Venture Capital

Startup Funding: The problem is you, not your address.

asdfI had the opportunity to drop in on the opening ceremony for Dallas Startup Week 2015 on Monday. During the first panel Michael Johnstone of the Mark Cuban Companies was asked why it was so hard to raise money in Dallas and instead of agreeing with the premise of the question he argued that it wasn’t really harder to raise startup capital in Dallas versus San Francisco. I’ve been thinking about it and I’m starting to think he might be onto something.

Case in point, the other day I met a couple of founders at my StartupMuse office hours and listened to them talk about their mobile application. They’ve been working on it for two years and they’re struggling to raise outside capital. After asking the pair about their personal lives and determining they could easily pick up and move to the Bay Area I immediately told them they should move – that was the ticket to startup funding. The next week one of the founders dropped in on my office hours for a second time and we started playing with the actually mobile application – it was horrible. It was then that I realized moving to San Francisco would be a HUGE mistake for this company. Ironically, I imagine it would be EASIER to raise money in Dallas for this particular team – their deficiencies would be glaring in the Bay Area.

Optically, when you read TechCrunch, the startup publication of record, you’re reading about 90 Bay Area startups for every Dallas based startup so you might naturally assume it is easier for startups to raise money there. The truth might be very different.

10000 SFO Based Startups (unfunded)
1000 SFO Based Startups (funded)
10% funding rate

1000 DFW Based Startups (unfunded)
100 DFW Based Startups (funded)
10% funding rate

These numbers are simply for example, but I hope you get the idea. There are simply far fewer startups in the Dallas area seeking funding. I would imagine that for every 100 startups running around in the Valley there is just one here in Dallas. This is just conjecture, but I wonder if it is actually EASIER to get funded in Dallas? In the Bay Area EVERYONE is starting a company and very few of them are getting funded. In Dallas most everyone is NOT starting a company so those who do are the exception not the rule. Perhaps it is easier for Dallas startups to get attention because they look more like black swans than white ones.

In fact, I am the poster child for Dallas based companies raising venture capital. I have attempted to raise startup capital exactly three times. First with LayerOne (total investment $30M+), then with ShopSavvy (total investment $7M+) and finally with ViewMarket (total investment $10M+). In each case I was able to secure the initial funding as well as follow on funding – I really wonder if I would have been as successful if I was in San Francisco.

I am 100% certain that I am not certain whether or not it is harder for Dallas companies to raise venture capital, BUT I am certain raising money is hard. I do, in fact, believe that most of the companies that aren’t successful at raising capital aren’t successful BECAUSE of their product and team – NOT their location. Good products and teams WILL find investment capital regardless of location.

 

 

Austin Ventures Has Been Dead For Years

safe_image.phpThe Texas startup world is abuzz with the news that Austin Ventures has FINALLY died. Dan Primack in penning his Fortune article titled, “The death of Austin Ventures” has decided it is time for the eulogy. Of course most of us have known Austin Ventures has been dead for years – just ask Joshua Baer.

When I was an inexperienced 20-something entrepreneur I received my first termsheet from Austin Ventures – 5X participating preferred AND a signature line with the title “interim CEO”. I ended up raising more than $20M from investors in Silicon Valley and New York at 1X and as CEO – we returned 600X to our investors in the end. I’ve always had a chip on my shoulders when it came to AV and I’m not alone.

The Austin funding scene has been gutted over the past several years. Today there are only a few small funds left to fill the void left by AV including:

This void is being filled by Houston and Dallas funds like Mercury and accelerators like Tech Wildcatters and TechStars, but it is indisputable that startup gravity in Texas is moving toward Dallas and Houston – Austin is getting left behind like Rick Perry and his Presidential campaign.

If you have any doubt check out Dallas’ Startup Week • March 2-6th.

How to raise angel investment in 6 steps.

indexThis morning during my office hours at Cafe Express I had the opportunity to meet with an entrepreneur who is just beginning the process of looking for seed/angel capital for his startup. He had a deck, an idea, a team and was hoping to get some help finding potential investors. I could have made a few referrals, but figured it would MORE helpful to share my own personal experiences raising seed and/or angel capital.

Thesis One: Money Ain’t Equal

When we began looking for seed investors for ViewMarket (an ecommerce marketplace for video content creators) we intentionally sought out investors who’ve had success in the space. For example, we thought Dave McClure would understand the ecommerce aspect of the business from his early experience at PayPal. Next we thought Christine Tsai would would understand the video part of the business from her early experience at YouTube. Finally, we thought Will Bunker would understand the analytics side of the business from his experience as one of the Match.com founders. Once we secured funding from these three we knew we were onto something – they helped us validate our own thinking. Had we raised money from local real estate or oil and gas investors we we’d still be wondering if we were on the right track. Smart money CAN be very smart.

