Early stage investment tradeoffs

I was asked recently by one of the companies I’m working with that is post-prototype, but pre-revenue:

How can I make this deal sweet enough for early stage investors without jeapordising future investment or diluting founders further?

That is the dilemma.

As a founder, you need to get cash into the company to grow, often just to survive, and you aspire to create massive value for yourself and investors.  You don’t want to be diluted, and you know that later investors will want to see the founders sufficiently motivated.  But at the same time, you need to make the deal really attractive to investors now if you’re going to get them to invest in your company so that you can survive and thrive.

What to do?

Convertible notes are one method, but they are no means a panacea.  Convertible notes let you avoid the question of valuation (and dilution) until the next round, when ideally you’ve reached a much higher valuation. Some investors don’t like them at all, considering them a way of putting off the hard question of valuation, and avoiding showing progress through a series of successive equity rounds at steadily increasing prices.  Most convertible notes come with general security agreements, meaning if you can’t close the next round on acceptable terms, your noteholder might be in a position to bankrupt your company and you could walk away with nothing at all. This rarely happens though, as it’s a “mutually assured destruction” scenario, and your investor would likely walk away with nothing as well.

My wise friend Simon Swallow summed up the issue this way:

[Founders] have to work out their prepared trade-off for speed versus probability of success versus value versus share.

So are they better to bootstrap it and take longer to get to the end point and not dilute as much, or raise money to give them a greater chance of success happening sooner but be prepared to give away a portion of the company?

Companies have momentum and if you generate strong positive momentum then people get on board, but if you don’t, the company sits on the shelf and passes its expiry date eventually.

And finally if you want to get you have to give.

If you’re going to get diluted, you want to ensure that the dilution hit you’re taking results in the percentage you still own experiencing a much great value uplift than had you bootstrapped.

Andy Lark once expressed this one year at Morgo as, “what would you prefer – a small piece of a portion of the hind leg of a cattlebeast, OR THE ENTIRE ANT?”  If you’re seeking investment, make sure you’re selling a cattlebeast and not an ant.

A friend who is a startup CEO and founder adds (slightly paraphrased):

There is another tradeoff – remaining in NZ, or raising overseas where investment terms are generally more favourable.

I suspect that many deals are not optimal in that founders leave money and terms on the table, because they are less experienced at negotiating than the investors on the other side.  If that’s the case, get someone with the necessary experience on your side, and ensure that their goals are aligned to yours.

Back to the original question: for very early stage companies, how do you balance dilution, current terms, and future rounds?  My simple prescription is to figure out how much money you really need to (a) enable rapid growth that you can commit to now and track, showing a path to monetisation, and (b) avoid spending all of your time and energy on raising money for the next 18 months.  Then execute and achieve those goals.  And as a general rule, if you get an investment offer on terms you can live with, take it.

Sounds easy, eh.

Pre-seed advisory board agenda template

I recently took on the role of Entrepreneur in Residence at the Kiwibank Fintech Accelerator, powered by Lightning Lab.  Consider me the “Mentor-in-Chief” – as well as advising the ventures and helping them make great connections and destroy roadblocks, my main job is curating the relationships between the ventures and their mentors, and later in the programme, between the ventures and their [potential] investors.

We have a super strong group of mentors contributing to the programme, and we’ve organised them into advisory boards for the teams. I am totally humbled by the calibre of the mentors, and their generosity in contributing to the growth of these nascent startups.

If you’re a mentor in this programme, or in any other programme, please accept my deepest heartfelt thanks for your contribution. People like you make the startup world go round.

Here is my suggested agenda for a one-hour pre-seed Advisory Board meeting.  NOTE: this is only a template, and should be adjusted (likely cut down) to your specific requirements at the time.

