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What Does a Series a Funding Strategy and Plan Look Like?

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Funding Strategy

This post is the first in a series that I am planning to do on fund raising. I have successfully raised money 3 times (to a total of $29 Million – series A, B and C) and failed twice (once trying to raise $2 Million series A and second time $3-$5 Million series B).

As a background please read Elizabeth’s great post on “Behind the scenes of a seed round”.

Fund raising is one of the most difficult parts of a founder’s job. Getting money from investors of any type is hard. Dont be fooled by stories of entrepreneurs talking to investors and getting checks in 10 minutes. Those are truly black swan events.

The first thing you have to realize is that you need to develop an comprehensive plan and strategy to raise your series A. Think of it as an effort that’s similar to the launch your product. For purposes of this discussion lets call series A, as your first institutional round.

I am also making the assumption that you have a working product, paying customers and are targeting a very large market (>$1 B for US, >$250M in India). If any of those criteria are not met, dont bother trying to raise money in this environment.

What are the 3 most important elements of your funding plan?

1. The pitch deck – a 15 slide PowerPoint presentation which summarizes the market, problem, traction and investment requirements. This is needed only for the face-to-face meetings.

2. The target list of potential investors – a Excel spreadsheet which has investor’s firm, name of partner, list of 2-3 recent investments (in the same general space as yours), email addresses, phone numbers, admin assistant’s name & email address, investor connection (people who can give you warm introductions to the investors), status and notes fields. You could use a CRM tool like Zoho if you like, but its overkill for this purpose is what my experience tells me.

3. An email introduction (40 – 100 words) and a one page summary. A simple text file with no images or graphs (something that the investor can read on their mobile phone (most have blackberry, although that’s changing). This can be sent to your connections to introduce you to investors or directly to known investors.

What should your strategy be?

1. Who should you target by role?: Investment firms have partners (decision makers) and associate / principals (decision enablers). Partners make decisions so if you can, get a introduction to a partner. If you cant, its not all doom and gloom, since many partners rely on their associates and principals to source deals for them.

2. Who should you target by investment thesis: Every investment firm has an investment thesis (how they will deploy funds to get best returns for their investors). This should guide you as to whether you’d be a good fit for the firm.

Example: An investment firm might say we believe India’s broadband access and huge number of consumers with high disposable incomes is a great target for Indian eCommerce companies. So, they will deploy a certain % of their funds in eCommerce companies. Similar theses exists for big data, SaaS, etc.

Example: if you are an education startup focusing on India, Lightspeed (thanks to their success with TutorVista) should be on the top of your list. If you are a SaaS firm targeting US, Accel (thanks to Freshdesk) should be on your list. If you are a travel technology startup, Helion & Saif (thanks to Make My Trip) should be obvious targets.

A word of caution: If a firm has invested in a company in your sector, they will very likely ask you to speak to the CEO of their portfolio company to perform cursory due diligence. You may decide that company might be competitive and likely to execute your idea better since they have more resources. So proceed with caution and dont reveal any thing during your due diligence that might hurt you later.

Many investors invest in a sector because they “need one of those in their portfolio”. Example: Every firm has a baby products eCommerce company. So, I also recommend the “herd rule”. Which means, you should talk to other investors if your competitor has been funded by your first choice investor.

3. Who should you target by investment stage: Although every Indian investor claims to be sector agnostic and stage agnostic, there are a few early adopter VC’s. If you are the “first” in a new space, then consider an early adopter investor, else any investor who has not made an investment in the sector will suffice.

In a next post I will outline what the series A funding process should look like. This post will include information about whether you should follow a “back-to-back” process, or do a “listen and tweak” process.

If you like this post, please consider submitting to Hacker News.

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Creating Artificial Constraints as a Means to Innovation

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Artificial Constraints

Many of the entrepreneurs I know have created new innovative startups thanks to real constraints they had. For example, I was hearing AirBnB’s Brian Chesky, on the Corner Office podcast and he mentioned that when he and his cofounder were trying to get some money to get started and the only way to keep afloat was to “rent” their air bed they had in their room. That, then led to Air Bed and Breakfast, which is now AirBnB.

This was a real constraint they had – no money to “eat” so they had to make it happen somehow.

I have heard of many stories of innovation where in the protagonists had real constraints of either financial, technology, supply, demand, economic, social or any number of other characteristics.

The interesting story that I have also recently heard of how Facebook has “pivoted” from being a desktop offering to getting a significant part of their revenue from mobile is how they were given the arbitrary constraint of only accessing Facebook via the mobile phone.

