Category Archives: Venture

A.B.F. – Always Be Fundraising

The CEO of any startup has three primary roles:

  1. Raising capital
  2. Setting the vision and overall strategy
  3. Hiring the right people

As anyone who has built and run a business from the ground up will tell you, being a CEO is not the easiest gig in the world. With so many different distractions pulling you in so many different directions, it’s easy to get overwhelmed by the minutiae of the day to day and lose sight of those three responsibilities.

To be fair, CEOs are responsible for more than just those three things. Each CEO has to wear multiple hats. But the fundamentals are still true.

Raise Money—And Then Raise More

I’ve noticed a pattern amongst entrepreneurs—even the good ones—where many of them forget the importance of the first responsibility listed above: raising capital. They forget that fundraising is an ongoing job that needs to be done regardless of the current cash balance.

Raising money is hard enough as it is. But by not working on it in between rounds, CEOs and founders make it that much harder on themselves. To be successful, CEOs need to take the A.B.F. approach to fundraising: always be fundraising.

A little maintenance goes a long way—just like heading to the gym on a regular basis is good for your health and fitness. Don’t get fat and lazy in between fundraising rounds—getting back into fighting shape (or fundraising shape!) is 10 times harder when you don’t have a base.

Some readers will almost certainly blow this off as easy-to-say/hard-to-do VC advice, but I actually screwed this up in the past too. Knowing what I know now, I wish I could go back in time and talk to my former-self. There were times when I was terrible about A.B.F. and other times when I was much better at it. The results of each approach were pretty clear.

I now see the difference between CEOs who take the A.B.F. approach and those who treat it as as a finite transaction. If you are not talking to and engaging investors between rounds, you are not A.B.F and you’ll pay later. When it’s time to raise (even in a “things are awesome and I need to fund the growth” scenario) it’s way more work as you are starting the relationships from scratch in many cases. The biggest difference is the fact that, with an A.B.F. mentality, whenever it’s time to raise more money—regardless of whether it’s a big up round or a “leap over the valley of death bridge”—the rounds get done faster, easier, and with more support from investors…and often on better terms.

Here’s a simple contrast between A.B.F and transactional fundraising: 2-3 hours a month woven into everything you do or 3-5 stressful months on the road herding cats during only two good windows per calendar year. Am I getting through?!?

Tips for Making A.B.F. a Reality

So how exactly can you become an someone who lives and breathes A.B.F.?

  • Maintain two investor lists. The first list should include current investors who you share monthly or quarterly updates with. The second list is for the investors who’ve passed at some point but left the door open. (You know the “if you were at YYZ in MRR we’d take a closer look, keep us posted” folks). Add new contacts to this list as you do the A.B.F. groundwork (networking, taking intros, etc.) This list becomes your target list for the next round.
  • Update the first list monthly. Be consistent—make it part of your routine. Put the asks at the top followed by the wins & metrics. The data should be telling a story clearly so there is no ambiguity about what is working and what isn’t. You might even find that they realize it’s time to add more capital to the business before you do. VCs are great at pattern recognition (for better or worse). This is low-hanging-fruit in terms of helping investors follow along as the chart moves up and to the right!
  • Solicit feedback and advice from the second list occasionally. You don’t want to be too annoying, but you don’t need to completely disappear either. In a previous blog post, I talked about the idea that when you ask for advice you get investment and when you ask for investment you get advice. Play the game and engage. Ask for feedback on metrics, messaging, and progress to ensure they’re thinking about you and your company.
  • Update your target investors every quarter. Put in some face time with investors on that second list. This can be a 20 minute video call. Just say top of mind if you can. Spread it out and mix it up. Personally, I’m way more likely to take a coffee meeting or a quick call to help an entrepreneur I know or to hear how things are going vs agreeing to be pitched formally if the company isn’t on my radar.  ­Asking for quick feedback on a high-level deck or just sending over news of a few wins will get the job done. The occasional business ask will test to see who is really paying attention. Put these at the top of the emails!

Are you the kind of CEO who’s always thinking about raising money but not doing it? Or could your fundraising game be enhanced? The sooner you adopt an A.B.F. mindset, the less time you’ll spend actually fundraising!

