Startup Whisperer

Raising Venture Financing Is A Sales Process

Some recent posts have generated a lot of interest around the process of raising money.  This post is really around running the fund raising process.  For those of you that have sales as a competency or profession, you'll understand that this spreadsheet is a poor man's sales funnel.  Raising money is a sales process.  Understanding each firm, your pitch, and the details around the process are critical to closing a round of financing.  Don’t' act like a first time startup CEO (even if you are one).  I cringe when I meet a new startup CEO that is running around like a sailor on leave. 

A good tool to have as an entrepreneur to have after you have mapped out your financing strategy, is to map out a plan.  A very specific, project-like tactical plan that you follow religiously is a sure fire way to keep your financing process moving.  It also ensures that you don't forget critical follow-ups.  Here is a simple spreadsheet format that is really helpful (click here: Download sample_venture_tracking.pdf) .

The first column has a list of status codes:

• Hot - good news; you have a VC on the hook.  They are getting back to you quickly and asking for more information in the way of financials, supplementary business plan information, etc.
• New - Very early in the process;  you have either talked to an associate or very early discussions with a partner.
• Lukewarm - the venture firm is still interested but they are not giving you a strong sense of momentum or interest;  lukewarm is the entrepreneurs purgatory.
• Waiting - your business is being presented at the partner meeting;  this happens on Mondays.
• Stale - they are not getting back to your email or vmail after 3-4 days.  This is basically a 'no' but the firm doesn't have enough respect for the entrepreneur to get back to you.
• Passed - remember this is nothing personal;  they passed so move on.  The best firms will actually explain why to you in email and even better a phone conversation.  Please listen to their feedback.  Its usually really darn good.

The firm, contact, and sponsor information is very self explanatory.  However, an important note is that make sure that you key contact in the partnership is someone senior enough to sell through your business.  If not, the Monday partner meeting process will just roll over your idea.  The partner in question can't get enough of the partnership excited about the idea nor pulls enough political weight to get the firm behind the idea.  There is more emotion behind these decisions than you might think and having the right person behind your business is crucial.

Latency and Last Contact Date are important tools for you.  I am very religious about tracking this and flags go up for me personally if I haven't heard from my contact in 4 days.  Venture capitalists hate the idea of losing a deal so if you've run your process correctly there is a healthy bit of tension around how hot your investment is.  so, if you are getting 4 days out email responses then you need to start to pull in (aka expanding your target list) more firms and analyze what you are doing (or not doing correctly).  At this point, if you have several lukewarms right out of the gate then make use of Board members, advisers, and your team.  Ask hard questions about how you are pitching, your presentation, and even deeper ones (say around your business). 

Full history is fun for you anal retentive types.  Its almost at the point where you would want to use a light CRM system.  But, I basically jot down little milestones along the way.  What I look for in this section are things like what information have I sent, people that I have met with in the firm, and any feedback from those encounters.  I also have a column that indicates whether I sent financials.  Its good to know who has them. 

Good luck.  Raising money is tough. Ben Elowitz did a great post on the Startup Whisperer that is helpful and Bill Burnham's post last year was really good to.

Building corporate culture in startups

Your startup corporate culture is key to getting things done.  Corporate culture embodies your common corporate vision, goals, shared values, and beliefs of your company.  Its is easy to define
organizational culture from a top-down perspective.  You as the CEO can define the management structure, objectives and strategies of the business.  But, the corporate culture is the glue that defines how things actually get done.  Its one thing to define organizational processes and its another thing to understand how these processes actually happen.  If you've done a good job defining what the companies values are and how you  expect people to behave, then everything just gets easier.  If you reinforce this thru your HR team and your hiring practices then you'll hire people that match how you get things done.  The backbone of your company is the people.  Having everyone with a shared social norm on how to get things done is super important. 