Thesis Two: Smart Money Begets Smart Money

Eventually, if you have any level of success, you’re going to raise a Series A investment from institutional investors (VCs). The fact that you’re earliest investors are familiar with the space and had their own successes will give you a big leg up. First, it is very likely that these engaged angels will help introduce you to the same investors who funded their prior companies (presumably the VC made a lot of money on this deal so they’ll take the meeting). Second, other investors, when they learn that seasoned/successful/known entrepreneurs have risked their own money to help you launch they’ll be curious and want to meet.

Given these two thoughts I recommended that the entrepreneur do the following:

  1. create a list of all former/current startup competitors.
  2. create a list of all startups that have ‘pain’ that his product solves.
  3. create a list of the investors in the above companies.
  4. create a list of the founders of the above companies.
  5. reach out to the investors to ask advice about his product and ask for referrals to potential seed investors.
  6. reach out to the founders to ask advice about his product and ultimately ask for investments.

Only AFTER the entrepreneur had secured an investment from two of these angels should he move forward with a broader conversation with more financial investors. This process will save you a LOT of time. If you can’t convince someone who’s had experience and success in your space to invest – you might want to keep working on your idea before raising money. Remember, most startups fail. If you can find a few entrepreneurs who’ve been there and done it in your space you’re much more likely to find success – leverage their experience. Good luck!

Startup Investor Relations 101

sand-hill-roadOnce a startup founder has raised outside capital, regardless of stage or amount, it is time to think about building a lasting relationship with his investors. Here are my top four tips:

  1. COMMUNICATE regularly with each investor/director by sending a monthly progress/update email. Spend 30 minutes detailing all your accomplishments, challenges and go-forward plans. You don’t want to wait until your next board meeting or until they email you asking what the hell is going on.
  2. ASK each investor/director for help each month. Think about how each investor/director can help you – perhaps with a product launch, a candidate for employment or a business development deal. If you keep them busy they will be a LOT less likely to get in your ‘business’. One of two things will happen – you will get much needed help or he will hide from you.
  3. MEET (in person or via phone) with each director PRIOR to each board meeting. Show him your agenda and ask him if there is anything he’d like discussed at the meeting. If there are controversial issues to be discussed determine where he stands. If he’s on your side enlist him to meet one-on-one with directors who might not be on board yet PRIOR to the board meeting.
  4. DOCUMENT each interaction with your investor/director. The day after your board meetings email an overview of what happened and what decisions were made to each director. You will approve the minutes at the next board meeting, but you’d be surprised how time can change your perception of history. Do the same thing EVERYTIME you engage with your investor/director – a quick followup email detailing what was accomplished and what everyone has committed to do is VERY important.

Let me know if you have any ideas to improve your investor/director relationships.

Women in Venture Capital & Startups

female-investor

Women are changing the face of Venture Capital and if you’re an entrepreneur you need to start finding out how they’re doing it. I’ve put together a Twitter List of women in venture capital who tweet. It only has 50 women on it today, but I’ll be adding more in the coming weeks (feel free to recommend anyone I’m missing). Subscribe: Women in Venture Capital.  I also have put together a list of the women most likely to join the Women in Venture Capital List called Startup Women (feel free to recommend women involved in startups).

How to fire a startup founder.

The_insanity_of_Jack_Torrance_by_thomasinhoThere is a dirty little secret in the startup world and if you promise not to tell anyone I’m going to share it with you this afternoon. Deal? Startup founders are completely insane. Seriously, they are total nut jobs. Anyone who thinks they can take an idea born from their head, hire a team, build a product and raise millions of dollars is crazy. The second dirty little secret is that these lunatics are the ONLY people willing to take the risks necessary to change the world. VCs know both of these secrets.

Time and time again I watch VCs fire founders who are obviously insane for being insane. Of course these same VCs funded these lunatics in the first place. The very same traits that helped the entrepreneur come up with the original idea, attract the right team and investor are the very same reasons an investor will use to oust that same entrepreneur after the first year. Sadly the Americans with Disabilities Act doesn’t offer startup founders any sort of protection.

The irony is that in corporate America, CEOs who do well keep their jobs, but the in the startup world when founders do REALLY well they almost always get replaced. Investors want to find someone who can effectively manage the opportunity for growth the founder and their investment created.

