# Friday, March 13, 2015

Yesterday I was in a discussion on Twitter with Semil Shah and Marc Andreessen about the value of a pitch deck. Marc thinks that the pitch deck has to be well polished and Semil and I think that a bad pitch deck with an awesome presentation by a passionate founder is ok for a seed round. 

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That was the critical differentiator:  the round. If you look at the conversation, Marc and I are in agreement on the need for a quality deck, we just disagree on the stage. This got me to thinking of the main difference between raising a Seed round and a Series A round.

As several Fresco Capital portfolio companies are currently raising a Series A or have just completed one, the difference between Seed and Series A is fresh on my mind (hence why I felt bold enough to challenge an icon like Marc yesterday..)

If you remember from my previous post, typically when you are raising a Seed round you don’t have your product-market fit figured out, nor do you have the exact facets of your business model ironed out. You typically figure this out during your Seed round and execute on your business model in a Series A.

Raising a Series A round is very different than raising a Seed round. Seed is about finding a business model, Series A is about executing that business model at scale. Marc is correct and you need polished deck for the Series A,  however, you also need to demonstrate two other important things in order to get funding: you need a repeatable business that scales. 

Repeatable Business

In order to demonstrate a repeatable business, you will have to show that you have customers, users, etc, coming back for more. You want to keep the customers you win engaged rather than churn them out.  Measuring engagement is not going to be the same for each business, but you need to figure out what it means for your business. Typically it has to with the Customer Lifetime Value and how many customers your business can support. 

If you are building a consumer app similar to Instagram for example, you have to demonstrate the engagement of the users you have posted XX photos per week. How many comments they leave, etc.  If you are building an e-commerse mobile app, it may be defined by the transactions performed each month, a game can measure how often they play and level up, or in a B2B service, how often certain tasks are performed. Even in the Seed stage, you should be able to determine this number, even if you have to do small tests and experiments to do so.

Scalable Business

Having a repeatable business is not good enough, you also need a scalable business. I’m not talking about the techie versions of scalability where your app and site perform the same under load as they do under normal conditions, but rather the business model. Typically this has to do with customer acquisition costs. Specifically, you need to work through this formula: CLV - CAC = $some really big number

Where CLV is your Customer Lifetime Value or the amount of profit each customer brings to your business over the course of their entire experience with you. This is difficult to calculate at an early stage (as you hope to have customers for 10+ years and you may only be in business for a year), but with enough cohort analysis and other data analysis, you should get a good feel for this number by now. 

CAC is the Cost of Customer Acquisition. This is how much it costs you to get a person through the funnel and convert to actually buy something. This number may be easy to calculate if you get 100% of your customers from marketing campaigns, take the total cost of the marketing campaign divided by the number of people who converted into customers. (For example if you spent $100 on AdWords and 4 customers converted, your CAC would be $25.)

Let’s look at how important this formula is:

CLV ($45) - CAC ($45.01) = -$.01

Here you are losing one cent on each customer and will eventually go out of business. Not good, not even the best deck can save you here.

CLV ($1) - CAC ($0.99) = $0.01

Here you are earning one cent on each customer and will eventually build a profitable business. The difference of just two cents can make or break your business! 

Now in reality, I’d like to see something like this:

CLV ($6) - CAC ($1) = $5

Meaning, for every $1 you put into your customer acquisition/marketing campaign, $5 comes out. Very scalable. If you are raising a Series A of $5m and in your deck you show this formula and say that $2m of the $5m is earmarked for customer acquisition, the investor knows that $10 should come out. Assuming that your formula is correct. (Actually as an investor, I would expect you to focus like a laser beam on the funnel optimization and get that CAC down while simultaneously increasing the CLV.)

As you move your business out of the seed stage and onto a Series A, make sure you make Marc happy and have an awesome deck. In addition, if you want his (or my) money,  demonstrate that you have a repeatable business that scales.

posted on Friday, March 13, 2015 6:39:20 PM (Eastern Daylight Time, UTC-04:00)  #    Comments [0] Trackback
# Thursday, March 05, 2015

If you have ever seen me speak at an Accelerator or startup event, I usually refer back to my experiences raising capital for my past startups. I’ve had experience raising money in four distinct eras: the “dot com era” circa 1999, the post dot com crash circa 2002, the post Google IPO-pre-Lehman collapse era (2006-2008), and the more current (post-Lehman) environment. While many of the rules of fundraising are the same, the stages, amounts, and terms have drastically changed over the years. Living and investing in Silicon Valley, I have observed the new pattern of fundraising, broken down to four stages.

fundraising stages

The four stages are:

  • Acceerator Round/Initial Capital
  • Seed
  • Series A
  • Series n

 

While there are all kinds of startups out there from pure software to BioTech to hardware, I’ll use the example of a typical software startup in the example below. The rounds and rules hold true in board strokes for most startups, but the dollars and sources may very. 

