Startable – Healy Jones’ & Prasad Thammineni’s Blog

Using the power of Google Analytics, it’s easy for me to see which Startable blog posts were the most read in 2009. Keep in mind that I’m merely looking at the number of views, so stuff posted earlier in the year has a distinct advantage of making it to the top.

10. The hidden cost of down rounds – the antidilution provision. When venture backed companies’ values drop, the pain is not felt evenly amongst the shareholders. With venture backed companies’ valuations falling like rocks due to the financial turmoil and bad-economy-induced-missed projections, I’m not surprised that this post got a lot of traction.

9. 4 Ways to generate business ideas. Prasad’s post on idea generation and ways to come up with innovative businesses and solutions still attracts good traffic to Startable.

8. The Entrepreneur in Residence. The first in a three part series explaining what an entrepreneur in residence does at a venture capital firm. The follow up posts talk about how to deal with an EIR and how to meet with one. I think this post will continue to get good traffic; it is actually the number one search term driving traffic to Startable.

7. MBAs and Startups.  Right when I was fresh from leaving venture capital and starting actually doing the entrepreneurial thing, I responded to a Dharmesh Shah post on 10 things MBA school won’t teach you. Now that I’ve been a “real” entrepreneur for the past 6 months, I agree with what I wrote. This post also had a bit of a TechCrunch boost.

6. Early stage venture capital valuations. Right after I left venture capital I felt that I could reveal the truth (as I saw it) on how VCs value startups. VCs have a target ownership, and the more you raise the higher valuation you startup will get. I continue to stand by this.

5. So you want to be a junior VC. My advice to someone who emailed me asking for tips on interviewing for a non-partner position at a venture capital fund.

4. Angel groups are professionalizing and I’m not sure VCs realize it. I was pretty impressed after attending a meeting of the Northeast ACA (Angel Capital Association.) This isn’t a meeting most venture capitalists get to attend, and I was pretty shocked at the level of sophistication. Angel groups are really getting good. Somehow this post got a lot of stumbleupon love.

3. The venture capital investment memo. Since I worked at a few funds, I thought it would be fun to compile the “average” investment memo put together during the investment process at a venture firm. I get good monthly search traffic to this post.

2. Leaving venture capital. Well, this is when I officially announced I was leaving Atlas Venture. I guess people wanted to read about it!

1. It’s not me it’s you, the real reason many startups can’t raise venture capital. Many, many startups are rejected by venture capitalists for the simple reason that the VC doesn’t have confidence in the founder. However, this is rarely communicated. I list some tips that the founder can use to tell if they are the problem.

Wow, so I’ve written a lot this year. Hopefully I’ll continue to have some good content going forward. I am always available over email or twitter, so don’t feel bad reaching out.

Happy New Years!!

Charlie O’Donnell has a great post on getting momentum in a seed financing round. He is talking about momentum, but an understated undercurrent is how to get a higher valuation. I’d like to elaborate on one of his points, which is “understanding the social graph of the investors.” Charlie’s point is a great one – that if you can get a group of investors who talk with each other (and invest with each other) to talk about your company then you dramatically increase the chances of closing a deal with them. Thus, he recommends focusing and lighting a fire under one of these groups and using that to push toward a close. He is 100% correct.

However, I’d like to point out that this strategy does not maximize the chances of a higher valuation. I’ve found that angel investors who regularly invest with each other tend not to like to compete with each other – instead they like to co-invest with each other. While this is great if you can get things going, since you are likely able to raise enough capital to hit your fund raising target, it does not help you create an auction type environment where you get a higher valuation. As I’ve said before:

Once one group (an angel group) sets a pre-money valuation I don’t think the other angel groups are going to get into an auction type-process. These groups need each other to fill in bigger financing rounds. One group can’t outbid another aggressively, or they will not be able to find enough capital to meet most startup’s financing needs. A startup can get different syndicates of venture capitalists in a bidding war; I don’t know if this is as easily possible in the angel financing world. It may be a better idea to try to pit a VC against the angel groups if you are really valuation sensitive.

(That quote came from my post on how angel groups are professionalizing)

So, I will moderately disagree with Charlie’s last point of not pitching in too many places. If you are going to get a decent valuation, you probably need a couple of different groups interested – groups that don’t naturally invest together or information share with each other.

Last summer I was lucky enough to be an advisor to Boston TechStars. It was an awesome experience, and I highly recommend the upcoming Spring session. Applications are due January 11th; you can apply on the TechStars web site.