At my current company, we talk a lot about Passion, Leadership, and Trust.  We hold individuals accountable to run their roles as standalone leaders.  I talk often of having a team of empowered leaders that have a bias towards action.  There is no other way that 12 folks have been able to build a billion plus ad network in 8 months.  The things that we do on a daily basis reinforce this culture.  From the reporting of our metrics, to meetings, to our company events, I am often reminded of how the values dictate the behavior and the behavior dictates the values.

We just had an event this weekend where a bunch of the company participated in a race called the Urban Dare.  Its part amazing race meets trivial pursuit.  You have a partner and you must rely on an extended team to help you find clues while learning how to prioritize and allocate roles amongst your partner.  For our company, we don't have a culture of having a casual BBQ.  We'd much rather run for 2-3 hours solving problems.  The event was fun and taught us a lot about how to move quickly by being measured and analytical in the way that we approached problems.  It turns out that each team figured out who the best backend-operations guy was and used the same researcher to find clues.  But, each team prioritized their time differently based on the strengths of their team.  Our CTO and developer analyzed the most efficient route before they first started to find clues and took public transportation since they agreed that they were not physically ready to run the entire course.  Our young marketing guys went for speed and used aggressive tactics to flank competing teams, and my team used multiple researchers while we ran from each clue.  All of the approaches actually suited the styles of those team.  Winning was important to the teams and there was a side bet on who would  finish first (guess who won)? 

This exercise exercised our core beliefs as a company.  Without having to "plan" a leadership seminar or to "plan" fun like most companies we naturally build outside and internal structures to reinforce how we  get things done.  Your company is likely very different and I encourage you to think about how you can reinforce an ethos in your company around reinforcing and building a strong corporate culture.  You'll  be more efficient, you'll hire better, and inevitably build an organization that feels like a family versus a company.

RBC Internet Conference Notes

I am attending the RBC technology, media, and communications conference.  The meeting is very well structured and has a fantastic format for both private and public company CEOs.  The Of all of the many conversations that I had and the panels that I sat in on today, I most enjoyed the "Lead Generation Comes Of Age" panel. 

The panel opened with some interesting data:

• Online lead generation is a $1.6 billion industry
• 165% growth over the last several years
• Projected to be $6 billion by 2012
• Lead gen represents 7% of total online budgets
• Verticals that are leading the lead gen category:
• Education
• Financial Services
• Automotive
• Real Estate

The panel included CEOs from the following companies:

• Reply.com - Built a lead gen exchange to address the discrepancy between supply and demand that exists today in the space.
• All star directories - education focused lead gen
• Vantage - large online lead gen player (with an education focus)
• Mediawhiz - built channel lead gen operator
• Vinyl Interactive

Some interesting factoids of each company

All Star Directories

• 6000 schools
• 50/50 on traffic between SEM and SEO - SEO converts less than SEM
• 333% growth in 7 years of business (~$50 million in revenue)

Vantage

• Education is their largest market.  Additional markets are home services, Finance/Insurance, Consumer
• 175 clients/1K brands
• Focus is on the quality fo the leads
• Manage over 40 million keywords

Mediawhiz

• Founded in 2001
• 130 employees
• Offices in New York, Atlanta, Fort Lauderdale
• Verticals that they focus on:
• Finance
• Research
• Cosmetic (wellness)
• They have three business lines:
• Lead generation
• Search
• Display

They just launched a product called, Scribefire.  It's been downloaded 1.5M times and they claim 150K publishers.  The pitch on this product is that this product enables the long tail to build an ad in 5 clicks.

Some key takeaways from this panel discussion:

• Performance marketing segments will do well becasuse of the clear ROI
• Lots of discussion on how using technology for implementing affiliate cleaning and scoring.  Examples-Vinyl has 2 people in Korea that are scrubbing affiliates.  All of the CEOs that presented mentioned that they had built custom software for maintaining network quality.
• Theme developing around a flight to to quality;  lead prices going up, as conversions going up
• Technology infrastructure is key to weed out bad publishers.  An example is that Mediawhiz has built extensive tech infrastructure in order to scrub data;  approach is totake as much traffic as possible, put it into a lead management system, and efficiently delivering the leads to the advertiser. The key for them is to get a lead from the Web to a person within 5 mins;  they use SMS too directly to sales reps.  There was some data mentioned that a study showed that leads delivered in under 5 mins have 100x or greater chance of converting v. waiting 24 hours.
• Another one that was shocking to me that 50% of the leads generated are not contacted.

