Category Archives: Entrepreneurship

Why you need 3 presentations (with increasing depth) to land investment post your seed round

The 3 step process to raising money post your seed has

a) an overview step – usually at a demo day (3-5 min presentation) or via a warm introduction followed by

b) a first meeting (30 – 60 min) where your pitch deck showcases your company and business and finally

c) a follow on second meeting (60-90 min) with partners at the firm where you outline your operating plan

Your overview presentations’ goal is to pique interest in 5-7 slides and generate enough excitement to warrant a follow on meeting

The pitch deck’s purpose in 12-15 slides is to give enough visibility into your business to help potential investors understand it.

The operating plan’s purpose in 15-25 slides is to share the details of how you plan to invest the raised capital to get to the milestones that will make your company succeed.

Over the next few days I will take each slide deck and share some of my experiences with examples.

Let us first take the overview deck. This is typically given at your demo day or when you have 3-5 minutes alone to pitch, instead of 30 minutes (when you will need your pitch deck)

Your should cover 5-7 key areas and here is what I recommend:

1. Your single line positioning, company name, founder’s email and angel.co profile address.

E.g.

1. Get Magic Now – Text this number to get what you want with no hassles

2. Seed.co – Modern business banking without branches

3. Get Meadow – Buy medical marijuana for delivery today.

The positioning is different from your tag line, which focuses more on being memorable and different about how you do something as opposed to what you do.

Here is how I think about positioning: Try to address in one word who your customer is, another word for what you do for them and third word for how you do it differently

2. The problem you solve (and focus on the customer specifically) – be as specific as possible, and show how customers are currently solving that problem.

3. Your solution & how is it different – use screen shots to show your product if you wish

4. Size of your market – total and addressable market size is preferred

5. Traction – be as specific as possible either in terms of users, revenue, or other metric you are tracking. # of meetings with customers or discussions with prospects is not traction.

6. Team – answer why you are uniquely positioned to execute this opportunity

7. Call to action – Dont say we invite you to talk to us. Ask for folks to download, or ask them to tweet for early access, etc.

Over the next few days I will outline each of these slides with examples.

How to be a more innovative startup by changing just 2 words in your meetings daily

Most every startup wants to be innovative. That’s the essence of being in a startup. To be innovative, most entrepreneurs realize they have to get their culture right. An innovative culture fosters and innovative workplace which builds an innovative company.

So, now the question is how do you build an innovative culture?

To build an innovative culture, I believe you have to encourage experimentation. Lots of it. Most people learn only by experimenting, not by sitting in classrooms and being taught. While it is important to sit and learn the first principles, most everything else needs to be learned by doing. You will have to let people try lots of things and learn what works for your company, your industry, your market and your customers.

The trouble with experimentation is that it breeds failure. Lots of failure. If everyone of your experiments were successful, then you are not taking enough risk, which means the company wont be as innovative. In fact, the leading indicator for innovation in most companies is the number of failures they have. Which means they are taking more, but managed risk. A good metric to measure, is the # of experiments your startup conducts in a unit of time and what the failure rate is.

The best way to do this is to practice the art of disciplined experimentation. Which is why I am a fan of the phrase “My discipline will beat your intellect“.

So, if you do conduct a lot of experiments, you will fail. How do you understand, organize and learn from your failure?

Most companies conduct an audit of their experiments, the hypothesis, the initial learning and the final results. That’s where the the biggest problem is to be found.

Most managers and executives are trained to ask the question –

“Who to blame”?

That’s the question that most meetings post experiments start with? What happened? Why did it happen? Who is to blame?

I propose a small change instead, which will get your people less defensive, more open to taking risks and experimenting.

The right question to ask is –

“What to blame”?

Focusing on the process, steps, methodology and systems brings out the best answers to the question “how do we get better”?

Surprisingly you learn more about people, their strengths, limitations, weaknesses and biases if you focus on the process that was broken instead of assuming that the people messed it up.

For most founding entrepreneur CEO’s this is one approach that works best to foster a culture of innovation and risk taking.

Do you have a manager who has followed this principle? I’d love to understand what you have learned from them. Drop me a note on Twitter. (I do respond to all @ replies BTW).