So how do you fire a startup founder? Fund him and then wait. You’ll be able to find a great reason to fire him soon enough. Steve Jobs, crazy in his own right, said it best,

“Here’s to the crazy ones, the misfits, the rebels, the troublemakers, the round pegs in the square holes… the ones who see things differently — they’re not fond of rules… You can quote them, disagree with them, glorify or vilify them, but the only thing you can’t do is ignore them because they change things… they push the human race forward, and while some may see them as the crazy ones, we see genius, because the ones who are crazy enough to think that they can change the world, are the ones who do.”

There are countless examples of investors easing or pushing out founders out of the companies they founded. You might have heard about Tinder the UBER popular mobile dating application. From the start, this little company was run by crazy 20-somethings Sean Rad, Justin Mateen and Whitney Wolfe. Their emails and texts to one another posted all over the internet give you a glimpse into the craziness of these three founders. Today IAC, the investor in Tinder, is slowly easing them out of the company for being crazy, BUT the folks at IAC who funded these kids always knew these people were lunatics. They chose to ignore the craziness in the hope they’d build something fantastic – and Sean, Justin and Whitney did just that.

So how can startup founders become the exception (think Gates and Ellison) and not the rule (guys like me)? The easiest option is to talk to a healthcare professional and get a prescription for Prozac. This will likely help a great deal. If you’re not into mind altering drugs you could use Chris Yeh‘s eight step plan to keep your job:

  1. Don’t get caught by surprise.
  2. Start planning your defenses early.
  3. Get everything in writing.
  4. Constantly work the key players.
  5. Realize that you are dispensable.
  6. The best defense is a good offense.
  7. Don’t sign anything during the coup attempt.
  8. Counterattack.

How to Fix your Mobile Application Company

1748651e64eb0c0373293f2052dac0c7As the Cofounder & former CEO of ShopSavvy, one of the most popular mobile shopping apps, I regularly get approached by recruiters and investors conducting CEO searches for mobile app companies. Most of the time their mobile app company has hit a plateau and they’re looking for someone with experience to come in and ‘fix it’. While I find it inconceivable that I’d actually be offered a CEO position, the idea of accepting a CEO position I didn’t create in the first place is unbelievable. At the end of the day I suspect that 99.9% of the companies that approach me have no intention of hiring me, instead I think they want the benefit of my experience for free. So here is what you’d get for FREE if you called me:

How can we get more users? There is a inherent level of users and usage for every application – i.e. a certain percentage of the population who is aware of each application will download and use your app. The sad truth is that most people who hear about an app won’t download it and even fewer will actually use it even if they do. Companies need to figure out what percentage of the total population they’ve exposed their app to and then determine it’s ‘inherent level’ of adoption. This won’t be an easy effort, but definitely worth the effort as it will help the company understand how to proceed. Here are some of the most common methods for getting more users:

  • Buying Downloads. Some developers have had success manipulating the App store by paying for downloads, but these strategies rarely work and even if they do for a time they won’t work for long as Apple actively seeks to prevent abuse.
  • Paid Media. Companies can simply buy digital, print, radio and television spots to drive awareness of their application. This method has worked for many developers, but is a very expensive option. The apps ARPU and user retention needs to be HIGH for this method to work out economically.
  • Earned Media. This was the method we used at ShopSavvy. Working with our PR firm, we spent all of our time helping reporters build print and television stories about our application. We held reporter’s hands, building sample video content of all aspects of our app, helping them tell a compelling story to consumers. As a direct result, each year we have HUNDREDS of television stations running 30 second news segments all over the country. Working with partners we also managed to get BIG celebrities, like Jimmy Kimmel, Oprah, Anderson Cooper and Martha Stewart, to use our application on their television shows. Through polling, we believe that more than 50% of American smartphone owners have heard of ShopSavvy (have you?). Earned media is a great way to find users.

The real problem with most applications is that they lack an inherent mechanism for user growth. Most companies that approach me about a job have well designed and very useful mobile apps – the problem is that I’ve never heard about most of them. There are simply too many apps vying for too few users. Even BIG brands have a hard time attracting users. The solution is actually very simple: design applications so that they become more useful when a user’s friends use the app as well.

Consider the photo creation app Instagram. Not only does Instagram allow you to add unique and fun filters to your photos it makes it easy to share them with your friends and family. Instagram is a FAR better app when you get your friends to download the app. Instagram found an inherent mechanism that led to amazing user adoption. There are scores of similar apps that have better filters and photo editing capabilities, but they don’t get better when you get your friends to use them.

