12 August 2013

Announcing the launch of Foundersuite: Software and Templates for Entrepreneurs


We are very excited to announce the launch of Foundersuite (www.foundersuite.com), which is a set of software modules and templates for startup founders.  

Try it out for free, and if you like it, you can use the code "SeedStageLove" for 20% off everything, forever. 

We started working on Foundersuite about a year ago, with the mission of helping startup founders launch, manage, and grow their companies more efficiently and effectively.     

In Version 1.0, Foundersuite’s SaaS tools includes modules for: i) Getting feedback on your new company or product ideas; ii) Running corporate housekeeping tasks; iii) Raising capital in a structured, efficient manner; and, iv) Tracking your progress and updating investors and advisors.

Also in V 1.0, we've curated some of the best template bundles for: i) getting your company started; ii) building an advisory board; iii) hiring early employees; and iv) marketing and branding.

We are already hard at work on V 2.0 with across-the-board product enhancements as well as a few NEW tools thrown into the mix-- stay tuned.  

Check it out, let me know what you think!  All feedback welcome.  


Nathan

PS:  We are building these products to make YOUR life better, easier, faster; so what startup-focused tools would YOU want to see in future releases?   Send us a note, we'd love to hear from you.  We'll be giving away a few Lifetime Accounts to those with the best ideas.  





     

12 October 2012

Raising Startup Capital Slides -- The Pitch, The Model, and Fundraising as a Process (General Assembly)

I recently led a three-part workshop series called "Raising Startup Capital" at General Assembly's SF office.  Here are the slides I used in my lectures.  

I've included the notes version, as I think there's a lot of useful commentary in there. Enjoy!

Session One:  Building a Killer Startup Pitch Deck + Pitching Hacks




Session Two: Financial Modeling for Startups




Session Three: Raising Capital as a Structures Sales Process




What do you think?  Any tips, tricks, or hacks to add to the mix?  Please share. 

13 July 2011

Hacking Angel List

7 Tips For Raising Startup Capital

AngelList is an amazing thing.  No, let me rephrase that-- AngelList  is a freakin' phenomenon. 

Since launching just over a year ago, 2,250 investors have joined, over 400 startups have raised money, and according to co-founder Naval Ravikant, about 20 new inbound companies per day sign up.

Wow.  

In case you’ve been adrift at sea for the past 9 months and have no idea what I’m talking about, AngelList is a hugely-successful online service that matches early stage companies with angel investors.  It is similar in concept to a “stock market for startups” where privately held companies post information about their businesses and a filtered list of angels, HNW individuals, and VCs can follow the companies, take intros, and ultimately invest.

I’ve had two portfolio companies “list” on AngelList, and I’ve also started wading in as an investor member.  In addition, I have another two startups that are getting ready to raise funding rounds, and AngelList will likely play a very big role in our capital raise strategy.  As these startups get ready to make their debut, I thought I’d synthesize a few observations, tips, and suggestions for making the most of this powerful new funding vehicle. To wit:

1.  Land a lead investor before going live.  This is the best tip I can give, yet the hardest one to achieve.  Nonetheless, it’s critical for success, as AngelList is a momentum-driven platform where “hot” deals get hotter, but the unwashed masses (without any existing investors) often stall or are neglected.  This could eventually change, and I do believe Naval and gang are working hard to create a system where any quality startup-- even “raw” companies-- can raise money on the system.  But at present, AngelList is more useful as a tool to pour fuel on an already-burning fire, than it is to get the fire lit.  In other words, use it to round out a round vs. trying to source a new round.

Granted, getting the first domino to topple is usually the most difficult part of the game-- as a rough proxy, plan on spending 80% of your time and effort closing Investor #1, and the remaining 20% locking down the rest.  As needed, be ready to offer sweetheart terms to the first person to take the plunge.  In short, do whatever it takes to make sure the “Current Investors” field on the AngelList application form is not blank when you go live.

In addition, you get massive bonus points on AngelList if your lead is “someone who has done something”-- in other words, an investor who is not your dad or your dentist, but a recognizable personality or industry expert.  Here’s why: I believe that the long tail of investors on AngelList are paying close attention to what the “head" investors are doing; in other words, of the 2,250 angels, perhaps 10% are very actively taking intros, making comments, and otherwise generating buzz for certain startups, and the other 80-90% tag on when a startup starts to heat up.

Thus, there is tremendous marketing value in a name brand lead, and the more effort you put into finding one-- even if s/he is investing a relatively small amount-- the easier the rest of the process will be.  A good place to start is the first 3 or 4 pages of this list here, combined with LinkedIn's "How You're Connected To..." function.    

UPDATE / COUNTERPOINT Naval responds: "Thanks for this. I vehemently disagree with this first point, though :-) The majority of companies-- probably even 75%-- that we send out now and raise money have no lead and often no investors, e.g. .  It's just that companies that don't have something else obviously special about them need that to get past our bar.  The rest of this post is pure gold. The conveyor belt and watering hole analogies are spot on."    

2.  Focus (a lot more than you’d expect) on building “social proof.”  When you list your startup on AngelList, you populate fields such as Company Description, Traction, Management Team, and so on.   Many of these fields are similar to the information displayed on Google Finance or Yahoo Finance for a publicly traded company.  But one very clever field you’ll find only on AngelList is a category called “social proof.”  This is where you name drop key people, both inside and outside the company, who are involved-- Advisors, Referrers, Endorsers, and Current Investors.

This is a hugely important field, for two reasons.  First, unlike a publicly-traded stock, most startups do not have much (if any) revenue, profit, or other financial metrics for investors to analyze and compare; thus, angels are relying on “who you know” as a filter (and presumably, are assuming that someone among this bunch has done their due diligence).  Second, due to the sheer number of startups listing on AngelList, it is efficient for investors to filter for those that have attracted name brand folks.  Spend the time and legwork to connect with influencers who can signal that your startup is In With The In Crowd.

But don’t stop there-- prod your social proof folks into action.  Get them to generate buzz on the site and amongst their peers.  Have them promote you using the Follow and Share buttons, and have them Comment on your status (feed them soundbites to talk about, if necessary).  As with other social networks, these actions get pushed out to their followers, and they may be amplified if Naval or another AngelList uber-member “likes” that comment.  In short, get your social proof points talking.  

Let me give you a quick example using one of my advisory clients, a startup called Zerply.  Zerply worked it pretty hard and did almost everything right to generate positive social proof:
  • Jonathan Nelson, founder of the networking group Hackers & Founders, originally referred us in --> instant street cred
  • The team met Naval at an event, and he sent out a “cultivated email” to an initial group of hand selected investors --> very valuable initial buzz and endorsement
  • Startup networker guys like Adam Rifkin and Brendan Baker became Endorsers and commented on Zerply’s profile --> more buzz, particularly among these users’ followers
  • Zerply's CEO Christofer kept the company's profile updated with current screen shots and traction metrics --> demonstrating both business momentum and the team’s design prowess
  • I and another advisor Nicolai added a few Comments such as an announcement of some NY Times coverage --> further reach within the AngelList news feed
  • A few prominent angels including Dave McClure put in money, and were added to the profile --> additional credibility, momentum, followers, intros, etc. 
...And so on; momentum begets momentum.

