Category Archives: Funding

If you are #napkinStage what is the 1 thing to focus on to get traction with investors?

I was at the Seattle Founders Institute graduation event last night with 40 others who gathered to see the 3 newly minted entrepreneurs from the program. From the over 100’s of applicants, there were 30+ who signed up for the program, and yesterday 3 folks graduated.

Seattle Founders Institute

Seattle Founders Institute

TeaBook is a monthly tea subscription. The founder has spent a lot of time in China to source and obtain unique tea’s that will be mailed to your home every day. The tea market is over $25 Billion and growing at 7% annually. They had a great story and compelling market presence. I personally felt the monthly subscription commerce business has many players, and I suspect in the next few years there will be much consolidation. The tea market itself has many competitors as well including TeaLet, teabox, Chahoney and LizzyKate. They have some early indication of traction, with some trials and some passionate customers already willing to sign up for the service.

American Giving – was focused on ending poverty in the US, with a researched philanthropy website. They founder was looking to create a indegogo style site, where philanthropists could research, back and support giving to Americans better. The potential to unlock over a $ Trillion in well researched giving would be large and they were looking to take a 15% admission fee on all giving.

MeltingSpot, has a 2 sided marketplace for helping consumers looking to meet “folks they like” near them. Think of “Tinder meets FourSquare”. They Melting Spot could be a bar, or a restaurant, who wants to “sponsor” a spot where people only interested in “animals” would be able to meet others. There are many dating sites and apps, and many social networks, but their focus was on helping folks in their local region. They would make money by charging bars to sponsor a “melting spot” – initial suggested retail price was $30/month.

All 3 entrepreneurs had great stories and did an excellent job showcasing the market (which was large) and spoke to their personal backgrounds as well. None of them had a working website or prototype (some mockups), but they had financial projections. They were all non developer or technical founders, looking for their CTO, but had the sales and marketing background and expertise.

All of them were looking to raise some money – from early seed (>$100K) to seed ($2 Million – teabook).

As an investor, the biggest challenge I faced was I was not sure how many more pivots were going to happen before they get Product Market fit. I suspect a lot more, because none of them had product shipping yet.

Which leads me believe that Kickstarter or Indegogo is the best way to show social proof, customer validation and early traction.

If you have an idea and you want to progress on the journey towards investment, the launch page with social proof, early orders on your crowd funding campaign, product prototype and having a well rounded team are a must have for #napkinStage companies. Those would be the things to focus on, more than distribution channels,

The rise of the Micro VC fund and the future of seed stage funding – 5 questions for @SamirKaji

Samir Kaji at First Republic has been following seed stage investing for a while now. I have written before about the rise in Micro VC funds, which are typically <$100 Million funds run by a solo General partner or two partners. Many angel funds are in the sub $25 Million range, as well.

Samir Kaji First Republic

Samir Kaji First Republic

Over the last 10 years (since Jeff started Soft Tech Venture Capital) there are over 250 Micro VC firms that have been started. I had a chance to talk to Samir yesterday and asked him 5 questions to explain and understand this phenomena. Here is an edited version of our conference call.

1. What are Micro VC funds and why are they a thing now?

As the cost of the software startup drops, the amount of money required at the early stage has reduced as well. At the same time the number of startups has increased and so has the number of angel investors. Micro VC funds are deploying smaller capital at the earlier stages than traditional Venture firms. Typically 10 years ago, the VC fund would be $100 – $200 Million and invest in 20-30 companies, between $2 Million to $20 Million per company. Now the larger funds are deploying $5 Million to $50 Million as their fund sizes have increased to $500M to $1 Billion.

2. How many of these Micro VC funds are there are where are they located?

Close to 40% of the 250+ Micro VC funds are in the Silicon Valley said Samir. 25% of them, or about 60 are in Asia and Latin America. About 30 are in Europe (largely London and Germany) and the rest in Chicago, Boston and New York.

3. What value does a Micro VC provide besides cash?

Depending on the Micro VC, expertise and connections are the most important things they provide besides cash. A good Micro VC is already thinking about your next round and has built a good network of connections to help you with follow on funding. Since most Micro-VC funds are small by nature, many often cannot exercise their full pro-rata in follow on financing rounds, and almost certainly do not have the ability to serve as a lead in the next round of capital. Instead, they have a well curated list of investors who they have worked with before to help introduce startups to their network. Expertise varies by investor, but most will be able to help you hire good people and also help you with Go To Market, Pitch preparation and some early business development.