Why Your Startup Should Eat A Debt Sandwich

I’ve given this talk at various Techstars programs quite a few times now, and most recently gave it in L.A. at our awesome Healthcare Accelerator in partnership with Cedars-Sinai. I always do this talk off-the-cuff (no slides) to keep it interactive. You won’t find my talk online anywhere, so I’m excited to share some of the key points for the first time here.

Founders are often given valid but over-simplified advice when it comes to debt financing. Some of the “mostly true” points include; debt rounds cost less from a legal standpoint, that you can negotiate a high conversion cap (implicit next round valuation target) than are priced equity rounds, and you can raise money progressively (one investor at a time).

All of this is often true. Debt rounds can be easier and can also keep costs down for all parties involved. That’s why I’ve often heard it said: “If you don’t know what to do just raise debt”, or “if you don’t want to price your company, just raise debt.” Venture Deals does a great job of discussing these dynamics in more detail.

Don’t get me wrong, I’m not here to say debt rounds are bad news. At all. All I’m saying is avoid raising two (or more!) debt rounds in a row.

Instead, sandwich debt between equity so the debt won’t come back to haunt your company later.

Why Sandwich your Debt?

Your cap table can end up like a sandwich with too many condiments stacked on top of each other. We all know what happens, and only about ½ the sandwich ends up in your mouth!  

Debt rounds become problematic because each round of debt comes with its own discount, it’s own conversion cap, and other rights/terms. It becomes particularly complex if one of the rounds has a low conversion cap and the next has a higher one. The cap table math gets complicated, the founder/common dilution gets significant, and the new money investors end up with less ownership than they are looking for.

All of this has to be sorted out by legal or the VCs, messaged to the existing investors, and managed by the lawyers in papering the round. This causes problems for everyone, and some investors will just walk because the deal becomes complicated.

The early investor sometimes get asked move the cap up, and no one feels good about that move. I often remind founders that $1.00 isn’t actually $1.00 with debt, it’s either a $1.25 (remember the 20% discount & interest) or more like $1.50+ if your next round is well above the cap.

It’s good to go in eyes open and to realize that stacking debt means the discounts, the interest, and the cap all end up driving up the actual dollar leverage to the investor and the company sells more equity in the round but gets no additional net-new capital to spend from it.

When you sandwich your debt between equity rounds you are mitigating the risk of the next equity round toppling over due to complexity or having to do a massive amount of negotiating with both old and new investors and having the dilution get out of control.

Real World Example

  • One company I worked with had 3 different note rounds with escalating caps and discounts (1M/50%, 2M/20%, 3M/20%). The 1M cap round was the 1st money in and what a deal that was (for the investor)!
  • The timeframe across all of the 3 notes was ‘too short’; The 1M note was only 6 months from 3M – new investors felt the cap/discounts on the early notes were a ‘deal that never should have been done’ and there was friction from the get-go. Naturally the founders didn’t want to sell any more debt at that 1M/50% level.
  • Without a restructure of the early debt, it would have amounted to an approximate 5% additional dilution to founders when the priced round closed.
  • The early note holders were friends and family, but despite that, getting them to agree to changing the debt terms was very challenging. Who wants to give up the better deal they got for taking the early risk?
  • New investors have a range (ownership model) that keeps founder/early investor/new investor ratios balanced  – the successive debt rounds painted the company into a corner where it was almost an impossible equation to solve for. It became messy – and almost killed the deal.

The Solution

The company ended up renegotiating the 1M cap notes to 2M. This cost the CEO 80 hours of time, the co-founder another 60 hours, and a substantial legal bill. Let that sink in for a moment. The founders lost a good month of productivity on this.

Had they raised the 2nd/3rd round of notes as a priced round, the first round of notes would have been converted in early. The 1M note investors would have gotten a quick 2x on their investment and then owned equity.  None of this process and extra dilution would have taken place. The company would have raised that seed round with a pre-money around the same valuation as the later note caps, so they would have also saved the 20% discount.

Avoid this kind of headache, and just eat a debt sandwich instead.

Resource – Getting from Seed to Series A

ICYMI, Techstars has launched a new live AMA series for Entrepreneurs which I’m super excited about. We are recording the AMAs for later consumption, so no need to worry if you can’t make the live event schedule.

