Course Curated By: Dr. G. Danford (London Business School MBA, Helsinki School of Economics PhD)


Advice Before Starting

The only proven method for measuring learning is to take a pre-quiz and post-quiz of the content.

[WpProQuiz 9]

Raising Money

 

Content

  • The concept of ‘outliers’
  • The concept of ‘invest in strength vs. lack of weakness’
  • The concept of ‘peeling away the risk’
  • The characteristics of a successful startup founder seeking funding
  • The process of ‘diluting’ founder ownership
  • The benefits of compelling cash-flow when seeking funding

 

Investment Readiness Level (IRL)

The Investment Readiness Level (IRL) is a coherent number and a common language for evaluating viable startup deals. IRL was adapted from the NASA Technology Readiness Level framework (created 40 years ago). The NASA model had been used to help determine how close-to-ready any technical solution was, as rocket launch-time approached. Blank adapted the model for evidence based entrepreneurship.
The Investment Readiness Level can be used by investors to rank the technologies and the business models they are evaluating including: product market fit, revenue, plan for monetization etc. When using this tool, VC partners can define what investment criteria they value most, and how individual criteria rank against each other. Therefore, investors and entrepreneurs now have the ability to see how well they are doing on the path to commercialization.
‘It’s important to note that the Investment Readiness Level is still imperfect. It’s subjective and it’s incomplete. However, it represents a major leap over what was being used before, when there was no common language to compare startup projects’.

 

  • Level 1-2: Do we have our hypotheses, is the value proposition summarized, are the hypotheses transferred to the Business Model Canvas, and articulated? Is the value proposition detailed enough?
  • Level 3-4: Have we discovered (validated) the problem/solution? Do we have a low-fidelity minimal viable product (MVP), and is it available and ready to test?
  • Level 5-6: Have we validated the product/market fit? Is the right side of the Business Model Canvas validated (revenue, customers and channels)?
  • Level 7-8: Have we validated the left side of the business model canvas (costs, activities, resources, partners)?
  • Level 9: Do we have invest-able metrics that matter?

 

The IRL (4:00)

NOTE: this video will start and stop at the pre-assigned times 20:14-22:23

 

The Elevator Pitch

Most startup pitches begin completely wrong! Often startup founders start their pitch with the solution to a problem, and that is completely wrong. By contrast, a really successful elevator pitch first begins by defining the user problem, and only after that (if at all) a solution to that problem, according to Dave McClure (co-founder, 500 Startups). Dave says that starting with the ‘user problem’ from the very beginning, helps to establish a strong emotional context with the listener (potential investor).
It can also help to consider some different pitch scenarios, each of which may connect more closely to the person you’re pitching in front of. Therefore, first identify the listeners interests, and only then pitch the most appropriate message that resonates best for that particular listener. Finally, every elevator pitch must demonstrate how the startup can tap into the powerful, emotional, and evolutionary needs, that we all have as humans!

What’s The Problem) (2:30)

Dave McClure (founder 500 Startups)