Accelerator Round/Initial Capital/Friends and Family ~$100,000 USD

This is the round where you move from idea to prototype, possibly to a first version you let people play with. Lots of experimentation, MVPs, and customer discovery. You use this round to get a sense of a “product-market fit” but not necessarily a business model. Typically you have two or three founders working on sweat equity and some money borrowed from friends and family. This is the stage to go through an accelerator or have a single angel investor. The average size of this round is about $100,000 USD, excluding the value of the sweat equity. Once you have demonstrated the ability to execute and launch a functional prototype and can extrapolate the results, you are ready for a seed round. 

*Note that if you are a hardware startup, your Kickstarter campaign, would typically come into play here. 

Seed Round ~$1-1.5m USD

This is the round where you obtain “product-market fit” and find your business model. You develop and release your product and start to measure the results. Your customers may not pay you a lot at this point, but you have built an audience or customer base. This is the round where you bring on your first non-founder hire and move out of the garage, typically to a co-work space. The range of this round is between $1m to $1.5 USD structured as a convertible note. The typical scenario is that you have 3-4 investors, one lead at half the round at $750k and the other 3 investors in at $200k - $300k each. It is important to have a lead that is capable of investing in your next round, possibly leading that round as well. As general advice, beware of an AngelList syndicate as your lead during this round, a lot of the time that syndicate is only good for the amount of the syndicate in your seed round and not capable to lead the Series A. 

Series A ~$3-7m USD

This is the round where you execute on your business plan and scale. You have paying customers, you know where to find them, and you just need to accelerate the process of on-boarding them. Typically with a Series A, you don’t need the money as you can grow organically, however, you raise a Series A in order to grow faster. Typically you use a portion of the funds raised for customer acquisition as well as some new hires in both sales and marketing roles. The range of this round is typically between $3m-$8m USD with some if not all of your seed investors participating. Sometime about now you think about moving out of that co-work space and into your own office. 

Series N… $25m-$1b USD

After a Series A, typically the later rounds (Series B, C, n…) are for massive growth. I like to use the analogy for a Series B as “rocket fuel.” For example, you found your product market fit in your seed round, you developed and executed on your business plan in your A, and you have a repeatable business that scales. You’re making money and have a great team. You know where your customers are and how to get them to give you money. If you grow out of revenues, you are going to get to the target (say 30% market share or $150m in revenues), but it will take you a long time organically, say 3-5 years. This is the airplane taking off and going fast, but hovering above the tree line. With a Series B, it is like poring afterburner rocket fuel on to your airplane and the goal is to get to the target in 1-2 years, not 3-5. Later rounds continue this trend and are also used for acquisitions to speed up the process as well as provide some capital to enter foreign markets. 

 

While this is not the exact path that your startup will take, it is the “textbook" course a startup will take. Use this information as a guide and as with everything in this business, your milage may vary

posted on Thursday, March 05, 2015 5:54:17 PM (Eastern Standard Time, UTC-05:00)  #    Comments [0] Trackback
# Monday, February 23, 2015

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Over the past few years I’ve had the opportunity to work with hundreds of early stage companies looking for funding. They all seem to approach fundraising the same way: make a big list of investors, ping their network for warm intros, and take every meeting with any VC that replies. Unfortunately this is not an efficient way of doing things.
 
Instead, I advise startups to filter the list of potential investors by three critical criteria and only meet with an investor that matches all three. If an investor meets only one or two of the criteria, you are wasting your (but potentially not the investor’s) time. So what are these three criteria?
 
Size of Check
Perhaps the most important criteria, and also the most overlooked by a founder, is the typical size of check written by the investor. For example, let’s say your startup is looking to raise a seed round of a $1.5m convertable note. The typical scenario is that you have 3-4 investors, one lead at half the round at $750k and the other 3 investors in at $200k - $300k each. If this is the amount of money you are looking for, don’t seek out Angels who are only going to put in $25k-50k at a time or don’t seek out VCs that typically invest $25m or $75m in a round. The size of the check that they typically write won’t match up with what you are looking for. 
 
Domain
Another common mistake is to hit up an investor who matches your check size, but doesn’t invest in your domain space. For example, let’s say you are a hard core B2B business and you approach an investor who only invests in consumer mobile apps, looking for the next Instagram. Big waste of time. What if you just finished your Kickstarter campaign on the next awesome IoT breakthrough and you approach an investor who has never made a hardware investment before. If they were even willing to invest, why would you want their money, they have no expertise in hardware? Instead filter only investors who actively invest in the space that you are in. They will add the most value since they understand your domain. In addition, they will have the most patience since by definition they are a believer in your space.
 
