadshow to Silicon Valley…
We’ll only take seven CEOs and a few of their team members down there — but we are hot to trot, and keen to get them Funded upstream from institutional investors. Easy as pie. Right?
And so now we recruit the Sandhill Road VCs to invite the ones to get the first dibs on our fresh NorthWest Tech StartUp companies…. http://www.meetup.com/AmericanAngels/events/225621719/
Last time down there we had a perfect score passing all seven Cos on to the right VC experienced hands. Still there is plenty of work that needs to happen between now and then, to get these teams in anything resembling funded company shape. It’s steep hike because these young CEOs and their fresh Startups need to built their rocket and fill it up with rocket fuel, as they get readied for exponential growth.
I teach Innovation, but I also teach about the rigours of Angel and Venture Capital too, and most importantly about proper Business building. Business processes are rather important along with business leadership and product fit. But having good IP trumps all that because Innovation is now the core engine of both the StartUp economy and the world economy. And as it turns out, Technology is the driving force behind the innovation… and He who controls Technology simply “prints money” and thus controls the world.
Yet that Innovation includes the basic Angel Funding that allows for the Intellectual Property building process that StartUps rely upon. Mind you the recent article on Forbes that clearly states that up to 90% of a StartUp Company’s value is tied up and exclusively related on the startup’s IP can be seen as validation for my Angel investments that are always directed to spending the first draft on securing good legal support through top Lawyers for securing patents, trademarks, and copyrights.
That’s how you create Great Dividends and that is my Angel investment practice and you know what — it works.
I’ve been doing it for twenty years and only now Forbes comes out with the article that makes this a Harvard Business School Case… I’ve been doing General Financial Innovation, FinTech and VentureTech as well for so long that now it feels like driving. And there is no better way to teach Innovation than by practicing it, because practice creates habits and the method of it makes our system fairly excellent if not almost perfect.
And as always with all things and time — Venture Capital changes as the nature of Ventures changes. StartUps change, and so do the Angel Investors. Styles of Investment, size of tranches, and Startup funding cycles change. The time ascendancy of Capital raising changes too. CEOs change and so do the Investors. Companies pivot, Angel Funds pivot, StartUps pivot, VCs pivot. We all pivot and change each and every day… but none changes as much as Angels.
We change fast and furiously because we are the first responders. We are at the forefront, and we bleed profusely when the companies we invest into die off en-mass. Even Banking Investors change and when they fail the government steps in to bail them out. But Angels have no bailout facility like Banks have. So we’ve got to persevere. And the further revelation here is that Investment demands change too, whether it goes up or down. Investment principles change as well. Value investing is all about accommodating change and promoting this over time through Innovation. Today Innovation is the biggest driver of Business Growth and Technology across the world. What is that but change itself?
The illusion of stability is far greater than the living reality of StartUp Funding out there…
Yet there are solid principles in Innovation and Funding Change and these constitute the Funding Circle we often talk about: So we make it official, and we extend a formal invitation to all of our teams by inviting them to the discussion, and we Start it up by focusing on Early Stage Investment Funding. We start our discussion with Angel Funding and the necessity of this but then we open it up with an inroad to the VC market.
So my VC friends need to tell me about their availability for our next Road Show down to Silicon Valley by RSVPing here: http://www.meetup.com/AmericanAngels/events/225621719/
Following this past month’s Accelerator Innovation Master Class in Seattle — there are a few questions that we brought up and that will get everyone thinking and now we want to give everyone a chance to speak their mind. The point of this effort, is to make sure that every stakeholder in the group contributes towards the success of the enterprise.
People write books about Venture Capital as if these principles are chiseled in stone, or as if they remain unchanged for ever. Yet principle remains. Change is the only CONSTANT we can count on.
