I can’t claim a big time IPO in 2007 like my former RealNetworks colleague and friend Sujal Patel at Isilon is able to do. However, that doesn’t seem to stop start-up entreprenuers from sending me several emails per week asking for tips as to how Imagekind was able to raise VC money with relative ease. These are only my thoughts in no particular order based on my own opinions. I hope some of this is helpful for you if you’re looking to get your own software company funded.
1) The business of getting funded is only about the business you’re trying to build and nothing more
By this, I mean that it is important to remember that your job is not to raise money. It is to build the best product you can. Working in Seattle I very frequently cross paths with fellow entreprenuers who tell me they are exhausted from “making the rounds” or doing “the roadshow”. Of course this means that they are having to spend a disproportionate amount of time going from investor to investor with a powerpoint deck and reams of Excel spreadsheet data under their arm that shows why their company is a great investment. If you haven’t done it before, raising money can be an intoxicating experience. And why not? That a third party would be so interested in what you are doing to consider giving you millions of dollars is quite an ego boost. Venture capital is a financial instrument that exists for the sake of building a bigger, better business. Getting caught up in the meetings with big name VC’s and spending a disproportionate amount of time talking about whether or not you’re going to get a term sheet is valuable time you’re not spending on the product you’re trying to build. Don’t get caught up in this process. There is a local Seattle start-up entreprenuer (whose name I will not mention) who kept a list of all his big name VC meetings on a white board near his lobby while he was working on his Series A. He was very proud of the fact that he met with Sequoia, Ignition, Kleiner Perkins etc. These kinds of meetings are fun. But most will not invest and really…what’s to brag about if you take a meeting with a top flight VC who doesn’t invest in your company anyway? Do your research. Keep your pitch short. You will know if there is real interest in half the time if you’ll only allow yourself to notice the signs. If legit interest is there they’ll find you. In the meantime get back to work and don’t spend a lot of time talking about it.
2) Don’t confuse perserverance and a poor plan.
Good books, parents and Hollywood movies are full of stories of the guy who was told he couldn’t do something by those who know better but managed to succeed anyway. “Never let people tell you that you can’t do something.” How many times have you heard that line in some movie? We are trained to learn that perserverance is the key to achieving your goals. We are trained to stick to our convictions. And, 9 times out of 10 no business gets funded or has a successful exit unless the CEO and team had an unusually high amount of perserverance. For every Google there is a VC who didn’t invest but Google made it anyway. Perserverance is a good thing. Now that I’ve gotten that out of the way, let me go on to say that people who don’t get funded after a VC meeting will almost always tell you that “they just didn’t get it”. Fact is, most VC’s are pretty smart people. If nothing else, they are at least “street smart” in that they are educated by all the meetings that they take from people like you. VC’s learn from the entreprenuers who pitch them constantly. You already know how hard it is to gather relavent market data, consolidate it into a cohesive presentation and pitch that data so that it rings favorably when delivered to the investor. Now imagine that you get to sit in front of hundreds of these pitches. You get to see market data presented 10 different ways and you get to hear perspectives on the same or similar market opportunities from various angles of attack. If you’ve been out there trying to raise money unsuccessfully for 6-12 months it’s time to look harder at yourself and your business. There is a big difference between perserverance and blindness. Plan and improvise based on changing conditions. Not all feedback from investors will be gospel but over time you should notice a pattern of feedback that you should apply to the company you’re trying to build. Don’t over react! But also don’t fail to adapt your plan over time. Some of the best feedback I ever got on a presentation was from an investor who ultimately didn’t put money into my company (Mike Slade comes to mind).
