# Tuesday, May 19, 2015

Everyone is talking about replicating and building the “next Silicon Valley” with the rise of Silicon “roundabouts” and Silicon “beaches” in several locations around the world.  While this is going on very few people are talking about how Silicon Valley is evolving: specifically that Sand Hill Road is now the Wall Street of the West Coast. 

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The rise of the “Uber” Round

More and more tech startups are raising hundreds of millions or even billions of dollars in later stage “uber” rounds. (I call these the “uber” rounds as a play on the German for “super” or after the company Uber that has raised well over $4 billion in Venture Capital.) As of this writing, Lyft has just closed a $680 Series E. According to Crunchbase, Lyft is one of 20 startups that have raised $1B or more in venture funding in the past 5 years.

Companies are going public later and later, a trend started by Facebook; instead of rushing to an IPO, companies are staying private longer and are taking more and more uber rounds. (Some people think that these companies should be going public as the investing public can’t participate in the later stage growth, allowing the rich to get richer.) The average amount of money that companies have raised before going public has been going up, more than double since the 2008 downturn.

What is Going On?

Most pundits think that companies are staying private longer to avoid the hassle and expense of going public as well as regulations like Sarbanes-Oxley. While those are all reasons to stay private, the real reason is that Silicon Valley VCs on Sand Hill Road have evolved to grow larger and focus on late stage massive growth. 

Typically an IPO is for massive growth. A company will get to a certain stage of maturity and then raise anywhere from $300m to over a $100b at an IPO. The IPO accomplishes a few things: allows early investors and employees to “cash out” and sell their shares to the public as well as provide much needed capital for massive growth. 

Today companies are delaying the IPO and raising the growth capital with their uber rounds. On the surface this looks crazy. But in reality, it is genius. 

Lean Startup and Uber Rounds

Let’s take a made up startup LeanCo as an example. Assume LeanCo already took a Series A ($8m) and Series B ($30m). Now they are kicking butt and are growing at the same rate as the other high performing startups. Say they have well over $250m in sales, expanding market share, healthy margins, and are expanding internationally. This is the textbook case for an IPO.

What would happen is that LeanCo would go to a big Wall Street bank and raise approximately $5-$10+ billion in an IPO. After all the costs and fees and the Wall Street bank’s cut, the company would have a lump sum of money, let’s just say $5b. Now the company has the war chest it needs in order to grow. Typically LeanCo will acquire smaller rivals, enter new markets, and build out new products and services. 

Instead, the LeanCos are choosing to raise billions for growth before an IPO. Instead of raising $5b in an early IPO, they are raising $2-5b privately before a much later IPO (at a much higher valuation.) They are raising the money $400 or more at a time. Here lies the genius of this approach: LeanCo only raises what it needs, when it needs it in a private (closed) market that will provide a higher valuation than a public one. There are also other benefits to staying private during the growth stage, like not disclosing your financial health and spending to competitors. 

For the investors, this is actually a much more conservative approach. By only giving LeanCo the money when it is needed and doing it incrementally, LeanCo has to operate in iterative cycles similar to the Lean Startup and Agile Development. For example, if investors provided LeanCo with $5b in one lump sum, LeanCo may spend it unwisely feeling that they have a lot of capital on hand. If investors give LeanCo $400m or so at a time, LeanCo will have to take an incremental approach. If LeanCo were to go under after an IPO, investors would lose all of the $5b. If LeanCo were to fail after raising “only” $2b, investors lose far less money. 

The Post-IPO World

The VCs on Sand Hill Road in Menlo Park have changed the game. I remember in the .com bubble, the largest Venture Fund was $1b and the largest deal was around $75m. Now the VC funds on Sand Hill Road are all well over a few billon each and think nothing of leading a $500m round. 

Eventually the startup companies are going public, however, that is only because at some point they have to in order for the VC investors to sell their positions and the employees to cash in their stock options. I’m sure that over time, Sand Hill Road will evolve past the IPO, where companies stay private forever and large East Coast financial institutions buy back those positions from the VCs and earn returns via dividends, etc. You are already starting to see the signs of this when large pension and investment banks such as Fidelity, T. Rowe Price, and Goldman Sachs are part of the last round of financing for companies like Lyft, Box, and Uber. In the future, you won’t be able to buy shares in a Facebook individually, but you will buy shares in a Fidelity “Silicon Valley" Mutual Fund. Silicon Valley is disrupting Wall Street. 

