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. 

A Better Way To Ask For Investor Intros

8 Tips To Optimize Your Fundraising Process

About once or twice a week I get an email that goes something like this:  

“We are starting to raise our seed round; who should we be talking to?”

It’s a reasonable request, but unless I’ve just finished lunching with an investor who specifically mentioned that she is looking for a “cloud-based-big-data-streaming-content-gamification-platform-for-RIM-tablets,” the answer is probably the somewhat dismissive “I’ll keep an eye out.” 

It’s not that I don’t want to help.  On the contrary, I absolutely love to connect people when there’s a mutual fit.  It makes you look good, it makes me look good, and investors appreciate it when you bring them good deal flow. 

Indeed, I love making intros. The problem I have with this type of request is that it puts the burden of establishing fit on my shoulders.  Which is not where it should be.  

Let me explain.  Intros work best when they are filtered and pre-qualified, and when there’s a natural, organic match between the two parties being connected.  As Mark Suster says in his excellent piece How To Develop Your Fundraising Strategy: “Qualify your buyers early so you focus your scarce resources on people likely to buy your product;” and, “Spend time researching your buyers and not just pitching them.”  This is not rocket science, but it takes time, effort, and legwork.  And unless you’re paying me to do this, it’s your job as startup CEO.  

So instead of the passive approach of “Do you know anyone?” a much better active method for finding investors is as follows:   

Step 1:  Designate A Driver.  


Raising money works best when one person is put in control of the process and is responsible for keeping it all moving forward.  This is usually the CEO, but sometimes the CFO or BD person should lead the charge.  Quite frequently, however, I see startups that have a general consensus that they need to raise money, but no one is really pushing hard, and pushing it through to yes / no decisions.  It ends up directionless and ineffective; it takes too long, and it becomes a huge distraction.  Raising money cannot be done by committee. 

Step 2:  Start With The Top Of The Funnel.  Treat It As A Numbers Game.  


Our first step is to assemble a target investor list, and the best way to end up with a highly focused list of qualified targets is to start with a very broad list of candidates at the top of the funnel; I suggest you aim for a minimum of 100 investor names.  Start by adding everyone you can think of-- investors you’ve seen speak or present at relevant events, names you’ve come across on VentureWire, TechCrunch or PeHub, folks you’ve met at tech gatherings or found on AngelList, personal contacts, friends of friends, and so on.  Go ahead and add everyone who could potentially be relevant-- we’ll filter it down in the next step.   

Pro Tip:  Build this initial database using a Google Docs spreadsheet or in an excel file stored online using Dropbox, so that everyone on the team can access and add to it. Keep the structure simple-- label your columns with titles like: Name -- Firm -- Stage -- Email & Phone -- Similar Deals -- Initial Contact Date -- Next Steps -- Notes, and so forth.  One related tip-- don’t just list the VC firm name (e.g. Accel, Norwest, etc) on this spreadsheet.  Instead, drill down another level and list the specific partner at the firm that will be the best fit for you.   A super-old example is like this:

Tools:  Angel List is fast becoming my go-to source for building the target list, as it’s an absolutely invaluable resource for efficiently researching potential investors.  Literally, it is the investor party that everyone’s at.  Furthermore, it’s not just angels anymore-- it’s becoming increasingly popular with traditional VCs, most of whom have at least some presence on the site.   And of course, in addition to sourcing leads, it’s a great venue for the outreach process as well-- more on that later.   

UPDATE:  Naval Ravikant sent me this tip for using AngelList:  "Here's a killer feature for building a target list:  http://angel.co/people.  Choose stage, market, location.  Sort by paths. It'll create a personalized list of investors for you to approach, sorted by how easy it is for you to get to them."   

Other useful list-building tools include Crunchbase, Quora, and CapLinked. In addition, subscription databases such as Capital IQ and Pratts are good but expensive; some universities have them so you might get an MBA to help you here.  Personally, I find that scanning the speaker lists of relevant events tends to turn up good leads.  Numerous other sources exist on the web, such as this list of Ron Conway’s portfolio (and co-investors); start to look, and you’ll start to see.