So there are ways that you can create “artificial” constraints to force innovation to happen.

Most larger companies and some smaller ones as well, have to constantly find ways to create artificial constraints – to find a way to innovate and be more be a pioneer.

While some constraints are good – lack of funds at the early stage for example and lack of resources, there are entrepreneurs that are stymied by these constraints and those that will find  a way to seek a path to go forward.

I think this is a great way for you to think about innovating in a new space. If you have constraints, find a way to use it to your advantage.

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The Great Mobile App Migration of March 2020

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Mobile App Migration

Over the last few weeks as many in the world have been in lockdown, there has been a temporary “mobile app migration” happening. There are new apps downloaded and they replaced existing apps on the “home screen”.

While some of these apps are likely temporary use, for e.g. I have 6 “conferencing apps” – Zoom, Uber Conference, Webex, Google Hangouts, Blue Jeans and Goto Meeting. That is because of the many people I have conference calls with – each company seems to have chosen a different web conference solution.

Other apps seem like they will have staying power – Houseparty, for e.g. which has games, networking and video conferencing all built into one app to keep in touch with friends and relatives.

Houseparty

The apps that have moved away from my “home” screen, which I expect will come back once the crisis will be behind us include – Uber, Lyft and all the airline apps from Delta, Alaska and United.

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Perseverance with the Ability to Pivot on Data: 21 Traits We Look for in Entrepreneurs

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Perseverance with the Ability to Pivot

There are 5 key inflection points I have noticed which makes founders question their startup, to either make a call to continue working on their startup, pivot to a new problem or quit their startup altogether.

It is at these points that you really get to know the startup founder and their hunger and drive to be successful. I don’t think I can characterize those that choose to quit as “losers” or “quitters” because of many extraneous circumstances, but there is a lot of value that most investors see in entrepreneurs who face an uphill part of their journey to come out on the other side more confident and stronger.

These five inflection points are:

  1. When you have to get the first customers to use and pay for the product you have built after you have “shipped” an alpha / beta / first version. Entrepreneurs quit because they have not found the product-market-fit – because the customer don’t care about the product, there is no market need, or the product is really poorly built, or a host of other reasons.
  2. When you have to start to raise the first external round of financing from people you are not familiar with at all. Entrepreneurs quit because while it is hard to get customers and hire people, it is much more harder to get a smaller set of investors to part with their money, if you do not have “traction”, or “the right management team” or a “killer product”.
  3. When you have to push to break even (financially) and sustain the company to path of being self sufficient. Entrepreneurs quit at this stage because they have now the ability to do multiple things at the same time – grow revenues and manage costs, and many of them like to do one but realize it is hard to do that without affecting the other. So, rather than feel stuck they decide to quit.
  4. When you have to scale and grow faster that the competition – which might mean to hire faster, to get more customers, to drive more sales, or to completely rethink their problem statement and devise new ways to grow faster. Entrepreneurs quit at this point because they are consumed by the magnitude of the problem. They overassess the impact the competition will have on their company, give them too much credit or focus way too much on the competitors, thereby driving their company to the ground.
  5. At any point in the journey, when the founders lose the passion, vision or the drive to succeed. Entrepreneurs quit a these points because they have challenges with their co founder, they don’t agree with the direction they have to take, or encounter the “grass is greener on the other side” syndrome.

While I have observed many entrepreneurs at these stages at  discrete points in time, I have also had the opportunity to observe some entrepreneurs in the continuum, and I am going to give you my observations on 3 of the many folks I have known, who, have quit.

Perseverance separates great entrepreneurs from good ones
Perseverance separates great entrepreneurs from good ones

One went back to college to finish his MBA after getting a running business to a point of near breakeven, another found the business much harder than he originally thought he would and got a job at a larger company and the third was just unable to have the drive to go past 11 “no’s”‘ from angel investors.

Over the last 8 years, if I look at my deeper interactions with over 90 entrepreneurs, who I would have spent at least 100+ hours each, I would say that of the 24 people that are not longer in their startup, the one thing that stands out among the ones that persevere is that it is not “passion” or “vision” at all.

It is the inherent belief that they are solving a problem that they believe is their “calling”. They also don’t believe that there is any other problem that’s worth solving as much, even though there may be easier ways to make money.

So most of my questions of entrepreneurs to test whether they will pivot or quit are around why they want to solve this problem (which I am looking to see if they know enough about in the first place) versus any other one.

The answer to that question is the best indicator I have found to be the difference between the pivots, the leavers and the rest.

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