What Does this Mean for Startups in Silicon Valley

We all know that New York City and Wall Street is the IPO center of the world. Did a startup have a competitive advantage by being located in New York? As a native New Yorker who built three startups in New York City, I can confidently say no. Mark Zuckerberg proved that when he showed up to his Wall Street pre-IPO meetings in his hoodie. When your company is ready and has the right numbers, the Wall Street Investment Banks will work with you, no matter where you are.

What about tech startups located in Menlo Park, Palo Alto, or Mountain View, close to Sand Hill Road? (Sticking to the geographical description of Silicon Valley.) Same thing, when your company is large enough to take the uber rounds, it does’t matter if you live in Menlo Park or Montana, or Mongolia, the VCs on Sand Hill Road in Menlo Park will work with you. You are already seeing this with startups being located in the City of San Francisco and not down south in Silicon Valley. The larger established companies such as Facebook (Menlo Park), Tesla (Palo Alto), Google (Mountain View), etc are down in Silicon Valley, but the young, early stage startups are up in San Francisco. This means San Fransisco is about the startups and Silicon Valley is about the money.

San Francisco is the new Silicon Valley. Silicon Valley is the new Wall Street. 

posted on Tuesday, May 19, 2015 5:11:38 AM (Eastern Daylight Time, UTC-04:00)  #    Comments [0] Trackback
# Sunday, May 10, 2015

I’m super lucky to be from New York City and have lived in both Europe and Asia before settling down in Silicon Valley two years ago. I’ve also been lucky to work at a startup in Eastern Europe that grew to be so successful that many of my former co-workers there have become either Angel investors in the region or left to do their own startups. Of course, Fresco Capital is geographically diverse with 2/3 of the partners overseas. Because of this I get to meet a large amount of startups from outside of Silicon Valley, particularly from overseas. 

Typically when they come to Silicon Valley for the first time, I am their first visit. (Honored!) That said, they all ask me the exact same question: “Steve, we are about to raise our Seed round of $1m, can you introduce us to some investors that will put our round together?"

This is when I have to give the founder “The Talk."

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The Talk(TM)

I say that raising a $1m Seed round in Silicon Valley is easy, just go to a Starbucks in Palo Alto and trip a few people and when they fall down, $100k will fall out of their hoodie. Aim for someone with a Facebook or Google hoodie and maybe $200k will fall out. While this is a (slight) exaggeration, the point is that most seed rounds that are not lead by an institutional investor are pieced together by wealthy Angel investors usually $200K or so at a time. While a foreign startup has the potential to meet Silicon Valley Angel investors on a two week visit, typically, you raise this money via a personal network. (Your’s or your advisor’s.)  If you are not from the Valley, you won’t have this network and would need to stay and network for months and months, burning cash and wasting time (that should be used to build your startup).

I Know Nobody in the Valley, What Should I Do?

I always suggest to non-local entrepreneurs to go raise their seed round locally in their home market where they have a network of potential investors. It will be easier and faster than trying to raise money in the Valley where you don’t know anyone. You can then come to the Valley for your Series A from a  position of strenght after you have nailed your business model. 

This presents a problem insofar of the level of sophistication of the investors in your home market. While I agree that most markets are not nearly as sophisticated as Silicon Valley, there are “Valley” type investors in all markets these days, you just have to go find them. The easiest way: build an awesome business. I was talking with by buddy Pascal the other day about valuations in Europe compared to the Valley. Startups outside of the Valley tend to have less of the valuation inflation that the Valley startups do. If you build a sustainable, repeatable, scalable business with funding in your local market at a competitive valuation, when you come the Valley later on to raise a Series A, you will find it easy to raise money!

Good luck. :) 

posted on Sunday, May 10, 2015 1:51:36 AM (Eastern Daylight Time, UTC-04:00)  #    Comments [0] Trackback
# Friday, May 01, 2015

In my role at Fresco Capital and as an advisor to several startups, I’ve seen it all with founders: disputes over shares, disputes over money, disputes over a new laptop, founders break up, a founder falling ill, founders get married, founders get divorced, founders get into physical arguments. Often this leads to one founder completely disengaged from the business and still holding a significant amount of equity or even a board seat. We’ve seen this at large companies such as Microsoft and more recently at ZipCar. Typically you need this equity to hire executives or attract investors. Worse, if the company is being acquired, you now have one founder who can hold up the deal if they are on the board and disengaged. That of course is a problem, but one that can be solved with a dynamic founder agreement. 

