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Why is Traction So Squishy?

alleywatch-logoNote: A version of this post appeared in my semi-regular column on AlleyWatch.

“Let’s talk again when you have a bit more traction”

I don’t think there is a founder on earth who hasn’t heard that from an investor. Is it legit or is it the infamous VC “soft no”?

The savvy founders know to follow up with some variation of, “I completely understand. So that I know what milestones I should be aiming for, can you tell me what metrics you would want to see before I’m in your strike zone?”

The savvy founders also know that, if the investor squirms a lot and is reluctant to offer up a specific number, it’s probably a soft no.

But then why do many investors who are genuinely interested and who confidently answer with hard numbers also seem a bit uncomfortable with this question?

The answer is that traction is a squishy concept.

Squishiness #1 – What’s the slope of the line?

Which startup impresses you more: the startup that got to $1M Annual Recurring Revenue in 6 months or the one that took 6 years to get there?

‘Nuff said

Squishiness #2 – With what inputs?

All other things equal, a startup that gets to $1M ARR on $500K investment is more impressive than another that needed $2M to hit that same mark.

But this one isn’t that open and shut. What if the second startup spent the first $1.5M on a different type of product or attacking a different customer and then pivoted. In this case, version 2.0 of the startup used the same $500K to get to the same milestone. So how do we view the first $1.5M they spent? Is it all truly a sunk cost, with no bearing on the future of the business, whose only impact is that the founders of the second company are more diluted than the first? Or do we view it as a potential indicator that they aren’t as attuned to the market or perhaps not as cash efficient as the first startup?

Squishiness #3 – What type of revenue is it?

It’s no secret that recurring software-based revenue is the gold standard. When you are selling electrons, the marginal cost of rapidly growing your revenue is near nothing. Add to that long term / auto-renewing contracts and it just doesn’t get any better than that.

But what if some of your revenue comes from one time set up fees or hardware sales? Those revenue streams come with hard costs in labor and/or material so investors generally discount these revenues. Many investors even mentally write them down to zero.

Then there is transactional revenue. How do you value revenue when the Customer has to go back to a website or app and actively purchase the item again? If the revenue is consistently growing and the vast majority of the customers reorder repeatedly on a well-understood timeframe, that kind of repeat transactional revenue is pretty close to recurring revenue. But if sales vary dramatically from month to month and there is little data to support the claim that customers will frequently and repeatedly purchase the product or service, the startup will get considerably less credit for that revenue.

Service revenue is the least valuable. To increase sales you have to throw more bodies into the mix. That means you have lower margins and you can’t scale as quickly. Most VCs will completely ignore your service revenue unless you can somehow convince them that it will soon convert into a different kind of revenue. For example, let’s say you built a “wizard of oz” prototype – your service looks automated to the customer but you are processing their requests manually for now because you want to prove that you have product-market fit before building the automation. If you can convince me that everything that goes on behind the scenes can and will be automated as soon as practical, I’d likely credit this revenue as if it were repeated transactional or recurring revenue.

Lastly, most investors will completely ignore revenue that was generated under a business model or product or service that you’ve discontinued. For example, if you sold $500K of your product to large enterprises but have decided to switch to selling direct-to-consumer, the $500K from B2B sales tells me nothing about how you’ll do B2C. Remember: where you are is a proxy for where you can go. If you don’t do it that way anymore, your current traction is useless as a predictor.

Squishiness #4 – What kinds of customers?

I would rather see a B2B startup with 4 mid-sized customers than 1 big customer. The former tells me a lot more about product-market fit and the startup’s ability to sell. When a startup has just 1 or 2 big customers, they might be the founders’ former employer or they might have a close relative at that company championing them.

On the other hand, big “name brand” customers count for more than mom & pop customers. It’s harder to get to the right decision makers and navigate through the order process at larger companies, especially for a startup.

So how does a startup with 2 big, name brand, customers stack up against one with 4 mid-sized, less known customers?

Uhh, let me get back to you on that one…

Squishiness #5 – Is the Go To Market scalable?