I recently hosted a live AMA with Michelle Crosby of WeVorce and Todd Saunders of AdHawk (both Techstars Ventures portfolio companies) that was a continuation of the discussion started at CES 2016 around “Getting from Seed to Series A” which I then blogged about here.

There are so many great posts and resources already out there on this topic but here’s a quick hit list of items that popped up in the last week to add the to the reading queue.

Bookmark this post as I’ll keep adding links to new content from Techstars and others around our network on this important topic!

From Seed to Series A

NOTE: This is a repost from my blog entry over at techstars.com.

I recently moderated a panel discussion at CES 2016 on how to get from Seed to Series A and it ended up being great in a lot of ways. Topics were broad with some contrarian views on metrics and approaches. A few days later a Techstars CEOs posted a very relevant question on our email list and a great discussion ensured. I chimed in with some of the take-aways from the panel on that list and thought I’d share them here.

A quick note of thanks to my esteemed panelists who provided great input and kept me on my toes!  Anjula Acharia-Bath of Trinity Ventures, Nihal Mehta of ENIAC Ventures, Jenny Fielding of Techstars and Adam D’Augelli of True Ventures.

The question from the CEO was:

 

“In your experience, what ARR is required before approaching investors for a Series A? I’ve received a few suggestions, but most suggestions come from our existing investors (with bias).”

The email responses included some of the market-standard metrics like $100K MRR and double digit monthly growth as common targets.

Our panel went in a different direction on what it takes to get from Seed to Series A.  Part of the framing for the panel and the room was:

While getting rounds done isn’t going to get any easier in 2016, there is a lot you can do before going out to raise to improve your chances. As a group, we could not agree there was set number, or even one set of criteria that made any Series A round a given…

  • One of the themes that came out of the panel was that Series A is still about the overall story. Metrics do play a part, but the investors have to share the vision and the long term potential about a huge return at this stage.
  • Related to the point above, make sure you know who you are talking to and and how they like to make investments. For example, if you are talking to Bessemer, a prolific Cloud/SaaS investor, make sure your metrics are tight and you know their portfolio. If you are approaching True Ventures, know that they like to lead/co-lead the 1st institutional round.
  • One of my panelists thought that investor feedback of, “ your metrics aren’t quite there for a Series A” truly means “we just aren’t that excited but don’t want to say no yet.” A lot of VCs like to hold onto optionality by not saying no, but not saying yes either. In my experience a “no decision” is often a no and rarely changes. For what it’s worth, I got a lot of this with Filtrbox in 2009 when I was raising the A. I was at $70-80k MRR and growing just around 10% per month and was told, “if you were over $100k MRR this would be an easy round to do.” I think I heard this over a dozen times.  We would have been at over 100k by the time the round closed. At the time this was super frustrating because investors were using it as a smokescreen and that option value. Had I been growing 20-30% M/M for 6 months, I think it would have been different. Note that 2009 was a very hard time to raise money, but the market is turning in that direction more than where we were in 1H 2015.
  • Growth and solid G2M metrics are a bit of a proxy for gross MRR, but you have to have enough runtime with those numbers for investors to be comfortable they are real and will stick around. Two to three months of high growth might get the meeting, but everyone is going to want to see another chapter or two unless they fall in love with the business on the spot or have FOMO.
  • The Series A crunch is real in that there are many seed-funded companies but not a commensurate growth in Series A funds out there — what this means is that rounds are going to be harder to get done and truly based on fit between the fund and the company. Do your VC research deeply and make sure they are a fit on paper so you don’t waste time.
  • I heard anything from $50k MRR to $250k MRR for Series A on the panel. Not super helpful given the range but illustrates the dynamic a bit.
  • Every investor will tell you to, “Have eighteen months of runway, be able to run at break-even, and it’s about survival if the market gets really bad,” – pretty vanilla and predictable advice, but the reason for it is investor risk-mitigation. If I fund a company’s A round and the sh*t hits the fan, I want to know we can batten down the hatches and ride it out without having to put in more money.
  • “Build relationships, not pitches,” was discussed as well. The panel debated whether this was true for seed rounds vs. Series A. The gist of the debate was that many Series A round investment decisions can happen when the investor is in “advice mode” and the light bulb goes off.