Location
Location is often is overlooked as a third matching criteria. I don’t mean your physical location, which is important to some investors-particually in Silicon Valley or a government backed fund, but rather the location of your target market and customers. If you are a startup targeting the Indian market, find an investor that is comfortable with that market and has an expertise there. You don’t necessarily have to find an Indian investor, but one where you are located that understands the Indian market and is not frightened by it and can connect you with the local ecosystem. 
 
After you have applied your three criteria filters to your list of investors, now it is time to reach out and get those warm intros. Only then will the meeting be productive. Often times I get pushback from founders saying that they are meeting with Investor XYZ that meets two of the three criteria. I tell them that the investor is wasting your time. What they are doing is taking the meeting to learn about your domain or target market without having to invest. For example if Investor XYZ never invested in Africa and your target market is Africa, they may take the meeting to see what is going on in Africa and report back to their partners. For them a one hour meeting in their office hearing your pitch is a worthwhile use of their time to get educated for free.
 
Same if an investor typically writes larger checks, say $25-50m average, but also has a new “seed” fund. Avoid those investors at the early stage. You get very little synergy from the brand name and will never meet the famous partners. In addition, if it really is a seed fund and there is no avenue for follow on pro-rata, you are back to square one when you are pitching the “main” fund. Also, in some instances the “seed” fund at a larger fund is typically the “B” team-young partners recently hired who are thrown into the seed fund without any real influence at the senior partner level. 
posted on Monday, February 23, 2015 2:29:15 PM (Eastern Standard Time, UTC-05:00)  #    Comments [0] Trackback
# Monday, January 05, 2015

Twenty years ago I quit the only “real” job that I ever had and started my first business. It was a pretty modest five person software development shop writing database driven applications and charging by the hour. My first exposure to Venture Capital and the high tech startup ecosystem was a few years later when the .COM era was in full swing. My consulting company wrote a ton of software for startups in exchange for equity. Then one offered to hire us full time; we accepted and I became CTO and my team of developers came with me. Then I flew out to Silicon Valley to raise Venture Capital on Sand Hill Road: Something I did not know anything about, but found exciting.


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We raised the money, built a business, and I never looked back. The startup I joined didn’t go public as we had planned, but we did eventually have the “exit”. It was 2002 and I had my first taste of the entrepreneurship bug. Over the next thirteen years I got to be the co-founder or very early employee of four more venture backed startups, all lucky enough to have an exit as well.


Over the past few years I had the opportunity to be part of the entrepreneur support system by doing a few angel investments of my own, sitting on some startup boards, mentoring startups at various accelerators, and co-founding and running an accelerator. It felt good to help entrepreneurs. As Telerik’s acquisition started to move from a discussion to a reality, I started to think about what would come next for me. As I talked with my friends and colleagues, they all gave me the similar advice: Jump right into another startup. Apparently they all think that I’m good at it. I started to think about what kind of startups I can start or join.

 

Then one day this past summer, I went up to San Francisco and had breakfast with a partner at SOS Ventures, then met up for lunch with Peter Thiel and a bunch of the 20 under 20 fellows (I’m a mentor there), then made it back down to Palo Alto and had dinner with a friend who is a partner at a fund on Sand Hill Road. The next day it hit me, I literally had breakfast, lunch, and dinner with a different VC. I decided then that I had to change my seat at the table so to speak and move from being an entrepreneur to an investor. The experiences that I had over the past 20 years of being an entrepreneur could be put to use over a larger surface area than just one startup.

 

I couldn’t go work for just any old VC, I needed to find a fund that had the same values as me: Entrepreneur friendly, international and diverse. I also needed the fund to a bit of a startup itself: I like to build things. Lastly, I needed to really like the people I would be partners with. After I thought about it in those terms, it was obvious to me that joining Fresco Capital was the right choice for me.

 

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I’m happy to announce that starting on Monday January 19th, I’ll be officially joining Tytus andAllison as part of the Fresco Capital team. I’ll be involved in all aspects of investment and operations with a specific focus on enterprise and IoT. Being based in Silicon Valley with two partners in Hong Kong reminds me of my last gig. I guess old habits die hard…


posted on Monday, January 05, 2015 12:45:16 PM (Eastern Standard Time, UTC-05:00)  #    Comments [0] Trackback
# Saturday, February 08, 2014

What do I mean “Mobile apps are dead???” When I first started out as a developer in the client-server era, things moved slow. We dreamed of doing things faster. Then came the Internet and “internet speed.” That was crazy fast. Now in the device + cloud era, I think things are moving at ludicrous speed.

Technologies come and go. Look at Flash on the infographic below. Devices come and go, remember how big the Palm Pilot was? Just 4 years ago the Blackberry was the number one mobile OS and the iPad did not exist! Standards are ever-evolving (remember the Blink tag?) and can die when you least expect them. What about the death of MS-DOS and MySpace? We barely remember them as we will barely remember iOS and Facebook in 10 years.

