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.

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? 

Positioning for a Startup Market Turnaround

It was around this time last year-- Summer of 2008 to be precise-- that a rash of VC firms and angel investors such as Ron Conway and Benchmark Capital issued highly publicized decrees to their portfolio companies to bunker down, cut costs, and prepare for a deep fund-raising freeze.

Now there are signs that things may be (slowly) starting to turn around. I've had a couple lunches with attorneys this week which were illuminating. I would posit that startup lawyers are the 'canaries in the coal mine'-- they work on deals well before the deals are publicly announced. So these data points, while not statistically significant, were nonetheless encouraging.

During a meal of excellent Osha Thai food in SF, one boutique attorney stated that he has worked on something like 25 early stage financings this summer, mostly involving web startups and angels or 'super angels' (i.e., folks with small seed funds like the aforementioned Ron Conway).

Indeed, angels have picked up the slack in the early stage funding market, as evidenced by an Under The Radar Strategy Series conference I attended in September. This 'fireside chat' was led by Rob Hayes of First Round Capital, Jeff Clavier of Softtech VC, and Aydin Senkut of Felicis Ventures, all of whom have been very active investors as of late. To wit: Hayes had six investments in the last quarter, Senkut had five with three follow-ons, and Clavier stated he had put down two term sheets that very day.

The other attorney I brunched with this week works in Silicon Valley at a large law firm. He stated that he has recently worked on several deals where large VC firms were making seed investments. This is unusual-- large venture firms, who are investing from funds that often top $200M or greater, generally seek to put substantial amounts of capital to work in each deal-- typically a minimum of $4 or $5M and up-- due simply to the fact that any given partner can effectively serve on only so many boards at once.

The attorney's thesis is that the large VCs are making such small bets to secure an 'option' to invest later-- basically, using the $500k or $1M seed round to guarantee a seat at the table for a future larger round, when things pick up again. (Indeed, there is some corroborating buzz around this trend; see this post, "Seed is the new Series A for VCs.") The sentiment he picked up was that follow-on rounds would start happening in Q4 of this year or Q1 of 2010.

It's certainly encouraging, as things have been fairly tepid for all but the hottest web and social gaming startups. August was among the slowest months we've had here at VentureArchetypes since 2002, when the funding market hit bottom in the last recession.

But these things always go in cycles, and we have been taking advantage of the downtime between clients to lay the foundation for the next upswing. It's actually rather nice to have some time to take care of all that is neglected when we're going 100 MPH-- website updates, marketing materials, etc.-- as well as the network. It is a luxury to have the time to reach out and catch up with contacts-- after all, this is a relationship-driven business.

We have also been laying the groundwork for a new service line, which we will debut shortly. It is called StartupPartnerships, and the focus will be on offering outsourced business development consulting to technology startups. It is a service we have been doing semi-formally with clients for many years, so it is a natural spin-off of our business plan and venture strategy work.

You can get a sneak peak at this new direction here: www.StartupPartnerships.com -- please let me know what you think, and how we can make the service as valuable as it can be to startups.

And finally--to end on a positive note-- I leave you with two more links showing encouraging signs regarding the startup market: Mark Suster's post on "The Big VC Thaw" and Bob Ackerman's post on how "M&A and IPOs are Restarting the Innovation Flywheel."

This may, in fact, be the best time to pursue your vision and finally launch that startup idea -- carpe diem!