Check out a recording of the full panel below:

 

If this is helpful and/or you have more questions about raising your Series A – let me know in the comments!

Our investment in Smart Vision Labs

I’m excited to share that we recently led the Series A investment in Smart Vision Labs, Inc. The company is based in New York City, and is changing the way eye exams are done with the world’s first commercially available, mobile phone based autorefractor, the SVOne.

svone

The Smart Vision Labs press release and TechCrunch coverage talk about the global market opportunity and need in detail, so I’ll suffice it to say we believe that seeing well is a right, not a privilege. We also love to see technology used for good and to improve our lives, so these two ideas together are very compelling for us.

When we first saw the SVOne and met the team behind the technology, we were inspired by the potential and the sophistication of the approach Smart Vision Labs has taken. The solution uses wavefront aberrometry, a technology typically found in large, heavy desktop autorefractors in your eye doctor’s office. The team at Smart Vision Labs has shrunk this down, connected it to the cloud and put it into the palm of your hand.  Its true convergence.

Yaopeng Zhou (CEO)  and Marc Albanese (COO) are passionate and mission-driven co-founders with strong backgrounds in the vision and optics space. They have a great story and a long history together. From the early days at grad school, Yaopeng and Marc have had a clear vision (sorry, had to!) around what was possible in this realm and have been pursuing it relentlessly. What started as an idea between two researchers at BU has become a groundbreaking product already in use around the world.  Like every great entrepreneurial journey, they’ve had their challenges and curveballs thrown at them. Yaopeng and Marc have handled all of it well and are monster executors – they just get things done! This Series A financing is another one of those milestones, and we are fired up about where the company is going next.

The entire team at Smart Vision Labs is great and laser focused on the task at hand, and I’m happy to also announce I’m joining the Smart Vision Labs board as a Director.  All of us at Techstars Ventures look forward to digging in and working with Smart Vision Labs on this important mission of improving eye exams and helping people the world over see more clearly.

Chasing Rabbits

I was on an email thread earlier this week – a conversation between a Techstars company and its mentors. There was a healthy discussion around the current areas of focus and whether to start monetizing or focus on users/growth (or do both).

Wayne Chang,  another (awesome) mentor on the thread shared a great quote that really resonated with me:

dogchasing
“The hunter who chases two rabbits catches neither”

This stuck with me for the rest of the day. Such a simple thing, but so very true.  Its a great gut-check. Are you focused? Are you about to catch your quarry? FOCUS! is a startup rallying cry, almost to the point of being a cliche’ at this point, but its valid.  Early stage market validation and finding product-market fit are so, so important and yet many companies get distracted and try to do too many things at once.

To be fair, I’ve also observed there being a lot of grey area around what it means to be truly focused. For some companies, focusing on user acquisition and raw growth vs trying to monetize those users is enough. For others, driving success with one user case, or in one vertical may be enough. I’m working with a company now that is super early but is doing 4 things at once. They are laser focused on the mission and vision, but the tactics  require doing many things at once. They are focused on winning the market, and everything they do rolls up to that strategy.

In all cases, its the end result that matters. Every business is different, but if you sit with this quote for a minute…it just might illuminate something valuable. Happy hunting!

Welcome to the Future

2013-05-26_techstars_ID_final_bug with typesetWhen I was a kid, I was always fascinated with technology and mechanics.  I could not get enough of anything that seemed complex or innovative. When I was a kid I built model planes, I built and raced RC cars, I also built and flew gas-powered RC planes for a few years. Then I shifted my focus to computers and cars as I got older. I grew up in the bay area and was surrounded with early tech and I was just drawn to it.

I also seemed to have a really hard time staying focused on just one thing for very long. I wanted to absorb as much as I could. I’ve always been interested in what’s next. Its not ADD, its curiosity (or so I tell myself).

