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Posted On August 23rd, 2016 by Crowded Ocean

Living Through History: a Renaissance in Silicon Valley?

Before Tom went into the technology industry, I was an historian—specifically, a Lecturer in Holocaust and Genocide Studies (happy guy, I know). Screen Shot 2016-08-12 at 8.12.32 PMAnd one of the things that we History dweebs would do when we got together was wonder, out loud, what events of today are going to be ‘history-altering’ and which of them, though seemingly important at the moment, are going to be quickly forgotten (see: Trump, Donald).

History is a matter of perspective: the later you come along, the more perspective you have.

For example, it’s hard to image Leonardo da Vinci and Michelangelo, over a glass of wine in Florence in the early 1500’s, musing to each other: ‘Isn’t it great to be alive during the Renaissance?’ Why? Because they were caught up in something so new that it didn’t have a name. In short, they lacked the perspective to appreciate how unique their situation was.

Screen Shot 2016-08-12 at 8.13.44 PMWhy all this historical musing? Because we have an opportunity that those who have come before us haven’t. We’re living in a time that is easily the equal of the Renaissance (or Industrial Revolution) in terms of its impact—and we should appreciate it now, not in our dotage. Just as the printing press and steam engine dramatically changed the world, so, too, have the internet and the PC/smartphone. And these tools are only a couple of decades old: think what the world will be like as they mature and their availability extends to every corner of the globe.

At Crowded Ocean, given the wide range of companies and industries we work with, we have a ringside seat to a variety of new technologies. Are any of them as potentially impactful as the internet or the PC/smartphone? Probably not (though we’re just scratching the surface of what Artificial Intelligence can do), but it’s important for all of us—not just those of us in the business—to stand back every now and then and marvel at the world we’re living in today and speculate on what tomorrow will bring.

Posted On August 16th, 2016 by Crowded Ocean

How Not to Get ‘Pitch-slapped’

In interviewing over 20 VC partners for our upcoming book, The Ultimate Startup Guide, one of the questions we asked was: what do you want the entrepreneurs who are pitching you to understand before they arrive? The answers came back in different forms, but they had one common component: empathy.

Screen Shot 2016-08-12 at 8.04.28 PMNote: not ‘sympathy’. VCs may not live a life of roses and champagne, as some shows and articles depict them, but they’re not eating Alpo either. They don’t want or need your sympathy: what they do want is for you to understand what their life—and daily life at that—is like, and what it means to you in terms of getting their attention (and ultimately, their money).

Here are the most common points that emerged from the interviews:

  1. VCs invest in far fewer projects than the public appreciates—usually 2-3 in a year.
  2. While the number varies from firm to firm—and VC to VC—they can have between 20 and 30 meetings similar to the one they’re having with you—in a week.
  3. ‘Fit’ is everything. Are you the right fit for the market they’re most interested in, are you coming at the right time in their investment calendar (given that they only do 2-3 in a year)? Are you the right person (passion, experience, drive, leader of a team) to make this all work?
  4. There’s a partner meeting ahead at which the VC partner that may become your sponsor has to sell your company and you. Did your pitch give them the tools to do that?
  5. A week (or less) from your meeting with them, how will they remember you (if at all)?

So what the bottom line for startup entrepreneurs? Be memorable. Be succinct (as an earlier Crowded Ocean blog noted, you really have 10 minutes at best to make your point, not a full hour). And why you and why now? What’s in it for your investor—not the ‘market’ in general. Again, put yourself in their place as you prepare the pitch, then again as you deliver it.

 

Posted On August 9th, 2016 by Crowded Ocean

New Words in Startup-land: Aug 2016 edition

Swarm session: if you’ve got a knotty problem to get through, one of the new startup tactics is called a “swarm session” which involves convening a group of people who lock themselves up for a couple of days together to solve it already.

Intrapreneurial hacktivists: large corporations are encouraging new product development within their walls to foster innovation and develop new markets, according to an article in Harvard Business Review.

Breadcrumbers: described as “one step shy of ghosters” are colleagues, friends or romantic interests who pop up with a text, and email, a creep of your LinkedIn page but never commit to a meeting or a concrete follow up. They are connections but not relationships or conversations. Tantalizing and frustrating both.

Creepers: unlike breadcrumbers (see above), these are people who peek at your social media pages and leave a trace of their viewing and almost-contact but they do not text or email.

Reputation scoring: Spam filters are built to examine the servers sending the email and rank the servers to determine the legitimacy of the sender. Email providers like MailChimp and ConstantContact innovate on the deliverability of email by investing in reputation scoring.

Posted On August 2nd, 2016 by Crowded Ocean

The 10-Minute Window: a guide for startup pitches

In the process of researching our book, The Ultimate Startup Guide, we interviewed a wide range of VCs—some of whom we’ve worked with before, some of whom we knew only by reputation. Screen Shot 2016-07-28 at 3.23.28 PMAs we collated our notes by topic, there were a couple of back-to-basics takeaways that stood out.

