The 4 Kinds of Series A Rounds in Enterprise roadmap for understanding how to go from seed to Series A

A wise VC once told me when dinner is served, you eat. When it comes to fundraising, I’ve learned that if someone is trying to invest now, you should strike while the iron is hot. Given that the headwinds are getting stronger, we at boldstart have been advising all of our portfolio companies to raise as much as they can as soon as they can and to make sure that every dollar spent has a real ROI.

Related to this, the question I am often asked is “what metrics do I need to hit” to get that next round. While super important, I always like to understand where the business is in its lifecycle before answering. Having spent the last week in several meetings with startups going from seed to A, I thought I would break down the various types of A rounds and the major ??? to success:

The 4 kinds of A rounds:

  1. No A round. Sucks. — self explanatory
  2. Vision A round, super hard — raise on the promise and pre-launch, on the vision, huge market with the killer team that can build and scale. sometimes easier to raise on the promise and the expectations of amazing success than after the launch
  3. Metrics A round, easier — killer metrics, repeatable growth and predictable sales model, used to be $80–$100k MRR/$1mm ARR, the bar is raising…
  4. Hybrid A, toughest — this is where you are between 2 and 3 and the hardest to get done.

Read More

What entrepreneurs can learn from Jeff Spicoli you don't have to have all of the answers

I know I may be dating myself here, but over the past few weeks I couldn’t help but think about the movie Fast Times at Ridgemont High and one of the standout characters, Jeff Spicoli.  When asked by Mr. Hand, his teacher, why he keeps coming late and wasting his time, Spicoli answers, “I don’t know.”

 

In several meetings with entrepreneurs during the past few weeks, they would have been better off answering like Spicoli rather than giving me some hollow bull shit answer.  I want to make it very clear that I don't expect entrepreneurs to have all of the answers to my questions.  In fact, many questions I have may not have an answer today so "I don't know" will be your best answer. My one caveat is that the "I don't know" is followed by a how might you figure out the answer or a when might you figure it out.  This line of questioning is really just another way to test how you think and determine how our working relationship might be were I to invest.  I would rather have the honest "I don't know but I'll figure it out" then a made-up answer that will never allow you or your investors to really understand what is driving your business.

Never give up but move on quickly startups are tough, you always have to keep fighting

As a young kid, I was always taught the valuable lesson of never giving up or quitting.  No matter how many times you get knocked down, you have to stand up and keep moving.  That is the same trait that I also admire in many of the entrepreneurs that I have funded over the years.  This mentality is what carries many great entrepreneurs from near death experiences to ultimate success.  However, I do caution that entrepreneurs should temper this “never give up” attitude with a “move on quickly” one as well.

Let me explain.  Many entrepreneurs will take this same “never give up” attitude with the sales process or raising financing.  On the one hand this attitude is what is absolutely necessary to get things done but on the other hand it can be quite detrimental.  What entrepreneurs need to do is learn how to qualify their leads and to do it quickly.  The worst outcome for an entrepreneur i to spend countless cycles on trying to close a deal that is not closable or spending way to much time on a lead only to end up giving away the farm to make it happen.  Never giving up may actually prevent you from finding the next great customer or funder.  I have seen this time and time again from many companies and what is problematic is that time is precious for a startup.  You only have so much time to hit your milestones so use it wisely.  When you are meeting with potential prospects make sure to qualify them in  the first meeting and understand if they really do have a need for what you are selling, the decision making process, the timeframe in which a decision is made, and ultimately the potential budget.  If the information does not meet your needs, move on quickly.  You can take your “never give up” attitude by trying to qualify as many prospects as possible rather than “never giving up” on one or two.

Startups getting caught in No Man’s Land stuck between seed and series a funding

“No Man’s Land” is traditionally known as the area between two trenches.  This is a reference to World War I and the vicious trench warfare and hand-to-hand combat that characterized that war. In “No Man’s Land” lay a wasteland of dead bodies and other debris and shrapnel.  Increasingly I am seeing many startups who were ably seed funded get caught in “No Man’s Land” between the seed round and a true Series A round led by a venture capitalist.

This is happening because there are way too many companies raising seed capital but not enough executing their way to a Series A.  This can happen for many reasons including not raising enough capital in the seed round to begin with and of course not getting your product out the door.  So what does an entrepreneur do when caught in this predicament?  Many try to do an additional seed round or add-on to the prior round.  While not a bad idea, this is rarely successful because many seed funded startups have way too many investors who are more apt to write off the investment then to bridge more seed money.  Secondly many angel investors would rather invest in that shiny new car or first seed round then add more capital to a used car or startup that did not “get there” on its first seed financing.  Smarter entrepreneurs are increasingly doing two things to make sure they don’t caught in “No Man’s Land.”  First, rather than getting 20 great names as seed investors, they are making sure to get at least 3/4 or more of the round invested by a couple institutional seed folks that may have deeper pockets and more ownership in the startup to really care about what happens in the future.  Secondly, the smarter entrepreneurs are really thinking carefully about what milestones need to be hit to raise that first Series A round and work backwards to determine how much financing they need to get there.  While not an exact science, it is imperative to think like this as you don’t want to be one of the many seed-funded companies that will linger in “No Man’s Land.”