Hiring your “best” friend as a first employee, at your startup – pros and cons

Many startups have co founders who are best friends. I have heard of many cases when that has worked out well and a few cases when it did not. I would say in more cases than not, it has worked out (anecdotal). Hiring your best friend as the first employee has different connotations for your startup. You want to hire so that the person is individually proficient and collectively efficient.

The word “best” indicates to me that you know each other very well. There are secrets you’d keep from your family and other friends, but not from your friend.

The word “friend” indicates someone you know for a long time. This person is not someone you worked with for 1-2 years, but typically someone you either grew up with, studied with or worked with for an extended period.

Sometimes this can apply to your spouse or significant other as well.

Your best friend comes by and you start to think, why dont I ask her to join my company?

Even if they are not a “perfect” fit for the role you are trying to hire, you think you need a utility infielder anyway, so why not get them on board.

First the pros:

1. She knows you very well, so it is likely you will have a good relationship and be able to talk about anything about the business. Even if you have a co founder, running a startup is a lonely business, so having a sounding board, who wont judge you is a great advantage.

2. She can help you see things you dont see. Most entrepreneurs (not just Steve Jobs) create a reality distortion field around themselves, so having someone who can objectively point out the flaws in your argument, without you getting defensive will help you go a long way in your ability to grow as an entrepreneur.

3. You trust the person instinctively so it is likely you will be able to have them take on any role and be supportive when they make mistakes. This helps a lot when you have to explore new markets, attempt a new technique to sell your product or investigate a new architecture framework to use.

The other advantage is that the journey is a lot more fun when you like and enjoy working with the people you interact with daily.

Now the cons:

1. If you are both alike, (regardless of what people say, I think most people are best friends with people who are *very* similar to themselves), then it is likely you will see things the same way. This makes your company fairly uni-dimensional. Opportunities are best created when there is a good mix of different skills, talents and perspectives. Diversity creates dissonance, which leads to new ways to think about the same problem.

2. They may not be the perfect fit for the job – either because you need a front-end UI person and they are a back end developer, or they are a marketing person and you need a quota carrying sales person or if they dont have connections in the industry you are trying to tackle.

3. They are more likely to take liberties in the company (rare, but happens). This creates an environment where other professionals you hired will feel a sense of resentment towards the employee, since they believe your best friend will snitch on them.

In the last 3 years, I have seen about 120 companies go through our accelerator programs and looking back I notice about 10 cases where a best friend was hired as an employee (as opposed to a similar number of cases where the best friend was a co founder).

I cant think of a single case where it ruined a relationship even though the company did not do too well.

In my own personal opinion, bringing on your best friend to work with you at your startup is one of the best things you can do.

Funding the best company from each accelerator is a better strategy than funding all from the top program

Yesterday, I had the chance to talk to a friend who is an angel investor and an entrepreneur. Over the last 1 year he had a chance to view our work at the Microsoft Accelerator and he was keen to come and talk to me about funding companies from our program.

Over the last 3 years, we have helped over 350 companies at Microsoft Accelerator programs worldwide, which has resulted in 15 acquisitions. Over 85% of the companies got funded after our program, largely from angel investors. Looking at these numbers, he was keen to participate in the upside.

He was considering joining a syndicate which allowed investors to buy a chunk of a startup fund, which invests in all startups coming out of YCombinator. He was asking my advice on why he should consider investing in other accelerator companies at all instead of putting his weight behind YC companies.

Angel list syndicates are the new and efficient way to invest in a lot of startups using a single instrument. Think of them like a Mutual fund for privately held technology companies.

If you buy into the construct that accelerators are the new MBA programs for entrepreneurs, then it makes more sense to invest in the top graduates from every program than all the graduates from a single program.

Here is some evidence as to why based on research and in this piece it is presented by Malcom Galdwell.

The research so far suggests that the best performing students from even the worst colleges perform better than the worst students at the best colleges.

That’s even when you consider that the students at the top college performed better in standardized tests than the top performers in the not-so-good colleges.

The question is then does this hold true for tech startups as well? There is very little data to suggest that it is possible to make a completely data driven argument for the case.

Considering that companies going through accelerators made up < 10% of all Venture funded companies worldwide last year, there will be good data only in a few years.

If you look at the historical data and compare 3 programs – YC, 500 startups and TechStars, the data seems to indicate that it might make sense.