4. When and how should entrepreneurs approach Micro VC?

Typically after you have a little traction is when most Micro VC’s will be interested is what I learned. Most want to see some validation of your startup. Some of them do work with Accelerator programs, but I have seen many of them working their network of entrepreneurs to get introductions to other potential entrepreneurs.

5. Will there be more or fewer Micro VC’s in a few years? Where is this headed?

Micro VC’s are here to stay, said Samir. In fact, he sees more of them will emerge in the next few years. The main reasons are that there are enough entrepreneurs who have had some modicum of success and dont want to do a startup again, but want to use their expertise, connections and network to help diversify their risk and give back by helping other entrepreneurs. So, they will in fact continue to exist. He did say that the Micro VC’s with more tenure will likely move “up market” and start to raise larger funds and become the next generation VC funds, while newer, smaller GP’s will start to become Micro VC funds.

Quora: the best source of secondary market and competitive research

Yesterday I met an entrepreneur who has built his company in a suburb of Seattle, completely bootstrapped and without any outside investors. He is growing 30% YoY and the most amazing thing he taught me was that he gets all his questions answered on Quora.

This led me to take another look at Quora to understand where any entrepreneur could use it. Turns out there are a lot of use cases. Most people use it to get specific questions answered, but I know that Jason from Storm ventures has used it to build the SaasTr brand, another entrepreneur uses it for lead generation, etc.

One of the first places I got to these days to get an understanding of any market is Quora. It turns out many of the questions, competitive information and relevant market numbers are largely available on the Q&A site.

In fact here is a list of things you can use Quora for, but it is such a good waste of time as well, so I still recommend you Google your question and get to Quora than search Quora alone. When you do get to your question, browsing relevant questions within that topic are really valuable.

1. To understand what problems need to be solved that people face

Quora for Digital Marketing Problems

Quora for Digital Marketing Problems

2. To validate key features that are needed.

3. To understand competitive products

4. To learn about the key influencers in the space.

5. To keep up to date with strategies for growth hacking

6. To look for new people to hire (especially non developers)

7. To get a new source of daily ideas

Quora for Ideas

Quora for Ideas

8. To pick a list of questions to answer for your company blog

9. To learn about strategies that will help you sell and get your first few customers

Quora Sales Questions

Quora Sales Questions

10. To get ideas on which investors would be the most relevant for your startup.

Quora for Investing Advice

Quora for Investing Advice

The #napkinStage of a company is the most fun

Over the last 15 years working with startups and entrepreneurs, I have finally figured out where I can add the most value and have the most fun as well.

I call that the “napkin stage” of the startup.

Napkin Stage Startup

Napkin Stage Startup

There are 3 most important reasons why I love the stage:

1. There are no bad ideas and no bad markets. They are all based on experiences and personal opinions. Which means I learn a lot of new things. I love learning about markets, sales growth and building scalable marketing channels, but after a while it gets to be more of the same.

2. If the idea is simple enough that you can express it on a napkin, instead of using a PowerPoint slide or need a complete prototype for someone to get it, then I get excited about the possibilities.

3. Entrepreneurs are most excited when they dont have to deal with hiring problems, marketing challenges, customer churn, etc. So, I get to work with them when there’s sunshine and roses all around. They have nothing but optimism at this stage.

There are challenges as well.

1. 90% of the ideas never “take off”. The market is too small, the customers dont need the product or the value is very limited.

2. The idea maze leads to a lot of churn, and many back of the napkin ideas really are a big waste of time.

3. Teams pivot constantly, are never settled and sometimes will change their mind to pursue a “job” if the idea is not appealing enough

I believe there are 5 most important things I bring to the table at this stage:

1. Customer development and validation. Getting early customer validation by talking to 10+ people and understanding the “real problem” excites me a lot. I have a decent enough network to ensure that I can call on 10 folks and get to understand any market in technology enough to understand if there are opportunities.

2. Market research and knowledge. Understanding, analyzing and projecting market needs is something I have enough experience with, and have done it for long that I really enjoy both the top-down and bottom’s up analysis of the markets and segmenting the customers.

3. Helping build your team, or finding a cofounder. Over the last 15 years, I have helped 19 startup founders find early (#1 or #2) employees, and about 11 founders find their cofounder. I love putting people together who I think might work well together and complement each other’s skills.

4. Build an early prototype, mockups or alpha version of the product. That’s the true use of the napkin these days anyway. I enjoy this the most. Reducing complexity and figuring out “Enough” to get by for a MVP is the most enjoyable experience in my mind.

5. Coaching the entrepreneur on structure of the company, financing landscape and whether they need to raise VC funding or make it a lifestyle business instead (which I actually have no problem with at all).