Startups like to brag, “…and we did it all with zero marketing spend!”

They have no idea how nervous that makes investors.

What it says to me is that they don’t know how to acquire customers at scale. A startup can often get its first few customers or first couple of thousand users simply by reaching out to their extended network. But when they’ve exhausted that avenue, where do they get the next 10x growth? On the other hand, a startup that can, for instance, point to Google or Facebook ads spend as driving the revenue growth and show that their cost of customer acquisition is many multiples lower than the lifetime value of the customer, that’s a startup that can scale. As long as the inventory of keywords that are effective for them is large, they can multiply their advertising spend by 10x or even 100x and grow their revenue correspondingly.

If a startup cannot show that what got them to where they currently are will continue to get them where they need to go, their traction is less impressive than it otherwise might be.

Why I Hate Your Market Size Slide

propmodo logoA version of this article was previously published on Propmodo in Sept 2018

Given how much topic annoys me, it’s surprising that I haven’t written about it before.

As managing director of Dreamit UrbanTech, I see well over a thousand (if not 2000) pitch decks a year. Now that we work with more mature, pre-Series A round startups, most of our applicants have already raised a seed round and may have even gone through other accelerators, so it’s more than a little bit surprising to me that somewhere between 10-20% of those applicants still have unnecessarily complicated Market Size slides.

Here’s an example of what I mean:

Yeah, you’ve seen it before too. Looks kind of impressive, doesn’t it?

Unfortunately, here’s what I see:

Let me break this down for you you:

  • Total US Construction – The startup sells software. Why do I care about money spent on concrete, labor, etc.? That’s no more relevant to this startup than Dim Sum sales in Moscow.
  • Contractor Software Spend – They sell software to subcontractors. If a general contractor is spending $50K or $100K a year on Procore, why does that matter? Those GCs have no use for this startup’s product, will never use it, and will certainly not be spending any of their money on it. Might as well toss in revenue from video game sales for all that has to do with this market.
  • Subcontractor Software Spend – Right type of product, right customers – now we’re getting somewhere. Probably still a top-down estimate but at least this is less obviously wrong.

Top down is for convertibles, not pitch decks

Let me let let you in on a secret: top-down market size estimates are almost always incorrect and generally useless to an investor.

Why are they almost always incorrect? Because they typically capture a lot of related spending on different types of tools. In the example above, the figure includes spending on other construction related software, not to mention more general purpose software like Microsoft Office and Quickbooks. Furthermore, the top-down approach ignores pricing. Let’s say, hypothetically, that you make software that replaces absolutely everything the subcontractor might possibly buy but do it at a tenth of the price. By definition, your market is 90% smaller than the top down estimate suggests. Alternatively, say you provide a solution that’s much more functional and valuable than anything on the market and expect to price at a premium to existing software. In that case, the top down market size estimate understates your potential.

The more accurate and useful way to estimate your market is bottoms-up. It’s really not that complicated. At the end of the day, it is simple third-grade math: Total number of potential customers times what you plan to charge. Really, it’s that simple.

So that’s what an appendix is for…

I called top-down estimates “generally useless” instead of simply “useless” for a reason. They occasionally are a useful appendix slide as a sanity check. If you are creating a completely new product category and your bottoms-up market size estimates are large, it’s good to know the size of the total budget you are competing for. For instance, if your bottoms-up estimate comes to $100B and the software spend for the entire construction industry is $130B, you are essentially arguing that your customers will either stop buying 77% of all the software they currently use to buy yours or that they will manage to steal budget from other departments. Not entirely impossible, but extraordinary claims require extraordinary proofs. Needless to say, you’ll get a lot less pushback if your bottoms-up estimate came to ‘just’ $10B out of $130B.

Who’s on first?

As simple as the above TAM equation is, it still has two variables: number of customers and price. So if you haven’t told me what you charge, the equation isn’t going to make much sense. You need to define the price variable before adding the number of customers into the mix. That’s why your Revenue Model slide should almost always immediately precede the Market Size slide.