     

Step 3: Boil The List Down To Direct Hits.  


Starting with the initial list of 100 or so targets, our next step is to filter down to the best 20 to 30 matches.  The filtering process is not difficult, but it can be rather tedious-- basically, it involves scanning the websites of VCs and the LinkedIn bios and AngelList profiles of seed stage investors.  You’re simply looking for reasons to cross off the names of those who are clearly not a fit, thus saving your precious time and improving your hit rate later on, when we start to make contact.  

Pro Tip:  To cull the herd, ruthlessly weed out investors that: i) have existing investments in their portfolio that are directly competitive; ii) invest at a different stage than you are at (e.g. “growth stage” firms don’t generally invest in Seed or Series A, and even if they do, this can lead to signaling problems later); iii) are near the end of their fund (most funds have a 5-7 year fund life; if they haven’t raised a new fund lately, they may not have enough “dry powder” for new investments); iv) are focused on a different sector or vertical than you (e.g. they do enterprise software, you’re a consumer play); v) are run by a**holes (see the commentary on TheFunded, listed below, for unvarnished feedback).    

Tools: TheFunded.com, VC company websites, VC blogs, general Google searches.  It can also be very illuminative to contact CEOs of current or former portfolio companies to get the inside line; an added benefit is a potential warm intro if you develop rapport.  

Step 4:  Tee Up Your Advisors And Referral Henchmen.  


Our next step is to spool up the folks who will actually make the intros.  If you have an advisory board, great-- this is where they can really come in handy (and if you don’t have an advisory board, you might consider building one).  But don’t stop there--  add your lawyers, add your accountant, add your b-school or CS professor to the list, and of course, add all the uber-networkers, “connectors” and startup scene mavens that you know.  Set this list aside for a moment, as we go back into research mode.   

Pro Tip: If your advisors are local, it can be psychologically very effective to hold a fundraising kickoff meeting to get the troops rallied.  Rent out the back room of a restaurant and lubricate with wine and beer; the face to face interaction is much more effective than a conference call, and helps to overcome inertia.  Plus, it introduces a small element of competition when your advisors try to impress by showing off their broad network reach.    

Step 5:  Play The Game, “6 Degrees Of Kevin Bacon (or Rose).”  


Next, we take our filtered list of 20-30 investor targets from step three and overlay it on top of the social graphs, rolodexes, and personal networks of our advisors and other intro sources from step 5.  Essentially, our goal here is to map the best and “strongest” paths in to our targets.  This is largely a function of plugging the target investor’s name into LinkedIn and then using LinkedIn’s “How You Are Connected To” function to flesh out who knows whom. 

It’s a brilliant tool. In many cases, you’ll find there are several people you know in common with the target, so I recommend emailing your first degree connections and asking how well they know the person. Then, soft-circle the connector with the strongest relationship.  

Pro Tip:  Try to find out the context  behind each relationship, and rank the connections on a scale of 1-5.  Massive bonus points if your connecting node is someone the investor has done a deal with in the past (i.e. a fellow investor), or an entrepreneur they’ve previously funded.  And of course, the ultimate homerun is an intro from an entrepreneur who’s made them money in the past.  They’ll take that meeting every time.  

Tools:  90% of this work is done on LinkedIn; to a lesser degree, other social networking sites like Facebook, Path, and Zerply can be useful for finding alternate connection routes.  Recently, AngelList has started to show connection maps as well-- a promising development.  

LinkedIn

Angel List 

UPDATE:  Naval of AngelList responds: "AngelList  paths run through many connections-- we let you connect your LinkedIn, Twitter, Facebook, and then also look via mutual companies you may have worked at / invested in.  The more graphs you connect on AngelList, the more paths you find.  The paths are also quality-weighted, can show multiple degrees of separation, and you can sort all investors / entrepreneurs / developers on the site by their path distance to you."    

Step 6:  Polish And Streamline Your Pitch.

We are almost ready for showtime here. But before we make first contact, we need to make sure our message is of rockstar quality-- one that will stand out from the clutter.   