So, I am thinking about how I can help, add value and enjoy the ride with the “earliest” of early stages of a company – The Napkin Stage.

A day in the life of a Micro VC – @jeff of @softtechvc tells me where he spends his time

Jeff Clavier

Jeff Clavier of SoftTech Venture Capital

At the 500 startups LP meeting and dinner last night, I had a chance to meet with Jeff Clavier. He is one of the first Micro VC funds (before they were a thing in valley). Their latest fund (Softech IV) is a $85 million fund. Jeff and I have known each other for years now, since 2005, when I first met him at a TIE conference and he’s still the same very approachable, friendly and simple guy – surprising given that he’s French – (sorry, Jeff, could not resist taking a dig).

A Micro VC fund has a much smaller team, is the first thing you notice. While larger funds like A16Z have over 100 people and even a a large fund such as Menlo might have over 20-30 people, a $50-$100 million fund, cannot afford more than 5-7 folks. Typically there might be 2-3 partners, and 2-3 associates or Vice presidents.

Which means you are pressed for time. Jeff, mentioned that he’d ideally like his time spent in thirds.

1/3rd of his time spent on sourcing new deals and working to build a pipeline of opportunities, by meeting new entrepreneurs and trying to help them even if he wont invest.

1/3rd of his time portfolio management, which includes spending time helping them with execution and operations, thinking about fund raising and helping make key connections and finally helping open doors to potential hires or prospective customers.

Finally a third of his time is spent managing the team, investor communications and networking with other investors at events, judging startup hackathons, and learning about new areas to invest in.

Each of the 3 partners at Softech VC does 5 deals a year, so they do 15 deals in the 3 years of investing in the fund. To do 5 deals a year, they end up meeting about 250-300 entrepreneurs he said, and roughly 2 times that many introductions are made to him from others.

Digging deeper, the first 1/3 of the time sourcing new deals begins largely by getting warm introductions, which were built by the years of working with other investors, and helping other entrepreneurs who have been the best source of his deals.

The 2nd third of his time is disproportionately taken up by warm email introductions and strategy discussions with his existing portfolio on fund raising. Typically Jeff stays on the board for 2 years, ensures that they company has a very good series A investor and then hands the board seat to them, keeping in touch with the entrepreneurs if they need his help. Which, according to him makes it all the more important to ensure that you think about later stage investors

Finally, the last third of time time is for “everything else” – which includes fund communication, meeting with new potential Limited partners, attending startup events, connecting with other entrepreneurs, discussions with potential M&A targets for teams and mentoring his own team, to discuss opportunities.

The first thing that strikes you is that this is a full time job. Many who claim that the the life of a General partner is mostly golfing, 2 hour lunches, 3 hour dinners, attending events, spouting knowledge about unknown markets and “networking”, dont appreciate the amount of time that it takes to source, manage and attract high quality partners who can help you connect with great entrepreneurs.

Second, unless you spend time (and lots of it) building good relationships with good potential downstream (assume that a series A investor is downstream from a seed investor) Venture capitalists, then you will have a hard time helping your companies raise more money and feel confident that your invested dollars are in safe hands with folks looking for the best interests of the company.

Tomorrow, I will touch on a topic that he and I talked about – how many “warm introductions” to potential investors, does it take to get a funding round done for an early stage startup.

The Bay Area’s obsession with the “it” company syndrome for “poaching talent”

In 1995 when I reached Silicon Valley from Baltimore, HP was the company to poach talent from. Most startups and mid-sized companies during that period were keen to hire away from HP. It was known as the place that had a very refined “Management API”. Every executive and manager from HP was defined as having been through rigorous training, experiences and situations to help them navigate the complexity of running technology companies.

A few years later, the “it” company to hire from was Cisco and then Siebel was the target. Now it the “it” companies to poach talent from are Google and Facebook.

Surprisingly if you are a founder, and have an exit, you have lived through hell and back, but if you crave relevance and recognition, then you are better off being the 150th employee at an “it” company than the founder of the 150th exit.

In fact the most sought after founders are not serial entrepreneurs with a small exit, but an early to mid-stage employee at an “it” company.

That’s the Silicon Valley “meritocracy” in action. Working at “it” companies is regarded as a proxy for good pedigree. If you don’t have a Harvard or Stanford degree, but are working at an “it” company, you will be courted.

Yesterday, I had a chance to drive up to the airport with a good friend, who had a good exit (small, <$20 Million at an ad tech company in NYC). He had a very surprising observation to make. For all its “meritocracy” discussion, the only thing the valley values is pedigree. Which is not surprising. Which also means Silicon Valley is more similar to Hollywood than it is to any other place in the world.