I’m not affiliated with TechStars at this moment, and I want to make it very clear that I have absolutely no involvement with the application screening process. However, I do have some opinions on what made some of the Boston companies successful, and I have a strong suspicion that the screening process is designed to bring in a certain type of entrepreneur(s). By a “certain type” I mean someone who will get a ton out of the program, engage with the mentors and create something really cool. I also happened to have been around Shawn, David and Brad when they were talking to the Boston mentors about what they look for when picking entrepreneurs. So, I’m no expert, but…

Here are my opinions on some of the characteristics TechStars is looking for:

Tech rockstars

You need one, preferably two plus rockstar developers. You are going to be creating something from scratch over the course of a few months. Whatever you are going to make would likely take a big corporation’s tech department a year or more to build. But you are going to have a working demo and hopefully customers in just a month or two. So you better be pretty awesome in the technical department.

How you prove it: Have real, working demos or alphas that blow their socks off. Really impress them. Do something totally new with a piece of technology, even if it is not related to what you want your company to do. Check out what Brad Feld says about why he liked the founders of RedLaser.

Ability to accept criticism

If you are accepted to the program you are going to be exposed to some of the most successful technology executives in the Boston area. These are people who have walked the walk and who are involved with the program because they want to provide mentorship. Being provided mentorship means you can accept criticism and be flexible in shaping your vision.

How you prove it: This may be one of the hardest things to prove in the application. But other entrepreneurs have done it, so I know it’s possible.

Have a business model

Understand how your idea will make money. This means you understand how customers currently solve the itch you are going to scratch. Is the way you want to make money consistent with their willingness to pay? Check out David’s post on the business models from previous TechStars companies.

How you prove this: Make it clear you understand what customers already pay to solve the problem; who the competition is and how much money they make selling a solution. Look for similar business ideas and see how those companies are monetizing. The way your company actually makes money in the future can be different, but you need to prove that you are thoughtful and that you are more than just an awesome developer – you are an awesome developer with some business savvy.

Have goals

When you raise venture capital, you try to raise enough so that you can hit critical value creation milestones. In TechStars, you’ve got three months of reasonable funding, free office space and dry humor provided by Shawn. What the heck are you going to accomplish with that? You had better be able to achieve some real milestones by the middle, end and a few months post program. Know what the metrics are that show you’ve created value. I don’t know what your business is, but if it’s anything like the other TechStars companies I saw perform well then you will want to have 1) a working product (even if it’s a minimally viable one) and 2) highly visible customer traction.

How you prove this: Have an aggressive developmental timeline that you can actually hit. And, see my next point:

Hit goals during the application process

I remember Shawn saying “we admitted these guys because look what they did during the application process.” The company he was referring to launched product, on the schedule the proposed, in between the time they applied and were accepted. Set goals on development (or marketing) milestones that will occur between January 11 and Feb 1 when acceptees are notified.

How you prove this: You do it! You say, we are going to launch our iPhone app in three weeks and you do it. You say we are going to have the private alpha ready on January 20th and you get it out.

Great interview with Don Dodge, tech luminary who recently joined Google from Microsoft. Don was technology ambassador for Microsoft and is now in a similar position at Google. Don has a very unique view into both companies strategies, technologies and cultures. Some of the best quotes:

One of Google’s biggest challenges: “Another challenge is to earn a reputation for communicating clearly with developers and partners, providing them the support they need, and being as clear as possible about our product road map. ”

On how Google is prioritizing its efforts vs Microsoft: “All the exciting new applications are running in the browser, with application code in the cloud and the cell phone as the platform… Microsoft has product offerings in each of these areas, but they weren’t the high-priority programs… At Google, Chrome (browser), Google App Engine and Google Apps (cloud), and Android (mobile) are top priorities…”

On the state of MSFT: “I think Microsoft today is a lot like IBM was in 1985.”

On the cloud: “It all comes down to your application needs, workloads and design architecture. Amazon, Google and Microsoft are all solid choices.”

It’s a great interview; check it out.

It’s great news that Laura Fitton’s oneForty has received venture funding, in Boston, by Flybridge Capital. I’ve blogged about oneForty being one of the most exciting companies coming out of TechStars Boston this past summer, and it is great news for the local New England internet scene that oneForty has been funded by a local firm.