YC has funded 800+, 500 startups over 700 and TechStars over 400. The top 10 companies from each of these programs, has outperformed the remaining 95% of the startups from the other programs.

Again, the data set is limited, but it proves the theory.

The second question is how do you know which are the top startups from each cohort or program before or at demo day?

If you look at traction as a proxy or mentions in the press ( I am going to use TechCrunch and VentureBeat as examples), during the demo day, then traction “seems” to be a better indicator. In fact, if you bet against the press, you’d do very well. So there might be a contrarian investment thesis around not investing in companies that the press anoints as the “best companies from the demo day for each accelerator”.

The final question is does this hold true for all accelerator or just the top 10 accelerators?

That means should you just fund the top 10 companies from the top 10 accelerators or the top 1 company from every accelerator?

That’s also a question that’s not easy to answer directly, but you can make some educated guess via proxies.

If you look at the 1500 companies that have gone through accelerators over the last 2 years (check out SeedDB), you will notice that 21% of them have gone through multiple accelerator programs. So the best from each program (or the worst, not sure) make it to other programs as well to eventually be among the top in the top programs.

So I think the best strategy is to fund the top 1 or 2 companies from each of the top 100 accelerators, instead of all the top program or the top 10 from the top 10 accelerators. 

Founders make good money when a VC funded company exits very rarely

Dragons:

A dragon is a company that returns an entire fund — a “fund maker.” VCs can have dragons in their portfolios just as LPs can have dragons in their portfolios.

Unicorns:

Many entrepreneurs, and the venture investors who back them, seek to build billion-dollar companies.

Decacorns:

Billion-dollar companies join a club of “unicorns,” a term used to explain how rare they are. But there are more than 50 of them now. There’s a new buzzword, “decacorn,” for those over $10 billion

Cartazonos:

The company where founders make significant money as well as investors.

According to Wikipedia: 

Unicorns are not found in Greek mythology, but rather in accounts of natural history, for Greek writers of natural history were convinced of the reality of the unicorn, which they located in India, a distant and fabulous realm for them.

The growing number of startups with unicorn valuations is leading many entrepreneurs to believe that they will be billionaires when their startup realizes the $Billion valuation externally, or when they get an “exit”.

Turns out the only time the founders get an exit that’s worth the effort is when all the stars align.

Here are 3 examples of good, bad and ugly.

1. Good: Cloudera’s funding resulted in founders (4) worth more than $250 Million in paper.

2. Bad: The cautionary tale of RedBus acquisition for employees and everyone but the founders.

3. Ugly: Get Satisfaction gets acquired by Sprinkr for < $50 Million after raising about $20 Million so far and the founders get washed out.

Gives you pause on the “headline” announcement for the huge fund raising that companies do.

If you are a founder and are looking to hit pay dirt, you will do that only when the exit is aligned with investor interests after their liquidation preferences and return restrictions.

 

Top 5 tips on coming up with #startup metrics that align with milestones

Startup milestones both internal and external help you understand and explain how your company works, grows and scales. While most entrepreneurs will continue to tweak their milestones and keep setting new ones as they scale, the metrics that underlie tend to change as well.

The way to think about metrics is that it should answer the question:

If we align all the resources at our disposal to optimize and improve this metric, will my startup do better the next time we measure this?

Most entrepreneurs initially measure everything or nothing at all. Operating from gut (measuring nothing) is as bad as operating with lots of useless data (measuring everything). When you measure everything (or as much as you can), you tend to get overwhelmed and try to optimize everything.

Which is why most every accelerator program I know of, advises entrepreneurs to pick one metric and focus on them.

Without trying to give you a list of metrics that you should consider, I thought I should outline the thinking process you should follow to come up with the metric you should care about, measure and track.

1. Leading vs. Lagging metrics: Metrics fall into multiple segments, but the are usually leading vs. lagging. A leading indicator tells you what’s going to happen to your business, while a lagging metric tells you what happened. For example, usage of your product with customers is a leading indicator, but revenue is a lagging indicator.

2. Financial vs. Operational metrics: A financial metric, as it implies, affect your top or bottom line. An operational metric is useful to track and improve your efficiency. For example, Customer Acquisition Cost (CAC) is a financial metric, but Conversion Rate is an operational metric.