1. Welcome and into (5 minutes)
Roll call
Conflicts of Interest
Approval of previous minutes
Matters arising from the previous minutes

2. Context (10 minutes)
Current pitch and feedback
Changes to Lean Canvas
Learnings from last week
Key things we need to learn
Product update1
Runway2
Roadblocks we need to destroy3

3. Metrics (5 min)
Site analytics (acquisition)
Users: total, active, growth rate week-on-week (activation)
Revenue
Retention
Referrals

4. Sales (5 min)
What’s working
What needs improving
Action plan

5. Investor wrangling (5 min)
Who have you talked to?
Who should you be talking to?

6. Strategic Topic (changes every meeting, be sure to set this in advance) (15 min)

7. Other business (5 min)

8. Actions and deliverables (who is going to do what by when) (5 min)

9. Next meeting time and farewell (5 min)

If I had more than an hour, I’d throw a little bit more time at context, and most of the time toward strategic. I’d like to stress that the above is only a template – what you actually use will vary from startup to startup, and from meeting to meeting. Do not stick to the template slavishly, but use it as a mnemonic or a guide.  The timings are so quick, but it is designed for an accelerator, where things happen quickly.  If you want to make a longer meeting, I’d throw the extra time at strategic topics, where you’re going to get the most value.

You can (and should) also make time to meet individual advisors or mentors outside of your advisory board meeting. Also, encourage them to talk to each other (we have a Slack for that) in between meetings.

I’m interested in community feedback for the above agenda. Am I missing anything (like the boat)? Please comment below, and I’ll modify the list as required, with appropriate attribution.

Thanks to the following people for their contributions for improvements to this list:
1 Ryan Baker
2 Andrew Wallace
3 Sunit Prakash

Convince me to invest in your startup

What do angel investors like me look for in investable early-stage companies?

It’s all about:

  • You and your team
  • Your market
  • Your startup
  • Your progress
  • Your financial plan
  • Your investment terms
  • Your other investors
  • (and a few other things too).

Watch the video of a talk I gave on the subject at CreativeHQ‘s Startup Garage last week, as part of an introductory series for Lightning Lab XX.

You’ll also find my slides below.

Getting the most from your mentor in an accelerator

I’m planning on being very involved in the Lightning Lab Christchurch accelerator programme that starts next week, mainly as a mentor.  As I look back on both Lightning Lab Wellington accelerators where I mentored in 2013 and 2014, I felt that most of the teams could have used their mentors more effectively.

With that in mind, here’s a brief guide to how to get the most out of your mentors in an accelerator.

  1. Choosing a mentor is one of the most important decisions you’ll make during the accelerator.  Choose wisely.
  2. Be clear about what you want from a mentor up front, even though expectations may change during the course of the accelerator, as you and your mentor learn more about unknown unknowns. What are the gaps you’re looking to fill?
    1. Industry experience
    2. Specific skills, eg sales
    3. Contacts (NZ / Overseas)
    4. Potential investment, especially someone you can turn into a lead
  3. Be clear about what your mentor wants up front.  Why are they doing this?
  4. Make sure your mentors have read and understand David Cohen’s Mentor Manifesto.
  5. Don’t accept any mentor that comes along – even if you’re desperate.  A bad fit is a lot worse than rejecting them.
  6. Do “due diligence” on potential mentors.  Check their LinkedIn profiles.  Ask for references.
  7. Don’t take on too many mentors. Ideally, have one “lead” (or maybe two) that you spend at least an hour a week with, and possibly some others that you use for specific advice
  8. It’s like dating.  Do what you can to attract The Right One (or three).  And like dating, you could end up being “stuck” (or thoroughly enjoying) a long-term relationship with them.
  9. Look after them, and hopefully they’ll look after you.
  10. Be honest at all times.  One porkie can really wreck trust, even if it’s only a minor one.
  11. Keep track of action points for each side from mentor meetings.  Ideally, send out an email after each mentor meeting identifying who is going to be doing what between now and the next meeting.
  12. Hold your mentor to account, and expect them to hold you to account.  If one or both sides is blowing the other off, it’s not working and you should terminate the relationship and invest your time more productively.
  13. Your mentors are probably extremely busy people.  Try to plan meetings and activities well in advance, and establish a regular rhythm if possible.  Here’s a typical week in my calendar:
    dave-calendar
  14. REMEMBER – IT’S YOUR COMPANY, NOT YOUR MENTOR’S.  Don’t hold back on pushing back. Be reasonable, and listen to reason, but your mentor is generally all-care-no-responsibility, and you’re the Founder left holding the baby company.
  15. Timing is everything.  Use your founder spidey-sense to know when to cut your losses and fire your mentor, and when to double-down on their advice.