I had a bad feeling that oneForty would move West, as Laura had good angel funding backers from the SF area. She also was working closely with a web design firm base in SF. Of course, the major thing that had me scared she’s leave Boston was the recent ZenDesk move – cool company leaves Boston after it gets funding from a West Coast VC. But Boston was in luck! Jeff Bussgang of Flybridge had the cojones to step up and keep this cool company in New England. Good luck with the investment Jeff and good luck to Laura as you grow the business! (Also, congrats on recruiting Sachin Agarwal to the team and bringing a talented internet entrepreneur to the area from Chicago.)

I’m going to do something out of character (and off topic for this blog) and complain about Wall Street. I started off my career as a baby banker before moving into venture/growth investing, and think I know a bit about the people on Wall Street. My thoughts here stemmed from a recent post I saw about several important bankers missing a “chat” with the President. I’m not really faulting the bankers for missing this meeting; there was bad weather and their commercial flights were canceled. Although, I will point out that, when I was a banker intern in NYC I once had to take an overnight town car from New York to DC to deliver pitch books because the senior bankers were afraid that bad weather would keep the associate on the deal from making the meeting. And they were right. And the senior bankers also had the courtesy to fly in the night before to avoid potentially missing the meeting with the important client. But I understand not needing to fly down the night before to make the meeting with the President. After all, he’s not really a client or anything.

But that is not the point of my piece. Rather, I’d like the point out the problem with Wall Street.

The problem with Wall Street

Wall Street is full of people who really, really want to make money.

In some ways this is a good thing. It provides a place for people who want to make money to do so in a legal fashion. It’s kind of like the way the Marines provide a legally valid profession for people who really like to kick a** and take names and blow things up.

But it also leads to some issues.

One, Wall Street will gladly take money from your grandmother. If grandma is silly enough to make a bad trade in a complex security, then she deserves to lose her money. Or, if grandma’s pension fund trusted some of its money to a money manager who is just not as smart as someone else, then grandma also deserves to lose her money. It’s too bad, but that is how it works. Although I’m not really sure how grandma is supposed to retire if there isn’t really a safe way for her to invest her money without sharks taking an unfair percentage of it.

Two, somehow incentives on Wall Street lost touch with the duration of the risks and assets bankers were creating. An annual cash bonus system doesn’t work if you are creating a security that might not show any problems for the next five to ten years. There is no claw back. Unlike PE shops, where partners can actually their pay taken back if their fund loses money, a banker (I’m not really sure why they are called bankers when they are actually traders/hedge fund guys working within a bank) – anyways, a banker gets paid at the end of the year for the actual and/or fictional appreciation of her trades. Imagine there is a trade (syndication, loan, whatever) that a particular banker could make that might result in her getting paid millions of dollars this year. Even if this trade has a small percentage chance of sinking the bank (or maybe even the entire financial system) why wouldn’t she make that trade? Her downside is limited to losing her job; her upside is unlimited. The NPV of that trade is very, very positive to her. Like the good little capitalist that I am, I always assumed that public stockholders, through the board, would ensure smart risk management and proper compensation of traders. But I guess I was overly optimistic, since shareholders lost billions and happy bankers still are getting nice bonuses this year.

I, for one, am glad that Wall Street exists. Money needs to move from industries of low returns and flow into places where it can create jobs and finance growth. I also like making money for myself and I don’t find anything morally wrong about wanting to make money.

I guess I sometimes feel bad about grandma’s retirement, but I’m not really sure how to protect her. And I don’t know how a bank is supposed to retain talent when that talent can easily leave the bank and go to another shop where it will get paid a ton in the form of annual bonuses based on short term gains. But something just does feel strange when grandma can lose her retirement, via no fault of her own, and very smart people on Wall Street can once again get awesome bonuses based on very short term incentive plans. It just feels strange.

There are some very cool new startup and innovation blogs on the scene in Boston, and they are definitely worth checking out!

ForEntrepreneurs.com – One of the best venture capitalists on the East Coast is David Skok. David is a partner at Matrix Partners, and previously founded several companies. David was on the board of a startup where I was a board observer – and I learned a ton from watching him. (A few of my older posts were inspired from comments he made on the board.) I am still working my way through all of his posts on forentrepreneurs.com. So far I really like the Building a Sales and Marketing Machine series.

startupblender.com – Adam Berrey is an experienced startup/technology marketing professional in Boston. I’ve had the pleasure of meeting him a few times, and he really knows a lot about getting startups focused on their right target customers. His new blog compiles his experiences as a startup marketing professional. Check out his post on how SaaS businesses changed the software marketing world.

bostinnovation.com – A new site devoted to covering technology innovation in Boston. Their stated goal is to help bring together the startup community in Boston. Since the whole New England region is constantly trying to find its innovation center of gravity I welcome their efforts and wish them luck! Check out the posts by my marketing intern, Matt Fellows.