 

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Founder Troubles 

Most founders settle the division of equity question with a static founders agreement. It usually goes something like this: 

Founder 1: 50%, vested over 4 years, 1 year cliff 

Founder 2: 50%, vested over 4 years, 1 year cliff

This solves a lot of problems, such as if a founder leaves after two years, they will still have 25% of the company but give up the second half of their equity. What happens if one founder is not “pulling their own weight” or contributing enough to earn the vesting (in the other founder’s eyes) but did not leave the company? What happens if they have to leave due to illness or personal emergency? What happens if there is misaligned expectations as what skills a founder brings and what role a founder will play?

I’ve seen this happen at one of my own startups. One of our founders was a lawyer and at the time we sold the company, he could not represent us due to it being a clear conflict of interest. While the legal fees were not all that bad (maybe $50k), to this day, almost ten years later, my other co-founders are still mad at the lawyer co-founder. This was clearly misaligned expectations.

This is what Norm Wasserman calls the Founder’s Dilemma, or the unexpected consequences of not spelling out the roles and expectations of the founders early on combined with the unintended complications of a founder leaving early or disengaging. He suggests a dynamic founders agreement.

The Dynamic Founders Agreement

The dynamic founders agreement is a way to mitigate the risk of an underperforming founder by changing the equity based on pre-set parameters. For example say I am starting a company with my friend Sam. Sam and I agree to a 50-50 split with Sam being the “business guy” and me being the “tech guy". The assumption is that I will be the coder of V1 and lead the development team after we get funding. But what if I need to leave the company due to family emergency? What about if I decide that I don’t want to code anymore, before we can afford to hire a developer? What if I only give 30 hours a week and consult on the side? 

A dynamic founders agreement is a big IF THEN ELSE statement that spells all of this out. IF Steve works as expected, his equity is 50%, if Steve has to leave the company, if he becomes disengaged, here is the pre-negotiated equity and if we have to buy Steve out, here are the terms. For example:

IF:

Steve works full time as CTO performing all the coding and technical duties of V1, his equity is 50%, vested over 4 years, 1 year cliff.

ELSEIF:

Steve works part time, is disengaged, or we need to hire developers sooner than expected, his vested equity is reduced by half and he forfeits his unvested equity. Loses board seat. 

ENDIF:

If Steve has to leave the company because he needs a job or a family emergency:  if Steve built V1 then the buyout is a one time payout of $50,000 USD cash or 2% vested equity, if Steve did not build V1, the buyout is 0.5% vested equity. Loses board seat. 

 

Having a dynamic founders agreement won’t solve all of your problems, however, it will make the the process of removing a founder much less stressful. Sure some of the language in the dynamic founders agreement will be subject to interpretation, but the “spirit of the agreement” is much easier to follow or even if you have to litigate, more robust.  If you never need to use the dynamic founders agreement, but built one anyway, it will force a frank and open conversation about roles and commitment among the founders. This only strengthens the relationship between founders, increasing the chances of success. 

 

posted on Friday, May 01, 2015 1:59:24 PM (Eastern Daylight Time, UTC-04:00)  #    Comments [0] Trackback
# Sunday, April 26, 2015

All startup teams need help. The good news is that there is no shortage of “startup mentors” out there. The bad news is that there is no shortage of “startup mentors” out there. How you recruit and work with your advisors is critical as the right advisors managed properly can really have a powerful impact on your business.

Advisor

 

 

 

 

 

 

 

Many startups that I work with like to build as impressive a list of advisors as they can. When talking with founders about advisors, I usually focus on two things:

  • Making sure the advisors augment the skills lacking in the current team
  • Formalize the relationship with the advisor and compensate them according to an objective standard

The Team’s Needs

Look at the needs of your business over the next six months to a year and then look at the skills of your team. You will have a lot of gaps. Start to think how an advisor can fill some of those gaps. Some teams will need help figuring out BizDev or do pricing of their products. Some will need help with higher level technology decisions-or someone to interview a CTO candidate/co-founder. Some teams have all the necessary parts but lack a little “gray hair” or folks with the battle scars of doing business a long time. Some teams lack the network to raise money and some teams lack domain experience. (Which I question why are you in that business in the first place.) 