In some cases your Revenue Model may be a bit complicated. Your price may increase based on usage (e.g., number of seats or concurrent users), frequency (e.g., API calls, reports or searches per month), or value received (e.g., which modules they subscribe to). Your Revenue Model slide should include this detail at a high level but should also clearly show what you believe the average spend will be across all your customers. Assuming the reader thinks that estimate is plausible, he or she can seamlessly plug it into the market size equation on the next slide.

Maybe we can meet in the middle?

Typically, when you see the infamous 3 circles the only number that matters is the bottom circle but, alas, not always. Sometimes the Total Addressable Market is actually the middle circle. For example:

Now we have to actually think about it (dammit!). If the startup is pitching software for roofing subcontractors, the bottom circle is the relevant one (and I can stop reading right there because that market size is way way way too small). But if a founder is making software for all subcontractors and they’ve identified roofing subs as the first subsegment they are targeting as they go-to-market, then the middle circle is the one that matters when it comes to TAM.

Bear in mind that the bottom circle is not wrong. It’s even interesting and relevant information as far as an investor is concerned. It is simply in the wrong place. “TAM” means “Total Addressable Market”: if everybody who could use your software uses it, how big is the market? If you choose to sell to some types of customers before others, that information belongs on your Go To Market slide.

Don’t sell yourself short

What would you make of this slide?

At first glance, this looks like a $200M market. That’s a nice size for a self-funded company, but it is generally not considered large enough for venture funding. But take a look at footnote 3. This company is assuming that they ultimately get only 25% of the total market. This may very well be true but they are selling themselves short. Investors think in terms of total market size; all our rules of thumb implicitly assume that the startup will only capture some of that total. In theory, we should be able to correct for that but, psychologically speaking, the low number sticks in our mind. Plus that assumes we caught this in the first place. As I mentioned before, we don’t particularly like it when you make us think.

When top-down and bottom up are the same

Before I get more than the normal volume of hate mail and ‘gotcha’ email, there is one legit exception to this rule. Under certain revenue models, the top-down estimate is actually what drives your bottom up number. For instance, if this software was used for purchasing construction material and had a revenue model where the software was free but they got a commission on all sales of, for instance, 4% of contract value then the top down figure of everything spent on construction supplies is actually the entirely relevant input to the “third-grade math” equation for market size: Total purchases x 4% = TAM.

You would still have to be very careful to exclude the types of construction supplies that are not on their platform (e.g., if you can’t sell cement, you have to pull that spend out) but in this case, the top-down data is not only valid but necessary.

“The TAM Commandments”

With the above in mind (and apologies for the awful pun), here’s a quick recap of what you can do to make your Market Size slide as effective as possible:

  • Thy TAM shall be a single figure.
  • Thou shalt have no other market figures before (or after) the TAM and expect Me to figure out which one (or two) to ignore.
  • Thou shalt use bottoms-up estimates. Top-down estimates are an abomination. (Except when they aren’t)
  • Remember thy Revenue Model slide and keep it before your Market Size slide
  • Honor thy Go To Market with its own slide. Leave GTM strategy off the Market Size slide.
  • Thou shalt not kill your Market Size by reducing by your expected market penetration
  • Thou shalt email me if you can figure out a way to riff on adultery, theft, bearing false witness, and/or coveting your neighbor’s wife in this context.

Thanks for reading and please share this with all your friends… because I’m sick and tired of bad Market Size slides.

Note: This example is loosely based on Dreamit UrbanTech alumni Knowify. Their Market Size slide looked nothing like this and, for those of you who actually read the footnotes on the charts, the $800M TAM is 800K subcontractors in the US x an average software subscription price of $1000 per sub. So in other words, Knowify did it right. 🙂

Stale Words and Hackneyed Ideas That Make Edtech Investors Cringe

alleywatch-logoNote: A version of this post previously appeared on EdSurge

 

If you go to startup pitch events, you’ve seen it happen:

An entrepreneur says something—something so naïve, egregious and hackneyed—that it makes the investors, along with educators who are now increasingly in the audience, physically cringe. As funders wince and squirm uncomfortably, some are thinking along the lines of: “How do I respond to this pitch genuinely without coming off like a jerk?”