Vivek Wadhwa had an interesting post today on selling in TechCrunch. I’m learning some serious lessons on selling now that I’m the head of marketing at Pixily – although I am very much still a novice sales manager! I reserve the right to be completely wrong/change my mind on any or all of these points

1. Aspiring to a touchless sales model is great, but small business customers like to know they can reach you on the phone. Many great SaaS companies have a great sales funnel that terminates when a customer signs up online without speaking to a sales rep. I think most small business SaaS startups hope to create this type of sales cycle. After all, how can you have a profitable company if you need to have a sales person on the phone closing $15 per month sales? But, at Pixily, we’ve found that phone calls result in sales and great free to paid user conversions. We offer a free trial, and a decent number of our paying customers choose to sign up for the free trial and eventually convert to paying customers. The highest converting (free to paid) lead source is the customers who call us and who we sign up for the free trial over the phone. The convert to paying customers by over 3x vs. the next best source. (Note: “source” is probably not the right word to use, but it’s Saturday and my coffee isn’t kicking in quite yet…) Is this sustainable in the long term? I’m not experienced enough to know at this point.
2. Customer service reps make great sales people too! Vivek mentions how developers make great sales people. I’d very much agree, since our developers often drive closed leads from networking events they attend and from conferences they speak at. But we are having success with our customer service reps doubling as sales people. First of all, they know the product. Secondly, they understand how live customers are using the product. Third, when a free user calls in to ask a question it’s the time to try to sell them on an upgrade!
3. Customers do the darnedest things with the product – asking them “why are you interested in my product” is really helpful in selling. For example, one of Pixily’s products is a simple document scanning service. We happen to be pretty good at scanning documents, and can offer it profitably as a stand alone service. We had a bulk scanning customer who was a magazine publisher. He wanted to get his old magazine issues (from the 80′s and beyond) online, but only had them stored in print. Once we actually really understood how he wanted to use our product we were able to sell him – even though we were more expensive than a couple of local scanning providers in his area. We’ve sold this particular product a few more times, mainly because we “get” what the customer’s end goal is.
4. Managing a sales pipeline is harder than it looks. When you are the VC, you get to see all these pretty sales funnels at board meetings. When you are the person trying to grow the business, keeping the different campaigns and leads all moving along in the funnels is much more challenging! I guess it’s just in my nature to enjoy playing/measuring our sales channels by output, but I have to fight the instinct to not spend too much time in analytics and not enough time in selling/content creation.
5. When selling online, content is king. I’ve had a ton of luck getting great content out of a marketing intern we recently hired. Not only has he built an entirely new site dedicated to document scanning, he’s also put out some very helpful blog posts and made content upgrades to our web site. All this content is producing – both in terms of us moving up on Google, getting more traffic and improving our conversion rate.

I was invited to judge business plans being presented by students taking the Entrepreneurship and New Ventures class at the Harvard Extension School yesterday. Of all the business plans I judged, the one that stood out the most was Kiwilimon. Having had the experience of pitching Pixily over 25 times to investors in the last 8 months, there are a number of things I found this team got it right:

