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Very Early Stage Technology Investing

Archive for the ‘Pitches’ Category

Characteristic of Good Seed Stage Founders

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As early stage deal flow increases across the country entrepreneurs face a more difficult task in breaking through the clutter.  First impressions matter more than ever.  As a founder you are blind to the competitive nature of fund raising because you may only see your company’s pitch. Investors see lots of companies and have the luxury of choice.  While frustrating when raising money, coming to grips with this reality and building a better first impression is critical to getting investors on board.  There are plenty of pitch examples and tips on what to put in your exec summary, etc.  I wanted to take a stab at explaining three things I look for in a good seed stage founder/founding team.  These characteristics will drown out a polished pitch or burnish an unpolished one.

First a note on homework.   Make sure you are even calling on an appropriate source of money.  To simplify managing their deal funnel investors often apply exclusionary criteria which they put on their websites, blogs, etc.  Are you pitching someone who would view your company as stage-appropriate and industry-approrpriate?  Do you meet their geographic preferences?  Are there companies in their portfolios that would suggest your company is a potential fit.  If you can’t qualify me as a prospective investor, you are not going to be efficient in how you go about other tasks.

The first characteristic I look for is a bias for action.  I want to invest in teams that are not afraid of taking on a big market, but also are willing to go directly at the unknowns.  This requires a willingness to get out and interact, make connections, seek feedback and insight from prospective customers and partners.  A seed-stage company, our sweet spot, is really a premise in need of validation.  That is really the essence of a seed stage plan – what must be true for this to work and how can I start knocking down those assumptions.  The DNA of a good founder or founder team is a combination of confidence in the premise and fear of being wrong.  I look for people with their senses turned way up, afraid of what they don’t know.  If you have that sense – and you can’t fake it – that makes a great first impression.  You should present evidence of proactive DNA, a bias for action and no fear of getting in front of people you don’t know, people that can help you.  One friend and successful founder simply asks everyday, “Who can help me move the business forward today?”  He then seeks those people out and asks their help.  Simple, but I’m amazed by how many times a founder is in front of our group with glaring gaps in knowledge and no plan to fill them.  Too often they are asking me to fill that gap for them in some way.  There can be no fear of knocking down the right doors and seeking out the right help.

Another characteristic is a mature understanding of risk and how each stakeholder in an early stage company is exposed to it.  Investors are exposing their money or their LP’s money.  Someone else made that money and someone has the responsibility to manage it.  To put that money in the mix for a seed stage or A round investment indicates an investor with a very high risk tolerance.  But successful early stage investors are trying to minimize capital exposure in the early stages of a business.  They seek very high capital efficiency and a clear path to value creating milestones.  To show that you understand that perspective on risk it is important to have a clear path to remove unknowns and build value in the company.  There is a quantitative element to that, but it is more important to show the qualitative aspects of progress.  It is bad form to simply ask for a year’s worth of funding, for example.  I’m more interested in funding a series of tasks that build to a value inflection point, not some arbitrary date on a calendar.  And be ready to show how you will extend the runway for the company if it takes longer.  Also recognize the risk you as a founder are taking.  Put together a plan that accelerates your awareness of whether this is a good idea or not.  Be passionate, committed, but not blind to negative market feedback.  Build a fact-based business as fast as you can.  Respect your time/effort and other people’s money.

Finally, know your market and be incredibly curious about the world you are seeking to change.  Being curious, by the way, means being open to the chance that you are completely and utterly wrong.  In building a relationship with seed stage investors, founders must be comfortable with admitting what they don’t know.  I am scared by cocksure founders with all the answers.  Rarely will they succeed, and never in a capital efficient way that protects seed stage investors.  Everyone involved in a seed stage company – investors, employees, founders – should be afraid of the one fact or law of the universe that invalidates the premise.  Finding those quickly allows you to stop, pivot and attack the issue head on.  It can be frightening and painful to face a piece of negative feedback about your idea, but you have to get it out on the table.  And you need to find people that can guide you on your journey, help you avoid pitfalls and fatal mistakes.  Know that the biggest investor in your business is you.  Life is short.  Get from darkness to light as quickly as you can.

These three characteristics – bias for action, risk awareness, and curiosity – are the cultural underpinnings of great entrepreneurial cultures.  They must be baked in at birth for a start-up, you can’t really hire it in later.  If you are a founder and feel that you don’t have these in abundance, or need someone to balance out some element of these, find a book-end to work with you on the company.  You won’t be able to fake it.

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Written by Mike Venerable

March 11, 2011 at 4:03 am

Paying to pitch…

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One complaint I hear from entrepreneurs about is having to pay an angel group or venture event to make a presentation.  There has been a dust-up recently about this topic, triggered by Jason Calcanis, founder of Weblogs and Mahalo.  He has attacked the notion of charging presentation fees, but I think there are some finer points to put on this topic.

First, I don’t think venture fairs/forums should charge start-ups to present.  It’s a bit like asking the pig to pay for breakfast.  They’ve already paid.  While these events obviously cost money, there should be enough critical mass of attending funds, law firms, and other service providers to support the event.  Most events we follow do not charge, but some are less entrepreneur-friendly.

A good event is the 3 Rivers Venture Fair in Pittsburgh.  It is well attended, has great pre-event coaching for companies, and brings together a critical mass of regional investors.  The organization reaches out to other communities in the Midwest to help find and filter companies that will present.  It is a serious event that represents a regional one-stop shop for entrepreneurs.