Thanks to Grant Gieringer for the invite.  Awesome conference.

Managing Your Board

We all strive to be the best stewards for our businesses.  We've talked in this blog the importance of communication to your employees.  Communication is extremely important to your Board and investors, too.

Here are some tips for managing your Board.

Board meeting

a. Keep the formal - Startups are fun because they are more casual, fast-paced, and exciting than big companies, but, that gives you no excuse to run an informal meeting.  Use Roberts Rules of Order to get things moving along and items approved by the Board.

b. Drive the meeting.  I'll talk in future posts about the ideal structure for the meeting.  In general, you'll have corporate business in the beginning (employee stock grant approvals, financing discussions, 409a valuations, etc), executive summary on the business, financial overview, etc.  You'll want to have already taken care of the corporate business and historical operating data within the first hour.  The next 2-3 hours should be open to discussion the strategic stuff. Things like macro economic conditions in your market, the competition, your product direction, etc.  You know the strategic stuff.

c. Drive the meeting - I've been in Board meetings where the CEO struts out his team like members of "America's Got Talent".  You've got the CTO doing a demo and rattling off about cool new platform improvements, the marketing executive waxing prophetic on direct response campaigns, etc.  That's all fine in limited doses but this is really the one driving the meeting.  He/she drives the meeting.  Your CFO is critical for the financial overviews but you as CEO should be driving the show.  You should be talking over the majority of the meeting.

Regular communication

a. Send regular email communications -- either weekly or bi-weekly communication should be sent out.  Cover your key KPIs.  Articulate how you are trending to your plan,weekly and monthly changes to revenue/gross margin/EBITDA, new sales deals closed, etc.

b. Pre-Board huddle - Its also a good idea to have a pre-Board meeting chat (in-person or phone) with
each Board member.  This will give you a chance to add some color commentary concerning what you are about to present.  Remember that the battle is won before the war.  Don't surprise your Board.

I found an older post from Beyond VC which is a particuarly solid bit of advice.  More to come. 

What's In Your Wallet?

An entrepreneur asked me recently, "how much money should I have in the bank before I look for more money."  He was really asking, "at my current burn rate,  when should I look for more money."  The best answer is that you shouldn't because you are cash flow positive and don't need a lot of new capital.  You have a revenue model and are looking at using different types of financial instruments to super-charge your growth.  But, given that most VC-powered startups require large amounts of capital for the promise of high returns,  I understand the tension. 

I personally, like to have at least 12-18 months of cash in the bank.  In other words, if something disastrous happened to your business, how long would you have to ride out the storm.  There is still a lot of money flowing into venture-funded companies per the chart below. In fact, it wasn't down much from the previous quarter.  Techcrunch has a good piece on this recently.    However, expect the bar to get higher as we move into worsening economic conditions.  Never be in the position of having an under-funded startup.  There are two many examples of great ideas and great management teams failing due to their lack of capital.

Startup Employee "Pit Crew"

If you follow auto racing, imagine a pit crew coming out and quickly enabling the driver to have fresh tires, gas, and quick maintenance to get back into the race.  That is how you should approach getting new employees contributing in your company.

When you are in startup mode (which is seemingly never-ending), you will want to indoctrinate processes in your company to quickly get new employees effective once they are hired.  Many larger companies have developed very sound processes around new employee orientation and management  practices around on-boarding employees.  When you are under 50 people, my guess is that you haven't spent a whole lot of time thinking about this.  Imagine each new employee as helping give you fast mover advantage for your business. 