NOTE: this video will start and stop at the pre-assigned times 1:58-4:37

The 9 Pitch Questions

  1. How You Make The Customer Happy?
    • All good pitches should outline how the idea makes customers happy, along with how it’s better and different from the existing products/services out there.
  2. What Is Your Market Size?
    • This matters because most investors want to know that you’re going after a potentially big business. There are two ways to think about market size: top down (reported market data), or bottom up (calculated based on number of users, size of transactions, frequency, value of industry in offline vs. online capacity etc.).
  3. What Is Your Business Model?
    • Describe how you will make money (is it a transactional or subscription-based model etc.).
  4. What Is Your Unfair Advantage?
    • Try to identify your unfair advantage. VC’s don’t like to take risks, therefore your market advantage must be based on your team, number of customers, revenue, intellectual property or patents etc. (define what your biggest assets are, and always emphasize what your advantages are over others in the market).
  5. What Are Your Competitors Solutions?
    • Investors want to know what other competing solutions are on the market, along with how what you’re doing is better than what’s already out there. Therefore, it’s important for you to list your most relevant competitors. Don’t leave competitors off your pitch if you want to begin a proper relationship with investors.
  6. What Is Your Differentiator?
    • Knowing your competitors is important but you must also outline why ‘what you’re doing’ is different. Therefore, it’s essential before the pitch to figure out how you can be better and different from all the other possible solutions.
  7. What Is Your Marketing Message?
    • Frame the problem or product that you’re selling in a way that’s interesting and compelling (volume, leads, conversions, revenue, cost etc.). Outline how you plan to get your unique message (solution) across to customers.
  8. Who Is Your Founding Team?
    • What skill-sets do the founding team have: Hustlers, Hackers or Designers? Hustlers figure out how to get customers, Hackers have engineering or technical depth, and Designers can frame product in a way that’s appealing. Remember that the breadth of founding team skills is critical.
  9. What Are Your Three Budget Scenarios?
    • There are three ways to spend money: hiring to build product, hiring to support marketing (campaigns, acquiring customers etc.), and overheads. You must prepare three budget scenarios that address three different levels of opportunity: small, medium and large. In the elevator pitch you should argue and demonstrate how you are going to hit those three milestones (small, medium, and large)?

Source: Dave McClure (founder 500 Startups)

 

Venture Capital

 

Marc Andreessen (Co-Founder, Andreessen Horowitz)

Andreessen Horowitz a venture capital firm (seed to growth) founded in 2009 and raised $4.2 billion in funds. They have made 395 investments in 262 companies (Twitter, Skype, Facebook etc.).

Andreessen Horowitz invest across stages (seed stage, venture stage, growth stage) and in a variety of business models: consumer, enterprise, and other variations. Marc outlines two general concepts. The first is that venture capital (VC) is a game of outliers (extreme outliers). Four thousand venture fundable companies a year want to raise capital. Two hundred of those will get funded by a top tier VC’s. Fifteen of those will, someday, get to a hundred million dollars in revenue. Those fifteen, for that year, will generate something on the order of 97% of the returns for the entire category of venture capital in that year. So venture capital is such an extreme feast or famine business.

Andreessen Horowitz have a concept called ‘invest in strength, versus lack of weakness’. The default way to do venture capital is to check boxes. That check-box includes; really good founder, really good idea, really good products, really good initial customers. Check, check, check, check, is reasonable process. However, what you find with those sorts of check-box deals is that they often don’t have something that really makes them remarkable and special. They don’t have an extreme strength that makes them an outlier. On the other side of that, the companies that have the really extreme strengths often have serious flaws. So one of the cautionary lessons of venture capital is, ‘if you don’t invest in the cases with serious flaws, you don’t invest in most of the big winners’.

The key to success in raising money is be so good, the investors can’t ignore you. If you build a business that is going to be a gigantic success, then investors are going to be throwing money at you. If you come in with a theory, a plan, and no data, you are just going to be one of the other thousand startups, and it’s going to be harder to raise money.

You are almost always better off making your business better than you are making your pitch better. Raising venture capital is the easiest thing a startup founder is ever going to do. Recruiting engineers, and selling to large enterprises is harder. However, getting viral growth on a consumer business, and getting advertising revenue is even harder.

The single biggest thing for entrepreneurs to remember is the relationship between risk and raising cash, and the relationship between risk and spending cash. Andy Rachleff taught Marc years ago about the onion theory of risk. A startup has every conceivable kind of risk; founding team risks, product risk, technical risk, launch risk, market acceptance risk, revenue risk, cost of sales risk and viral growth risk etc. So a startup at the very beginning is just this long list of risks. Therefore, the way to think about running a startup is think about raising money. That process involves peeling away layers of risk as you go.

First the startup raises seed money, in order to peel away the first two or three risks layers (founding team risk, product risk, initial watch risk). Then the startup raises the A round, in order to peel away the next risk level (product and recruiting risk). Following that, they peel away some of the customer risk after they get their first five customers. The firm is peeling away risk as they move forward and achieve milestones. As they achieve those milestones, they are simultaneously; making progress on the business and justifying the raising of more capital. Therefore, the best way to get the introductions as you progress through this peeling process towards A stage venture firms is to work through the seed investors. The other alternative is to work through something like Y Combinator.

