Jess Lee (Partner at Sequoia Capital) and Aaron Harris (Partner at YC) discuss raising money as an early stage company, and how to think about the fundraising process. Ali Rowghani (CEO of YC Continuity, previously CFO, COO @ Twitter, CFO @ Pixar) shares his thoughts on how to be a great leader and succeed long-term. Thanks to Stanford Online.
I stumbled on this brilliant video of an after-hours startup funding event at the Stanford business school, a panel discussion putting two of the best-known, most influential, and most successful investors (Marc Andreessen and Ron Conway) together with another successful entrepreneur (Parker Conrad, founder of Zenefits), a moderator, and a group of interested entrepreneurs. The video format is perhaps less than optimal, unless you like the rapid-access panel on the left (I do, actually) … but the content is outstanding.
Make sure, please, that you hear Ron Conway suggesting “bootstrap as long as you can.” You can find that with the navigation on the left.
And also, what both investors say about how they choose investments, what makes them successful, and valuation. And Marc Andreeson quoting Steve Martin on “be so good they can’t ignore you, and then, adding:
“Focus on making your business better, not making your pitch better.”
The original for this is on Sam Altman’s online course. Click here for that.
Some excellent quotes:
Marc Andreessen on startup funding as hit or miss:
The venture capital business is one hundred percent a game of outliers, it is extreme outliers. So the conventional statistics are in the order of four thousand venture fundable companies a year that want to raise venture capital. About two hundred of those will get funded by what is considered a top tier VC. About fifteen of those will, someday, get to a hundred million dollars in revenue. And those fifteen, for that year, will generate something on the order of 97% of the returns for the entire category of venture capital in that year. So venture capital is such an extreme feast or famine business. You are either in one of the fifteen or you’re not. Or you are in one of the two hundred, or you are not. And so the big thing that we’re looking for, no matter which sort of particular criteria we talked about, they all have the characteristics that you are looking for the extreme outlier.
Ron Conway on bootstrapping before startup funding:
Bootstrap for as long as you can. I met with one of the best founders in tech who’s starting a new company and I said to her “Well, when are you going to raise money?” “I might not,” and I go, “That is awesome.” Never forget the bootstrap.
I see this confusion a lot: People use the terms “venture capital,” “venture capitalist,” and “VC” to apply to any outsider investing in a startup. However, it’s really useful to draw some distinctions in this area, between three important classifications: venture capital, angel investors, and anybody else.
Venture capital means big-money investment managed by professional investors spending other people’s money. The money comes from extremely wealthy people, insurance companies, university endowments, big corporations, etc. Think of Kleinert Perkins et al., First Round, Softbank, Oak, etc. Venture capital usually comes in millions of dollars.
they must have a net worth of at least one million US dollars, not including the value of their primary residence or have income at least $200,000 each year for the last two years (or $300,000 together with their spouse if married) and have the expectation to make the same amount this year.
Those rules were going to relax with the Jobs Act of 2012, which people would open the gate to crowdfunding, but hasn’t yet.
The most important distinctions between angels and VCS are:
Angels invest their own money; VCs invest other people’s money.
Angel investment is much more likely to be in hundreds of thousands than in millions of dollars.
Aside from those two distinctions, it is generally true that VCs will be more rigorous in studying (called “due diligence”) the investment before they make it. Both angels and VCs will have similar processes for looking at summaries, then pitches, then business plans.
Anything else is called “friends and family,” which really means “not VC” and “not angel investment.” The laws on investment allow a few so-called friends and family, but there are limits. The intention of all the regulation in this area is to prevent the kind of stock frauds that were rampant during the great depression.
What do investors want? I’ve read more than 100 business plans in the last two months. Entrepreneurs are overwhelmingly predictable on this point. Investors want disruptive. Investors want game changing.
But not just saying it. Being able to believe it. Two of every three plans says it. Only a very few make it actually believable.
And believable, in this context, is still a matter of huge uncertainty. Nothing in startups is fully believable. The closest you get is an interesting market story about solving a real problem and doing something important differently, and a team that seems to have experience and background that indicates it can execute the idea.