In the interest of fixing this problem at the source, I reached out to some of the advisors and investors in the Dreamit Edtech network to get their “lemon lists” of concepts, statements, and business models that Edtech entrepreneurs may want to think twice—or thrice—about.

For convenience, I’ve aggregated their suggestions into two broad categories: Cringe-worthy Concepts and Modest Missteps.

Cringe-Worthy Concepts

These are not inherently “bad ideas” per se. It’s just that the investor community have seen tons of these, and in order to impress you need to jump right to what makes your approach a quantum level better than everything else out there. Hint: “It’s mobile,” “We have a better UI,” and “It’s for millennials” are not the answers.

Student engagement and retention mobile apps

Yes, this is a big problem. But there are many startups in this space. Most of them offer some variation of the thesis that improving how “engaged” students are in their coursework and community will boost academic outcomes which will then increase retention. Yet academics are not the main reason student drop out; according to a study from Inside Track, it’s the fifth most important factor.

The other solutions I see in this space tend to throw a lot of features (such as calendars, student to student messaging, event check-in, and newsfeeds) into an app and hope better retention just happens. I’d cite a few examples of this approach but, as you can imagine, startups who take this approach rarely get off the ground and those who do don’t last long.

Parent communications platforms

There are already several well-capitalized startups (including Bloomz, ClassDojo, Remind), established companies (SchoolMessenger), and other deep pocket players from learning management system providers that already boast significant traction here. Like Peter Thiel says, if you are not delivering a 10x improvement, you don’t stand a chance.

Chatbots

Chatbots are hip and cool these days and, while I agree that they have a lot of potential, most of the pitches are simply applications that turn IBM Watson’s natural language processing technology loose on a university’s existing FAQ page. If that’s all you’ve got, what makes your business better and defensible? In these situations startups that master the space early get a rush of initial business—until the mass of fast-followers come in and drive prices down to the bare bones.

College recruiting and lead generation

The growing population of 18- to 24-year-olds in the U.S., along with the stream of foreign applicants to U.S. universities (which, to note, has taken a small dip under the Trump administration), the widespread adoption of online applications, and nearly 700 colleges accepting a common application, combine to make college admissions more competitive than ever. So finding and getting into the right college is clearly a major pain point.

The catch is that the vast majority of people suffer it only once. This means that customer acquisition is challenging and your company’s revenue model has to be rich enough to support it. Unfortunately, the days when you could sell a lead to the university solely because a student visited its page on your website and clicked “save” are long gone. For your lead to be worth much to the college you need to have robust data about that student’s underlying needs and preferences, and demonstrate that students value your site or app as a highly trusted source of information and advice.

Peer-to-peer or crowdsourced tutoring network

Simply saying “We’re the Uber of education!” doesn’t make it so. There’s a graveyard full of these startups (such as Tutorspree) and only a few survivors like Wyzant. They almost all underestimate the cost of customer acquisition and overestimate how much usage and viral boost they will get.

To be clear, it is not any specific dollar amount that concerns us; it’s the ratio of customer acquisition cost (CAC) to the lifetime value (LTV) of the customer. As a general rule, LTV has to be 3x higher than CAC for the business model to work. But when I see these kinds of businesses, if they estimate CAC at all, it’s based on a small experiment that won’t scale. So I ask them, “If the economics are that good, have you maxed out all your credits cards to pour every last cent into this customer acquisition channel?”

Invariably, they start backtracking, hemming and hawing, and eventually admit that there either are channels that cannot absorb more marketing spend (e.g., they were bidding on rare search terms that just don’t come up that often) or that CAC starts to rise as others spend more (e.g., startup bidding on more competitive search terms).

Particularly unconvincing: telling us you got a few hundred signups at your college “with zero marketing spend.” What this tells us is that you have no idea what it will cost to get students onboard at the other 4000-plus colleges you do not attend.