3.  Stand up, stand out, and get noticed.  When I initially explain AngelList to founders who are considering it, I use the metaphor of a fast-moving conveyor belt loaded with startups rolling past a line of angels who are scanning them as they go by.  It’s a highly-efficient system, yet the trip down the belt goes pretty quick, and if your company doesn’t get noticed and plucked out of the masses by an interested investor (or three), you’re dumped into a bin at the end of the line and are quickly buried under the avalanche of new startups in the queue behind you.  It is then very difficult to claw your way back to the top of the pile.

This happened with one of my startups in the social marketing space-- we went out with no lead, and with a ho-hum profile.  Traction was good but not outstanding.  The product demo was still a work-in-progress, and we only had one other advisor (aka social proof point) involved.  As a result, that company was ignored on first pass, and it took an extraordinary level of hustle to generate enough interest to close the seed round.

Appearances and presentation count.  I suggest you learn from our mistakes.  To do so, make sure that:
  • you show Screen Shots that are compelling, and your links point to stellar demos (that are not password protected)
  • you have Traction Stats that are meaningful, and that tell an up-and-to-the-right story
  • you frame said Traction Stats in a compelling manner, and you dress up your profile with eye-catching charts and graphs showing your momentum 
  • you portray each co-founder in a favorable (and well-rounded) light, with bits from your bios that prove credibility and an ability to execute
  • you have recruited Advisors, Endorsers, a recognizable Referrer, and ideally, a Lead Investor.  
  • you have set your valuation and raise amount in the sweet spot of the majority of investors on the system (e.g., a $500k - $750k raise at a $2m -$6m valuation) 
  • you get a quote from Robert Scoble or another accessible-yet-trusted entrepreneur as the icing on your profile cake.
Doing this work upfront-- before going live-- will make your profile “pop” and as a result, you’ll be hard to ignore.  Call it "peacocking for the investor mating dance."

4.  Pare your company down to its “Hollywood pitch” soundbite.  As mentioned, there are simply so many quality startups running through AngelList that it’s critical to have something unique in your pitch-- something that spurs investors to stop and take a closer look.  In short, you need a hook.  For many popular startups on AngelList, the format that works well is similar to the Hollywood pitch, where new movie concepts are sold to studios by references or mash-ups using the familiar-- e.g. it’s “Ghostbusters meets Waterworld.”

In the startup world, this becomes “We are Airbnb for puppies”.  This approach does seem to be quite effective, and the shorter the hook is, the more memorable it becomes and the less friction with which it spreads among investors.  Just be on the lookout for any investor soundbite fatigue (comparisons to Uber, Pandora, and Airbnb all come to mind).  Further, as HubSpot CEO Dharmesh Shah recently tweeted, “Saying you are [x] of [y] is shorthand for describing your startup; it’s not really a long-term strategy.”

As an alternative, consider using a super-short description of what you actually do, e.g. MogoTix is "Simple, social, secure mobile ticketing."  Another approach is to have a teaser that doesn't actually say that much, but is very intriguing; e.g. TracksBy is "The most viral way to launch music" or Pipedrive is "If Apple designed Salesforce."  Clever.

5.  Tweak your profile, tweak it again, then tweak it some more.  Startups can game the AngelList system somewhat by making frequent changes and updates to their profile information.  Essentially, when you update something, it shows up in the News Feed as “Acme Corp updated their profile” and you can get viewed again.  However, I’d suggest that startups not overplay this card, which would quickly become annoying to your followers and prospective investors.  Update your profile frequently, but only when you have actual, real news to report (e.g. you’ve just added another 10k users or inked a distribution deal with Oracle).

6.  Do (at least) one thing exceptionally well.  Naval covered this point beautifully in a recent talk he gave to the Founder’s Institute members called “Anatomy of the Fundable Startup."   Here’s the nut of his message:  “investors are trying to find the exceptional outcomes, so they are looking for something exceptional about the company. Instead of trying to do everything well (traction, team, product, social proof, pitch, etc), do one thing exceptional. As a startup you have to be exceptional in at least one regard,”  Of these five categories: (1) Traction, (2) Team, (3) Product, (4) Social Proof, (5) Pitch/ Presentation, which ones do you have?  What can you work on prior to debuting on AngelList?

7.  Use AngelList as a resource for self-directed hunting.  Despite your best efforts and despite following these tips to the letter, there’s still a good chance you might not get much attention on AngelList.  Indeed, quite a few interesting startups generate just a few follows or comments, but not that many intros.  Others are more or less ignored.  In short, investor interest is not distributed evenly on AngelList; rather, it tends to cluster around a couple dozen companies.

If interest in your startup is lackluster, then take the matter into your own hands, and go on an active hunting trip.  AngelList is quite possibly the single largest and best collection of angels, all gathered in one place-- like a watering hole on the African Savannah, “all the great animals” are here.  Thus, why not use this resource to research profiles of money folk, form a short list, craft a really poignant and targeted intro, and go after these angels directly instead of hoping they notice you?  Ideally you can use your personal network, attorneys, advisors or LinkedIn to find a warm intro; significantly less likely, but still possible, is to form a connection on Twitter or a cold email.  Regardless of the form factor, put them on your radar, and there’s a good chance you’ll find a way to get to them.  Don't just passively wait to be discovered.

Bonus Tip:  Create a catalyst to close the deal.  This tip applies broadly to raising capital vs. being purely AngelList-specific, but it’s worth mentioning.  Second only in difficulty to landing that first lead investor is wrangling the rest of the cats toward a signed term sheet.  Investors drag their feet.  As long as they're not at risk of getting bumped from a deal-- and assuming that the valuation is not skyrocketing--  it is in most prospective investors’ best interest to watch and wait as long as possible before actually handing over the check.

Thus, it helps to have something on the horizon that will encourage investors to get off the fence.  Setting an artificial deadline is rarely effective; you’re asking for their money-- they can ignore this.   Marginally better is a deadline with some actual basis in reality, like the fact that you’re about to head off to Israel for 3 weeks.  But my favorite is a deadline triggered by something that has the potential to a) suddenly generate a lot of investor interest; b) ramp up the startup’s valuation; or c) all of the above.

As an example, one of my startups is participating in Dave McClure’s 500Startups accelerator program.  At the end of the program a few months from now is Demo Day, which will bring startups and investors together for pitches and meet-n-greets.  We know there will be a ton of frenzied press and buzz leading up to this event, and we know our startup is well positioned vis-a-vis the other startups demo-ing.

Thus, we are using this event as a catalyst to help close a near-term convertible note.  Investor psychology is always driven by fear and greed; so at the same time we are overtly selling investors on the opportunity (greed), we are also subtly signaling the possibility of missing out on the deal when it heats up at Demo Day (fear).  It’s amazing how fast investors can move when motivated in this manner.