Recall that we are using a sniper’s rifle instead of a machine gun for our hunting, which is why it’s critical to have our gun sighted in properly.  This means that our investor story is honed, polished and tight,  that our pitch deck is crisp and compelling, and that the numbers and assumption in our business model / financial forecast are logical, solid, and well thought out.  It means that our customer acquisition and engagement metrics tell a great story (ideally, they are up-and-to-the-right), and that our demo is bug-tested and mother approved.  
To note, having a killer pitch can go a long way toward closing a round quickly.  A good pitch inspires your audience; you’ll find that if you’re really nailing it, then prospective investors will actively open up their rolodex and make intros to others, since a good pitch makes them look good, by association.  

Pro Tip:  I generally advise that startup pitches need to contain a “momentum story” before they’re ready to be told to investors, since the speed and ease of raising funding is directly correlated with the slope of the traction curve.  Without meaningful customer adoption metrics, you’re likely to be lost amongst the other 1500 startups passing across their screen that week.  Massive bonus points if you can walk in and say your servers have crashed 3 times in the last two weeks because traffic is exploding.  

In addition, aim for brevity.  My favorite pitches are extremely minimalist-- brief details on your vision, team, and product, told in a narrative format-- but supplemented by the ability to pitch the numbers.  Once again, metrics speak for themselves; metrics get startups noticed, and more importantly, funded.  As an extreme example, read about Fab.com’s lightning-fast round, here.      

Tools:  Keynote, PowerPoint, Excel, Word, etc.  For do-it-yourselfers, see pitch outlines at VentureHacks and on Guy Kawasaki's blog, and be see these pitch templates on Quora.  For outsourcers, or if you need help, contact VentureArchetypes, we’ll build a killer deck for you (yes, shameless plug, but hey-- this is our blog :).  A good article written by Daniel Odio on how to optimize your AL pitch can be found here. There is also some chatter / prediction that AngelList will standardize the pitch deck sometime in the future.  To present the all-too-critical metrics, use Google Analytics, Alexa or Compete.com, or better yet, take a tip from Fab.com’s very successful fundraise and use RJ Metrics. 

Step 7:  LIne ‘Em Up And Knock ‘Em Down.  

We’re now ready to rock and roll.  The process here is straightforward-- tee up batches of email intros, usually no more than a handful per referral source, and give them the green light to fire away.  

Generally, it’s best to try to concentrate the funding road show into as short a time frame as possible.  Thus, I usually advocate the “blitzkrieg” approach of hitting the entire target list at once, with the goal of getting multiple first round meetings concentrated into a 2 or 3 week period, and ideally, getting a lot of corresponding buzz and momentum going (which in turn can help accelerate the closing process).  

However, in other cases we may want to test how well our pitch resonates by hitting just a handful at first, often starting with investors a bit lower down our preference list.  Taking this approach even further, we may even want to “A/B test” the pitch by, for example, sending out two different versions in separate batches of 5 and seeing which one generates more meeting requests. The decision here is really up to you-- but in general, if your pitch is killing it and generating a consistently “hot” reaction, go for the blitzkrieg approach.  

Pro Tip: The best tip I can offer here is to make it extraordinarily easy for your referrers to make the referral-- remove all unnecessary friction from the process.  This means writing a custom email (with a summary teaser or a link to your AngelList profile) so that your connector can simply hit the “forward” button to send it along to the target.  You can also include the "hashed URL" supplied by AngelList for sharing information, including the confidential part, in this email if you choose. (To do so, look for the "share link" on your AL profile.)  In general, the email you write should go something like this:  

“Hi Nathan, I see you are connected to Lewis at ACME Ventures. I would love it if you could introduce us.  

As you know, we launched CatBnB to make life better for the 82m cat owners in the U.S. when they go on vacation.  Since launching our closed beta 3 months ago, we have had nearly a million cat owners register, and 75k have already boarded a cat in their home.  We’ve recently introduced our subscription model and to our delight, 15% of our users have upgraded.  It now costs us $3 to acquire a new paying customer, each of whom generates an average $12.50 ARPU.   