Any B2C app for language learning

Personally, I like using Duolingo, and Voxy is a great option for people who want to learn English. But as with tutoring networks, the customer acquisition costs are much, much higher than you think, especially the ones that, like Google Adwords, can scale with you are you grow.

Some of the apps do reasonably well at getting free users, but usage drops off pretty sharply when they are asked to pay anything. That means the acquisition cost per paying customer is very hard to recoup.

Graveyard Ideas

These next few ideas were great…back in the day. Now, the market is pretty much locked up. Startups that are attempting to build the following tools are at least 10 years too late to the party, especially if they’re attempting to tackle the US market.

Yet another student book exchange

How are you better than Chegg (or Amazon for that matter)?

Yet another LMS

Switching something as deeply entrenched in a school’s operations as their LMS is so painful that it’s basically a non-starter. Switching costs are high, and most schools are not likely to switch from solutions like Blackboard or Canvas for the sake of a prettier interface or more “social” features. Sometimes you could give your solution away for free and they still wouldn’t switch. In fact, a freebie option is emerging as some schools are adopting Google Classroom as a lightweight LMS.

Yet another Test Prep Provider

KaplanPrinceton ReviewTutor.com … the list goes on and on.

MOOCs or General Assembly for country X

Do you know what company is “Facebook for country X?” Facebook is. (Except for in China, perhaps.) Which leads us to…

Don’t Say These Things

“90%+ of teachers hate their LMS/SIS/etc.”
And yet they don’t seem to switch. What does that tell you?

“It’s fully integrated. Plug and play… as long as there are APIs.”
So it works. If it works. Except when it doesn’t work. Gotcha.

“And we haven’t even started selling to parents yet!”
Yeah, that’s not hard at all…

“If we only get 1% of the market…”
Yeah, that’s not hard either…

“I created this because it is what my child/class/students needed.”
My follow-up question: “Is it what other child/class/students need?” If, after two years of cranking away, there are only a few dozen of other schools that are willing to pay to solve this same problem, most investors will lose interest very fast.

“We will get the teachers using the free version and then school will pay for it.”
Ah, no they won’t. Why would they when teachers can use the free version? It’s not surprising that a go-to-market strategy that avoids the pain of selling directly to a school administration by hooking the teachers and effectively deputizing them to drag the principal along appeals to a lot of founders. But figuring out where to put the paywall between free and premium is critical. The free version has to be useful enough to teachers that they will use it, but you have to keep enough value in reserve that the administration will make budget for it.

So now that you know how to make an Edtech investor cringe… please don’t. Take the time to pick the right concept and get it right. Then, we’d love to hear from you.

Author’s note: I’d like to thank all the people who contributed their ideas to this warning list… but most of them asked to remain anonymous (I wonder why?) so I’ll just say “Thank you all… and you know who you are” 🙂

The Three Dimensions of Pain (Points)

alleywatch-logoNote: A version of this post appeared in my semi-regular column on AlleyWatch.

“You need to sell painkillers, not vitamins.”

I’m sure you’ve heard that one before. Vitamins are nice-to-have; painkillers are must-haves. Vitamins are hard to sell; painkillers are (relatively) easy to sell.

But have you ever really stopped to consider what pain is? It’s not as simple as it sounds. In fact, there are at least three dimensions of pain you should understand.

3d-Pain

The first dimension is intensity. Is it a hangnail or did you just smash your thumb with the hammer? Because fixing a hangnail is never going to make your customers’ top 5 priority list. And given how time-starved we all are and how many excruciating problems we might have, most of us will never make it to item #6.

Most home automation solutions I see fall into this bucket. Turning your bedroom lights off from your office just isn’t a pain point for most people. The same goes for adaptive lighting solutions that vary brightness and color to fit our circadian rhythms better. While the health benefits are real, for most of us, a cup of coffee in the morning and manually turning down the dimmer at night seem to do the trick just fine.

One of the reasons Twist is so compelling is that it hijacks a real pain point with its wireless speaker embedded light bulbs. Wireless speakers rarely are genuinely wireless – you still need electricity – but Twist solves that problem by screwing right into a light fixture and gives you healthy lightning and the backbone of a home automation system as the cherry on top.