You need to find advisors who can augment your team with skills, experience, and connections. If you are all PhDs in astrophysics and are building a related startup, you don’t need the head of your University’s Physics department or even a Nobel winning Physics on your advisory team. You will need some people with business and fundraising experience. Also, don’t try to go get famous people to be an advisor; I know that Mark Zuckerberg is not meeting with you monthly and won’t add much value except for the coolness factor. 

The good news is that there are a ton of people out there willing to give you advice. The challenge is keeping the advisors engaged.

The Dreaded Conversation: How to Formalize and Compensate an Advisor 

Your advisors mean well and want to help, but they are busy people. You need to set the expectations up front as to what kind of advice you need and how often you will be asking for it. If you don’t have this conversation with your advisor, you run the risk of some very misaligned expectations, leading to a bad experience for both sides. Typically for companies that I advise, we usually have a call once month or every six weeks. But when something comes up that I am uniquely qualified for, the frequency is higher. 

You also need to formalize your relationship with you advisors! This is important for several reasons, but the first is legal liability. If overnight your company is worth billions and your advisors have been informally advising you without a contract, they may think that they are due a large stake in your company and sue. Another reason to formalize your advisor’s relationships is that by formalizing it, they will take the relationship more seriously. So many companies ask me to advise them, but the ones I say yes to and have a formal agreement with, I feel more obligated to make the time for. An easy way to lock down an advisor is to use one of the standard Advisor Contracts. I have used this one several times

Lastly, you need to compensate the advisors in order to keep them engaged. If your advisors want a huge chunk of your company or a salary or stipend, they are not the advisors for you. Use the following matrix to determine how much to compensate the advisor with. First determine what stage your company is at: idea, startup, or growth. Idea is usually pre-seed, startup is usually Seed stage, and Growth is typically a Series A or later. (I explain the stages of funding here.) This is important due to the amount of risk your advisor is taking. Then determine what kind of advisor you are signing up: Standard, Strategic, or Expert. I know that these are kind of vague, but they usually line up pretty easily. Make a proposal and then use the equity number in the box. This should be a standard and non-negotiable. If the advisor tries to negotiate away from these numbers, don’t have them as an advisor. They should not be in it for the money/equity, the compensation is more of a “nice to have.” They should be advising you because they want to.

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Lastly, have a vesting schedule and a way to easily remove the advisor. Typically you have an advisor for a year or two, depending on the need of your team. For example, if you lack a technical team at the idea stage and engage with an advisor who is very technical and expected to help you recruit and hire an CTO within a year, you probably only need to sign that advisor up for a year or two. Then make room for other advisors in other domain areas. 

Advisory Board vs Board of Directors 

What is the relationship between a Board of Directors (BOD) and your advisors? Nothing. More importantly,  your board members are responsible for the governance of the company and legally liable for its execution, while your advisors are responsible for nothing and legally liable for nothing. Your directors have high engagement, often meeting in person several times a year. Your advisors are less engaged and often engaged via email and Skype. 

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Communication 

You should update your advisors (and investors) with a bi-weekly or monthly email: explain the good, the bad, the ugly since the last email communication. At the end of the email put in the ask, or what you want your advirosrs to pay attention to or what you need from them. While your advisors may only skim over the updates as they come in, at your next call, the advisors can review those emails before the call and make the call more efficient. You won’t have to spend the first 10 minutes of the call updating the advisor on what happened over the past month. I love getting these emails, it shows me that the companies that I advise are organized and understand proper time management. 

 My Experiences Advising 

I’ve advised many companies over the years. I’ve been asked by many more than I’ve said yes to, I only say yes to companies that I can add value, are in an exciting space, and the founders are awesome people to work with. (Now that I am an investor, I say no to almost 100% of the asks to prevent a signaling issue. I did, however, recently agree to become an advisor to a company where my skills made me uniquely qualified to help.)

What was my experience like? Some companies rarely contacted me. Some contacted me randomly, usually when they needed some specific advice. Other’s scheduled a regular phone call. I’ve done it all: lots of general strategy, accelerator application advice, fundraising tips, team compensation, interviewing CTO candidates, make introductions, M&A advice, and sitting in-between founder breakups. 

Some of my companies have had exits, sometimes the money from my shares was great; one exit was small and paid for an awesome dinner and night out with the team. One company I advise recently shut down and I helped the founder find a new gig. All my experiences were worth the time I put in and lots of fun.