The first had to do with the nature of the relationship you’re trying to cultivate.

The second had to do with how much time you really have to pitch.

Every single startup founder and VC partner stressed the long-term nature of the VC-startup relationship and likened it to a marriage (or family in some cases). The idea is that you’re in this relationship together for the long haul, so choose selectively. Founders will mistakenly focus on valuation or the term sheet and the brand name of the firm ignoring components like the stature of the individual partner within the firm, their capacity, domain expertise, individual track record and their potential to build rapport with you. This isn’t a marriage solely for economic gain. This is a marriage you are entering “soberly and advisedly” where the capacity of the partner to build trust and to guide and mentor you, the startup founder, is hugely valuable and not to be underestimated.

surveillanceIn bed with your VC partner

And you’re going to be in bed, so to speak, with your VC investor for a long time. As this Forbes article pointed out, according to the National Venture Capital Association, the median time to IPO exit since first funding for VC-backed startups was 3.1 years in 2000, and 7.4 years in 2013.

The second takeaway has to do with how much time you really have to communicate your new idea. The reality is that even though many VCs leave their laptops and phones outside the door (to show the startup that they have their undivided attention), they have their pad of paper…and they are human. More importantly, most VCs will cop to having some form of ADHD: they’ve got all their current portfolio companies as well as the ones they’ve recently met with that they’re considering funding. And they probably have three more meetings after yours. So there are a lot of places their mind can go while they nod at Slide 28 of your presentation.

You booked an hour, but you’ve only got 10 minutes

Therefore, even though the meeting you’ve booked is 60 minutes long, you should plan on 10 minutes of attention. (Sequoia Capital partner Aaref Hilaly advises founders here to plan to hook your audience in the first 5 minutes of the meeting.) The point is that you need to engage quickly and powerfully and leave plenty of time for discussion. Pro tips:

  1. Make the meeting more a conversation than a pitch. Check in with the VC early in the presentation (as early as the 5-minute mark) to ensure engagement.
  2. Lead with the opportunity for the VC—not the dreaded ‘About Us’ or ‘Market Share’ slides. Why should they invest—what’s in it for them?
  3. Plan on bringing your product to life with visuals, screen shots, maybe a mini demo.
  4. After you’ve established that the market opportunity is Trumpian “yuge”, keep the detailed market metrics in the appendix

For more insights into the “pitch and the ask”, stay tuned for our upcoming book described here. Pre-order now!

 

 

Posted On July 26th, 2016 by Crowded Ocean

How much money should a startup founder raise?

Guest Post by Vito Palermo, Managing Director, 38 Degree Advisors

There are many variables that go into answering this question. One is the attractiveness of the market category of your company. Then, there are factors such Screen Shot 2016-07-25 at 12.58.30 PMas the current funding environment; the experience of your team and the stage of development of your company. However, in general, the earlier the stage of development of your startup, the leaner your funding plan should be; and the later the stage of development, the larger the rounds should be. It’s not uncommon to raise 6-12 months of burn rate at the seed or startup stage, 12-18 months at the product development and early customer interest stage and 18-24+ months at later stages of customer acceptance, business model viability and rapid sales growth and international expansion.

The Lean Startup strategy for fundraising

For early stages, one of the common themes is a “Lean Startup Strategy”, which emphasizes establishing the product-market fit before spending a lot of resources on sales and marketing trying to sell the wrong product. Lean startups launch as quickly as possible with a “minimum viable product” and then continually and incrementally refine the product features while not investing in scaling the business until they are sure the solution matches the market problem. Applying this approach to funding leads to a lower amount of funding required and a lot less dilution for the founders.

Screen Shot 2016-07-25 at 1.17.45 PMFundraise for specific stages of company building

Therefore, at early stages you should think about how much money your startup requires to get to specific stages such as proof-of-concept/prototype, first revenue, a proven business model, etc. and make sure you have enough funding plus some hedge to achieve those goals. The benefits to this approach include: reducing the risk for investors; lowering dilution and maintaining a lean and focused startup culture from the beginning. The risk to this approach is that you may miss milestones and run short on cash so be sure to give yourself a margin for error.

Fundraising to scale your startup

In later stages you now have lots of stakeholders involved such as customers and employees to be concerned with. At this stage the business challenge is often more focused on building sales and marketing, expanding internationally and scaling the overall business infrastructure. During this stage, the competition is often more acute so be sure to give your company a bigger margin of error and maintain a bias towards raising more money, not less. While the focus should be how much money you need to raise to get to profitability, it could also be on how much capital you require on the balance sheet to make sure more conservative customers and business partners are comfortable with your long term viability. To address these questions it’s not uncommon to see $20 – $100M late round financings.