Let’s say you are a successful entrepreneur (good, but small exit) and are looking for what’s next. You head over to the valley VC Mecca – Sand Hill road, thinking yeah, you have been successful, made money and have been thorough the grind and know how to exit and make money, so people should be interested in funding your opportunity – right?

Then you are in for a rude shock, because no one gives a damm. Most of the folks are chasing the ex-1200th employee at an “it” company, who worked on an arcane part of their advertising solution. That employee may have never actually built an entire product let alone a company, but they are “it” right now.

So, how do you break the mold? Only by showing success. It is the path that will be harder to take. It will be road with more obstacles.

You may hear stories of how an ex “it” company engineer raised $5 million on the back of a napkin over cocktails. That’s not going to happen to you.

You may hear that 2 engineers with a prototype got a series A term sheet, while you with a product and revenues, are still struggling to close your seed investors, even though you are in the valley as well.

That’s the nature of the valley, so don’t be disheartened. You too will shine and grow. Until then though, focus on building your business and keeping customers happy enough to tell others.

The rest will follow.

The 3 most important questions you will need to answer about customer segmentation

Customer segmentation for entrepreneurs is a tool to reduce distractions, focus your product roadmap towards your Minimum Viable product and create personas that can help your marketing, sales and development efforts.

I am often asked 3 questions associated with customer segments, which I thought I’d address in this post. I am going to use an example of a company building a new age mobile Patient Records Management solution (or EMR – Electronic Medical Records) for the tablet as an example.

1. What are the steps to a good segmentation strategy?

The first thing you need to do to ensure a good segmentation approach is to write down your ideal customer attributes. You dont need any framework to do this, just a list of attributes will suffice. Your attributes need to be specific, numerical and descriptive.

(I) Specific means, you will have to outline their environment. What are they using currently? How specific is their problem? Do they have alternatives? If your target is doctors in our above example,. that’s too large a segment. Instead there are different types of doctors:

a) Those that practice independently vs. those that are attached to a hospital

b) Those that are general physicians vs. those that are specialists.

c) Those that see < 10 patients a day vs. those that see more, etc.

(II) Numerical means there has to be a set number of customers that fall into this segment. It has to be a number much less than your entire target market, and not more than 2.5% of 2.5% of your target market. Why 2.5% of 2.5%? That’s usually the second question.

(III) Descriptive means, you have to outline their current day-in-the-life scenario without your product. Explain how they are currently solving the problem (if it does exist) and how they are solving it without your product. It cannot be that they are not solving it. They may be used pen and paper to keep medical records, but a system does exist.

2. How many customers is enough to build a segment for? Is there a minimum number?

Innovators - theory of diffusion

Innovators – theory of diffusion

According to the theory of diffusion, we have 2.5% of customers who are innovators. These are your earliest of early customers and your initial targets. What I have found with most of the startups I am helping is that 2.5% of those innovators are truly the engaged, early influencers who will be willing to have the discretionary time and budget to try truly innovative products and then be willing to evangelize them to the rest of the innovators.

To be clear, you dont need all of the 312 to be your early customers. These are your early segment of potential customers. Typically 10% of them being early customers tends to show “traction” for an investor.

Lets say the total number of doctors in the US is 500K. Then your Innovators are 12.5K. Of them, 2.5% should be the first segment, which is about  312. That’s the ideal target for you to have as a start.

3. What if most of the target customers dont have the pain point or dont want the product? Does that mean the segment is incorrect or there is no market need for this segment?

If you have targeted 312 doctors who are primary physicians (segment by practice type), in the Texas area (segment by location) who work in a multi-use work location (segment by work area) and are currently using paper based medical records (segment by current product usage) theny you now have a segment of customers who you want to go after.

Google Adwords Segments

Google Adwords Segments

A trick that I have seen most people use is to segment based on Google Adwords segments (see diagram above) or segment by Facebook targeting options.

Facebook Targeting Options

Facebook Targeting Options

Once you have your segment at 2.5% of 2.5%, then you are doing a combination of ads, conversions, focus groups and interviews to understand if they have the pain point.

If you end up finding out that customers dont have the pain point or the conversion rates on your ads is low it is indicative of either poor targeting, poor messaging (your message did not resonate), incorrect framing of the problem or lack of the problem in the first place.

What I have found in my experience with over 300 startups is that the number one problem is poor targeting, followed by lack of the problem existing for the prospect in the first place.