 

The Outlier: Marc Andreessen (4:00)

NOTE: this video will start and stop at the pre-assigned times 29:12-33:06

 

Ron Conway (Founder, SV Angel)

SV Angel are an angel investor firm (portfolio approach) founded in 2009 and have raised over $100 million in funds. SV Angel have made 615 investments in more than 540 companies (Pinterest, Snapchat, Codecademy, Dopbox etc).

When a startup first meets a potential investor, they should be able to say in one compelling sentence (practice it like crazy), what their product does. The potential investor should immediately be able to picture the product in their own mind. 25% of the entrepreneurs Ron talks to, after the first sentence he still doesn’t understand what they do. Therefore, the startup must work hard to get that perfect. Furthermore, they have to be decisive, because the only way to make progress is by making decisions.

Procrastination is the devil in startups. Therefore, no matter what you do, you’ve got to make decisions quickly. After you have a great product, then it’s all about execution and building a great team. Another important point to remember is; bootstrap for as long as you can!

 

Late to Market, Ron Conway (3:00)

NOTE: this video will start and stop at the pre-assigned times 26:46-29:10

 

The relationship between investors and founders involves lots of trust. The biggest mistake Ron sees by far is, not getting things in writing. When somebody makes the commitment to the startup in a meeting, they should get in their car, get back to the office and send an email that confirms what has been said and agreed. A lot of investors have very short memories, and they often forget that they were going to finance a company. Therefore, in meetings take notes and follow up on what’s important. The SV Angel network is so huge, that today they basically just take leads (seed stage) from that network. SV evaluate the opportunities based on a really great short executive summary. If they like that summary, the Partners then vote on the investment opportunity.

Ron says that it is very important for the founder to ask themselves in the beginning; ‘at what point does my ownership begin to demotivate me?” He says this because there is a forty percent dilution in an Angel round (forfeiting ownership). He actually says to the founders, ‘do you realize you have already doomed yourself’ – your ownership share? He says this because the founder is going to eventually going own less than five percent of the company, in normal cases. Therefore, understanding these guidelines is vitally important.

 

Parker Conrad (Founder, Zenefits)

Zenefits manage HR, payroll, and compliance online. The company has raised $583 million and  employs more than 450 employees.

Parker started a company before Zenefits, and was at that for six years. Back then, he and his co-founder pitched to almost every VC firm in Silicon Valley. They literally went to sixty different firms and they all told them NO! One of the reasons he started his current company was that it felt like a real business. He was so frustrated from his experience of trying for two years to raise money from VCs that he sort of decided, to hell with it. You cannot count on there being capital available.

The Zenefits business seemed like one that could do without raising money at all. There seemed to be a path to achieve enough cash flow, and it seemed compelling enough that we could do that. It turns out that Zenefits are exactly the kind of businesses investors love to invest in (healthy cash-flow), and that made it incredibly easy to raise money. 

However, the more important thing at the seed stage is picking the right seed investors. This is because seed investors are going to lay the foundation for future fundraising events, and they’re going to make the right introductions to others. There seems to be a threshold (particularly for seed stage companies) for which investors think; ‘above a certain level of investment is crazy’. This is a rough range of investment that people are willing to pay. Therefore, you have to figure out what that range is when you are pitching. At the seed stage it seems ten to fifteen percent is commonly what people say a company should sell.


 

[WpProQuiz 9]

Recommended Readings:

How to Convince Investors

How to Raise Money

Linkedin’s Series B Pitch to Greylock

Roy Conway’s Recommended Reading List


 

In the next session topics include; culture and hiring (Alred Lin, Sequoia Capital & Brian Chesky, co-founder, Airbnb), testing the culture, mission, branding and more.

NEXT: Culture and Hiring 10/20 (Part 1)

Presenters: Alfred Lin (Y Combinator) and Brian Chesky (Airbnb)