Sum
I hope this list provides a few good pointers for making the most of AngelList.  AngelList is a true a gem of a resource for startups seeking capital, and Naval and Nivi do a fantastic job of measuring, tracking, tweaking, and all around improving the site on a near real-time basis (seriously, it blows me away-- every time I check in there are new features).  Start playing around with it and get to know it.

Is your startup on AngelList?  Have you raised money?  If so, I look forward to hearing what has worked well for you (and what hasn't)-- please email me at nathan (at) venturearchetypes (com)  or you can follow me on Twitter @startupventures.

11 July 2011

Startup Financial Models and Forecasts: Part II

Note: in my first segment on startup financial models, I discussed the reasons why an entrepreneur should build a startup financial model. You can read that post here.  In this post, I discuss what makes a model a "good" model.  

Attributes Of A Good Model

Hopefully by now I’ve convinced you why building a model is worthy of your time; now let’s discuss some best practices and attributes of excellent startup forecasts.   The best startup financial models are:

Logical: The architecture, assumptions, and inputs used should all be logical, with the model accurately reflecting your business and its economics.  To achieve this, build the model bottom-up—for example, number of salespeople X monthly quota X price.  Also, try to base your key business metrics on proxies from “real world” companies or established benchmarks.  For example, let’s say you have an ad supported website.  It’s generally not too difficult to search for average CPM data (or play around with Adsense) and figure out what the going ad rates are for content sites in your market.  For other key inputs, you might ask an advisor or investor—someone who sees multiple businesses in the space and has a feel for typical metrics. 

Reasonable: Here, we look at things like margins (gross, operating, and net), revenue growth (and rate of increase of that growth), hiring plan, etc.  Take the outputs and filter them with simple sanity checks; e.g., are your margin forecasts in line with those found in the 10-k’s of analogous, publicly-traded companies in your space?  For example, if your startup is a SaaS business, are you showing Salesforce-type numbers?  Based on your full-year unit sales forecast, is your implied market share percent reasonable, or does it show you’ll own 80% of the market? Is the model showing a required funding amount that that you could realistically raise?

Simple: Good models are readily understood by model users or future model developers. This is especially important when we develop a model that will later be handed off to a startup CEO.  Likewise, good models distill the number of key business metrics down to just a handful of inputs; this takes discipline, and a desire to model only that which really matters.  There is beauty in simplicity; try to avoid over-engineered, complicated and unwieldy tools that will ultimately frustrate model users.

Navigable:  Related, good models have an intuitive navigation system and well designed layout. The more complex a model, the more important this becomes. In addition, a clean presentation signals a solid and logical architecture—I can usually tell within seconds if the formulas are spaghetti code simply by looking at the format and presentation.

User friendly: We like to separate the model into three sections: Inputs (Assumptions), Calculations (Logic) and Outputs. Our favorite approach is to create one main page for (almost) all inputs, which we call the “dashboard;” this is then followed by the revenue buildup and monthly / quarterly / annual rollup. We also employ a few tricks to make it even more user-friendly, such as having all inputs be in a blue font, all hard-coded entries in red, and all formulas in black. This way, the end-user knows exactly what (s)he can play around with, and what not to mess with.

Sensitivity & Scenario Analysis Capabilities:  as discussed in the “Why build it” section, having robust scenario analysis capabilities is a critical feature of most forecast models to facilitate decision making; this is particularly valuable for startups still figuring out the optimal business model.  In many cases this takes the form of visuals such as charts and graphs; for example, a line graph is a nice a way to visually show where the revenue and cost lines cross, i.e. where we start to make a profit on each user or customer (which ultimately is what gets investors excited to pour more fuel on the fire), and where the ’search for business model’ crosses over into ‘execution of the business model.’

Good Output Page:  Finally, in most cases we will want to extract some data from the model to present to investors, lenders, partners, etc. in the business plan or investor presentation.  However, we rarely want to send the entire model over—the burden is on us to present the data in an appealing, digestible manner.  For this reason, good models have a very clear summary page that might contain the key business metrics alongside such tables as Summary Income Statement, hiring plan, customer growth line, breakeven point (in units and/or number of customers), total capital required, and tables showing per-unit economics such as average revenue per user (ARPU) and cost-to-acquire (CPA) metrics over time.

Ok, that’s about it for the moment.  I’ve run out of steam on my mission to evangelize startup financial models. 

I now turn this over to you—what value have you received from working on your financial forecast?  What “model hacks” have you found that you’d like to share? 

04 June 2011

What Startups Can Learn From Sailors (Part Deux)

Note: This is the second installment of a series that draws parallels between sailing and running a startup.  The first installment can be found here.   This series is the result of having waaaay too much time to think during a 6-month, 7,000 nautical mile sailing adventure that took us from SF to Mexico and then across the Pacific to Polynesia (a 22-day open water crossing).

Part II of What Startups Can Learn from Sailors: 

A For Attitude.  On a boat, as in a startup, you are working in close proximity for extended periods of time with people you depend upon (and who depend on you).  Conditions are often stressful.  Fatigue is the norm, not an exception, and serves to amplify any negative emotions.  In such situations, attitude is the primary determinant of whether the journey—or business—is a success or failure.  It impacts everything. 

For example, we had several passages where our crew was made up of newbies, but they were eager to learn and eager to help.  Their attitudes more than made up for a lack of experience.  They were enthusiastic, pro-active, and looked for ways to make the trip more enjoyable for everyone.  When things got tough, they stepped up their game.  This type of attitude is infectious; when you find employees or crew with it, do whatever it takes to retain them.  Your entire operation will benefit.  

Captain, My Captain. When conditions are calm, boats pretty much sail themselves. Likewise, when markets are buoyant, companies find the going easy.  It’s when things get rough that the value of strong leadership emerges.  In stormy weather or stormy markets, it becomes critical to have a level, cool head at the helm—someone able to see the big picture, quickly assess risks, and give clear, decisive direction.  In short, every boat—and every startup—needs one single captain.   

A captain’s role is to set the vision, and delegate responsibility to carry out that vision.  It’s a tough role to fill; in exchange for the crew’s trust and faith, he or she is solely responsible for the safety of the boat and crew.  Yet shouldering this burden has a profound positive effect on the crew.  By removing the stress of ultimate responsibility, it allows them to concentrate on their specific jobs, which helps keep the boat (or startup) functioning optimally. 

The challenge, of course, is to find the right captain.  Skills and background count heavily, but the necessary critical ingredient is leadership—a much trickier thing to gauge. It’s almost impossible to assess during an interview in a cozy office how a leader will react during the proverbial perfect storm.  The only real secrets (if you can call them that) are to look for those with experience navigating companies through difficult times, and then to back-check that  experience with those who were ‘crew.’  It sounds overly simplistic, but you’d be surprised by how often young companies are seduced by charismatic personalities, only to find them duck and run when the skies turn dark. 

Joy of Control.  I’ve spent a lot of time crewing on "OPB"—other people’s boats.  It’s a great way to get experience, and since it’s not your boat, it can actually be more relaxing. You don’t have to worry about every little detail.  You’re not the decision maker. However, there’s nothing quite like the joy of sailing a boat you own.  Our boat was not fancy, large or new—but it gave us a sense of pride that was unmistakable.  Plus, owning a boat means you can choose—where you want to go, how you get there, and who you go with.  It’s an incredible feeling of empowerment.  So it is with a startup that you control.  Your ego, reputation and personal savings are on the line, but the rewards and successes are yours, and to have control over your destiny is a joy few ever experience.  Savor it. 