Inherent mechanisms are best, but artificial incentives such as leaderboards, sweepstakes and premium features can be used to encourage users to invite their friends to download the application. App stores are constantly changing the rules around artificial mechanisms to drive downloads – companies need to make certain they aren’t violating the rules.

How can we get our users to use our app? Once a company has figured out how to drive downloads, they invariably discover that it is a far more difficult task to keep those users engaged in the application. I know from personal experience how heartbreaking it is to acquire a user only to realize that they have forgotten that you exist a month later. Most apps are only opened a single time so companies must create COMPELLING reasons to keep in touch with their users. Facebook and LinkedIn have mastered the art of notifying users of activity via email, text and push – resulting in simply AMAZING cohort numbers. Driving user engagement is not terribly hard, but most companies don’t think about it until its too late.

How do we make money? There are many ways to generate revenue with your application; however, for purposes of this post I’ll focus on in-app advertising. Unless a company’s application is a rocket ship, it is important to incorporate advertising units from the very start. In fact, companies should seriously consider making advertising seem like a feature rather than a toll. When we built ShopSavvy we decided to tightly integrate the advertising unit to the actions of our user. Specifically, when a user scanned a barcode we knew what product they were holding in their hands, we knew they were likely going to purchase that item and we also knew which store they were in. We created highly functional advertising units based on this information that didn’t seem like ads. Here is a early presentation explaining how they worked:

Companies who find ways to incorporate ‘feature based advertising’ into their applications can generate MUCH higher CPM rates than applications that simply ‘display’ advertisements. To leverage these higher CPM rates, companies must create scarcity and exclusivity when marketing their advertising units. To start, stop selling ads from networks like Google. The best and most lucrative ad units are sold and not bought – companies need to sell their own ad units (or at least engage an agency to sell them on their behalf). Sometime the ads a company DOESN’T sell are more valuable than the ones it does sell. For example, at ShopSavvy we were regularly approached by advertisers that were willing to pay our rate, but their product (hotels, airlines, cars) weren’t relevant to our users activity. We elected not to run advertisements that were unrelated to our user’s activities and as a result we created exclusivity – not just anyone could buy our ad units. We also sold various location and product filters to single advertisers creating real scarcity. By focusing on feature based ads that were both exclusive and scarce ShopSavvy was able to demand a $500 CPM (yes, five hundred dollars).

How can we tell whats working and whats not working? EVERY single company that reaches out to me focuses almost exclusively on ‘vanity metrics’ like downloads, total sessions and total first time users. If I press them for real discovery analytics like: cohort-based analysis: quantifying exactly how specific groups of users continue to use and engage with their app and which groups generate revenue over time; user-centric funnel analysis: understanding how distinct user segments convert on specific goals and ARPU, they simply don’t have the data. The companies that are really measuring inside of their applications don’t call me. How can a company understand what is working and what is not if they’re not leveraging the data their users provide them each day? Users tell you everything you need to know. Companies who fail to listen fail generally. Start measuring NOW.

Hopefully this post will save us both a lot of time. It is terribly unlikely you’d want me as your CEO and even more unlikely that I’d actually want the job. Truthfully? I’m better at starting things than finishing them. If you want more help, I offer a full day of mobile consulting for $10,000+T&E. Shoot me an email if you’d like to get together: amuse@startupmuse.com.

 

Startups shouldn’t count on bridge loans.

indexIn the startup world S.O.S. means ‘save our startup‘ and the most common life saving device is a bridge loan. Typically a current investor will pony up just enough capital to get the company to either breakeven or the next funding event. But more often than not bridges are simply a way to allow a CEO to stay in a state of denial hoping that a magical solution will present itself. Worse yet, bridge loans send a VERY bad signal to future investors. Fred Wilson explains it:

“So bridge loans are often bad investments made defensively. And so they are red flags to other investors. When a new investor looks at a company and sees a bridge loan in place, they will understand that all is not well… And it will make closing a financing more challenging.”

It takes a startup about six months to raise a major investment round. If you haven’t made significant headway during the first ninety days it is time to take a good hard look at your burn. Your most important job as CEO is to save the company. It may be painful, but you must start cutting costs – renegotiating agreements with employees and vendors – whatever it takes. You need to get your burn rate down so that you can cut it completely if you end up running out of runway.