Each position will have a different approach.  A coder is of course different than a salesperson.  But,
each new employee should be supplied some core information from the manager.  This includes an overall roles and responsibilities document and a weekly MBO (management-by-objective) document,

I have previously posted about MBOs.  You can read that post here.

I'll spend a little time on the Roles and Responsibilities document.  It can be as simple as a 1-2 page document.  It should including the following information:

• Role: Overall description of the employee's role in the company
• Responsibilities:  A list of 3-4 job responsibilities for the employee.  Example:  Responsible for all revenue display deals for WidgetBucks, this includes:  ad networks deals, direct ad deals, and agency relationships.  (Note: this is important especially when companies are growing quickly.  Typically you get into trouble as you grow when you are not clear on job responsibilities.  When you move from everyone wearing different hats to more definitive roles, you can get confusion across the company if  you are not clear about each employee's responsibilities.  )
• 6-month MBO’s:  You can do 1-month, but, I find for a new employee, in a startup, you are going to be more fluid that annual goals.  The MBOs will include a list of 3-4 strategic asks to the companies objectives (as part of the agreed upon role) that are tracked every week.  I did an earlier post on the role of MBOs.  Each roles and responsibility document should include the 6-month metrics that you want that employee to hit.  They should be specific and measurable. Example MBO Metrics:

• Individual quota 8/15 – 12/31 = $X,XXXX
• Overall Sales Target = $X,XXXX
• Ship new front-end release by end of Q3 (contributes n% increase in revenue)

You should also articulate how to integrate the employee in the DNA of the company.  This includes key employees that will be important to get to know quickly, key meetings to attend, etc.  If you are a little larger, either have a mentor and/or the manager to help the employee get up-to-speed on the infrastructure (bug tracking systems, development platforms, CRM systems, etc).

In addition, you should plan on providing supplementary information on a network share and/or email that will help the employee get up-to-speed more quickly.  Some examples:

• Sample sales agreement and IOs
• Sales pipelines
• Prior Strategic planning documents and/or Board slides
• Latest specs on pertinent code bases
• Sales forecast information
• Marketing materials

Your goal is to get any employee up-and-running effectively within a month.  You want them to have everything the need to contribute and pumped full of enthusiasm about your company. 

What Is You Fortress of Solitude?

It is stressful starting a company.   You have employees, investors, competitor circling you at all times.  You are reading 200 + RSS feeds/day, managing your personal life, and trying to hit your numbers.  The signal to noise ratio is very high.

There are times when you need perspective.  I was prompted to think about this since Bill Gates has officially retired from Microsoft last week.  He was well known for his Think Week's where he would go to a remote cabin and well, think.  Not everyone has a Fortress of Solitude like Superman.  But, every entrepreneur can carve out time to think.  I am getting married soon and I am going to leave the BlackBerry at home.

I am excited to visit Greece which I have spent a bunch of time studying (both the history and the mythology).  I am really excited to just relax and think.  One of my favorite quotes is from Voltaire,

"Judge of a man by his questions rather than by his answers."

I plan on focusing on family and asking some big questions.  Breaks are a great time to unlever the brain from the norm and travel is a great way to get yourself out of your daily comfort zone.  See everyone later this month.

Would you pay your employees $1,000 to quit?

This is an interesting piece from the Harvard Business Review on Zappos.  Apparently, Zappos pays customer service reps $1,000 dollars to quit (if they don't like their job). 10% of employees take them up on that offer. 

The interview details the hiring practices of Zappos.  I found it to be an interesting piece which could be helpful in your endeavors.  In a previous life, I had a ton of great people that we're on  the front lines of helping corporate travelers.  You either need to be massively operationally efficient or have fat margins to pull off this type of customer service experience.  I don't know what Zappos' margins are but hiring passionate customer service reps that are enabled and empowered to make decisions is an incrediblely powerful retention tool.  My guess is that Zappos has built in a bunch of operational efficiency around support increased support costs.  A lot of businesses have used operational effiecny as an offensive strategy against their competitors.  Southwest Airlines comes to mind.  They used a specific service delivery strategy (point-to-point model versus the traditional hub and spoke model) to lower prices as well as developed a culture around having fun to really differentiate themselves in the market. 