Sh*t Happens.  Deal With It.   Despite our extensive preparations, and despite being constantly “on” and monitoring everything, boat stuff breaks. Sometimes it’s big stuff—I once snapped a mast in half, which caused the entire rig and all the sails to fall overboard.   And, it usually happens at the worst possible moment—like when the wind and waves are howling and the boat is being tossed every which way, or when everyone is exhausted from an all night watch. 

But as mentioned above, out on the open sea there is no “pause” button, no “esc key” or “ctrl-alt-undo.”  There is no tech support line to call.  It is in these situations that you quickly realize your options.  You can panic.  You can freak out.  You can yell at your wife or crew.  Or you can just buckle down and deal with it.  

It is in these moments that I channel a bit of Spock.  Yes, Spock.  Bear with me here; as geeky as that sounds, it’s what works for me.  I find it helps to strip out emotions of panic, fear and frustration—they are distractions, and an energy drain—and to aim for a clear, zen-like state of mind. Next, take a moment—even if conditions are worsening—to visualize what you’ll do next, step by step.  Then, take action—leave the safety of the cockpit and execute the plan. 

Doing this on a boat keeps you from falling overboard or injuring yourself or others.  Doing this in a startup—when a product fails or a PR crisis is looming—keeps you from acting impulsively or rashly.  It prevents you from responding out of emotions like anger or fear, thus making the situation worse.  Try it the next time startup life throws a curve ball your way.  Channel a bit of Spock. 

Have Fun!  To conclude this essay, I’ll leave you with my final and perhaps most important takeaway—the importance of making it fun.  Due to work obligations back in SF, I hired a delivery captain to bring the boat up the California coast. I found him on the web, and his email signature file has stuck with me; it read: “If you’re not having fun, you’re not doing it right.”  

This one line, this one clich√©, somehow encapsulates everything else I’ve written here.  If you’re not having fun sailing, it’s because…you’re fighting a headwind…your sails aren’t set right…you aren’t prepared…your attitude sucks.  

The same holds true with a startup.  You’re living the dream.  You are doing something most people only fantasize about.  Money is probably a motivator, but for most entrepreneurs, it’s not the primary reason you’ve launched a startup.  In short, if you’re not having fun…you know the rest. 

Fair winds and following seas!

17 January 2011

Coming Soon: A Game Of Startup M&A Musical Chairs

Several weeks ago, I organized an event called StartupExits.com, where Naval Ravikant of Venturehacks gave an excellent keynote called, "The Rise of the Super Angels" (you can watch Naval's video here). Naval was discussing whether there was a new seed investment bubble forming, and one of his comments stuck with me me– namely, that while the number of seed investments has grown 20x, the number of acquisitions has barely risen. 

The implications of this are rather profound; essentially, it means we could soon see a serious glut of startups populated by impatient investors, founders, and equity-incentivized employees, but not enough buyers to make everyone happy. It’s a classic supply and demand imbalance, and my conclusion (also voiced by Naval) is that startup failure rates will rise. 

So, what are the takeaways for early stage startups? How should you prepare for a game of ‘M&A musical chairs’ to ensure you get a seat when the music stops? 

Ask yourself if you really need external funding-- or if you can get by without it. Any startup that takes outside capital is obligated to generate an exit for their investors either through an IPO (extremely long odds), or through an acquisition (very long odds). However, with the cloud, EC2, offshoring, viral social media marketing, etc., it has become ridiculously cheap to start a startup, particularly in the software / SaaS / Internet space (Guy Kawasaki famously started Truemors, which led to Alltop, for $13k). In addition, many startups are great at generating healthy cash for their founders, but will never be “M&A material.” In short, if you can bootstrap your way to cash flow positive, you can control your own destiny, and avoid any M&A shakeout altogether.

Start working on your exit strategy now. I genuinely believe that entrepreneurs should strive to build something great, and not ‘build to flip’. But successful exits do not just happen; they need to be part of a startup’s broader strategy and gameplan. Developing an exit strategy is worthy of its own blog post, but in brief an exit plan covers topics like: when to sell (ASAP, or let the chips ride?); minimum acceptable valuation (at what price would you sell your baby, and give up control?); type of acquirer (who is likely to buy you and why?); type of acquisition (are you ok with an earnout, and working for the acquirer for another 3 years?). A key exit strategy goal is to set and align expectations for the above between founders, investors, and employees; failure to do so now creates fertile ground for lawsuits down the road.

Build acquirer relationships early. This is an important one. Startup acquisitions can happen quite quickly– sometimes in as little as a few months– but in most of these cases, a relationship already existed long before acquisition talks heated up. This can take several forms; for example, Google often buys startups founded by ex-Googlers–they already know the folks they’re buying. Similarly, many large companies acquire startups with which they have an existing business development relationship. The key point is to get on the radar of potential acquirers early, and to stay on it; reach out to their business development, developer relations, or corporate development group and start exploring ways to work together.

Pivot faster and more frequently. I’ve worked with startups for more than a decade now-- through both Web 1.0 and 2.0 cycles--- and something I’ve noticed recently is that the speed of business model “pivoting” is accelerating. Entrepreneurs are getting better at experimenting with different business models, testing and measuring feverishly, and quickly scrapping things that don’t work until they lock on something that clicks with customers (which is usually the point at which acquirers and investors start to pay attention as well). The classic example is PayPal, which went through multiple, completely different business models before settling on one that was successful. In most cases I think this experimentation is a very healthy thing, and acquirers are often willing to pay a huge premium for startups that have successfully “figured out” their business model (cue Steve Blank here) and are now ready to scale rapidly.

Fail quickly. This might be somewhat controversial, but the moment it becomes apparent that your 'great idea' is actually just the 22nd Twitter desktop client or the 56th Groupon clone– and you do not have a clear, better idea for a pivot– I would argue that you should fold up shop quickly and return as much money as you can. This is advantageous for your investors– $0.40 on the dollar is better than $0– and it’s advantageous for you, allowing you to get back in the game with a fresh start (and fresh capitalization table) and try again. This does not mean you should give up easily-- very few things in life are as hard as getting a startup off the ground, and it takes a special level of persistence and faith. But all too often I've seen great entrepreneurial talent locked up in a startup that has no exit options and really isn't going anywhere, and it's a waste.
    That’s it for now. Let me know what other topics related to startup exits you’d like to see covered, and stay tuned for our next StartupExits.com event, tentatively scheduled for late Q1 or early Q2 of 2011. In the meantime, be sure to check out our "Exit Strategy Thought Piece" on Slideshare-- please 'like it', 'tweet it', 'friend it', whatever.

    11 January 2011

    Deals Gone WIld (aka "What Drives Massive Startup Valuations?")