Is there anything I missed?  Please let me know in the comments.

What does a startup need to thrive?

Last weekend I was invited to be a panelist on Radio NZ’s “The Weekend” programme with Lynn Freeman, discussing what it takes for startups to thrive.  You can hear the audio here:

I took some notes before the panel, of all of the things that I wanted to say – but of course in these situations you never really get to say everything you want to, so I thought it might be useful to share them.

TEAM

  • Diversity – leadership, sales, tech, project management.  You very rarely get these in one person.
  • Resilience – you have to be able to wake up every morning ready to be punched in the face repeatedly.
  • Adaptability – you need to be able to learn quickly from the active and passive feedback you’re getting, and pivot accordingly.

MARKET

  • Big enough to support your goals; this generally means going after a market of 7 billion (the world) versus 4 million (New Zealand)
  • Plenty of room for growth
  • One in which you have a valuable point of difference from your competitors

EXPERIENCE

  • Your team has experience in the domain you’re trying to attack.  There’s no point in trying to send a rocket to the moon if you’ve never seen the sky.
  • Track record in the tasks required to launch and operate your business.

PASSION

  • This is what will carry you through the dark times and keep you excited about the change you’re trying to affect in the market and the world

PRODUCT

  • You’re solving a significant problem that people actually have
  • It works, and can be shown to work
  • Potential customers are demonstrably willing to pay for it

COMMUNITY

  • You have a great network of fans and supporters
  • You’re operating in an ecosystem that supports you
  • You are making a real difference in your community

RESOURCES

  • You have enough money, or access to enough money to make your business fly
  • You have the ability and networks to establish and maintain a presence in remote markets. [see note below]

DISTRIBUTION

  • You have a way of getting your product or service in front of people so that they know you exist
  • You have a supply chain that is interested in working with you
  • If you’re selling direct, the product has in-built viral mechanisms to ensure your existing users are helping distribute your product
  • Lack of distribution is a common failure point for Kiwi startups.

LUCK

  • You need to make your own luck.  It helps to have a plan.  Seriously.

Note on resources: “No worries”, I hear you say, “We’re an Internet based business operating from New Zealand, the Internet brings us everywhere so that we don’t need to be there physically ourselves.”  If only.  Unfortunately, each geographic market has its own cultural, legal, and physical peculiarities, and there’s no substitute for actually being there to establish yourself.  Sure, there are pure plays like github or noip to which geography is completely irrelevant, but these are few and far between.

Other notes:

On the panel, Masha said that NZ is a useful test market, in that our demographics are similar to the rest of the developed world.  I’d argue that these similarities are usually very superficial. The killer difference between NZ and the rest of the world is the structure of our market.  There’s one degree of separation in NZ, and practically everyone knows or has easy access to everyone else.  The rest of the world does not operate like that – distribution is critical.  As a global startup, every week you spend chasing the New Zealand market is a week spent learning the wrong lessons.  To extend Steve Blank, don’t only get out of the building, get out of the country!

Finally, the number 8 wire mentality is killing us.  Sure, we’re great all-rounder generalists, very flexible, and very resourceful. This is great for building a prototype, but suboptimal for building a scalable business that can compete on the world stage.  By all means build your minimum viable product out of number 8 wire, but plan out which bits need to be shored up to be industrial strength as you scale.  And rather than relying on cousin Trev who has a passing acquaintance with a specialist aspect of your business, do bring in some people who have deep experience, rather than relying on mates and mates-of-mates to see you through.

