Category Archives: Investments

First Impressions Matter

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We are in the process of evaluating the applications for Angel funding for our current round. Like most investor groups we use Gust as the platform for entrepreneurs to load their company information. Overall, I must admit I am disappointed in many of these applications. Many of the applications look strong in terms of idea or concept. Some apparently have traction. Some claim to have traction, but don’t support that claim. However, the real problem is that for more than 90% of these applications, it is the first time I am exposed to you. The application is my first impression. And first impressions matter! Here are a number of items that are problems.

Incomplete applications. Gust is a standard format platform. The executive summary, financials section, team composition are all fairly straightforward. Missing items or incomplete items leave a bad first impression on me. If an entrepreneur does not provide all the information by the deadline, then it requires substantial explanation. Leave a note somewhere on the document telling me when the document will be completed, and why you require the additional time. I understand, we are looking at a moving target, but at some point I need to review a snapshot.

Financials Section. On Gust, the financials section is where the entrepreneur asks for funding and offers a summary of projections. It includes a place to upload documents. Upload your documents. I expect to see a spreadsheet with details of the projections.

  • I don’t want to see a pdf file. With pdf I really can’t see the basis of your numbers. Load an Excel spreadsheet with assumptions and a polished look and flow.
  • One tab of sales projections is not enough. In addition to the assumptions tab, there should be at least tabs for a cover summary, a cash flow projection, hiring guide, balance sheet and revenue models. You need a minimum of five and don’t overwhelm me with 20. I don’t need that level of detail…yet.
  • Hidden tabs that include details I need to review are a minor inconvenience. Why should I work harder on your application? Make your data clear and easily accessible.
  • On the positive side, I have seen a few spreadsheets, that have a nice summary up front, a tab with an assumption table linked into the spreadsheet, a hire/HR table and clear, bottom up projections that go over time until past cash flow positive. The revenue projections are important and should not be overlooked.
  • Spreadsheets are a complete topic for another blog. For now, I will admit that spreadsheets are something of a work of fiction, because they are guesses. But the closer the entrepreneur comes to being correct about these numbers, the higher my confidence level in the venture.

Articulating the Value Proposition. Don’t make me guess what your real value is to customers. If you are not perfectly clear in articulating the product to the target market, then how will I know you will be able to effectively sell the product/service?

Proof Points – Gust does not ask for this, but it is important that you be very specific as to the stage of your venture’s development. This will come out in due diligence. But if you have a finished product or channel partners already lined up, that leads to a much better impression for investors.

Know the Rules of the Game. An understanding of how our Angel group operates will benefit the entrepreneur immensely. For example, if our average investment is $400,000 and you are seeking $900,000 then be certain how you can fill out the rest of the round. I don’t particularly like building piers. I want to build a bridge to the next round. If you have funding that supplements ours, then great. However, know that we prefer to lead rounds unless the terms of the other funding is sufficient. So, be careful uploading the other term sheet – know what we like.

Stage of Development. Don’t hide the point that customers aren’t paying or you don’t have any customers yet. Be honest and forthright and just tell us exactly how you will conquer the world. Make me take a bet on you through truth telling.

Traction. Traction is right. Traction works. Traction clarifies, cuts through, and captures the essence of the evolutionary spirit. Traction, in all of its forms …has marked the upward surge of saving the world (thanks to Gordon Gekko for the quote).

Traction is the basis of all that is good in a startup. Traction is the market validation of a value proposition with its target market. Traction shows proof points on its business model. Traction is based in real sales (not a give away product) and has evidence of other proof points – channel partners, a supplier base or existing value chain.

No Faith Based Entrepreneurship. I am really not interested in what you believe. Save that for church. Show me the proof. All that matters are evidence based startups.

Get these right and investors will be your friend.

Disclaimer: These are my own views and not those of any investor group that would have me as a member.

Pitching Dominates

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Pitching Dominates In Baseball & Entrepreneurship

Successfully Pitching to Angels

Last year in baseball was called the year of the pitcher—and good pitching dominated the game. The same is true in entrepreneurship. A startup is always pitching—to investors, strategic partners, channel partners, in an elevator, to potential employees, etc. I previously wrote about pitching form and what makes your pitch stick.

Today we discuss content in the pitch and what will impress an investor. First of all, remember that the goal of any pitch is to get to a second meeting. Just say enough to get investors interested in your business. Enough to want more information.

If you are pitching before angel investors then remember three major points. The first is that you must have proof of concept. This is usually a technical point: The technology works, beyond paper theory, and you have developed a minimal viable product, in the form of a prototype. An even better situation is to have customers lined up willing to test and purchase the product, called traction by investors. The second point is to show proof of market: Does your solution show evidence of a large market? The third major point is you must show evidence that positive cash flow is easily possible within a reasonably certain time span.

Be articulate, short and to the point. Use the KIS (Keep it Simple) method, as you never know for certain who in the audience, and who understands the technical points of your solution. Keep the technology talk to minimum. With regard to technology, a good pitcher only needs to show that their technology works and has protectable intellectual property.

There are a number of other points that will score points in the eyes of investors. Does your current team, not those that will join after you are funded, have the horsepower to execute and scale the company? Investors usually bet on the jockey (team) and not the horse (technology).

Here are a couple of recommended slide decks and don’t forget to put in a title and ending slide along with your contact information.