    A few months ago, I wrote a blog post on startup valuation that presented a table of normal or “typical” price ranges for startups depending on the sector and stage of development, among other things. You can view that post (and the valuation table) here.

    But what about the outliers? What drives the sky-high valuations and manias we occasionally see around a deal? What about the deals we all envy and aspire to do?

    In short, what creates valuations such as the $2B for LinkedIn, $2.1B to $3.7B for Twitter, $5.5B for Zynga, $6.4B to $7.8B for Groupon, and last but not least, the $42 to $70B for Facebook? (estimated ranges, based on recent secondary market trading).

    While every deal is unique, here are three of the top startup valuation drivers of "deals gone wild": 

    Founders who have done it before (ideally at a name-brand company). The premise here is that a proven jockey will figure out the best way to win the race. And while history is generally a decent predictor of future results, other success-determining factors probably come into play too. For example, ex-founders of “hot” startups often find it easier to attract top talent (e.g, FourSquare, Square, and Quora), which in turn draws in more top talent. In addition, seasoned founders have presumably gained much of the scar tissue and lessons learned from navigating companies to a successful exit the first time around. 

    A leadership position in a winner-takes-all market. Some startup business models benefit from so-called “network effects,” which means that as the number of participants grows, the network becomes incrementally (or exponentially) more valuable to each new member. Social networks like Facebook and LinkedIn work this way, as do services like Groupon. The ultimate result is the creation of the Borg (for Star Trek fans) or a snowball rolling downhill (for non-Trekkies); in other words, an entity that sucks up all the customers in a market space as it gathers mass and momentum, and that produces a dominant new platform leader. In my view, this is the biggest driver of deals that go truly wild. 

    Profitability from Day One. Some startup business models are, quite literally, profitable almost from the get go. Assuming the startup has achieved some baseline level of engagement, stickiness, and (ideally) viral growth, the investment bells go off the moment that ARPU > CPU; or, in simpler terms, each new customer brings in more revenue than it costs to acquire them. At that point, it becomes less about the business, and more about the opportunity to arbitrage that delta through increased marketing spend. In such cases, funding is a no-brainer, and it simply becomes a function of figuring out how large the company can grow, and how quickly capital can be pumped into it. The virtual goods space with its almost zero creation and transaction costs, and the online gaming space in general (especially those that feature low cost-to-create casual games like Zynga) fit this model.

    Granted, there are typically many other factors at play when valuations skyrocket, such as general frothiness at the secondary markets, implied validation by a trusted party (such as the Goldman deal with Facebook), or a hot exit or IPO environment. But in my view, the three factors above are at the core of most hot deals, particularly in the Internet space.

    What am I missing? When you put on your CSI hat and analyze the scene, what other causes of 'deals gone wild' do you see? What do you think drives huge startup valuations?

    04 January 2011

    Your Financial Model Is A Work Of Fiction; Build It Anyway

    Startup Financials Series

    Startup financial models are a pain in the ass. They take a ton of time to build. They are complex and often messy. They are never truly “right.” And they are outdated almost the moment you finish them.

    Yet building a solid financial model is absolutely one of the best things you can do for your startup. Here’s why.

    Why Build A Model? 

    I've been building startup models and forecasts for over a decade now, and I've seen the entrepreneurs and founders that I work with gain a lot of value by going through the model-building process. Here are a few of the core benefits:

    Analytical Lens:  First off, building a model brings a much-needed analytical lens to your startup. It’s a great framework for thinking through your business in an objective, critical manner, and it forces you to construct numbers around each assumption you have about your business model. Consider the model a vehicle that captures all the drivers and levers of your business plan in a single, cohesive place, and explores how sensitive the business is to these levers.

    Operating Roadmap:  A model is, by its nature, a chronological way of laying out what you expect to happen and when—and what it will cost—in a very granular manner. As such, it becomes a roadmap for your business, and a great way to set milestones, track progress, and identify issues or problems as they arise. It’s also a great way to set goals with your team (e.g. monthly sales quotas per salesperson) and to manage expectations with the board, investors, and other stakeholders.

    Risk Assessment:  Identifying the key levers (and sensitivities) of the business helps illuminate the risk points of your startup— in particular, the magnitude of downside risk. For example, at most startups, expenses precede revenue. Matching cash outlays to a timeline helps us monitor our "burn rate" and remaining months of runway, and it helps us get a handle on how deep in the red we might get before hitting breakeven. (Notably, this can be very illuminating and even a little frightening—on more than one occasion, I’ve worked with founders who decided to pull the plug after building a model and uncovering the real economics of the business; this is healthy.)

    Scenario Exploration:  Models allow for multiple forms of really useful business model analysis. For example: what happens to our break-even point when we lower prices by 10%? Or, how much extra money will we need to raise if sales take a lot longer than we expect? Or, what do margins look like if we hire a direct sales team vs. recruiting a network of affiliates? When we isolate a key factor to analyze, we’ll often do a best case, base case, and worst case version of the model. Trying out various business model scenarios in a spreadsheet is far cheaper and easier than learning by trial and error.

    Pitch and Sales Tool:  Last but not least, models are a great way to bolster your pitch to investors, lenders or strategic partners. At its most basic, the model eloquently explains how much money you need, and how much you will make for the investor or partner. And in my opinion, it’s a perfect left-brain / right-brain combo when you can go in with an excitement-inducing pitch deck or demo (which sells your vision and appeals to the emotional side of the brain) as well as a solid model (which speaks to the logical, rational side of the brain). I’ve seen numerous situations where the model is the icing on the cake, the tool that ultimately helps seal the funding round or deal.

    That’s it for now; in my next installment of this Startup Financial Model series, I will cover several attributes that make a really excellent model. Let me know what you'd like to see addressed, or how you’ve used your models to solve business issues.


    In the meantime, here is a presentation we gave at Plug & Play Tech Center a couple years ago: Financial Modeling Tips for Startups Plug and Play Tech Center  


    28 July 2010

    Startup Acquisitions: Exit Strategy

    We recently put together our "thought piece" on the dynamic world of startup M&A.  The premise is that for many startups, it is actually more profitable for founders to raise a small amount of capital and sell early to an acquirer like Google or Zynga, than it is to raise multiple rounds of VC (with accompanying dilution) and aim for an IPO or mega-acquisition.

    See below for our presentation, which can also be found on Slideshare by clicking here.  If you like it, please share it or tweet it. Thanks!

    Also, it is an evolving 'work in progress'...please send along your feedback or tips from your own experience with startup acquisitions.  We'd love to hear from you.
    Startup Exit Strategy Thought Piece V7.6
    View more presentations from VentureArchetypes LLC.


    Finally, we are putting on a killer event on December 9th in San Francisco on this topic; check it out: www.StartupExits.com  We have an excellent cadre of panelists, including Corp Dev folks from Google, Facebook, Yahoo, Twitter, and well as a keynote by Naval Ravikant of VentureHacks / AngelList.  We hope to see you there. 

    12 July 2010

    When Is A Startup "Venture Fundable?"

    I spend a healthy chunk of my time helping startups think through their capital raise strategies.  Part of this work involves assessing whether a company is “fundable” given its current stage of development, traction and business plan. 

