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.


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.

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?