Of course, most CEOs (including me) don’t start cutting deep or fast enough to prevent the need for a bridge loan. Ironically, VCs know that the bridge loan is almost ALWAYS a bad idea a ‘bridge to no where’, but they can’t help themselves. So if you need to take that bridge loan make sure can find a way to ensure that it buys you the time you need to save your company. Oh, and start looking for a new role within the company or a new job because your days are numbered. The best way to explain the need for a bridge to a new investor is to introduce him to you – the soon to be former CEO – they will only consider the investment if they can convince themselves that you were the problem.

 

 

Founders Fund Portfolio of Sin? Betting on Vice over Virtue.

miamiviceThe Founders Fund, a venture capital firm founded by Peter Thiel, announced they are investing in a cannabis company who sells Marley Natural brand marijuana. This was shocking to me because Founders Fund is a tier one, best-in-class venture capital firm. They’ve invested in startups you may have heard of like Facebook, Airbnb, SpaceX and Spotify.

Superstar venture capitalists like Peter Thiel, Ken Howery, Luke Nosek and Geoff Lewis (who is the lead partner on the Marley deal) NEVER get involved in so called ‘vice’ investments like pornography, drugs, tobacco, gaming and defense – until now. Don’t get me wrong, you can make a fortune in ‘vice‘ investments, providing OUTSTANDING returns for your investors, but firms like Founders Fund have had HUGE success focusing on their core manifestos. Did they need to take this risk? Was it worth it? I’m not certain, but it smells like a mistake.

The Founders Fund Manifesto, written by Bruce Gibney, describes two main objectives:

  • finding ways to support technological development (tech is the fundamental driver of growth in the industrialized world).
  • earning outstanding returns for their investors.

The manifesto suggests a strong belief that cynical and incremental investment thesis’s BROKE venture capital and that the Founders Fund method is the shortest route to social value. Does this investment provide any social value whatsoever? Does it support technological development? I bet it will earn an outstanding return (assuming the GOP doesn’t take control of the White House). Founder Fund claims they invest in smart people who are solving difficult problems. Well they picked a doozy this time.

As an investor where do you draw the line? If you there is a new porn provider that has built a great platform to deliver porn over the internet AND you are convinced you can make a fortune for your investors should you do the deal? For me it seems like a mistake to invest in a company that distributed illegal (at least on a Federal level) drugs to consumers. Maybe I’m totally off base here, but

How to get a meeting with a VC

sand-hill-roadThere are a million reasons why you might not be getting meetings with venture capitalists on Sand Hill Road. The most common reason is that you’re simply not trying hard enough. It turns out that it is REALLY easy to get a meeting with a VC – it is his job to meet with you. Referrals are the BEST way to get a meeting, but if you don’t have a referral you can make your own.  The following is my sure-fire method for getting a meeting every single time:

  • Step One: Identify the VC and partner you want to meet with (make sure the partner you choose funds startups in your space).
  • Step Two: Identify the CEO of each company where the partner is a member of the board of directors.
  • Step Three: Call the CEO and let him know you are considering working with [partner name from VC] and you wanted a reference. 100% of the time I have left a voicemail after dropping the name of the VC I have received a return call. The CEO will be happy to give you a reference and you’ll be surprised how candid many CEOs are.
  • Step Four: Call the VC and let him know you talked to his CEO and that he received a glowing reference. Ask for the meeting. 100% of the time the VC will return your call and as long as your company is in the right space and at the right stage you’ll almost always get the meeting.

Despite the fact that I’ve shared my ‘sure-fire’ method each week I get a message from an entrepreneur asking for help finding an investor for his or her startup. The message goes something like this, “Working on the next big thing, can you refer me to a few local investors?” In variably I will put this request in my ‘to-do’ mailbox and forget to respond. Sorry? Not sorry? Here is what you CAN do:

Remember that scene from Jerry Maguire where he tells his client, “HELP ME HELP YOU!”

Here are 9 things I need so that I can you can help me help you:

  1. Explain the stage of the product/service: idea, prototype, mvp, revenue, growth, exit…
  2. Tell me about the team: how many people, functional skills, full-time/part-time…
  3. Explain the funding you seek: seed, angel, series a, series b
  4. Tell me how much you are going to raise: $100, $250, $500, $1M (whatever)
  5. Tell me the form of the investment: common stock sale, preferred stock stale, note…
  6. Tell me who you’ve talked to previously and their thoughts
  7. Tell me how you plan to spend the money – i.e. what are the use of funds?
  8. Tell me your future fund raising plans after this raise.
  9. Send me your fund raising docs (if available) and your deck (a must).

You may not have all of this information, but send as much as possible. Save me time. If I can help I will. If you make me send you an email asking for this information – well I’m not going to. I might send you this post and ask you to try again. But no hard feelings right?