Bottom line, your business objectives and market requirements should define your funding requirements. It’s imperative to be able to crisply determine and communicate your aggregate cash needs and monthly cash burn rate. For example, statements such as “We need $1M to complete development of our product in order to get to market” or “with $2M we can prove out our business model” will help establish your credibility and transparency with investors while also presenting them with a roadmap that is measurable and often investable.

 

Posted On July 18th, 2016 by Crowded Ocean

Startups running out of money: they’re back

Pundits are calling the first half of 2016 “an adjustment phase” in the VC business as overall VC investment is down 20 percent and deal activity down 25%, compared to a eye brain nytyear ago, according to this update in the Wall Street Journal. Meanwhile, valuations have diminished significantly: the median valuation in the first half was $20 million compared to $55 million a year ago. This period of correction, as VCs hold on to their wallets and check books a bit more in recent years, means we’re seeing a new (and unfortunate) trend: strong Series A companies working harder for their next round of financing or having to quickly tighten their belts in light of the current environment.

All of this brings us back to what we’ve seen for the past two decades: ‘running out of money’ is still in the top three reasons that startups fail. Why? Well, first-time CEOs are optimists by nature, meaning they’ll assume their product will stay on target and budget. Also,they want to part with as little of the company as possible at this stage.

All of which is both commendable and understandable. But the rule of thumb these days—and we strongly back it—is to take your original budget and schedule and then add 50 percent to it. If you come in on target or ahead of us, you’ve got money in the bank. Literally. If not, you’ve still got room to maneuver and live to fight another day.

 

Posted On July 12th, 2016 by Crowded Ocean

Managing Your Startup Board of Directors

We work with a lot of venture capital firm partners, and once we’ve worked with them enough that they can be candid with us and vice-versa, one of the things we discuss with them is how unproductive Board meetings often are.

Screen Shot 2016-07-12 at 9.56.17 AMFirst, the company (or at least the CEO) shuts down for a week or more to prepare for the Board meeting (since the CEO never wants to look like he/she doesn’t have all the answers). Second, the Board feels like it’s only getting the sunshine part of the story, not the rain—and when they push for the bad news, they feel like they’re bullying, rather than looking for areas where they can help. And third, many Board meetings are just a forum for the VCs to opine, but nothing really gets done.

So, after enough of these conversations, we’ve put together a summary of the guidelines we’ve received from our VC partners on how to get the best out of both your Board and the meetings:

  1. Set a format and publicize it before the first meeting. It should consist of three components:
    1. What’s going right. Highlight the best programs and deliverables, with supporting stats. Aim for a level of detail that’s “executive summary” in nature.
    2. What’s not working . Own up to it before the Board discovers it. Be truthful and have a plan on how to address and remedy issues.
    3. What can the Board do to help. This isn’t a one-way street. Identify areas (recruiting, introduction to key accounts, etc.) that can benefit from their involvement, assign action items with deadlines and hold the Board member accountable (put all Action Items—including those assigned to Board members—on every agenda.)Screen Shot 2015-03-29 at 2.37.28 PM
  2. Don’t let assholes hijack the meeting. Here’s a headline: some VCs are full of themselves and love to hear themselves opine. (Helpful hint: make sure these get the most Action Items). Keeping to your agenda can help dampen their self-promotion, but if this behavior keeps up, remember that you’re not in this alone. Hopefully your other VC is more like a consigliere and you can ask him/her to address the issue with your fellow VC off-line.
  3. Always pick a different area of the company to focus on for each meeting. First, it’s sales. Next, it’s marketing, and so on. Invite the person who’s running that department into the meeting. It gives them their moment in the sun (or under a harsh spotlight) and shows that you’re not making the whole thing about you.
  4. It’s okay to say: “I don’t know. I’ll have to get back to you with the answer.” That’s far better than spending hours that you don’t have trying to anticipate and answer every possible question.
  5. Give your Board members a summary of the meeting that they can take back to the ranch, since they have to update their partners on a regular basis.

Most important, from the start, try to make this an ‘Us’ forum, with everyone on the same team. If you’re already in an ‘Us/Them’ scenario, you can reclaim it, but only with the help of your most influential Board VC. But it’s more than doable—it’s necessary

Posted On July 5th, 2016 by Crowded Ocean

Why VC is More Like Baseball Than Football or Basketball

In professional sports two of the toughest jobs are that of General Manager and scout. Screen Shot 2016-07-04 at 6.55.14 PMThe latter watch tons of film, interview athletes, attend ‘combines’ to measure performance, then make their recommendations to the General Manager, who then has to determine how high to draft that athlete and how much to pay him/her.

momentumContrasting these sports, based on the success rate (how many players you draft actually make it to the Bigs), it’s best to be in basketball, where the rosters are filled with first and second-round picks, and where scouts can even predict, as they did with LeBron, that he’d be a #1 pick—when he was in 8th grade. Then comes football, where the hit/miss ratio is higher (81 players were drafted ahead of Joe Montana). Finally comes baseball, where more first- and second-rounders wash out of the game than make it the big leagues. (In fact, Mike Piazza, a Hall of Famer, was the 1391st person drafted in 1988.)