 

The second dimension of pain is prevalence. How widespread is this pain point? Many founders I meet are passionate about the problems they solve because they lived it themselves. This means they are intimately close to their customers… except when they are the outlier. If the pain isn’t shared widely, your market size deflates like a leaky balloon.

Find-a-roommate apps generally fall into this bucket. For young founders in cities like New York & San Francisco, this can be a real problem but it’s irrelevant to married couples and in most cities where the cost of living makes renting your own place affordable. Plus, most singles have friends so finding a compatible stranger isn’t necessary. ** It is a testament to how valuable intent to move data is that these apps get any attention despite the limited prevalence of the pain point.

** I wonder if founders who gravitate to these kinds of apps tend to be less socially connected?

Most of the civic engagement solutions I see also fall short on this axis. The founders are often very engaged in their local communities and don’t want to miss out on pubic hearings about zoning, municipal services, etc. Most of us just don’t care. The vast majority of citizens cannot even be bothered to vote in local elections.

What made PublicStuff and New York City’s 311 call-in service (now an app as well) successful was that they found local issuers that we all actually care about – fixing the pothole on my block, seeing if I can leave my car where it is because alternate side of the street parking is suspended due to some holiday I’d never heard of (but now suddenly love). These are prevalent civic problems.

The third dimension of pain is frequency. The classic edtech example is finding the right college. A near universal, massively intense pain point with lifelong repercussions… but it only happens once in a lifetime.

In real estate, the equivalent is services that make buying or selling your home more efficient or that help you get a better price. Selling a home is incredibly stressful and one of the largest financial transactions in most people’s lives, this is an 8 or 9 on prevalence and takes intensity to 11 but it only happens a few times in your life. The implication is that finding the customer will either be difficult, expensive, or both. This is why real estate brokers can pay over $100 per click to Zillow for leads on clients in prime zip codes.

So if your startup fails on frequency, you’d better have creative, scalable ways to acquire customers or ways to monetize those customers so much better than your competition that you can afford to outbid them.

Ideally, your startup scores high on all three dimensions. At worst, you score very high on two and have a sound plan to get around the headwinds caused by the one you are missing. But if you don’t, please do yourself a favor and go back to the drawing board. You’ll be saving yourself a world of hurt.

Business Etiquette: 4 Things That Mildly Annoy Me

alleywatch-logoNote: A version of this post appeared in my semi-regular column on AlleyWatch.

Every morning I start my day with Dilbert & coffee and one of my favorite secondary characters in that strip is Phil, the Prince of Insufficient Light. Unlike Satan, Phil punishes people for small crimes by “darning them to heck”.

There are hundreds of articles in the business and startup press written about best practices and big mistakes to avoid, but surprisingly little about the small faux pas that, while they don’t immediately doom a relationship, will get you started on the wrong foot.
So in that spirit, here are four things that mildly annoy me and if you don’t stop doing them, I will sic Phil on you with his “pitch-spoon”.

1. No or uninformative subject lines
I know you think you get a lot of emails, but wait until you see my inbox. Anyone in the VC or accelerator business gets hundreds of emails each day from prospective startups, would be service providers, colleagues, portfolio companies – and that’s not even counting newsletters and personal correspondence.

Blank subject lines are like unattended bags at a train station; are probably not important but have a slight chance of being a bomb. You force me to open it just to be safe, when I have too many more time pressing emails to handle. Stop being lazy and toss me a bone here.

Meaningless subject lines are even worse. I can see you didn’t simply forget to use a subject, but how does “Hi!” help?

I’m a little less judgmental about ambiguous subjects like “Intro request” or “Follow up”. You are actually trying but don’t quite get it. When I’m staring at a screen with a hundred emails on it, how do I know what company or project this is about? If I’m later searching for this email, how can I tell at a glance that this is the right one? Consider these alternative subjects instead:

“X would like to meet Y (Co Y)”
“Follow up – Event Z, X (Co X) / Y (Co Y)”

These tell me at a glance who is involved. In the second example though, the event can be a phone call, meeting, conference, etc. and by including it in the subject you are giving me critical context.