I was still in high school when I applied for an internship for a valley tech company. My duties were split between the QA lab and writing a Investor Relations database for the CFO. Looking back, this split duty may have laid the foundation for my entire career. I’ve always found the most rewarding and challenging work to be a combination of business strategy and technical details. My early career path followed this model, now that I think about it. I’ll spare you the details but what’s relevant is that I couldn’t really figure out what to major in when I went to college. I loved tech, but couldn’t commit to being an engineer, and I loved business but didn’t love numbers enough to want to be an Accountant or Finance major (ironic, right?). I decided to split the difference and selected Marketing as a major at the CU Leeds School, and they had a brand new Entrepreneurship track that I hopped on. I haven’t looked back.

The last 15 years of my professional life has been an amazing journey across a number of different industries, markets and models. As it turns out almost every one of the companies I’ve either founded or been a part of was angel and venture backed (7 of 8 to be exact). I’ve had days where I loved VCs, and I’ve had frustrating days when I’ve hated them. For years I thought about getting into venture capital, and the idea that I could be involved in a larger number of businesses at once really intrigued me. I told myself that if I ever had the opportunity, I’d carry with me all of the lessons and scar tissue I had accumulated over the last 15 years. It had to be the right platform, the right team, and the right culture. I’m proud to say the time has come.

On Wednesday we announced a new $150M venture fund at Techstars. There has been a bunch of great press on it, and David wrote an phenomenal post that touches on how Techstars got to this point. Brad Feld also posted his thoughts on our evolution, and Mark Solon wrote a great post about his own journey to this point. I could not be more excited and humbled to be able to call David, Mark, Nicole and Jason my partners. I learn from them every day, and enjoy the unique strengths and perspectives we all bring to the table. I’m incredibly thankful to have a seat at the table.

I met David Cohen in 2006, when I was running Newman Venture Advisors. We had just sold off an early stage company I was the interim CEO of, and he casually asked me what I was going to do next. I pitched him on an idea I had been developing. Something to do with filtering the web and improving the signal to noise ratio. David pulled a two page exec summary he had written out a file cabinet. (We still used those back then). It was, almost verbatim, what I had just pitched. He suggested I apply to this new thing he was doing called Techstars. I demurred, and thought it wasn’t a fit for me. I think he said something like “just apply, it will be a good exercise”.  Always up for a challenge and immediately seeing the value of the application process, I agreed. On the way out the door he mentioned “oh, by the way…applications close in two weeks and you have to provide a functional prototype.” After the mild panic subsided, I put my head down and Filtrbox was born. Thanks for the nudge David, you changed my life!  David also introduced me to Tom Chikoore who became my co-founder and CTO at Filtrbox. We clicked quickly and although we barely knew each other we shared a huge vision for what was possible. Reflecting on how this all started,  there is something magical and serendipitous about being part of the team at Techstars today.  My future is here, and it all started almost a decade ago. There are no coincidences.

I wish I could tell you I was in constant disbelief about how this has all come about, but I’m not. I’m blown away, and at the same time not surprised. Techstars is the real deal. This organization lives and breathes its #givefirst mantra and entrepreneur-focused mission every day.  I’m constantly learning, constantly inspired, and super excited for this next chapter.

I’ll do my best to “do it right” and remember my experiences as an entrepreneur pitching other VCs. I’m not sure I agree with this Venn diagram (thanks @yoavlurie), but 15 years as an entrepreneur and operator won’t be easily forgotten.

I moved to Boulder in 2002 with my amazing wife Leslie because we wanted to find balance. I wanted to do awesome things in tech, but on my own terms. Brad Feld was a huge early inspiration and supporter (and later, we had a walk around a lake in Slovenia that had a profound affect on me). Jon Callaghan and Phil Black at True Ventures were some of the first VCs I met whose care for the entrepreneur was clear and evident.  Trevor Loy at Flywheel taught me the value of looking around the bend. Simon Khalaf, my boss and soon-after co-founder at JustOn taught me how to get shit done and execute on a vision in ways I could have never imagined.  And the day that Seth Levine said “we” in a Mentor meeting during Techstars in 2007 instead of “you guys” has stuck with me to this day, and I’m lucky to count him as a good friend.

David and Mark both talked in their posts about how the people around them have shaped their careers and personal paths, and I could not agree more. I’m so thankful to have amazing people around me, and I look forward to meeting many, many more amazing and inspirational people in my journey as an investor.