1. Passion: The most important element of a great pitch is passion. Presenting with passion will demonstrate how much you believe in what you are bringing to the market and also has the positive side effect of grabbing and maintaining the attention of the audience. Passion is something that you cannot put on but is something that comes from  your heart. It is ironic that a passionate pitch is not spontaneous but one that is practiced. If you practice enough times and make sure you keep improving with each pitch, you will start exhibiting passion. Like they say, if you say it enough times, you start to believe in what you are saying.
2. Simple, Short and Concise: A great pitch is one that is simple, short and concise. Of all the pitches that I made, the best ones were those that lasted no more than 10 minutes. Yes, it is possible to pitch your entire business plan in 10 minutes. If the investor does not get your business in 10 minutes it is very unlikely they he/she will get it in an hour. Of course, you need to have a lot of detail and backup information but that is something you can address when questions are asked. Make sure the appendix has all the slides you need to support the details.
3. Pictures are worth a thousand words: The best pitches I have seen are those that tell the story using pictures. With pictures, people can easily and quickly relate to the problem and how you plan to solve it. They tend to remember the details well after the pitch is made. With Google images and  micro-stock sites, you can find pictures for everything that you want to convey.
4. Convey what your business is in 90 seconds: Even though this is obvious, not everybody gets this right. It took a good five minutes before we got what one of the pitching teams was selling. Identify the problem/need and how your solution is the best there is in the first 90 seconds. If you cannot convey what you are selling in that time, you will start to loose your audience.
5. Keep text in a slide to no more than three lines: If you cannot use pictures, make sure you do not include more than three lines of text. Anymore than three lines will take much longer to go through and makes it harder for the audience to remember. With more lines of text, the audience is reading ahead of what is on the slide and not listening to the story you are telling. You want the audience to pay attention to you so that they can get how passionate you are about the business.
6. Target market and market size: As you are defining the need, define the target market. Knowing and conveying whom you are selling to is an essential element of a good business. If you can backup the market need with either primary or secondary research, your story will be even stronger. The size of the market is very important as it tells the audience how big the market potential is.
7. Marketing: These days it is much easier and cheaper to build the product and is much harder and expensive to market it. Spend a lot of time thinking about how you are going to sell the product, what channels you are going to employ, the partnerships you are going to create, and how many customers each marketing program would bring in. For the pitch, focus on the go-to-market strategy and the marketing strategy in the first year.Leave the mid to long term marketing strategy to the appendix.
8. Competition: Research your competition thoroughly, list the top three competitors, what makes them a success and identify why your solution is better than the competition. Also, make sure you are prepared for the “Barriers to Entry” question.
9. Product: If you have defensive intellectual property, make sure you identify it early on. If not, focus on the proprietary technology you have built or what makes your product unique. If you have customer testimonials, this would be a good time to share those.
10. Revenue potential: Identify all sources of revenue, how much they would bring in each year and over five years. Obviously, you are making a lot of assumptions to build this model but you will prove or disprove those assumptions as time passes. Do not be conservative when demonstrating revenue potential. Remember, investors are going to discount whatever you say by at least 100%. At the same time, do not be overly optimistic as the investors will not believe anything you have said.
11. Costs: Identify all the operational and non-operational costs including salaries, data center costs, product manufacturing costs, inventory costs, and customer acquisition costs. Make sure you show which of the costs reduce with scale.
    
12. Team: In a 10 minute pitch, I recommend that you leave the team slide to the end. In the team slide, quickly describe the background of the founding or management team and demonstrate why you are the best team to execute on the plan.

Kiwilimon got all these elements right and delivered the pitch flawlessly. I hope the lessons that I learned first hand and from others  will help you in your pitches. If there are others that I have missed, please feel free to share.

While I was a VC I put together a list of “pitch tips” for entrepreneurs pitching their businesses to venture capital funds. Of course, I probably should have glanced at them when I was helping Prasad pitch Pixily! To help me be a bit more organized the next time around I’ve compiled all of these tips here, with links to my original posts.

VC Pitch Tip #1 – Turn off your screen saver
VC Pitch Tip #2 – You won’t be eating much lunch during that “lunch” meeting
VC Pitch Tip #3 – Get to the venture capitalist’s office early
VC Pitch Tip #4 – You don’t need to wear a tie to meet with an early stage venture capitalist
VC Pitch Tip #5 – The Venture Capitalist will want to hear a lot about your team
VC Pitch Tip #6 – Bring a USB drive with your pitch saved on it
VC Pitch Tip #7 – Format your financial model for printing
VC Pitch Tip #8 – If you are going to use WebEx to during your venture presentation, send the slide deck over email ahead of time and have a direct phone line available
VC Pitch Tip #9 – Don’t show the VC the IRR they will get
VC Pitch Tip #10 – Technology venture capitalists love demos
VC Pitch Tip #11 – Keep the actual slide deck short but sweet
VC Pitch Tip 12 – Be able to complete your entire fund raising presentation in 10 minutes

Even me, who has seen a bazillion pitches from the other side of the table, totally forgot to get to the VCs office early enough for one pitch to comfortably set up the projector. And the first time, I almost sent off our financial model without formatting it to print – a huge NO NO.

Ah, well. Maybe for our next round I’ll be smarter.