Note: I’m not including misleading subject lines here because tricking me into opening your email crosses the line from mildly annoying to really pissing me off.

2. Poorly executed quasi spam
While we are on the subject of email, I’m getting a lot more unsolicited email for b2b services. Some masquerade as one to one emails but obvious lack of any clue as to what Dreamit and I do. This combined with the unsubscribe link at the bottom are dead giveaways. (Btw, if you are going to spam me, goddammit have the balls to commit and drop the unsub!)

At this point, I can even tell just by the formatting of the email that it’s a mass email. There is something about it that’s just looks to… formatted.

Some of these quasi spams even pretend to know me. They say things like “I’d like to follow up with you on…” as if it’s possible I’d suddenly remember a conversation we’d never had. Some claim to be connected to me through “a mutual friend” but when I reply asking who, there’s no one. A few even make up names of this mutual acquaintance.

Now, I meet a lot of people so it is possible that I don’t recognize the name right away but it’s not hard for me to check LinkedIn and search Gmail to get to the truth. I might let the first group get off with a quick Delete, but the pretenders made me think and for that, they get the Report Spam finger.

A refreshing few openly and candidly admit to being cold emails. If they are targeted (or lucky) enough to actually be relevant to me, I might even respond.

Note: One of these days, I may write a post on how to do the quasi spam right, but for now, on with my rant.

3. Generic Cold LinkedIn connection text
Would you go up to someone at a conference and say, “We should network”? Of course not. (Although, believe it or not, this did actually happen to me once.) You try to figure out enough about the target – from their name tag, where you are standing, any other scraps of context you can dig up – to lead with something that might, just possibly, interest them enough to want to continue the conversation.

So why on earth would anyone send a LinkedIn request to someone they didn’t already know with just the genetic “I’d like to add you to my network” message? If you have an idea why it might make mutual sense for us to connect, why not take the extra seven seconds to spell it out? Because if you direct me to crawl through your LinkedIn profile in order to read your mind, it ain’t happening. As you’ve probably noticed, I resent being made to think.

4. Calls without prior scheduling
Phone calls disrupt my flow. So if you call me without prior scheduling you’d better be my wife, kids, mom, or someone who I really, really want to talk to. Otherwise, you are one step below a Jehovah’s Witness knocking on my door. At least they care about my soul; you just want to sell me something.

Tip: if you are not sure, text me first. “Ok to call about xxx? Somewhat time sensitive” is not too much to ask for.

Please help make my days mildly less annoying by sharing this with the people you know who most need to read it… and I’m sure you know exactly who they are.

 

The Art Of The Exit: For Non-CEOs

alleywatch-logoNote: A version of this post appeared in my semi-regular column on AlleyWatch.

Like most entrepreneurs, I wasn’t CEO of my first startup. While I had a fair share of the company, I owned far less than the CEO who, in addition to having had the concept, also initially bankrolled us.

For the most part, this didn’t matter. Like most good founding teams, we had complimentary skill sets and mutual respect so decisions were by consensus. This worked fine until one of us wanted to sell.

For context, the company effectively started in early 2000. We were hit hard by the dot com crash and one of the lesser casualties of September 11 was our term sheet. So we stopped taking even meager salaries and bootstrapped to profitability in 2002.

The next few years, we lived the dream. Ridiculously high growth, increasing revenue per customer as we upsold new modules, competitors folding. Fun times.

Nevertheless, by 2006 I wanted to sell. Six years was a long time but my decision was mostly about the trends. Our growth rate, while still high, had started to come down and the vibe at trade shows was that we were past the early adopters; still plenty of prospects but slower to sign. At the same time, our competition was trying to lure our best customers away by undercutting us. We were doing the same, of course, but once a steal becomes an attractive trade off relative to greenfield prospects, something fundamental has changed.

That said, our growth was still really, really good and the market was *hot*.  On the numbers, we could have got 6-8x times earnings. Plus, we had a good chance to attract strategic buyers and their valuations can get crazy (in a good way).