And the proof is in the pudding. Here is an example: Twitter’s latest travails. In this latest round of leadership change Jack Dorsey came up on top again after a sinister back room battle. I keep tabs on Twitter because this one company was originally created in my Innovation Master Class Weekend in Stanford University back in the day. And so many years later after a few starts and restarts it got it’s IPO and became a darling for 15 minutes or so. Yet now it lost it’s way again. Is jack going to lead them out of the woods?
I don’t think so.
Knowing what I know the chances are that he is not confident enough to do this and that is why he keeps his other job on Square — to be able to jump ship when things go South. As they inevitably will…
This other deal, we’ll discuss, is about an early funding deal that epitomizes the changes taking hold of the venture industry today. Am seeing this from the same vantage point as both the CEO and the successful Venture Investor — because we are both n alignment with those who have a well developed sense of the urgency of NOW. As the old saw goes: When they pass around the plate with the cookies — take two… And especially take what you need to keep your energy levels up. That’s what capital for the Startups is. Rocket Fuel. Energy Boost. So those with the GOOD SENSE to grab the OPPORTUNITY at present. These are the only CEOs, Angels, and Venture Investors, worth hanging around with. Truly these are the only ones who are able to win.
And win big. This is what they do: Here is what the Startup CEO said: “We weren’t in fundraising mode — but there was strong outside interest with minimal dilution, and we felt like it was the right move for our Startup business.”
Today the term ‘fundraising mode’ has truly become almost non-existent, while ‘strong outside interest’ or the lack thereof, is now the de facto discussion of every Startup Company Board meeting.
And while each company and each deal are vastly different, one thing has become increasingly clear: The formal funding round is dead.
Investors and founders used to wait until a company was 3–6 months away from cash-out, before engaging in a formal fundraising process. Naturally that put a lot less stress on the investors who had their timetables ready to go when the burn rate was approaching flame-out. But with capital sloshing around in Silicon Valley and with VC competition ready for a brawl and a bar fight — the competition intensifies. With richer data available for both successes and failures, and with greater market volatility attracting all talented StartUps — the traditional funding process has been crushed and thrown away in the circular file.
The sequence of StartUp funding rounds has now fundamentally changed towards the always-on model. This is Good. And Bad… Yet for good companies out there the timing of fundraising couldn’t be better.
Even though the Burn Rates that traditionally have been the key to all of our StartUps have now become an unreliable measurement tool of Success, this still remains the main yardstick because companies are unsteady on their projected expenditures and the accounting thereof, with so many sudden acceleration opportunities, that bring on huge demands on their checkbooks…
Our StartUp portfolio Companies increasingly stop timing, their funding rounds, considering the time to Zero, after estimating a fixed date for their burn out, and instead they build plans towards certain goals, and raise cash by responding to opportunities as they come. This means that they focus on sales, and support from the marketplace, but it doesn’t mean they take whatever cash is going running in the street. Nor do they accept any external funding regardless of quality of the principals involved.
This in turn has vastly changed the way Venture Capital firms operate as a response to the changes in the way StartUps operate. And here is what is driving this, and what should founders be doing to respond to the changing climate in Ten soundbites that can be executed daily to have Success with Investors and keep the StartUp humming right along: 1) Address their long term needs in a Business Funding Plan… 2) Adjust for the increasingly blinding Speed of change… 3) Don’t matter if none of these rounds were in the plan… 4) StartUps should be aware that they must be far more agile in their hunt for funding.
5) Venture Capital is trying to play catch up and is thus becoming more proactive… 6) Constant Growth now matters more than ever… 7) Passionate Conviction matters more than ever… 8) Be open — Take the call, but be wary… 9) Manage to Goals, Milestones, & KPIs, not to a flame-out timetables… 10) Flame outs occur to all…
A key reason for the end of the formal funding round timetable, is that venture capitalists are in the hunter mode due to the slosh in the Capital Markets. The increased amounts of capital available in early stage technology markets, means that investors just don’t have the luxury of being able to sit and wait for rounds to come to them.