 

Pitching tips

Idealog magazine published an article today about a great little initiative by MYOB – getting people to pitch their startup ideas for a cup of coffee on their way to work.  Nice one, Sarah Putt – I’m all for anything that encourages people to find their inner entrepreneur and find the courage to share.

Sarah had asked me earlier in the week if I could share five tips for people pitching their ideas on the fly – and here’s what I said:

1. Always start with your name and the name of your business, enunciated very clearly.  Really basic, eh – you’d be surprised how many people don’t get this right, and left me thinking – who was that?  what was their business called?

2. Establish rapport with your audience – look them in the eye, and send out your love.  You’re doing what you’re doing because you believe in it and you want to help them, right?  If not, you should probably be doing something else or talking to someone else.

3. What’s your vision/strapline?  Whatever you’re doing, it’s to solve a real world problem.  Examples: The Warehouse – where everyone gets a bargain;  MYOB – Love your work;  BMW – The ultimate driving experience.  Focus on the why or the end state, not the how or the process.  Make sure your passion shines through!

4. What is it about your team or product that makes it unavoidably attractive?  Kiwis are prone to underselling themselves, now is not the time to be modest.  Don’t lie or overextend the truth, but everyone and everything has some kernel of underlying awesome – leave your audience in no doubt as to what that is.

5. End with a positive call to action – no ask, no get.  Frame it with urgency (not desperation) in the sense that they’ll be missing out if they don’t act.  Do what you can to make it easy to say yes and hard to say no.  If your audience doesn’t know what you’d like them to do, how could you ever expect them to do that?

6.  Practice, practice, practice.  Use live subjects wherever possible – listen uncritically, and integrate the feedback into the next iteration of your pitch.

Okay that was six tips, so here’s an extra added bonus:

7.  Always stretch the rules – but don’t overstay your welcome.

Questions for ventures seeking funding

People regularly approach me or one of my investment entities asking for a meeting to discuss their venture and possible investment.  If I know them, they’ve been referred to me by someone I trust, or they have an amazing LinkedIn profile I usually take the meeting.  If they’ve crafted a great short pitch or include an succinct one-page executive summary in their email, I’ll also be interested in having a look.

However, if they just send me an email requesting a coffee without much detail, I usually send them the following set of questions… the more complete and interesting the answers, the more likely it is that I’ll be interested in investing my time into finding out more.

  1. Your name:
  2. Email:
  3. Phone:
  4. LinkedIn URL:
  5. GitHub URL:
  6. Name of your venture:
  7. If you can, please provide a < 3 minute video describing your venture
  8. If you can, please provide a < 3 minute video describing your team
  9. Describe your business in 140 characters or less
  10. In more detail, what will your company do or make? What’s new, interesting, or different about what your company will do?
  11. Who are your customers?
  12. What’s your distribution strategy (how will your customers learn about and buy your product)?
  13. Explain how the company will make money.
  14. Who are your competitors (please include URL’s), and how are you different from them?
  15. Why is now the right time to be doing this?
  16. What are your key challenges?
  17. Please describe current progress or traction. Include customers, user metrics, revenue, or any other indicators of progress.
  18. What consideration have you given to applicability and opportunity in international markets?
  19. Have you considered an exit strategy?  How and when do you see your involvement with this business coming to an end?
  20. Please provide information on money the company has already raised, and any information on fundraising plans for the future.
  21. How much investment do you think you need to achieve your current goals?
  22. Please tell us about each founder and their role.  Include LinkedIn, GitHub, and any other relevant URLs.
  23. Not including the founders, how many additional employees are there? Include LinkedIn, GitHub, and any other relevant URLs.
  24. What are some things that the team (or its members) have built in the past? Please include URLs.
  25. Why is your team the right team to be building this business?
  26. How much time can you and your team members commit to working on your company?
  27. How much do you think your company is worth today, prior to investment?  Why?
  28. What’s the most exciting thing you’ve ever done (other than this project)?
  29. What has been your biggest personal failure, and what did you learn from it?
  30. Why should we choose your company to invest in?
  31. How do you think we can best help you?