The Telerik Platform is designed to be future-proof, encompassing the entirety of native, web and hybrid universes and puts app requirements ahead of the development approach. It enables developers to create awesome experiences perfectly optimized for every app and every screen, today or in the future.

With the Telerik Platform, developers can focus on what an application should do first and then choose the approach that best balances cost, development time, reach and access to device capabilities. I’m happy to announce our new Telerik Developer Platform, which breaks down the silos of mobile apps. Mobile development will never be the same, check it out today at www.telerik.com it’s been 10 years in the making. ☺
Attend our keynote on Wednesday Feb 12, 2014, register here: www.mobileappsaredead.com

posted on Saturday, February 08, 2014 11:13:36 PM (Eastern Standard Time, UTC-05:00)  #    Comments [1] Trackback
# Monday, October 07, 2013

MACH5

After running two successful batches of the mobile focused AcceleratorHK in Hong Kong, Telerik is announcing the Mach5 Accelerator in Silicon Valley. Mach5 will focus on startups doing HTML5 Web or Mobile development using our HTML5 framework, KendoUI.

The accelerator will be located in our office on University Avenue in Palo Alto, the heart of Silicon Valley. We’ll run from January 6th until April 11th, 2014. Applications are open until November 22nd for the first batch: apply here.

The batch will be small, only three teams, but the benefits are huge. Besides office space, you’ll have a great 14 week program complete with Silicon Valley mentors, up to $25k USD investment (in exchange for 4%-6% equity), and a customer development and MVP boot-camp.

Telerik resources are at your disposal too. In addition to the mentors from Silicon Valley, Telerik will provide a senior developer from our Professional Services team onsite for a few weeks of the program to help the teams get started. In addition to the techie help, our demand generation, community, and “growth hacker” experts will provide assistance to the teams. While you are in the Valley for the program, tap into our Silicon Valley staff’s vast network. Lastly, our Video Production team will assist with some high quality videos for the teams to use in their marketing and fund raising campaigns.

The best applicants are two person startups with one techie and one business person doing HTML5 development willing to relocate to Silicon Valley for 14 weeks and work on the startup full time. Applications are open until November 22nd for the first batch: apply here.

posted on Monday, October 07, 2013 10:34:24 AM (Eastern Daylight Time, UTC-04:00)  #    Comments [0] Trackback
# Tuesday, September 03, 2013

In case you missed AcceleratorHK Demo Day 2, the videos are now live. The entire video roll is here (about 1 hour) and the individual team links are below the break. Enjoy!

Individual team videos:

Verybite

Gyaan Tel

DooD!

Sofly

iceVault

Captain Planner

posted on Tuesday, September 03, 2013 4:42:25 AM (Eastern Daylight Time, UTC-04:00)  #    Comments [0] Trackback
# Tuesday, August 13, 2013

Last night in Hong Kong was the cohort #2 Demo Day! Over 150 people braved severe Typhoon Utor to make their way to The Good Lab for Demo Day 2. We squeezed about 120 into the main theatre and about 30 or so in the live streaming in the kitchen area of the Good Lab.

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The teams were hard at work but we all gathered at show time and did a shot of Port compliments of the Portuguese team. I tried to say something motivation and semimetal, but all I could say over and over was “I’m proud of you guys.”

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After a brief intro by Tony at the Good Lab and a photo slide show, I did a brief introduction. I fooled the audience into thinking that I made a typo on a slide with the wrong date, I had August 13 2012 on the first slide since one year ago to the date I began the Accelerator journey when my board approved the project. Quite fitting to have our second demo day on the one year anniversary.

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The teams did amazing! Here is the rundown:

  • Verybite: healthy home cooked food delivery service
  • Gyaan Tel: mobile data analytics for emerging market retailers
  • dood! Our 100% local HK team with a photo sharing app that turns your photos into gifts
  • SoFly: second screen and TV show tracking
  • iceVault: offline storage for your online assets. Starting with Bitcoin.
  • Captain Planner: online travel at the click of a button (really.)

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After the presentations we had a networking event and each team had their booths set up. Despite the looming T8 typhoon, I had to kick people out of the Good Lab after two and a half hours.

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Of course we had the all-important after party in LKF. By now the Typhoon had hit in full T8 force, at one point we took to dancing in the streets in the typhoon’s monsoon rain.

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Stay tuned for the videos and interviews to be posted here in a few weeks.

My journey at AcceleratorHK ends here. I’ll be moving to Palo Alto and running an accelerator this fall in Silicon Valley. Stay tuned as Paul and I figure out how to make cohort #3 of AcceleratorHK!

posted on Tuesday, August 13, 2013 11:36:37 PM (Eastern Daylight Time, UTC-04:00)  #    Comments [0] Trackback