  1. Problem/solution
  2. Market potential
  3. Team
  4. Channels and got to market strategy
  5. Competition
  6. Financial projections
  7. The ask and use of funds
  8. Always have backup slides (these are slides that answers the first few most likely asked questions)

And here is alternative, similar version:

  1. You address an important problem
  2. Your proof that this solution is complete and a magnitude better than others
  3. There is a large market for the solution
  4. The solution is better than others and why
  5. You have demonstrated good progress
  6. The team can execute on the company
  7. The investment provides a reasonable return to investors

What else might impress a potential investor?

  • You know the rules of the game. For example, you understand how the investor operates, the investor’s average investment, you have completed your due diligence on the investor or group, your average valuations to prior investments, and what excites them about an entrepreneur. In other words, you understand their process.
  • A flexible management team, good potential returns and an idea when an exit might occur
  • Good use of the proceeds from the investment
  • Good and frequent communications
  • Delighting early customers
  • You listen and learn well
  • Good qualitative and quantitative milestones
  • You measure progress religiously

What are some of the pitch or deal killers?

  • Lack of clarity and not being articulate
  • Demonstrating lack of leadership qualities
  • Lack of appreciation for the competition
  • A pitch long on history and technology but lacking an execution plan
  • Generic assumptions
  • Underestimating the barriers to entry, or overestimating those for your competitors
  • Weak marketing and/or sales plan
  • Unrealistic financials
  • Unrealistic view of capital requirements

Pitchers rarely hit it out of the park. But that is your challenge, and your goal.

Convertible Notes or Price Valuation: A Question of Risk and Alignment of Interests

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I am not a fan of convertible notes for entrepreneurs for a number of strategic issues. I also understand the reasons why convertible notes have become so popular with entrepreneurs and investors because of the simplicity of the closing. I believe series seed equity can close just as quickly and inexpensively as convertible notes.

For the uninitiated, convertible notes are debt instruments with an implied interest rate, maturity date and a convertible option to shares usually offered with a discount offered to the next pricing round. The intended purpose for investors is to avoid negotiating a valuation with the entrepreneur that might affect the follow- on round negotiated with the next group of investors. For entrepreneurs, convertible debt offers a faster option to close, and ergo cash in hand.

On the other hand, priced rounds offer each investor a price per share. Because of negotiation over valuation they can take longer to develop.

One of my favorite posts on why convertible notes are unfavorable to startups comes from Mark Suster. He offers significant details on the terms of the note and why they are not a good idea for entrepreneurs.

In addition to what Mark has written in detail, my take on this is much more strategic and focused on the alignment of interests between investors and entrepreneurs. First, by placing a maturity date on the convertible note, the entrepreneurs must strategically change their focus from company building to fundraising. Often the maturity date for the convertible note is set for approximately 18 months away. A better date for the entrepreneur would be 24 months, although sometimes they are set as low as 12 months, which is disastrous for the entrepreneur. Given the hunt for funds from new investors, due diligence and the negotiation of valuation—all of this activity can take time away from building and running a company.

The pro convertible funds side of the equation believes that that the time involved on a convertible round is much faster and settles quicker, ergo the whole purpose of a convertible note. My belief is that the function of the convertible note should not be necessary if the interests of the investor and the entrepreneur are strategically aligned.

In early stage companies, the best way to build a startup is through customer development and acquisition. What would an early stage investor prefer? Using their money toward the next fundraising round or focus on customer building? This leads to be an inherent conflict in strategy between the entrepreneur and investor on a convertible round. There is a specific imbedded date to obtain new funds. If that funding is not achieved by that date, the funds become a debt—and entrepreneurs sometimes need a longer runway to launch their companies.

The second issue regarding convertible notes revolves around the purpose of Angel investing. First or second sources of funding after the first formal funding round means to accept the significant risk involved with early stage technology financing. Angels understand that investing at this stage is inherently risky, and the reward is a significant uptick in pricing on subsequent rounds. Convertible notes are an attempt to hedge the risk by not pricing the financing round. Are the protections from down rounds or failures truly built into a note? Yes, a note may be higher in the pecking order of a fire sale in case of a failure. However, if a startup fails, what are the assets truly worth? If the round is not priced, the value cannot be determined easily.

What happens if the entrepreneur does not achieve the steps needed to get the next round of funding? The original Angel has a choice, put in a second round or let the company go broke. However, if the entrepreneur has been able to find another investor, the golden rule applies: “He who has the gold, rules.” The investor leading the next round may decide to offer to fund with the original note holders waiving a number of their protective rights.

Pricing a round allows the Angel to see the negotiating techniques of a founder and the founder to see how helpful an Angel is to the startup. They can begin to see whether their interests are truly aligned. Are both negotiating with the same sense of fairness and aligned interests? Why not have that difficult conversation about pricing, now? It shows the mettle of your CEO. It determines Angel alignment with company goals. If a valuation can’t be agreed upon fairly quickly then perhaps the deal should not have been done at all. Fred Wilson of Union Square Ventures said it well, “Equity is simple and you own what you own.”

As an investor, I attempt to understand the upside risk and prefer a clear valuation. After all, this is my risk capital portfolio. I want my entrepreneur to focus on building the company by creating a sound customer base, so that the next round is a growth round, not another marketing round.