The CEO wasn’t interested. He believed that our new products would fix growth so we could get the same multiples on a higher base in another year or two. Knowing what we knew then, he might have been right.

But he wasn’t. Next year growth was a bit lower. Still really high but now we had two years declining growth. Uh oh.

So he agreed to shop the company. Unfortunately, the banker we brought in now thought we could get 4-6x earnings from a financial buyer but there were still strategics….

After a year leaving no stone unturned, the best offer we got was… 5.5x. No strategics. Between the market cooling, taking time to digest their previous acquisitions, and our growth slipping, they didn’t bite.

The CEO didn’t want to sell. I knew it would be years before he shopped the company again and, even when he did, the odds of getting a better offer hinged on an increasingly unlikely turnaround so I still wanted out. But I didn’t have a large enough equity stake to force it.

So I told the CEO that, if the prior offer was too low, he should be thrilled to buy me out at that price. I also told him that I was ready to move on even regardless. Ultimately, he agreed to buy me out in exchange for my finding and gradually training a replacement.

I got my final check on Jan 2, 2009. He looked me in the eye and said, “Maybe I should have sold.” Fast forward seven years, still no sale.

This clearly wouldn’t have been possible without the cash. Plus, were I not a core team member, he might simply have wished me well. Ironically, it wouldn’t have worked had I had more shares – another cofounder with more shares couldn’t exit for this very reason! Not enough cash to buy out his stake.

Lessons? 

  1. For your first startup, a solid double or triple in a few years often beats holding out for the home run that may never happen. Life is a lot easier with a win under your belt.
  2. Use inside information. If you’re seeing the road getting bumpy, act on it.
  3. Don’t fill an inside straight. The irrational optimism that got you this far has no place here.
  4. Respect the market. It may be hot now but it can change at any time. You wait on it; it does not wait on you.
  5. Respect the market. (Yeah, I know…) Barring #2 above and filtering any of that through #3, if you ran a good process, the price you get is likely fair.
  6. Governance matters. Understand who can stop or force a sale under various scenarios. You may not be able to change this, but you don’t want to be surprised.
  7. Be creative. Not all exit doors are clearly marked.
  8. Recognize your leverage – in some cases, weakness can be strength – and be willing to use it.

Now go be awesome.

Tips From an Investor on What Not to Say to Investors

Note: A version of this post appeared in Fortune Magazine

You want to know the best way to tell an investor that they should not, under any circumstances, invest in your startup? Here are the magic words:

“We have no competition.”

There are many ways that sentence can backfire on you:

There are large competitors that you are unaware of
If this happens, shame on you. We see a lot of startups at Dreamit, many of which are tiny and under the radar. So I’m fine if an entrepreneur misses a small startup or two, but when they miss a major competitor, the founder has lost all credibility with me and probably has no business building a startup in this space.

You are defining the space far too narrowly
So you’re the only marketplace for left-handed stirring straws. Who cares? What’s wrong with using a right-handed stirring straw? You have just shown the investor that you don’t understand the customer. After all, when it comes to making a purchase, it’s the customer’s decision that matters, not what you have in mind.

You don’t understand the baseline
This one is more subtle. There are, from time to time, concepts that are revolutionary enough that the startup truly doesn’t have any direct competitors, but that doesn’t mean that people aren’t somehow meeting the underlying need. Before Uber came along, people didn’t just sit outside their caves moaning, “Gee, I wish there were some way I could get to the mammoth hunt.” We drove, took taxis or buses, or just plain walked. We found a way.

Whatever unmet need you are addressing, people are somehow dealing with it right now. They might be using telephones, Microsoft Excel, Post-it notes, walking down to the corner store—somehow, life goes on. As an investor, I want to know how they currently cope so I can assess whether your solution is a quantum leap forward or an incremental improvement—and I don’t invest in incremental improvements.

And if you truly have a startup that has no direct competitors, no indirect competitors, and your potential customers do not have workarounds in place, then your startup is likely addressing a problem that is so trivial, no one cares.