Got to do the Hustle…
On top of this, the vastly increased amounts of public data around every company means investors are now armed with the tools to form a view about a company before receiving a formal pitch. In the past, we relied on NDA-protected, broker designed pitch deck to understand how a company is doing…
Now our CRM allows us to instantly see the number of employees, social traction, and progress in multiple distribution channels, whether App Store, Github or beyond; well before speaking to a company, allowing us to be much more proactive in our approach.
The focus of founders has changed too. The cost of building most types of product has fallen dramatically, meaning that execution is now the key competitive advantage. The best measure of successful execution is growth in both revenues and margins. As soon as a company finds a way to sustainably grow these metrics, it doesn’t make sense to wait until your planned funding period and risk losing your differentiator. Instead the current market of cheap money means that founders want to throw fuel on the fire as soon as possible.
In an increasingly competitive world, there is no time for rumination. This does not mean that investors should shoot from the hip, but thumb-twiddlers will be left behind. We have more data on markets and companies than ever before, and the ability to do much more granular due diligence. But if we do approach a company to discuss investment, we know we can’t then waste their time by taking months to come to a final decision.
The heat is on: indecision is fatal. “Killing-It” in a deal means something entirely different today, than what it meant yesterday.
So, if the old-school funding round is dead and buried, how can founders make this work to their advantage?
One of the favourite Investor questions of days gone by, asked by the Men of Old, was: “How many months of runway does this capital give you?”
That’s a fair question — but it doesn’t mean much in a world where growth is king, and money grows on trees. Today, the size of your Runway simply matters far less than yesterday…
The question that entrepreneurs should be asked isn’t about runway, but instead: where does your current capital get you? What metrics do you care about hitting with the capital you have? “I have enough money to last six months” is a far less useful or powerful statement than “I have enough money to get me to XXX, MAUs, MRR, or EBITDA.”
While managing cash and burn, will keep you alive — you’ll still be a zombie unless you manage to grow as well.
In the same way that investors are becoming more transparent, companies have to be too. There is no point in NDAs or no-number teasers in a world where tools like Mattermark & CBInsights, are scraping mentions of your business on twitter daily. Even when things aren’t going well, it will build confidence in you as a manager and leader if you are open with potential investors on current metrics and your goals.
In a more proactive investor world, you’re going to have to deal with far more inbound emails and calls from your Investors, from their financial advisors, their CPAs, their auditors, their employees, and also from all other prospective investors… And while you don’t want to waste time talking to everyone, you should simply use all automated ways like podcasting, and BBS and other smart ways to keep people informed without spending much time and energy on the task, because You’ve got a job to do and thai is to deliver the Value and growth they all seek to make their investment worth their while…
So it’s a catch22 situation. The more time you spend haldholding — the less time you’ve got to execute. And vice versa. So find a way to reach many people with one action. See how I go One to Many: www.meetup.com/AmericanAngels
Do something like this because it is a simple approach to keep current investors happy and get new ones all the time. This is the way to run your investors circle like a Group of Fans. Treat them to frequent and regular ‘investor updates’ and events, emails to a list of warm contacts, and personal public meetings that are enthusiastic public Love fests. By doing so, you cultivate your public image while also building bridges, and a group of informed investors to call Your own. And this method of public outreach, grows the very public group of the people that you can call upon when you hit your growth metrics, and you have a perfect excuse to ask for follow on capital, and thus see who is really supportive of your nascent startup in advance. Keeping investors informed is the only way to raise quickly the next round and get back to executing on your business plan while you are carving out and following your very own road plan.
This also means you’ve got to be able to say No. Say no often and defriend a bunch of dead weight. It means that you can push off the hanger-on investors, who will always hang around, trying to be your friend, by telling you how excited they are — but they never really help you out, nor pull the trigger on an investment.
Lose the Losers. As a matter of fact it’s Good To Lose them quickly… Fire their ass.
Time wasted on this lot is never recovered.
Focus on the movers and shakers only.