Lastly, I learned a lot advising, as much as I taught the founders! 

posted on Sunday, April 26, 2015 3:22:48 PM (Eastern Daylight Time, UTC-04:00)  #    Comments [0] Trackback
# Sunday, April 19, 2015

Only five years ago, getting into and completing an accelerator program was something special. That was when there were only a handful of Accelerators worldwide and the program, mentorship, and opportunity for follow on funding was huge. Today there are literally thousands of accelerators out there, diluting your experience, unless you go to one of only a handful of programs. Today going through an accelerator does not distinguish your startup. I mentor at a bunch of accelerators and have seen a disturbing trend: A lot of startups are going to multiple accelerators! This is a very bad idea. 

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Accelerator Hopping

I’ve seen several startups “accelerator hop” or join multiple accelerators. The top reason I have been seeing is that a startup has gone through a regional accelerator in their home country and then wants to use an American accelerator to “enter the US market.” For example, let’s say you are startup CoolCo from Poland and you go through the PNA or Polish National Accelerator. You’ve given up 6% for somewhere between $20k and $75k. After a few months at PNA you “graduate” at Demo Day with some initial traction and a small amount of revenue, but don’t necessarily have much opportunity to raise money in Poland. You know that your core customers are in the United States, so you need to enter the US market. PNA does its best to introduce you to some mentors and connections in the US, but you are pretty much on your own. So you decide to go to another accelerator, in the US, in order to enter the US market.

The problem with this model is two fold. The first is that you get diminishing returns going through a second accelerator. You already spent the time working on the “product market fit” working with mentors and learning the “lean startup.” You should be an expert by now. :) All those mentor meetings, Friday check-ins, demo day pitch practice, will be educational, but a distraction. That is time you could be actually working on your startup, specifically hustling to enter the US market! Ironically joining an American accelerator will slow down your US entry! In addition, the accelerator in the US, while located in the US, is not going to help you break into the US market, just like being an exchange student in Italy won’t make you an Italian citizen. US accelerators do not focus on US market entry, so you are better off hustling and entering the US market on your own.

The second problem comes down to economics. Your second accelerator will take another 6% stake for somewhere between $20k and $75k. So you will have raised approximately $100k for somewhere between 10-12% of your company. Your next step is to try and raise a Seed round and now your have given up too much equity in order to get the seed round. 

Another reason I am seeing in the accelerator hopping phenomena is funding. Some startups join one accelerator, can’t raise a seed round after Demo Day, and then join another accelerator, hoping that the second accelerator will introduce them to more investors. They fall in the same equity trap as CoolCo above. The problem is that no accelerator is going to magically change your chances of raising money in three months, only traction and customers will do that. You are better off not wasting the time in another program and spending all of your energy getting customers. Paying customers leads to investment, not multiple accelerators. 

The Middle Ground

I understand that once you have graduated an accelerator your startup may not be ready for a seed round. In addition, you miss the focus and push that an accelerator gave you. One possible compromise is to join an incubator program. Incubators usually provide space, business services, and a very light mentorship program without taking any equity. They are typically run by government development funds or other non-profit programs and last between six months and a year. A handful of incubators will also provide access to some non-equity grant money. Incubators are not perfect, but can give you the final push your startup needs before doing a seed round without diluting your equity or wasting your time. 

Either way, don’t delay and go out and hustle!

 

posted on Sunday, April 19, 2015 1:54:38 PM (Eastern Daylight Time, UTC-04:00)  #    Comments [0] Trackback
# Saturday, April 11, 2015

A lot of people misuse the term “MVP” or Minimum Viable Product. To be clear an MVP is not a beta, not a prototype, but rather an experiment designed to test your value proposition’s assumptions by measuring a behavior and learning from the results. 

Behavior Testing

 

 

 

 

 

 

 

 

 

 

Back in the day, Dropbox did an MVP as just a video and Buffer was just a landing page. Both were experiments to determine if Dropbox or Buffer should even exist. Instead of guessing and building prototypes, they build the simplest of things in order to measure a user’s behavior. Today startups are building functional prototypes and calling them MVPs. They are better off building something they can learn from. Typically the first MVP doesn’t even have to be anything on a device or computer. For example, I once advised a new travel startup that wanted to give you one click access to a daily itinerary based on a map. They assumed that people wanted a map with pin points on it and times to follow. I told them to go to tourist spots and give people real maps with real pin points circled and an analog itinerary to follow. That was an MVP, it was an experiment (map) that measured (how many as a percent of total) a user behavior (did they use the map or not). Let’s take a look at how to build a better MVP.