We will soon be looking for funding to scale. I see that Lewis has a background in exotic cat breeding and has just raised a new fund. I’d love to show him what we’re doing.” 

Then, as the referrer, I can simply forward this on, and if I’m feeling particularly helpful, append a brief note like this: 

“Lewis, I’d like to intro you to Scott Shepherd, founder of CatBnB.  Scott was the engineer #3 at Facebook and his co-founder, Janet, was a top salesperson at Salesforce.  I’ve been advising them since inception and they know how to execute; they are (selectively) starting to talk to investors.  Take a look at their AngelList profile and their exec sum, attached.  I will leave it to you to to connect; let me know what transpires.  Best, Nathan”  

By keeping it easy and lightweight, you make it easy to send, and by ensuring you have a tight elevator pitch and some attractive metrics, you make your referrer look good in the eyes of the investor-- all of which are things that will help to increase the participation rate by your referrers.  

This approach has the added benefit of serving up “two pitches for the price of one”-- we’ve got the short teaser written by the founder, as well as a supporting blurb or endorsement written by the referrer-- all in a super short, tidy, and power-packed package.  It’s these little nuances that can make or break your first contact.  

Step 8:  Push, Nudge, And Outright Ask For It-- Drive The Deal Home.   

When you are raising money you are selling shares of stock, so do what any sales pro does and treat it like a sales process.  Channel a bit of Alex Baldwin from Glengarry Glen Ross and repeat the ABC’s after me-- “Always. Be. Closing.”   You don’t need to be a pushy a-hole here, but this is no time to be timid, either; instead, your goal should be to drive each discussion forward, all the way through to a yes-or-no decision.  Most investors will respect this tenacity, as it’s a signal that you will be aggressive with the business (and thus, their investment will eventually be worth something). 

Get outside your comfort zone, and politely but firmly ask your target for a commitment.  Put it in concrete terms; ask if they will come in for a specified amount-- $50k for example, if it’s a seed round.  In many cases, you may get a contingent yes-- they’ll put in their amount only if you are able to raise the full round.  In such cases, ask if you can formally mark them as “in” on AngelList and when speaking to other prospective investors.  Getting the first domino to fall is always the hardest part, but it will help generate momentum down the line.   

Tools: The key here is to stay on top of 20-30 investor discussions all at once, and to keep the momentum going with each one.   So we return to our trusty excel spreadsheet or Google doc on a daily basis to track our progress toward a yes / no with each target.  Update it frequently by adding things like Date of Last Contact / Next Steps / Issues to Overcome / Result, and be sure to follow up quickly on all diligence items.   

Pro Tip:  Amplify your offline progress and momentum by promoting it online.  In other words, hustle like hell to set up real-world, face to face meetings and get firm (or at least semi-firm / contingent) commitments.  Then use the results of your offline hustle to generate more leads on AngelList via frequent (yet meaningful and meaty) status updates.  Also, encourage / nudge your AngelList followers to re-share, “like,” or otherwise forward on your updates to people who follow them.  This in turn will often get the attention of more investors and generate new intro requests, ultimately creating a ‘virtuous cycle‘ that will help you close the round faster.    

One additional link while we’re on the topic-- one of my all-time favorite blogs posts on “closing investors" is from Travis Kalanick, founder of Uber.  Check it out here. 

SUMMARY:

• Turn your next capital raise into what it really is-- just another sales process. 
• Take ownership of the process  by building a robust investor funnel, then by rigorously filtering and pre-qualifying your target list.
• Layer the social graphs of your referrers and advisors on top of this target list to find the best and strongest path in to each investor.    
• Polish your script (pitch) and make it uber-easy for your referral network to make the warm intro.  
• Ask for the commitment; go for the close.  

Try it this way the next time you’re raising money.  I think you’ll find your signal-to-noise-ratio will increase significantly.  It’ll take less time, be more fun, and your odds will be significantly higher.  

Please let me know what other tips you have, and how these techniques work for you, either in the comments section or privately by email: nathan at venturearchetypes dot com.

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.

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? 

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 cliché, 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!

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.

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?