The best thing I’ve seen in a while on what investors want — at the high end of venture capital — is this one on The Anatomy of a Successful Entrepreneur, that appeared on TechCrunch about a week ago. Post author Rip Empson digs into the recent Kaufmann data on venture capital, adds some analysis by Fred Wilson, Chris Dixon, and others, and comes out with the short list shown here.
The Kauffman Foundation has long been a close friend of the VC industry. In addition to investing many millions of dollars with VCs, Kauffman’s mission of supporting entrepreneurs and high growth companies has resulted in them closely collaborating with the VC industry.
Here’s the problem in one simple business line chart (why I like business charts). It shows how the rate of return on venture capital looked great during the first big Internet boom. It’s not a pretty picture.
On the other hand, those low points in the last few years aren’t uncommon, are they? How is your industry doing since the great recession? The chart shows pretty much what Steve summarizes as follows:
Kauffman has many reasons why the industry is broken. But the quick summary is the industry simply hasn’t performed well. Only 38% of the funds Kauffman invested in over the last couple of decades beat public market small cap indexes. This is primary due to the expensive fees VC firms charge.
So does this mean hard times for startups? I doubt it. I see is a shift towards smaller seed rounds and more angel investment as a web and software technology have reduced the capital needed by the average high-end web startup to get from nowhere to proof of concept and validation. In an oversimplified general sense, what took $2.5 million in 1998 takes probably $250,000 today.
Business comes in cycles. Suppose the huge camelback hump in returns in the late 1990s (the boom) were a temporary aberration. The hard times afterwards (the crash) are probably a temporary aberration too.
I wonder if we as a society are ever going to figure out how technology can disrupt our antiquated systems for educating our children.
Think about what’s happened to information, social interaction, research, and business over the web — not to mention mobile technology — and then think about education. Preschool, K-12, and higher education.
Would anybody disagree that the institutions we depended on as kids are now embattled and crumbling as a result of political and economic factors? Higher ed has had the worst inflation of any industry I can think of over the last two generations. And the K-12 still depends on the old model of the teacher and two or three dozen students in a single classroom.
Innovation, yes, all over the place … but has it really changed anything yet?
(The innovative minds at TED have brought a new educational video website to the head of the class. Today, TED-Ed launched http://ed.ted.com a site that features TED-Ed’s original K-12 animated videos with accompanying lessons and quizzes. On top of that, the site allows educators to create original lessons for any YouTube video, rendering the video on a new link where teachers can monitor student progress.
And I’ve subscribed to several and offer several courses at udemy.com myself. And by this time we’ve all heard of Kahn Academy, another compilation of online courses.
How many universities are offering online courses? How many of those are simply free to users? How many at very attractive prices?
But what about attendance, homework, kids doing things they don’t want to do, people growing up, validation, certification, leverage, consistency?
My angel investment group is looking in detail at EdCaliber, which offers online tools for K-12 teachers. And I saw two additional education business plans over the last three weeks at business plan competitions at Rice and the University of Texas.
I’m hoping something really changes public education for the better. I haven’t seen it yet.
I’ve had several visits to Kickstarter.com in the last week. First because some friends of mine are looking to launch a project there. Second, because I’m getting so interested in crowdfunding. Third, because of the Three Years of Kickstarter Projects infographic on NYTimes.com.
At kickstarter, I saw the Pebble project that’s raised more than $8 million for an epaper watch. It was at $6.6 million when I first saw it last week. This morning it’s at $8.3 million.
While I was at Kickstarter, I preordered my Phonesoap unit there for $39. I saw Phonesoap at the Rice Business Plan Competition two weeks ago. It didn’t win that contest, but it has now won $63K of the best kind of financing, without question, which is sales.
Every entrepreneur has to go look at what’s happened with that project. Take a step back, exhale, and think of this as the best possible kind of financing: prepaid sales. The people who’ve contributed to Kickstarter don’t get a share of ownership. They get future product, not yet built. And they have to fit into one of the standard kickstarter.com categories. You can get that with the NYTimes infographic.
