Pitch Errors from VCs’ Perspective

Ever wonder how VCs view & evaluate your company? It’s not hard, the problem is we are so tied to our own businesses, we don’t often see the blatant holes. I’ve put together a fake company, filled with (surprisingly) common problems and asked if you can spot the issues.

As a refresh of a talk I did in NYC, I hosted an interactive event at EvoNexus where I asked the audience to judge my fake pitch and made sure that all the landmines were identified. They did a great job and caught many of the issues (not all). I am attaching the talk and slide presentation below:

Think Like a VC! Wing Wednesday from CommNexus on Vimeo.

First half is the pitch – try to spot as many errors as you can. The second half tries to spell out most, but even more are mentioned in the talk above.

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Entrepreneurs: Stop raising, please.

tl;dr – too many worry about funding, when they should be validating their business first.

I’m constantly talking to fellow or aspiring founders. The very first questions I try to ask are: 1) How can I help? and 2) What is your biggest challenge today. The top response (by far) to both these questions is “I need help raising capital.” I cringe a bit*, but wait and probe deeper: “Why? What do you need the capital for?”

Usually, the response is something about needing to build the product / hire the people or pay current ‘partners/co-founder’ so they can come on full-time / pay an outsourced developer or designer… Although not all terrible reasons, I view this general question and subsequent common responses as potentially missing the point.

I am really asking the entrepreneur about their underlying business and I don’t consider fundraising to be a step in validating the business. It might be required (usually optional, taken to accelerate progress), but is clearly a means to an end, not a destination. Further, an overwhelming percentage of those that ask me about fundraising are both not ready for financing and should probably not accept financing yet (if offered).

Why? The vast majority of startups have no solid indication of product-market fit. There are a lot of great resources online about this, but said simply: do you have something that people want (and hopefully are proving it to you by paying or enabling you to monetize through another channel). If you haven’t released anything, haven’t put up a landing page to test interest, haven’t even tried to sell to customers to get their reaction, it will be incredibly hard to raise capital from anyone savvy. Good investors know that it is so easy to glean early signal from the market on almost anything (yes, even big/hard stuff like healthcare, education, energy, etc.). The time, cost & effort to create a horrible prototype or a concept video, or try selling is approaching zero. The closer you can get to validating some product-market fit, the easier it will be to raise.

Look hard at your company/idea and ask what fundamental assumptions must be true for this business to exist. Make testable hypotheses that would validate (or invalidate) these assumptions as objectively & quickly as possible. This is essentially the Lean movement.

If that means living without a paycheck for another 3 months or not paying your partner or digging into your savings or throwing together a quick and small friends and family convertible note round – do it. If you can’t be scrappy about this stage, if you can’t convince people to take a risk on your venture with you, why is an investor going to believe you will be resourceful and resilient when the emotional and financial rollercoaster really gets cookin’.

[Here’s one of those cliché statements that no matter how many times you are told you don’t fully understand until it happens:] Fundraising is a full-time job. It is all consuming and during that time, at least one member of your team is not making any progress on the business. In such a vital stage, where growth percentages and traction metrics are kings, this can drastically reduce the attractiveness of your company if it is not moving in a clearly positive direction.

Also, the time it takes to close a round is highly correlated to the amount of validation you’ve achieved. Take the following hypothetical situation seriously, as I believe it is common: starting to raise money in your current state might take 3 months, where as spending 2 months to land your first 10 paying customers, might change the investment discussion so significantly that it takes 1 month to close. In the end, you have the same amount of money, but have a very different business. Further, that assumes you can even raise at all without that validation AND if it doesn’t work, you found out 5 months earlier (3 months of raising + the 2 months of business development).

*despite the fact that this is a topic I feel well equipped to discuss, I am anticipating their rationale.