Getting Started: Customer Segment and Value Proposition 

The whole idea of an MVP is to measure an actual result against your expected result to prove or disprove your assumption. In order to do that you need data. The first place to start is to think about is your customer segment; you have to know who your target customers are going to be. Without knowing your exact segment (22-34 year old professional, urban women, single, living alone, earning over $75k), you won’t be able get the correct pool of users to test on.

After you define your customer segment, you define your value proposition. Too many people think that their value proposition is just the solution to the problem they are solving. That is incorrect: your value proposition is the delta between the current solution or workaround to the problem people are currently using and your solution. You measure your value proposition in terms of how much better your solution is compared to the solutions that exist today.

Let’s say you are solving a problem for buying movie tickets. Several solutions already exist; there are lots of web sites, apps, etc. Maybe your solution involves buying the tickets via SMS. Regardless, you have to think about what the alternatives to your solution are and compare them against that. One is simply buying the ticket at the box office. Here your alternative has value, but not tremendous value. Alternatively, let’s say you are developing a life saving cancer drug. The alternative without your solution could be death. In this case your solution would be incredibly valuable.

The Assumptions That Fuel Your Value Proposition

Underpinning your value proposition are your core assumptions. These are the things that would compel someone to buy your product or service. The job of the MVP is to test those underlying assumptions. The only way to successfully test those assumptions is by making a prediction of the result and comparing the behaviors that you measured up against your predictions. Your predictions should be based in fact, facts that would determine if you have a viable business or not. If you don’t make a prediction, then you will not have a way to determine success or failure of the MVP test. 

Let’s say you are building a landing page, Buffer style. Your MVP will be to measure how many people give you their email address after your landing page described your product. You will have to drive traffic to your landing page, most likely by taking out some Facebook or Google AdWords ads. You want to measure the conversion rate of people who clicked on the ad (since you pay for click) to providing their email addresses. For example, if 100 people clicked on the ad and came to your page, but only 4 provided their email address, your conversion rate is 4%. (Not bad actually in e-commerce.) 

Should 4% be your target? No. You need to determine your prediction based on facts and your business model. Let’s say you estimate spending $100 on Google AdWords to drive traffic to your MVP.  If you have a conversion rate of 4%, it will then cost you $25 to acquire each customer. $25 is your CAC or customer acquisition cost. You need to estimate what your Customer Lifetime Value (CLV), or the amount of profit you expect to get out of each customer over the course of their relationship with you, is. At this stage it will be fairly inaccurate, but you need to ground your assumption in reality. (Future MVPs can test pricing.) Let’s say you make the CLV to be $21, based on a lot of factors in your business model. (I talk more about your CLV and CVC here.) 

With a a CLV of $21 and a CAC of $25, you will lose $4 on each new customer you acquire. Or CLV ($21) - CAC ($25) = -$4. 

For your MVP test, you will need a higher conversion rate/lower CAC rate in order to make a profit. For the first MVP test make a prediction that the conversion rate will be 5%, bringing your CAC down to $20. Or CLV ($21) - CAC ($20) = $1. 

Interpreting The Results

Now with your assumptions based in some business reality, it is time to run the test. Typically the results are one of the three following numbers (remember you are aiming for 5% conversion):

  • 0.021%
  • 4.28%
  • 17%
Let’s take 0.021%. This is an absolute failure, you can safely assume that your assumption is invalidated. Safest thing to do is declare the assumption invalid and go back to your value proposition and rethink it. If you have other assumptions associated with your value proposition, you can do some more MVP tests to determine if the entire value proposition is invalid or not. Chances are you will have to iterate your idea and value proposition some more.
 
What to do if you are at 4.28%. Technically it is invalid since you need 5% conversion rate in order to make any money. Should you just give up and go home? No. You should try some new UX and new design or different language and run the test again. Don’t run the test without changing anything! If your future tests with minor changes are at or over 5%, then you can declare your assumptions valid and move on to test the next one.  
 
Let’s look at 17%. Woo-hoo, your assumptions are more than valid, you blew away your predictions. Verify that your test was fair and then declare your assumption valid and move on to test the next assumption. 
 
Thats all there is to it!  Only by clearly defining what success is and basing those numbers in a business reality is an MVP useful. Anything else is just a beta. 
 
 
 
posted on Saturday, April 11, 2015 8:27:51 PM (Eastern Daylight Time, UTC-04:00)  #    Comments [0] Trackback
# 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