Need I say more? Go look at it.
So what’s going on at Kickstarter? The best possible financing, sales as pre-sales or pre-order sales. It’s not technically crowdfunding, but it’s better than that, because it doesn’t dilute ownership.
By the way, speaking of crowdfunding, Myventurepad.com this week released a free ebook called The Revolution in Venture Funding, which covers the topic pretty well . Disclosure: I’m one of the authors.
Earlier today I posted disruption vs. revenue and the tech bubble on the gust.com blog. I’m suggesting in that post that some special-case web-based startups have to choose between disruption or revenue, because they can’t have both.
That may or may not be true, but I’ve been guilty of suggesting it is to a couple of startup software companies recently. I think both were special cases. They had a real chance to go really big and generate spontaneous buzz based on the product itself. But locking their wares behind pay walls might slow their growth and dampen their success.
That may or may not be true. After the tech crash in 2000, I never thought I’d see that happen again, much less me recommending not covering expenses with revenue. Still, though, there’s Facebook and Twitter and Instagram and, oh my.
When this next bubble pops — and it will pop — the idea to make no money can finally pop, too. Then investors can start working with companies to build businesses that have long-term financial goals, instead of just building a short-term mystery.
But on the same day Chris Dixon (smart person) asked Is It a Tech Bubble on his blog and answered with some convincing analysis, “no.” And the second comment on that post is Fred Wilson of AVC (another smart person) saying:
[Zynga price] certainly doesn’t seem like a bubble valuation either. I do think there is more money sloshing around the tech/internet/mobile sector now than there has ever been. and that is impacting valuations across the board. The question is if this is temporary or the “new normal”. I guess we will find out.
So I’d like to answer this tech bubble question here, but as I was writing this, on Sunday, those other interesting and contradictory posts, from smart people, kept rolling onto the web. I ended up tweeting my conclusion to this post last Sunday, with the following tweet.
Uncertainy is a sign of intelligence. Maybe. I’m not sure.
I was happily reading Sramana Mitra’s The Other 99% of Entrepreneurs on Read/Write Web, agreeing with every detail, when I ran into a snag. It’s in italics in this quote from Sramana’s post.
Over 99% of entrepreneurs who seek funding get rejected. Yet, the entire world is focused on the 1% that is “fundable.”
The media, when pitched a startup story, is interested in who funded the venture. They seldom ask how much revenue the company has or if it is profitable. Incubators take pride in how exclusive they are and how many “deals” they “reject.” Angels and VCs, of course, discard most of their “deal flow.”And entrepreneurs? They seem to have confused the definition of entrepreneurship altogether. Entrepreneurship, they mistakenly believe, equals financing!
This is wrong.
I agree with her: It is wrong — except for that one extra detail. On the core of it, well, I posted something similar more than three years ago, in a respectful hats off to bootstrapping, on this same subject:
For years now, I’ve complained every so often about how we (in blogs, business plan contests, academia and entrepreneurship in general) tend to idealize the venture capital-financed startup, the SBA loan and the more formalized and carefully planned financial strategy. This is especially true in venture competitions.
This is the real world. Bootstrapping is often the only way to start, build and grow your business.
But don’t blame the investors. That’s like blaming up for down. Angel investors spent about $18 billion last year to fund more than 50,000 startups; of course they have to pick and choose. That’s the nature of investing in startups. And venture capitalists are investing other people’s money. They’re being paid to generate a return on investment. Their job is picking the best deals they can find. It’s for the rest of us to understand and respect bootstrapping.
Sramana Mitra is way too smart for that. I like her work and read her often, and included her in posts on this blog. I think she just got on a roll and added one detail too many. Because everything else in that post makes a lot of sense. And she’s one of the best writers/bloggers/thinkers you can find on startups and investment in general. I love her reengineering capitalism idea. So consider this a small correction for a really good post. On an important subject.