 

UPDATE: At this point, I feel the need to address another common retort: “Shouldn’t I start to build relationships with investors so that when I want to start raising I can do it quickly?” This is an easy (yet potentially controversial answer): No. Don’t waste your time. Here’s why: you’re smart, your business sounds reasonable -> it is easy to get meetings (or have people reach out to you). You go meet with a potential investor, they give you some good tips, you feel like you are being productive and helping your business, they tell you they are interested and appear excited (remember that’s their job). They want to stay in touch. You decide to take a couple more similar meetings. A month later you look back and you’ve taken 10-15 meetings, spent a couple hours prepping – you’ve wasted a decent chunk of time that you could have used working on the business. Further, your business will likely change in the next few months – anchoring an investor with your (probably bad) initial ideas and lack of understanding puts a first impression in their mind that may be hard to shake later if you pivot. As a bonus, if you say “not yet, I’ll get back to you in a month when I am ready,” you seem both in control and like the sexy girl pushing her suitors off a bit so they.

Customer Unit Economics & Financials

Taught a workshop yesterday on customer unit economics and startup financial models. It will be hard to capture without the discussion and example models, but just to make it available (since I haven’t found great resources for these topics elsewhere), I thought I’d share.

To summarize: Customer Unit Economics is a vital exercise (and essential metric to constantly track) to figure out what a customer is worth to your business. It is decomposed into Customer Acquisition Cost (CAC) or “how much does it cost to get a customer” and Lifetime Value (LTV) or “how much is that customer worth to me [over some reasonable amount of time].”

We discussed how to calculate CAC based on how you acquire customers, making sure you are tracking by channel (source). The biggest points of confusion were what to include (this is tough and customized to your business). Direct costs are simple (BoM, Sales, etc.), but are you having to do extra engineering customization? Are you training the customer? …

LTV clearly depends on how you monetize users. Then, most interesting for me, is the link between the two (LTV vs. CAC) and how you know if you’ve built a real business, and what you should be willing to pay for new customers based on where they enter the funnel. I encourage people to take a decent (reasonable stab) on LTV and work backwards to a target CAC.

For the second half, we reviewed basic startup financial models. This one is harder to summarize, since a lot was done with an example spreadsheet, but suffice it to say:

  • Don’t worry about traditional “financials” (Balance Sheet, Income Statement, Cash Flows) since they are basically worthless to a startup
  • Focus on your Revenue projections. What are the assumptions you have to believe to make the business big enough & interesting? Make the assumptions very clear. Do you believe them? What if you are off by half, etc.?
  • Build in calculations to key metrics that summarize the health of your business and be obsessive about putting in actuals every month as a reality check.
  • Layer in some basic costs, focusing on the few items that will be significant.
  • Have a summary tab that give the overview of both by year.

San Diego Startup Week – Recap & Thoughts

Whew! San Diego Startup Week is behind us. I hope you were there, met someone interesting, enjoyed yourself &/or learned something. Thanks again to all our sponsors and volunteers that made it all possible – we couldn’t have done it without your efforts and support.

Personally, I am glad for many reasons, but generally 1) thought it was overall a success and am proud of what a small team was able to put together, 2) it was a huge improvement over what we were able to do last year and 3) we can finally relax a bit and get back to personal priorities.

In the spirit of transparency, I wanted to share some takeaways, thoughts, and requests with the community. The organizers had a recap meeting a week after the event and synthesized your feedback from the survey (+ we want to hear more in the comments!).

Positives:

  • Attendance. ~600-700 total attendees (~300 week long passes purchased, lots of one-off event passes sold) Almost all events were full, except end of week (burnout?)
  • Quality & Involvement. General caliber of events was vastly improved, still a range. 15 total events from 8 different startup organizations (+ some more the appeared last minute). Top 3 events (by ratings) were (in order): Opening CeremoniesTech CrawlMentor Night
  • PR. Attention in local press about the event, a few national pieces, even some TV spots!
  • Demographics. Especially impressed with the m/f balance (more than I’ve seen in any city)

Needs Improvement:

  • Better organization / information for events ahead of time
  • Too many parties.  One opening party and one to close would have probably been enough. Parties didn’t have the same attendance or energy as the week progressed.
  • Too many demos. While demos have their place, our feeling was there were ~4-5 pitch/demo-centric events within the same number of days. The events that were either geared towards topical issues or smaller interactions (or just fun) faired better.
  • Some events will be cut/changed as the response was only mediocre.