In contrast, there is youngstartup.com, which runs the New England Venture Summit.  Recently two of our portfolio company CEOs received the following email:

Hi {Name Redacted},

Wanted to confirm that you received my previous email regarding the opportunity to present and be recognized as a top innovator at the 2009 New England Venture Summit being held on December 8 at the Hilton in Boston/Dedham MA. Let me know if you’d like further details.

Regards,

{Name redacted}
youngStartup Ventures

They both sent it on to me to see whether we knew of this event.  While the event does exist, it is clear that the email is nothing more than a come-on to get company CEOs into a dialogue about paying the $1,500 presentation fee.  It’s very much a “Who’s Who” approach to recognition.  You’ll be recognized as a “top innovator” if you pay us $1,500 to attend.  Note that the line about the previous email is suspicious as well, since neither CEO could find a previous email.

A quick visit to the website of the company is revealing.  It is clearly a business that makes money primarily from start-up companies and events around the business, if it makes money.  I really don’t know.  I do know that there are no people listed on the website whose backgrounds would indicate the company could help you do anything other than pay them to attend an event or get introduced to people.  There are also no tombstones of deals done, companies won.  The company and its founder also have limited information on Linkedin.

The event is real, and there are some VC attendees at this event and other youngstartup events, but I think entrepreneur/presenter registration must be lagging.  Not surprising in this economy, but the onus should be on the event and the sponsors, not the start-ups, to underwrite the feast.

So events/forums/summits should be free to presenters in my opinion, once selected through a reasonable screening process.  I applaud all the volunteers at law firms, funds, angel groups, and others who carry those start-up friendly events forward.  Stay tuned for a perspective on angel groups charging to present.

Written by Mike Venerable

October 26, 2009 at 6:00 am

Shark Tank – How not to raise money…

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I had heard about the show “Shark Tank” from someone last week, and my kids were also badgering me to watch it.

The premise is would-be entrepreneurs pitching their ideas to a panel of five “Sharks”, successful entrepreneurs who will evaluate the idea and possibly offer to fund the company.  During the two segments I watched it has the usual “acting out” problems of most reality shows.  The Sharks try to act cool and heartless, the entrepreneurs act coy and play hard-to-get.

In the most interesting segment two women with a patented slip-cover for porta-cribs agreed verbally to give up 40% of their company to a real estate entrepreneur in exchange for $350,000.  That puts the pre-money at $525,000 without considering any options.  Forgetting the absurdity of focusing entirely on the valuation (we don’t know whether they are selling preferred, etc.), I thought they got a raw deal.  They had 200k in revenue, plus distribution through Target and a handful of hotel chains.  And, as an analyst in my office pointed out today, they have now had free exposure to boatloads of prospective buyers and investors.  They’ll get a much better offer now that everyone knows how little it would take to get them to play ball.  And they might get it from someone with more experience in pushing out such a product than the real estate Shark.

Which made me wonder if these poor souls had signed any restrictive contracts in exchange for appearing on the show.  The reality TV world is famous for driving hard term on contestants at the beginning, before they make them famous.  Would they really be able to just walk away, or would the panelists have the right to match any offer they received based on the exposure they received on the show.  Let’s hope not, because the co-founders of the porta-crib slip cover company deserve a better term sheet and board members.

I have to give the show credit for at least having a credible panel.  They were also willing to discuss the issue of patent assignment in this instance, which made me wonder what other rather technical issues they would delve into on other episodes.  Could next week bring a dispute over liquidation preferences?  Ratchets?  Redemption rights?

What’s bad about the show?  That they imply that investment decisions among people like the Sharks – professional investors – can be boiled down into a few minutes of product presentation and chit chat.  TV oversimplified the process.  Imagine that.

Written by Mike Venerable

September 1, 2009 at 9:00 am

Throwing Out the First Pitch

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After a week of hearing pitches and working with a portfolio company on a presentation for a venture investor, it seems a good time to provide some general thoughts on pitches.  Despite my general dislike of pitches, I have surrendered to their prominence in the early stage/venture investing world.  That being said, I think most pre-revenue start-ups are far too interested in building an investor pitch and miss the first step:  building a compelling sales pitch.

The first pitch to build, I think, is for the target customer.  This will force you to encapsulate and clarify your product and value proposition.  This should include a compelling example/case study that details the economics of the purchase for the buyer.  Then, before talking to any prospective investor, I would run this presentation by real prospects, advisors, influencers to see if the product/value proposition makes sense.

Why?  Because that’s what investors will do after you pitch them for money.  They will take their interpretation of the product/value proposition and test it with real prospective buyers and industry experts.  If they get a negative or luke warm response, they are not going to dig much deeper.

Pitching your imaginary product with a posited set of benefits/packaging/pricing to buyers or buyer proxies will undoubtedly yield refinements to the overall plan and product.  While no amount of homework and pre-fund raising pitches will persuade an investor, it will give you confidence that their initial diligence has a much better chance of leading to interest.

One other advantage of developing the pitch is it will get you out of the echo chamber of your own ideas.  You really need to test and mold your idea in the real world as much as possible in the early stage, while development is notional.

You also have to be willing and open to the possibility that the idea is just not a good one.  I have had many business ideas in my life, nearly all of them imitative, late, poorly thought out, uneconomical…you get the picture.  Only through exposure to the real world does an idea become properly vetted, improved, adjusted, and validated as potentially of interest to the market.

Written by Mike Venerable

July 17, 2009 at 10:03 pm