3.  Actionable vs. Reporting metrics: An actionable metric is useful to change behavior. A reporting metric is useful to disseminate among key stakeholders. For example, % of candidates who applied for any position is  a reporting metric, % of those who you interviewed is actionable. You can change an actionable metric and it will affect quality. Change a reporting metric and it will look good, but not affect the way you operate much.

4. Primary vs. Derived metrics: Primary metrics are measured directly, derived are determined by a formula or combination of 2 or more primary metrics. For example, number of visitors to your website is a primary metric, visitor engagement, i.e. # of visitors and time spent on site is a derived metric.

5. Absolute vs. Relative. Measuring absolute numbers for a metric tell you where you are at a point in time, but a relative metric give you a sense of the metric over time. For example, # of open bugs is absolute, Growth in # of  blocking bugs is relative.

Given the segmentation and type of metrics, and that they serve different purposes, if I had to choose one metric, I’d choose:

A metric that’s leading, operational, actionable, derived and relative until I raise my series A funding.

You need to choose only one metric and it will be hard to pick one without others, but I’d highly recommend you do this exercise and paste the metric everywhere and communicate it constantly, so you can have everyone align around it.

One of my companies had a bell that they rigged up that would constantly ring when the metric turned south. The pain of listening to that bell was so bad that the entire company would rally around it to “switch the bell off”.

How to set milestones for your startup before you raise money from investors

The question “What do you want to be when you grow up” is a pain to answer for kids as it is for startup entrepreneurs. Most times you just dont know. Sometimes you ask other people in the hope that it will lead to an answer that you can co-opt. Other times it is not clear yet (unlike with kids) if you will ever grow up.

Even if you dont want to grow up, I’d still recommend you spend some time putting together milestones that matter to your company for an 18-24 month period from when you start so you know what you are shooting for.

The milestones fall into many buckets, but they should answer the question:

“If you hit the milestones you set out for your company, would you be much more valuable as a startup than you are now”?

The relative sense of “much more valuable” indicates that this is very different for each company, founder, market and type of startup. Most entrepreneurs who are focused on B2B bemoan that they are measured to revenue metrics, compared to their B2C counterparts who usually are measured on user growth (or engagement).

Regardless of what you are measured on, the key is to ensure that you document the most important metrics that will move the value of your startup.

So, to set milestones, the first step is to agree on metrics to measure, and then the date by when they will be achieved.

Here are some examples.

1. Revenue metrics. Regardless of what the new “temporary” trend might be, revenue and profit trumps all. In the early stages of your company, profit will be an illusion, so I would focus a lot on revenue growth. How quickly you grow revenue and have reduced churn, better predictability and more diversity gives an investor more confidence in your business. If you need to have one metric alone in place I’d recommend a revenue growth metric. As in most things, quality and quantity of your revenue metric matter.

2. Absolute # of customers / users metric: In some cases, when the revenue is not significant initially (for example you are in the razor blades and razors model of a business) then I’d focus on growth in # of customers. Again, like the previous metric, quality and quantity both matter. If you are an enterprise software business, getting the initial key marquee customers matters more than any customer. In B2C, this is widely followed with startups tracking # of users, MAU, DAU, or engaged users, or a proxy for # of users (# of snaps sent for example).

3. # of employees: This used to be a metric people tracked, but I am not sure this really matters as much in terms of growth. I’d focus more on the quality and profile of employees alone, instead of a growth in # of employees,. If, however you are in a consulting or services business and this metric drives revenue, by all means this becomes important to track.

There are many more metrics you could track, but the key question you have to answer is “Will this metric(s) drive my startup’s value higher. You can also track metrics that are a proxy for the metrics I listed above. This is so that you can communicate it externally and get people excited about it, instead of having to share a revenue metric.

In some cases, (like Uber for example) the # of rides as a proxy for revenue might be tracked.

Then the next part after you select the metric, (typically one is preferred) is to draw a line in the sand for those metrics –

What would those numbers be and by when would you achieve them.

This part is the “setting milestones”. It has to come with a “sell by date” or “achievement date”.

Simply setting metrics alone, without the date of achievement is typically useless.

The important next steps is to break down the milestone into smaller more achievable milestones during your progress (monthly, quarterly, etc.). This is so you can communicate with your team and have them all rally behind the milestone.