3) If your busines involves a website, consider the following…
Websites aren’t like cars. You can find some REALLY bad car designs like the Pontiac Aztek but building cars takes years of planning, thousands of people and hundreds of millions of dollars. For that reason, you’ll find roads primarily full of pretty or bland cars but only the occassional offensive design. How many times do you roll down the road and say…”wow, that car seriously hurts my eyes so bad I can barely stand to look at it!” Websites, on the other hand, are very easy to do poorly. In fact, I’d go so far as to say that at least 50% of my daily surfing ritual involves an ugly, broken or unusable website. But times are changing. For whatever reason, the Web 2.0 trend raised investors expectations in terms of how a website should look and function. I assure you…investors expect a consumer website to look good. Attention to detail is CRITICAL. Leave out features that you can’t execute and test in your presentation. Don’t think you’re a graphic designer if you’re not. Don’t think look and feel is unimportant. Remember that most VC’s are not technical insofar as they can actually write a stored procedure or tell you what an .ini file is. VC’s like things that look good just like anyone else. I used to buy and sell used cars to help pay my own way through college. My first car with a Honda Civic. I spent two weeks detailing that car. Even the underside of the car was spotless. I like cars anyway but for some reason, I just really enjoyed cleaning them. I sold that car months later for $300 more than I paid for it. Then, I bought a Volkswagon Jetta and did the same thing. Anyone who has known me for years knows that I’ve since bought and sold A LOT of cars. By the time I got to college I had a running credit line with the local credit union such that I could go buy a used car without getting prior approval. I’d spend a few weeks detailing every aspect of those cars…RARELY doing any actual mechanical improvement. The cars were essentially restored back to an “as new” condition without actually putting any new parts on except broken visible items such as mirrors, grill etc. I looked quite silly but eventually I had moved to Seattle and I was driving around Kirkland in a bright red Ferrari with a for sale sign in the window. Yes I looked ridiculous. Anyway…the lesson here was that visual impact and execution adds value to your web venture. I feel very strongly that some local Seattle companies that have been acquired in 2006 could have sold for $10-$20 million more if they had an effective marketing and design department. No line of code would have needed to be different to get the increased valuation in the case I’m thinking about (where the total purchase price as slightly north of $100 million). Let me put it this way. If you’re in the mobile or new media space you better be compelling to look at. Generally, developers who do their own design and try to get funded are either not going to be successful or they’ll not get as good a valuation as if they had presented a tidy package. Outsource design to people who have a portfolio to back up their abilities. Investors equate good design to a well executed project. I realize that Amazon is not pretty to look at. But that was then. This is now. Expectations are different for anyone starting out with a new consumer project.
4) When to copy and when to innovate
It is highly unlikely that you are building something that hasn’t been done by somebody else already. Even if you think you have an innovative idea it usually just means you don’t know about the other guy who is thinking the same thing. You two haven’t met each other yet. Yet, all investors want to know what makes you unique. A bit of a conundrum then heh? The best answers to the question usually should involve some of the following: better execution, better economies of scale, superior technology, innovate approach to the problem, highly efficient methods to attract customers and a VERY good team doing it all. For the purposes of this particular point, I’m merely trying to point out that you should spend less time trying to convince people that nobody else is doing what you are doing and MORE time digging to try to find out what competitor is trying to take the same dollars away from you. Once you find them, sort them out. Figure out who has a real business and who doesn’t. I can’t believe how many times people say things like “we’re trying to be like “Webb’r” but with some better improvements.” That’s great if “Webb’r” is a viable (real) company with a business model that doesn’t soley rely on “getting bought by Google”. But it strikes me that most of the time people either idolize competitors that are not real businesses or they reject the 10,000 pound competitor standing directly in front of them. Listing “Webb’r” as one of your competitors personally makes me wonder if you know what you’re trying to build. Go for the big guys and take what they do well and use what you’ve learned. Get on their mailing lists. Save all their emails. If you’re in the business of selling something, you’ll find it interesting to observe their mailing frequency and messaging patterns. Big companies have big marketing budgets and people to research the actual effects of marketing programs. Spent marketing money usually results in something YOU can see. A new homepage design. A new product category. New features. Discounts. Whatever. Your job, in large part, is to convince investors that you can become a big company too. That means you need to observer and borrow as much of the good stuff from the big companies that can benefit you and spend your remaining time innovating around them. I’m sure I don’t need to say this but I will: you will not get funded if you tell anyone that you are going to build something that is EXACTLY LIKE another company. You must try to develop something that is an order of magnitude better than what you can currently see in your category - the differences must be tangible, valuable and within your ability to execute. And, you should be able to show clear examples of this in your first meeting. For Imagekind, our model was fairly straightforward. “Yes Art.com is big but nothing really innovative has been done online as it relates to posters, prints and wall art. It’s a $36 billion annual market and we’re going to try a few things they aren’t doing to find a unique and profitable niche in this big market.” User generated content and a better online experience were a large part of our now ongoing effort.