Know When to Hold ’em, Know When to Fold ’em need to be honest with yourself on company status

I had a tough call with an entrepreneur this morning.  His company raised a fair amount of seed financing but did not hit the milestones it needed to in order to raise a real round of venture capital.  The product is nice but they took too long iterating and releasing a subsequent version while the market around it moved much quicker.  In the process, the company ramped up too quickly before it knew exactly what the core value proposition was and to whom.  Net net, the entrepreneur was left with a few choices: skinny the company down and try to get to breakeven, look to existing Angel investors for a bridge, shut the company down, or try to sell the business.  I am not going to go through each one of the above decision trees in this post, but given the market dynamics today and the overflow of angel funding, I am sure that this is a conversation that many an angel and entrepreneur are having right now.  Net net, way too many companies have received angel funding and many of these companies will not raise subsequent rounds of funding.

That is ok as that is how markets work.  If you are in this position, all I can say is don’t give up but also be honest with yourself and team.  Assess your strengths and weaknesses, dive into the market and opportunity, and be as lean as possible to give you as much time to get to where you want to go.  If you decide to fight through it and pivot and have the support of your existing investor base then great.  Many companies have been successful that way.  If you decide it is time to move on and capture whatever value you can for the assets then great as well.  Just make sure that you have this conversation with your investors earlier rather than later to ensure you have enough time to execute on the new path. In the end, this process is not unlike what The Gambler from  Kenny Rogers song had to go through at the table.

You got to know when to hold `em, know when to fold `em,
Know when to walk away and know when to run.
You never count your money when you`re sittin` at the table.
There`ll be time enough for countin` when the dealin`s done.

 

Put your users first! focus on an amazing customer experience before all else

As a VC who invests in seed and first rounds, I love revenue just as much as the next guy.  However, the focus on revenue should play second fiddle to a user/customer first experience.  Over the years, how many times have we seen companies grow from next to nothing in user base and somehow forget why they got there in the first place?  Yes, the answer is because they made an insanely great product or service that catered to their users.  Over time they then figured out how to generate revenue without destroying the delicate balance of putting the user first but generating revenue for the business.  In an article in the NY Times yesterday, there is a great quote from the MySpace founder, Chris DeWolfe:

“The paradox in business, especially at a public company, is, ‘When do you focus on growth, and when do you focus on money?’ ” said Mr. DeWolfe. “We focused on money and Facebook focused on growing the user base and user experience.”

This a question that we constantly struggled with at Answers.com years ago and now have found to have struck the right balance.  I remember some of the management and board meetings where we would all intensely debate whether to add an extra advertisement or not on a certain page and how that would impact the user experience vs the revenue line.  While this sounds like minutiae and too much detail, I would argue that if you don’t have this debate internally that you may be tilted too far in one direction.  In the end user experience won, the page views continued to grow, and consequently revenue improved significantly.  Over my 15 years of investing, it is pretty clear to me that the users are in control, keep them happy, and they will come back for more!

Standard investor update for startups great starting point on how to communicate with your investors

I remember when we hired a new CEO for one of our portfolio companies and my tip to him was to overcommunicate.  We had a few large VCs on the board and a number of high-profile angels that could also help in various ways.  His job was to keep everyone up-to-date but also to know how to get help when he needed it and from whom.  Given today’s excitement over seed investing it is not uncommon for many of today’s entrepreneurs to have 5-15 investors in any given round.  How you effectively communicate with your investors is an important priority that if done right will give you major value add while also not taking too much of your time.

In order to help our new CEO, I reached out to all of the other investors, and we all agreed that if we all spoke to him a few days a week about the same information that he would not have time to run his business.  In addition, this would be redundant for the CEO since most investors were asking for the same basic information.  In the spirit of streamlining information flow, we worked with the CEO to put together a weekly email to provide us with the key metrics the company tracked along with departmental updates on key high priority projects.  We weren’t asking the company to create something they shouldn’t already have (key metrics, departmental priorities, cash balance) but rather we just wanted the data shared on a timely basis.  Over time, we all found that when we did speak with the management team that we did not have to spend a half hour gathering information but rather we could get right to the point and actually discuss the whys or hows on certain sales numbers, metrics, or prospects.  In the end, we were all much happier and more productive since we had the same baseline of information and could focus our energy on productive and deeper conversation on the business stategy rather than gathering basic data.