Screen Shot 2016-07-04 at 6.53.18 PMSo what does all of this have to do with technology? Well, being a VC is more like being a baseball General Manager than any other sport. So much can go wrong between the moment of signing and the Big Leagues (IPO or acquisition). In baseball, can’t-miss prospects often stall out in AA ball (arm trouble, can’t hit the curve, etc.). The same applies to startup CEOs and their companies. Can their product scale? Can they scale as leaders? Can they be marginalized by a competitor? Add all of this up and you can see why a 10% hit rate for VCs is considered successful.

What can startup CEOs do with all of this? First, look at life through the VC’s eyes—what is their track record, both hits and misses? Find the characteristics of their 10 percent success rate and tailor your pitch accordingly. And, above all, know that you’re going to hear ‘no’ initially more than you’re going to hear ‘yes.’ Just like Joe Montana and Mike Piazza did.

Posted On June 29th, 2016 by Crowded Ocean

Why startups still need to fear the trough

The concept of the startup “trough of sorrow” coined by VC titan Paul Graham of YCombinator has clicked with Silicon Valley in a big way. The trough is a stumble in the life troughof a startup, just after launch, when marketing momentum stalls out, customer acquisition slows (and the words “customer traction” are no long uttered).

Having launched 42 startups, we’ve lived through our share of troughs and now make ‘trough avoidance’ part of every launch plan.

The trough is a period when marketing, understandably, comes under tremendous scrutiny. Everyone from the office manager to the Board will ask for website traffic stats, lead status, and metrics. Here’s our advice to help your startup go into launch with a strategy to avoid the trough.the creative process

  1. Plan ahead: Easier said than done, but no startup team should claim they are ready to launch without a 90-day marketing plan in place. In other words, the quarter after launch should be a fundamental component of the launch plan. That way, the visibility that your launch creates can be converted into visibility, leads, and mindshare with less cost and downtime.
  1. Invest in value nurturing : As our marketing colleague Anne Janzer stresses in her book Subscription Marketing, successful marketing teams focus not just on lead nurturing, but on value nurturing in order to maximize the loyalty, longevity and revenue potential of their customers. Value nurturing is the logical next step after lead nurturing and should be part of the best practices of every launch strategy.
  1. Test, measure, and iterate: After launch, the path to customer traction also depends upon an iterative approach to messages, materials and focus. In other words, expect to tune your plan. Successful startup teams go into launch with the idea of listening, testing, measuring feedback and iterating their sales focus, content and tools based upon feedback and learning from launch.

Bottom line, think of your launch as a major milestone, rather than the destination, along the path to growing your startup.

Posted On June 21st, 2016 by Crowded Ocean

Best practice – why every startup needs three chiefs

Even before a startup appoints its VP of Marketing, there are three “chiefs” that need to be in place to help position the team for growth and to support marketing.

Screen Shot 2015-11-16 at 8.28.27 AMChief Content Officer – the VP of Marketing will be the one responsible for creating the content (including page content, downloadables, blog, social channels, etc.) that powers a startup’s website, equips the sales team, and nurtures the backlog of sales inquiries into a pipeline of sales leads.

But what if you have not yet landed your VP of Marketing? That’s when the CEO needs to name an owner to make content development happen for the team. Yes, it will either be someone’s second job or it will be a consultant who has to stand in for the VP in the interim, but it’s essential to have someone owning the content.

Chief Culture Officer – sounds like a B.S. title for someone on your startup team but this is a very important role. This is someone to keep a watchful eye on how the culture of your startup is growing.

That way, you, the co-founder, can ensure that attributes that your team values are reinforced and even strengthened as your team expands. The Chief Culture Officer should be a team player who is tapped to “report in” periodically on how the culture is evolving and to flag concerns for the leadership team.

Chief Revenue Officer – it goes without saying that sales growth should be the bullseye on the target for every startup team. But we often find that in the early days, before a VP of Sales has been named, everyone on the team says they are doing sales. This is a wonderful and logical sentiment, but sometimes when it’s everyone’s job, no one really owns it. Our advice is to anoint someone on the team as “Chief Revenue Officer” which will be their second title, no doubt, but this temporary assignment will go a long way to centralizing sales activity and to reinforcing the need for sales focus (and for eventually naming a true VP of Sales as soon as possible.)