Closed Our Series B Round

I have been posting quite a bit about venture capital.  Some of the readers guessed that I must have been close to finishing our process.  We just announced it yesterday and have received some nice press pickup.  For anyone that is interested, there is more detail on the WidgetBucks blog. 

We are very excited to have Draper Fisher Jurveston as our investment partner for our Series B round along with our current partners, Ignition Partners.  When looking for investment partners, the right cultural and business fit is key.  I've personally had a bunch of investor partners in the past, and it is so important that you line up around values even before you talk to an investor partner around doing an actual investment.

Clearly, we thought highly of Draper.  I like this interview with Tim Draper on Vator.tv that covers many interesting perspectives including the investment questions that Draper asks themselves before making an investment in a company.

The interview points out the following investment criteria that the firm looks at:

1. Begin with the business plan which does need to cover some basics. Where does the team come from, their education, is this what they were "meant to do", is the market well understood, and competition analyzed?

2. The first question is whether it's a big enough market - which he stated as the total available market of over $1billion

3. The next cut - what is the approach to this market and how are they going to capture their share

4. Then comes the question about technology and whether it is feasible.

5. Finally, it's time to meet the team and its all about the people. Are the individuals completely driven to doing what they are doing - deep in their soul?

This criteria is similar to many venture firms.  I personally think that #5 is a huge deal and the more successful investment firms really look for the commitment and passion around the entrepreneurs
that they invest in. 

Guest Post by WetPaint CEO Ben Elowitz: How To Raise Venture Dollars

Ben Elowitz has graciously agreed to a guest post.   The timing is apropos since Ben just raised $25 million in the largest technology financing in Washington state this year.  Wetpaint is the leader in social publishing with nearly one million hosted user-powered sites.  They have recently made a very smart move by enabling their platform to be distributed (they call it ‘injected’) inside of any Web site.

Since there is so much discussion around raising money (by entrepreneurs) combined with the lack of information available, we thought Ben’s insight would be pertinent and helpful to the startup community.  Enjoy.

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For whatever cosmic reason, I cross paths with lots of early-stage entrepreneurs who are trying to figure out how to fund their startup.  We end up talking about bootstrapping, angel money, and venture funding.  Most of these entrepreneurs are surprised (to say the least) when I share my experiences in raising venture capital.  Based on Matt’s survey results, I now have a better understanding why.  My experiences with fund raising are not typical.  So take the information I present with a grain of salt.  As Matt would say, I’m an outlier… but it works for me.

So what is my approach to getting the term sheet I want to sign?  I invest way more time on the process, so that I waste as little of my own time and others’ in the process.   The following are the six principles that have helped me minimize effort and maximize reward.

1)      Keep it exclusive. 

If you meet with too many firms you look desperate (trust me…word gets around); and as we all know, many of the very hottest companies meet with just a couple firms.  That’s why I start by talking to just a few select investors on a very short list. 

The hard part is figuring out whom to put on that list:  who is most likely to clear the bar?  I spend a lot of time researching a firm’s investment history, profile and strategy before even making or returning contact.  I spend a lot of time to cross-reference investors; and the extra research saves me a lot of travel and meeting time. 

The best way to run the process is in waves.  Start with 4-6 investors in the mix.  Each week, as firms drop out, add more back in.  Be sure to carefully track time between meetings.  Three business days with no response generally means ‘no’.  If they want to schedule more meetings, you’ve got yourself to ‘maybe.’

When things heat up, I communicate the key milestones openly and honestly.  Don’t overhype as you might find yourself backtracking.  Never, ever put yourself in a position that compromises your credibility.

2)      Get a coach.  Or a few. 

I have a bunch of them.  VC’s like my existing investors are themselves great coaches.  I learn something every time I check in with them.  They know the system, the sensitivities, and the game.  They’re on my team; they are supportive and helpful.