    Being strategic about when to raise capital is important, since a full-court investor press takes a huge amount of time and effort to do right.  Fundraising essentially becomes a full time job, and can easily become a distraction for founders who should be focused on growing their businesses.  I’ve seen worst-case scenarios in which the fundraising becomes so consuming that important business milestones slip, which then derails the fundraising—a dangerous spiral. 

    To try to bring some clarity and structure to the critical decision of when to raise capital, I have attempted to boil down the basics of what constitutes a “fundable” company in today’s market.  In a nutshell, the main factors are: 

    1.  The “Big Idea.”  A good first filter is to honestly and objectively assess whether your startup is doing something truly novel.  Novelty and originality are surprisingly rare traits; many startups are highly derivative-- a slightly better mousetrap or an incremental improvement over what’s being done today (think: Groupon clones).  While a better mousetrap can certainly be the basis for a profitable niche business, it is not usually venture fundable (or at least, not easily fundable—it becomes more so, with #3 below).

    By contrast, pitching something truly unique, big, and audacious—what Mike Maples calls the “thunder lizard” startup—creates an entirely different response from investors.  I’ve worked with startups doing something interesting but not game-changing, and I’ve worked with startups with ideas that seemed crazy—but if they worked, they’d be huge.  

    The latter situation is much preferred, and makes the tiring work of raising capital exponentially easier. A really cool technology with the “wow” factor or a big, audacious, disruptive concept is almost magical in the way it can cut through the noise and generate buzz amongst jaded investors. At a minimum, VCs will take a meeting to hear what the hell you’re talking about.

    2.  A Story, Well Told.  While the Big Idea is the cornerstone of the foundation, the pitch is what gets people to stop and take a closer look.  Investors are pitched by literally thousands of good companies each year; an outstanding pitch will break through the noise and set your company apart from the unwashed masses.   

    A solid pitch neatly packages the company, vision, and deal in a compelling manner (typically via your slide deck, exec sum, and model), with a narrative crafted to appeal to the nuances of what investors are looking for.  It involves telling a clear and exceedingly simple story, so the message is frictionless and can be circulated among the partners at the VC firm and among other VCs in a syndicate.  In other words, the pitch is portable (and often somewhat “viral”).

    A solid pitch also includes polished and practiced Q&A, and an overall story that strikes both rational (how do I make a return on my investment?) and emotional (why do I want to be part of this vision?) chords.  Bringing all these elements together is surprisingly difficult, but when done well it is a beautiful thing.  

    3.  Supporting Evidence.  This is the clincher, and the one most startups miss.  VCs fund businesses, not concepts.  A concept alone is not fundable--startups must get the fire lit; venture money fuels an already-burning fire. Or, to put it in other terms, VCs typically want to see most of the technology risk and at least some degree of the business risk removed before doing a deal.   

    In the absence of some special factor (for example, a founder with multiple successful exits under the belt), startups need to generate some evidence of "market validation"—e.g. initial traction, early customer adoption, or a monetizable proof of concept--before approaching investors.  In short, startups need data showing the beginnings of a growth curve.  


    Fortunately, it only takes a few data points to show a pattern. I’ve seen startups with just 3-4 months of live customer data get a lot of investor interest.  Investors recognize that the delta between a startup with "deal in hand" and one that "will have a deal, if  we raise funding" is very large, and they use this gap as a filtering mechanism.     

    This is why designing and presenting startup metrics plays such an important role--metrics like engagement (MAU, DAU), stickiness & retention, upsell / conversion rates, virality, etc.  In a perfect world, you can show—even with just an initial, limited data set—that your average revenue per customer is greater than your cost to acquire said customer.  In such conditions, an investment is a no-brainer; this is what closes venture rounds.  

    While I’m a huge proponent of “pitching the numbers,” qualitative evidence can be useful as well, such as blogger support, press and journalist attention, rabid Facebook fans, evangelistic Twitter followers, etc. Regardless of the form, it’s a powerful combination when you can start your pitch with a right-brain lead-in (i.e., an emotive, visionary angle) and finish with a left-brain close (rational, unambiguous data). 

    Those are the three foundational pillars that offer startups at least a fighting chance at raising venture capital.  Keep in mind that raising external funding is significantly “harder than it looks”—estimates from the SBA and Angelsoft show that only around 2% to 5% of startups seeking angel or VC dollars actually get funded.  The bottom line is that being strategic about it— getting your sh*t together, and timing your investor outreach for when momentum is building around (and within) your startup—will greatly improve your odds of success.  

    Analysis of Common Mistakes

    The most common mistake, in my view, is trying to pitch too early without any supporting proof / evidence / traction / metrics.  Without any data, you’ll tend to get a lot of false positives-- meetings that just lead to  “let’s keep in touch” responses. This is a huge time sink, and it is often hard to re-ignite the conversation weeks or months later when you finally do have some data points to show.   

    Indeed, there is a direct correlation between customer traction/momentum and the speed at which a deal gets done.  Thus, one of the key success factors in getting funding is that founders somehow get their startup trains moving—by bootstrapping, doing consulting work on the side, tapping friends and family or "dumb money,”—and come at Sand Hill Road from a position of strength.  The alternative is just too frustrating and draining.  

    Another common mistake is going out with a rough-around-the-edges pitch. The people you are pitching probably sit through 10+ pitches each week, and a confusing or overly complicated message won’t stand out, or worse, is quickly forgotten.  Clear pitches—the kind, as Sequoia puts it, that can be elucidated on the back of a business card—enjoy a “halo effect;” muddled pitches are weighed down by their own inertia.     

    One more note: if you’re missing one of three key components described above, then, like the guy driving next to you in the large Corvette, you’d better have an oversized version of something else to compensate.  No real traction, but your concept is so big—so truly disruptional—that if it works it will be the next Zynga or Facebook?  You might have a shot, if you can adequately tell/sell the vision in your pitch.  Or, no pitch developed, but your unique monthly visitor growth on Compete.com is going hog wild?  You’ll probably have VCs (or at least their associates) calling you.

    (**Just to be clear, there are many, many other things that are important, and that can make or break a deal—things like the team, defensibility, IP, advisors, partnerships, market size, relative degree of customer need, and so on.   This blog post isn’t a comprehensive summary of every factor; rather the aim is to set an initial threshold of what needs to be in place so you’re not wasting your time on a fruitless money hunt.) 

    So that’s it in a nutshell.  Big idea + attractive story + supporting evidence = fundable deal. 

    Have you got it?  If not, what can you do today, tomorrow, and next week to get it? 

    24 January 2010

    Startup Business Development Strategies: 7 Tips For Putting Together Stellar Deals


    Business development is fun.  Putting together partnership deals requires a special combination of hustle, strategic thinking, technical chops, project management, and sales and negotiation skills.  It’s a bit like a triathlon, in that it stretches your abilities in multiple arenas.

    Business development is both creative and analytical—left brain and right brain—and done well, business development deals can be the purest representation of the equation “1+1=3” to drive growth.