Over the last 6 months I have made a number of seed investments and have shared the following company update with them. Each CEO has had their own minor tweak but this should give you a sense of what investors may be looking for and how it can help you streamline your communication and focus on how to extract value from your many investors.  If you choose to update weekly then obviously it will most likely be a shorter piece with maybe only the cash burned and current cash on hand as the financials.  If you choose to send out a report monthly then it may be more like the form I have uploaded on docstoc.

One other important note I forgot to highlight is that since many companies I invest in are web-based and therefore many of them have real-time metrics I can track.  Michael Robertson who started Mp3.com and Gizmo5 (sold to Google Voice) had one of the best real-time dashboards for tracking his business.  I could see number of downloads, minutes used, new paying customers, etc. whenever i wanted to by logging into the system.  Other companies have created an investor wiki or use status.net (full disclosure-a BOLDstart seed investment) or other communication platforms for investors to share ideas and information.  I only imagine this will even get only better in the future.

Anyway, enjoy and I hope to hear some feedback on what is missing or what may be too much information.

 

Scaling your management style founders have to adapt their leadership as their companies scale

After meeting with a number of entrepreneurs I recently seed funded, it was clear to me that one of the major challenges founders face is how to continue to scale their management style.  My preferred seed investment is in an engineering driven/product focused team who can code and get product out the door under the release early and release often model.  I often find that these types of entrepreneurs get quite a lot done with few resources and really have a strong pulse on the customer and market.  However the unfortunate aspect for these technical/product founders is that as their product becomes more successful, they often spend less time on doing the things they love – creating great product and iterating.  Many founders will find that they have to spend more time meeting with investors to raise money and dealing with internal employee issues.  In addition, many founders will find that once they raise capital and hire more people, that their one room, one whiteboard open management style is hard to scale.  So the question is how to get everyone on the same page?  How do you continue to be open and yet layer a simple process to create a shared vision and accountability?  Given that, I am bringing back an old post from 2007 on scaling your management style.  I want to be very clear though – do not be a slave to process and keep this simple.  At the same time, I hope some of these suggestions help:

What makes a startup team great early on in terms of getting product out the door and rapidly refining and honing the product from live market feedback can also lead to issues down the road if companies and employees are managed on a similar basis.  What is easy to roll out in a 5 person company gets harder to manage in a 25 person and even harder in a 50 person company.  Take the test – ask your key executives what the 3 key company goals are for the month?  Are they the same or not?  How will they help contribute in each of their functions to delivering on the 3 key company goals?  If they are not on the same page and you have trouble getting them together, you may want to continue reading for some thoughts on how to improve communication and accountability.

Here are some simple steps you can take to create a more fluid organization.  First, institute a weekly management meeting.  Yes, like you, I have an allergic reaction to the word meeting, but believe it or not, simple processes can help tremendously.  It is a great way for the CEO to get input but also guide the team to focus on the same company goals for the month or quarter.  Secondly, have key team members provide a weekly dashboard report and list of key goals to accomplish for the following week.  At every weekly management meeting, have each team member discuss progress against his/her team’s goals and what they will be working on for the following week.  How does each of the departmental goals contribute to helping the company meet its goals?  Once again, this all may seem simplistic and a giant waste of time versus managing the next product release, but you will be amazed at the number of companies I meet that have not gotten to this point and consequently seem to have different ideas of what the business is and how to get there.  In addition, having weekly management meetings and clear weekly goals with simple yes/no criteria goes a long way towards creating an action-oriented culture of getting results.  If a VP doesn’t deliver consistently, all of the other executives know and they also know it is time to make a change.  No one wants to be the manager that is known to overpromise and not deliver.  There is also a real difference between a manager having weekly individual meetings with their CEO vs. openly discussing theirr priorities and completed tasks with their peers.  With respect to cross functional communication, rather than complaining about engineering, for example, sales and marketing can now understand engineering priorities and what it may take to adjust and rearrange some of them to meet the revenue targets for the quarter.  Trust me, there are many more factors to a company’s success and failure, but please don’t make an allergic reaction to scheduled meetings and a simple lack of organization your cause for execution problems.

In fact, we can skip the word weekly report, and instead just say lay out the 3 things you were supposed to do this week and where you stand on them.  One other important point to note is that make sure that everyone on your team understands if they hit a roadblock on any of their goals to come to you immediately to tell you what the roadblock is, a couple ways to potentially resolve the issues, and then to discuss with you.  Clearly this is a methodology that can scale as you grow your team and business.  Good luck and remember to keep it simple.