Future thoughts:

  • Moving the date so we have students in town
  • Topical tracks. Perhaps by stage (idea/team-building phase, pre-seed, post-funding) or biggest issues (like GTM or Customer Development or Fundraising)
  • Small interaction activities (more events like Mentor Night – one idea we plan to try is to enable groups of 4-8 people to grab dinner around town)
  • Career-fair type event for startups to recruit talent & interns (hopefully open-air)

Podcast interview with Paul Clifford from Disruptware

I was honored to be the featured interview on Paul Clifford’s Disruptware podcast this week. During the chat we discuss my background (min 1), Membright (min 10), San Diego startup ecosystem (min 20), and general startup tips/strategies (min 24).  Skip to whatever is interesting to you and let me know how you think it went!

Play the Podcast here

 

My Impressions: San Diego Startup Scene (1yr in)

(repost from StartupSD.co)

The following is my perspective on the San Diego Startup ecosystem and the amazing progress I’ve seen since. It will also give you a quick overview of some of the programs we run today…

A year ago, I returned to San Diego after 12 years (I grew up in San Diego before I left for college in 2001). After graduating from Y Combinator’s class, my return was prompted by my wife matching to her residency at UCSD. Thus, it was not fully my choice (and, honestly, probably wouldn’t have been vs. San Fran or NYC where my existing network were strong).

My general impression at the time was that there was a fledgling community here; people were working on exciting companies and trying to build an ecosystem, but the efforts seemed like disjointed silos run independently (with a wide range of quality & success). It reminded me a lot of what I had seen 3-4 years ago in Philly (which has made tremendous progress since).

Within the first week of arriving I met with two people at the center of the scene: Brant Cooper (lean startup author, community organizer and consultant) & Eric Otterson (Cooley Startup Liaison & Promoter). These guys got me plugged in quickly to some of the activities and people leading them. A few of us (Eric, Brant, Melani, Jon Belmonte, Dave Karlman) got together after that event and decided to make some changes. Startup San Diego was born from these eager startup enthusiasts.

Meanwhile, Brant published an infamous post to his blog that critiqued many of the institutions around town and where/why they were falling short of actually serving the needs of entrepreneurs. Quick summary: Events tended to be for the benefit of the host or sponsor and often not that helpful to actual entrepreneurs & no collective identity or cross-program support. The post got a lot of backlash and attention from the community which I generally bucket into two responses: 1) “you don’t know what you’re talking about” (+ insert an ad hominem attack) or 2) “you make some good points, let’s re-evaluate ourselves.” Unfortunately, the second bucket was very small, but most notably included EvoNexus.

Through the new group, we started a mentorship program with the help of Melani Gordon – CEO of Bevato. It was suppose to imitate the YC/TechStars/DreamIt office hours I had experienced in the past. The program connected some of the best mentors in town with startups for 4-5 short 30-minute meetings in a row (like speed dating). Since then we’ve hosted about 30 mentor events (involving over 100 different startups) and 4 large night versions (with over 30 companies at each) and about 50 of the top investors & successful entrepreneurs in the region.

The organizers of EvoNexus started hearing about our events and asking questions. Several of us met with the Evo team (specifically Michele & Kristen) about improving their program and eventually decided to team-up on several programs and aid in their internal transformation into more of an accelerator (EvoStart). I believe that they are currently the best program in San Diego and constantly improving.

The group quickly grew to include some of today’s most vital members (most notably Al Bsharah from Embarke). The momentum from these events inspired others and allowed us to launch similar types of programs:

·      Mentor Hours & Nights – 1-on-1 mentoring sessions w/ successful entrepreneurs
·      Domain Experts – 1-on-1 topic-specific meetings w/ service providers (design, legal, HR, etc.)
·      Seed San Diego – dinners/events with local investors (education & company connecting)
·      CEO Forum – trusted startup leaders discuss their latest challenges
·      Poker 2.0 – monthly poker tournaments w/ founders & investors
·      Startup SD website – news, calendars, ecosystem info and sign-ups

All that being said, it’s not all roses. There is still a long road ahead and a lot broken: no huge success stories to tout, many investors still acting backwards, lots of posers (on both entrepreneur and investor sides), general business etiquette lapses, etc. But 1) these are all fixable problems and 2) I’ll write more about these later.