My amazing attorney Buddy sees more deals in a year than I will ever live through.  He knows the market and has the aggregated experience of 100 companies.  Don’t settle for a lawyer when you hire an attorney; make sure the person is truly your wise counsel. 

For the scoop on a prospective investor, I check with these advisors and the entrepreneurs I respect.  I do my best to uncover the reputation, investing strategy, hot buttons, and other data I need to see whether I should meet with them.  And in the process I learn a whole lot more:  in fact, every tip and insight in this post can be sourced to one of my great coaches. 

3)      Don’t sell.  Let them buy. 

The process of raising money is exhausting.    On the other hand, having great conversations with potential investors is something I truly enjoy.  So, keep the right ones updated about your business all along the way and they’ll indicate when the time is right.  Let them pull their way in instead of pushing it on them.   When you have inbound interest, fundraising takes weeks, not months.

When I first met Len Jordan at Frazier Technology Ventures, I shared the gist of Wetpaint asked him for input.  Questions like, “What do you think are the tough spots?” and “How does it compare to the winners and losers you’ve seen?” gave me a sense of the success factors he was looking for and where my concept hit and missed.  I asked questions like “what are the themes you are working on” and “what’s caught your interest lately?” He let me know what peeks his interest; it helped me get to know him long before pitching.  Ultimately, Len became one of my best advisors.  And a natural investor. 

4)      Give ‘em goose bumps.   

What is it that any investor wants even more than financial returns?  Bragging rights.  “I seeded Google.”  “This investment is the next Cisco.”   

But how on earth do you make them get that goose-bumpy feeling that this is ‘the one’? 

·        Show ‘em the momentum.  Charts that go up and to the right like this:  Download hockey_stick.bmp .

·        Inspire confidence.  They are investing in you.  Brand yourself as success, professional, reliable.  Deliver what you say you will.  Be the train that potential investors can’t wait to get on board.   

·        Tell stories worth repeating.  Highlight your own ability to manage and lead by answering questions with stories from your team.  I answer questions about how we will improve CPM’s by highlighting a member of our team who used to optimize revenue per pixel on Amazon’s home page.  Tell great stories and anecdotes – these are what investors remember and share with each other.  (A favorite example from one company’s prospective investor:  “To answer calls from developers, they hired women with Australian accents – and the conversion rates doubled. These guys optimize everything!”)

·        Huge markets and disruptive economics.  You don’t have to say these two key phrases out loud, but hopefully your discussion triggers these brain centers which are directly connected to every VC’s goose bump neurons. 

5)      Make really gorgeous PowerPoint slides. 

When the other partners in the firm meet you, it’s by way of an email saying, “Take a look at this company,” with your PowerPoint attached.  You can’t control what else is in the email; but you have pixel-perfect control of your slides.  Every advisor who’s seen my slides has had the same reaction:  “WOW”.  Don’t go on the road until you get that reaction. 

In each meeting, listen for what worked and what didn’t.  Take notes.  I make three columns on my notepad and write what resonated; what fell flat; and what to hit in the next conversation.  And I make changes to my slides for every single meeting.  On my Series C roadshow, I called back to my partner after every meeting and discussed how it went and what changes to make.  30 minutes later, an updated PowerPoint arrived via my cellular modem.   With continuous improvement, each meeting was even better than the last, and I had new material to review at successive meetings with the same firms. 

6)      Don’t negotiate the last dollar.

Goodwill at the tenth board meeting is much more valuable to me than reducing dilution by 2%.  Long before you have your first formal pitch meeting, you should have already made the decision that you’re going with venture funding to maximize the outcome, not to maximize your percent ownership.  Remember that.  The goal is to negotiate to a reasonable point within the fair range.  I’ve heard stories of deals that fell apart because of that last dollar.  I say forget about it. 

Get to the fair range, shake hands, smile, and celebrate.  Then let’s all get back to building our companies.  Now that’s where the money gets made.