    A few tips for startups doing deals:

    1.   Focus on the right targets. 
    Any meaningful partnership deal will require a significant amount of time and attention from your management team.  This places a real constraint on the number of potential partnerships you can chase down at any given time, especially if you’re trying to simultaneously keep the business afloat, hire staff, raise money, and manage all the other critical-path activities that startup founders are responsible for.

    As such, the “shotgun strategy” does not work well for startups; you’ll waste time fielding exploratory tire-kicker meetings that lead nowhere, or worse, you’ll find yourself paying attention to the firms who respond to inquiries quickly only because of some underlying flaw in their business (for example, they are struggling and desperate for something to move the needle—an ‘adverse selection’ problem).

    Since a founder’s time is his or her greatest constraint, it becomes critical to instead take a “sniper’s approach,” and carefully select a short list of partners who will deliver the most bang per bullet.  Strategic targeting—instead of being reactive to those chasing you—front-ends the bulk and burden of your work, but ultimately delivers a better investment return on your time and effort.  Selective hunting keeps you focused on the game that really matters.

    2.   Come to the table from a position of strength.
    Startups are often at a disadvantage when forming partnerships with larger companies, due to the simple fact that they are startups.  There is a natural bias against working with firms that are unproven, underfunded, and still developing and/or evolving.  The best way to compensate for the ‘startup stigma’ is to bring something special to the table—an asset that cannot be easily replicated by another firm.

    An “asset” can take many forms, both tangible and intangible: it could be an innovative technology that plugs a critical gap in your partner’s product line; it could be access to a market segment or demographic that you have been able to crack, but others haven’t; it could be the brand and “buzz” that you are generating with your business; or it could be a combination of all three.

    It is remarkable how much attention a startup can garner when it has something noteworthy, and how frustratingly little a startup can get when it is another minnow in a school of similar-looking fish.  The two situations contrast starkly with one another:  the challenge of the first is not being able to handle the avalanche of in-bound inquiries; the challenge of the second is that your emails are never returned and your phone calls never answered.  There is rarely a middle ground here. Thus, if you don’t currently have something noteworthy as your ace card, go back and continue developing or marketing until you do, so as to avoid a slow, painful drain on your time and resources, and motivation.

    3.   Get creative. 
    One of the best things about being a startup founder is that you (generally) have the leeway and latitude to write your own script.  Contrast this to a partnership deal between two well-established companies, where there are already formalized processes and procedures—in short, “rules”—for doing deals.  As a startup, especially if you’re in a new or emerging space like social media or online radio or video, you have the ability to make it up as you see fit.

    Indeed, the best business development deals are often those that break new ground and introduce new models for doing business.  Follow the rules of brainstorming, where no idea is a dumb one, and explore all sorts of possibilities; as long as the contemplated deal structure benefits both parties, it’s worthy of consideration. Set aside your predilections and constraints and get creative.

    4.   ”Ask not what your partner can do for you--ask what you can do for your partner.”
    Before pursuing any deal, it is useful to get inside the mind of your target partners, and view a potential deal from their perspective.  What is it they are lacking?  Where are they falling behind?  What keeps them up at night?  This takes research and an ability to connect the dots of an often-complicated mosaic of market trends, products, competitors, company culture, and other factors.

    Once you’ve established a pain point—for example, a competitor is eating their lunch in a new market segment—craft your pitch and business case from the perspective of how you can solve their problems for them.  Bonus points if you can do so in a way that connects directly to increased revenue, profit, market and mindshare.  In this way, you will find that the gap between your companies is small, and the deal will go exponentially smoother and faster.

    5.   Introduce competition into every deal.
    This is a key point, and perhaps the most powerful technique of them all.  In every situation, getting some competitive heat on the deal will give you negotiating leverage, increase the tempo of discussions, and greatly raise the odds of a successful outcome.  Even if you’ve followed the advice from point #1 and zeroed in on your dream partner, opening up a dialogue with their competitors is well worth the effort. In addition, you should skillfully and subtly let your target partner know you are having talks with other firms.   This is the “art of the reveal,” and weaving in the knowledge that their rival may sweep the deal out from under them greatly helps level the playing field.

    For example, I once worked with a mobile startup that needed to source both a carrier partner and a wireless chip vendor. We brought to the table dual assets of innovative technology and a ton of press buzz.  We initiated parallel discussion paths with two carriers and three chip manufacturers, even though we knew exactly who we wanted to work with from the outset.  The benefits of this strategy were clearly evident in the tempo of every meeting and in the tone of every term sheet. The deal was still a challenge—we were fighting the startup bias, after all—and there were a few heart-stopping moments where it looked like it would all fall apart.  But in the end, we got favorable pricing from our preferred partners, and did the deals in an accelerated timeframe.

    6.   Be operationally ready to do a deal.
    Startups are notoriously under-funded, under-staffed, and over-stressed.  Before going too far down the path with a partner, ask yourself whether you really can support the deal from both a business and technical perspective.  Can you spend weeks hammering out technical details and timelines?  Do you have the bandwidth and attention span to turn around multiple drafts of an MOU or LOI?  And of course, do you have the engineering bandwidth to actually implement the JV technology and nurture it through the launch and post-marketing support phases?

    To note, this is a classic balancing act; being “operationally ready” at a startup is almost an oxymoron.  Many startups have struck game-changing deals before they were really prepared to handle them, and then hustled like hell to successfully pull things off.  Indeed, startups need a healthy level of outsized bravado in their DNA.  But if your answers to the several of the above questions are clearly “no” it may make sense to get a little further down the path before sinking time into partnership endeavors.

    7.   Know when to cut bait and run.
    This is a tough one to do well, but it’s a critical skill nonetheless.  Sometimes your company’s goals will shift, taking a proposed deal off the critical path.  Other times, you’ll be two-thirds of a way through the partnership negotiations when you realize it is not a strategic fit. The initial enthusiasm fades as you get into the details, and you realize that the technology integration hurdles are massive, or that your partner’s marketing channels are not as strong as they appeared.  Sometimes it’s simply cultural or personal—the thought of spending years with a partner who doesn’t “play well in the sandbox” gives you night sweats.

    The challenge here is twofold.  First, it can be difficult to discern between deals where there is truly not a fit, and the normal struggles, politics, highs and lows that accompany any deal.  Second, in many cases you’ve already sunk a ton of time and money into the process, and it is emotionally draining to accept that it was all wasted effort.  However, time is the enemy for startups; the clock ticks faster when your funding is running out and markets are evolving rapidly.  Do the analysis, but trust your gut—if it’s clearly not going to work out, consider your efforts as sunk costs, extricate your firm as smoothly as quickly as possible, and move on to the next deal.  

    In sum, business development is fun—happy hunting!


    19 January 2010

    Startup Valuation: How Much Is Your Company Worth?

    Part of my job description involves prepping startups to raise capital. One of the most common issues that concern entrepreneurs is how to address the "Valuation Question."

    I understand this concern; raising money puts a very un-ambiguous stamp of “worth” on what you’ve worked so hard to create. Thus, it is logical that entrepreneurs want to approach the negotiating table with a bullet-proof spreadsheet detailing and supporting their valuation down to the last dollar.