I’ve been lucky enough to contribute something to the growth of several communities (NYC, Philly, Boston, SF), but have never seen the speed of improvement & growth that San Diego exhibits right now! It’s an exciting time to build your company in San Diego and the right time to get involved in the community – come join us! Do things – participate or, even better: help!

 

UPDATE: I’ve seen a new rise of gripes floating around the ecosystem. If you view this post as a complaint, I have sorely failed. It was suppose to celebrate the progress and direction we are heading. My responses to that hopefully appears consistent: get educated on what is really going on, then help out where we still need bolstering, or shut up. :)

Napoleon Dynamite dance

This was from my time at school – a dance show where I made a surprise appearance as Napoleon Dynamite.

Funniest part of it to me was that the school was ~45% international students. The U.S. students thought it was hilarious, the internationals had no idea what was happening and complemented me after for my “interesting dance.”

Favorite Foreign Directors

To follow my previous post on the domestic directors, I thought I’d mention my favorite foreign directors (and some example films) that I’ve followed for a while now. There were many to pick from, this is just a first approximation. Notice: many of these have now made English-language movies (after the quality of their craft was recognized).

Top Foreign Directors

Curing My Ignorance of Domestic Directors

Like many, I love movies. Yet, I remember a gathering that I proclaimed this to a group of friends and another film buff and I got talking about movies and directors. I quickly became embarrassed – although I knew quite a bit about foreign films and their directors, I didn’t know who directed many of my favorite domestic films. Tail between legs, I committed to update my knowledge on domestic films and the directors that I didn’t know I loved. Here are the results – 10 of my favorite domestic directors:

Top 10 Domestic Directors

As you see, I’ve tried to justify their selection with ~3 iconic movies (at least in my opinion) by each.

You’ll likely notice the omission of a few very popular and obvious American directors from the above 10. In my mind these include Spielberg (Jurassic Park, Indiana Jones, Saving Private Ryan, Color Purple, Schindler’s List, Lincoln, etc.), Scorsese (The Departed, Goodfellas, Raging Bull, etc.), and perhaps Jackson (all the Lord of the Rings and Hobbit films) or Eastwood (Million Dollar Baby, Letters from Iwo Jima, Gran Torino). Why? Well, (not a great reason, but most likely,) I admit to wanting to be a bit different, and the above directors are not putting pumping out huge blockbusters all the time and deserve more recognition.

Good Will Hunting Problem Solved

I love the movie Good Will Hunting for lots of reasons: It’s about being different and finding yourself, dealing with demons, the struggles with the ladies, but (much more superficially) it was at my school and deals with math. The movie glosses over some of the actual math problems, and I assumed that they were all way out of my league. Let’s be honest, although I went to MIT, there were many students beyond my capabilities. Do you remember the part of the film where the professor puts up a problem with these figures made up of dots and lines & claimed it was a problem it took the professors years to solve? The problem just looked cool and one day I got curious enough to look it up.

Here it is: Draw all the irreducible, homeomorphic trees of degree n=10

It’s actually not that hard, you just have to understand what that means to solve it. Here are the rules:

  • Make as many figures as you can
  • with 10 dots and lines that connect them
  • that are unique (homeomorphic)
  • that don’t create any internal shapes (i.e. closed loops)
  • that don’t have any dot with just 2 lines connected (1 or 3+ is ok)

Here’s my solution (don’t look if you want to try yourself)

 

Oops had to cross out a mistake, but still pretty happy how quick & fun it was to solve.

Oops had to cross out a mistake, but still pretty happy how quick & fun it was to solve.