5) Go as far as you can as fast as you can before you raise your first dollar
I’m not a big believer in funding your web startup with personal credit card debt. However, I am big believer that you should do everything you can to prove as much of your point as possible before you ask for money. Therefore, prepare to work harder and longer than you’ve ever worked in any “job”. The further down the line you can get, the less time you’ll spend on the fundraising trail and the higher the chances that you’ll be successful. In the case of Imagekind, we actually started out thinking that we wouldn’t take any outside capital. That in itself was enough motivation to be as efficient as possible. It thus turned out that we got so far down the line with the product that people started buying things and saying nice things about us on blogs and forums. Before long, people started emailing us and calling my cell phone asking whether or not we had raised any money or were interested in doing so. Our thinking at the time was that if we could just do more work on the site, we could get more customers and members who liked what we were doing and we’d just get to a break even point on minimal resources. That thinking indirectly led to more possibilities for us. We raised about $2.6 million in our first meetings. Several Seattle colleagues asked me why I didn’t take more time and go for “higher profile” VCs. I took this to mean one of the top 5 on Sand Hill Road or something like that. Whatever. Firstly I’d say that our investors are, in fact, impressive enough and they don’t need my reccomendation to help them be more respected than they already are. Crosslink and Holtzbrinck are world class organizations as would be our roster of angel investors. That a VC would reach out to us proactively because they liked what we were doing meant a lot to me. And I think the point here is that the more you can prove out the easier it will be to those fundraising conversations going forward. Don’t go bankrupt trying but push it out there as far as you can reasonably go. Work evenings, weekends, holidays…whatever it takes to get the product to the most mature state you can take it without further financing. And that doesn’t mean a bunch of database design and mid tier coding that normal people can’t actually make sense of.
6) Raising money is about people…not money
Trust me on this. You will spend a lot of time in meetings, on the phone and on email with your investor should you raise money. To be successful raising money, the investor has to like you on a personal level and respect you. A personal connection MUST be made. It is exactly like a date. Your job is to be impressive but likable. If you’re good at what you do you might be the arrogant type but be likable too. Go into these meetings thinking about what your best PERSONAL characteristics are. Be honest with yourself and leverage your personality strengths. Also be honest about your personality faults. Have a short temper? Don’t take criticism well? Whatever your personal faults, be prepared to have them tested and respond appropriately. Most people aren’t used to being in meetings like this and here is why. It is VERY rare that you will sit in a room and have so money questions directed towards you. Think about it. How often are you asked more than a few questions? Usually, the most questions that are ever directed at you in sequence would be at a cocktail party or other social setting and those questions aren’t very hard core. “So, how’s the job been?” “What did you say you did again?” “What are you guys doing this weekend?” Even in a typical office atmosphere most times you’ll be working in a collaborative setting where questions are not being machine gunned at you for over an hour. Your job is to establish a personal connection above all else. You must sell the investor on YOU. They are not investing in your business plan. An idea is an idea. Depending on what you are pitching they may be thinking all kinds of things but I can assure you that the main thing they are thinking is “does this person have the abilities to execute this plan and do I want to work with this person?” We all know how this works: people go out of their way to help people they like and they might go out of their way to sink people they don’t like. It’s best to avoid coming across like a salesperson but it is nonetheless true that poise, speech, demeanor and overall “likability” play a very, very large part in a successful early stage fundraising.
7) Presentations
Don’t even get me started on Powerpoints. I hate them. Most Powerpoint presentations have too many slides and too much information on each slide. We didn’t really do a full blown presentation. For the most part we encouraged investors to familiarize themselves with the website. In actual meetings I brought the financial data to include projections etc as well as the list of competitors and our stated advantages. This is probably a controversial point. Many VCs will want to see a deck. I much prefer a demo of the site and then a discussion. Regardless, DO NOT spend a week working on a powerpoint deck. Spend that valuable time working on the product. You’ll get more bang for your buck. Just don’t interpret this to mean you shouldn’t spend time working on your financial model in Excel. That’s a must do. Spend more time there and less time on the pitch deck. Skip the pitch deck if at all possible.
I am sure this list could go on for several more pages. I hope you get some morsel from these observations.
Kelly