    Which is exactly why they hate my answers to the question, “what is our valuation?”:
    • Startup valuation is an art not a science; and,
    • Your company is worth is what the market will pay for it.
    They hate these retorts for several reasons; for one, it essentially means that valuation hinges on their negotiating skills (which is daunting since they’re going up against professional investors / negotiators). Second, these are fuzzy answers— not what they expect from a CFA with a graduate degree in finance.

    Unfortunately, I cannot make it much less fuzzy. It’s not because I don’t understand valuation; on the contrary, I spent the first few years of my career doing nothing but valuations of technology companies.

    But the challenge is that none of the traditionally-accepted valuation methods really apply to early stage startups. Let’s briefly review why:

    Discounted Cash Flow Model: A DCF model “feels” the most robust because it is very quantitative and analytical, and it results in a single valuation number. In a DCF, we forecast several years of revenue and expenses, and then discount the resulting cash flow back to the present using a “venture capital expected rate of return.” The models are beautiful, sophisticated, and complex. They dazzle.

    But here’s the problem: a skilled Excel wizard can make a DCF spit out any valuation they want. Because there is no (or very little) historical financial data with most startups, forecasts are pure conjecture and fantasy. In addition, the model is extremely sensitive; adjust the discount rate down slightly and our growth rate up, and suddenly your valuation doubles. No serious investor would ever pay much heed to this.

    Cost-To-Recreate Model: This is just as it sounds—we back into an estimate of what it would cost to duplicate or recreate the company with one of like utility. It is analogous to a make-vs.-buy decision, and the premise is that a prudent investor would pay no more for an asset than its replacement or reproduction cost. As one simple example, we might estimate the cost in terms of the number of man-hours of programming required to write a comparably-functional software program. While this method also spits out a tangible, “hard” number, it doesn’t fully capture the future
    potential of a business, and it doesn't reflect the value of intangibles like the brand (which can obviously be quite valuable).

    Market Multiple Model: This is the most robust method and it is actually used in the venture world. With the market approach, we value a company by looking at recent sales or offerings of comparable companies, then we adjust the multiple to reflect specific characteristics of our company. This gets us closest to the answer above that “valuation is what the market will pay.”

    However, here’s the catch: it is very difficult to find accurate data on truly comparable startup financings. Not only is it hard to find apples-to-apples comps, but funding valuation data is often kept close to the vest. While some companies report this—usually when they get a huge valuation round—most startups do not, and as private companies they are not required to do so. (To clarify, many companies report
    how much they raised, but not at what valuation they raised it at). Even some of the very powerful databases we use such as Capital IQ do not always contain this data.

    So, having crossed off traditional valuation models, what do seed and series A startups do? How do we best approach the question of valuation? Here are three methods:

    1. Use Stage of Development As A Proxy: A startup’s path from idea to IPO can be charted as a series of major milestones (as well as hundreds of smaller stepping stones). At each milestone, a startup’s valuation rises as more and more risk has been removed from the business. Thus, one way to assess valuation is to look at where your company is at, and match it to typical valuation ranges for each stage. For example a funding-path for a web or software business may be as follows:


    Different types of investors play at each round, and if the company is executing to plan, there is generally a sizable jump in valuation at each stage. For example, the increase in valuation between stages 1 and 2 – where we’ve eliminated most of the technology risk—is usually relatively slight. Between 2 and 3, we’ve proven that a market exists—someone will buy the product. A much larger segment of investors are interested at this stage. Between 3 and 4, customers are piling on, which leads investors to pile on—thus creating astounding valuations like we see with Facebook or Twitter.

    2. Tell A Really Good Story: Because there are few really solid quantitative ways to value a startup, estimates of a company’s worth often come down to perception. This, in turn, comes down to how well you present your company in the form of your investor pitch and pitch deck. My rule of thumb here is simple: present the company in as favorable a light as possible, without misrepresenting it in any way. This includes how you position your company vis-√†-vis the competition, what you choose to emphasize or call out with respect to opportunities and strengths, and so forth. As in sales, it pays to focus on the attractive and compelling parts of your business and the value your company brings. Pitch it with passion, while addressing any issues or ‘warts’ candidly and honestly (they will come out in due diligence anyway).

    A corollary note is that
    presentation matters. How you present the company to investors in the form of your pitch deck and business plan is a signal of how you will present the company to the outside world, and to future investors in later rounds. To elucidate this, I use the example of selling a car. A few simple things like a thorough cleaning, detailing and a good polish can spark an emotional response in the buyer and raise the valuation far more than the cost of such services.

    The converse is true as well: a messy, unattractive, or problematic car will turn off most buyers; or, if buyers are still interested, they will use such flaws to beat down the price. This analogy carries through to due diligence: fixing a $20 rattling door handle preemptively removes that obstacle to a sale, just as cleaning up your startup’s capitalization table and IP assignment rights in advance will ensure the funding process goes that much smoother. In short, make it attractive and make it easy for the buyer to buy.

    3. Put On Your Best Poker Face And Just Ask: Let’s assume that you have a SaaS company that has built a decent first version of the technology, launched it, and generated a base of initial customers (and corresponding metrics). You’ve eliminated most of the technology risk and some of the market acceptance risk, and you only have one or two gaps to fill on the management team.

    Looking at the table above, you determine that Series A deals for companies with similar characteristics often fall into the $5 to $15M range. Your customer pipeline is filling up, and VCs have been receptive to your meeting requests; your pitch and slide deck are polished, and overall, you’re feeling good about your funding prospects. Thus, at the end of a pitch meeting, when asked what you think your valuation is, the best approach is to either avoid the question (saying you’ll let the market decide), or to state simply and without blinking, “we’re looking for a $12 to $14 million pre” (with "pre" signifying pre-money).

    From my experience, if the ask is within the range of reason, there is usually not much further discussion. The VC takes note of it, and files the information away as a point for future negotiations. After all, it’s not like we’re
    demanding a certain valuation and trying to justify it. We’re simply stating what we’re looking for. Continuing with the analogy of selling a car, the buyer probably knows the general price range for cars like yours, and if you’re within the relative range, then it comes down to how much he really wants the car. Whether he accepts the price you’re asking also comes down to how many other buyers are interested, which brings us to the next point…

    3. Get Other Buyers In The Game: This is the biggie. The level of interest in a deal is the single most important factor influencing valuation (and for that matter, for negotiating everything else on the term sheet). In short, if you have just one investor interested, he or she sets the price, and you are free to accept it or walk—you are a price taker. If you have multiple investors interested, then your leverage increases tenfold, and you become a price maker. In such situations, we have effectively created a “market” for your stock—and in some cases, this can escalate to become a heated auction environment (which is the reason why some valuations catch fire and go through the roof).

    In sum, a little knowledge (of comps and ranges), a little confidence (the “art of the ask”) and the ability to generate demand from multiple parties are your best tools to manage the valuation discussion and term sheet negotiations.

    Remember: your company is worth is what the market will pay for it. Create a market for your startup, and you will have the leverage to get what you feel it is worth.