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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. 🙂

PropTech Pitches That Are Past Their Expiration Date

Screen Shot 2018-11-08 at 2.56.38 PM
A version of this article was previously
published on CREtech in Sept 2018

Coming off another successful recruiting for our 3rd Dreamit UrbanTech cohort, we had the pleasure to meet quite a few truly incredible startups.

This piece is not about those startups.

This is about the other ones, the startups that, like milk past its expiration date in a coworking space refrigerator, we’d really like to quietly disappear and be replaced with something fresher. So, after canvassing a few of my colleagues, I’ve compiled this list of startup pitches that, absent extenuating circumstances, we’d just as soon not see again.

It’s a community portal for tenants

I live in Manhattan. I don’t even want to talk to my neighbors in the elevator so why would I want this? In virtually all the buildings I’ve lived in, there has invariably been “that guy” (or woman) who has tried to rally the other tenants to be more social. Often, we like “that guy” a lot – he’s nice, he takes our mail in, signs for our packages, etc. We just have no interest in what he’s trying to do.

Kidding aside, there’s nothing about this idea that couldn’t have been done as far back as the late 90s which should be a huge red flag to any entrepreneur considering a startup like this. With so many hungry and talented entrepreneurs out there, good ideas don’t just sit around waiting. In fact, established companies like BuildingLink have community sections that are invariably ghost towns. If you have a burning conviction that the world needs a tenant community portal, you should consider the possibility that you are “that guy.”

It’s a real estate crowdfunding site… but with blockchain!

The most charitable thing I can say about these pitches is that they (or most of them, at least) were not ICOs.

We started seeing pitches for real estate crowdfunding sites as far back as 2014, if not earlier, and there are already a number of players in the space with significant head starts (RealtySharesFundriseRealtyMogulPatch of Land, etc.) so if you are a pre Series A startup in the space, you are pretty late to this party. Since these are basically marketplace plays, first-mover matters.

But wait!” you say, “we use blockchain!

So what? It’s not that hard to keep track of fractional shares in a building using an old-school, centralized ledger. If you standardize the legal documents and purchase process, you’ve already removed the friction on this process. The hard part here isn’t transactional friction but marketplace liquidity: you need enough buyers on the platform so that when someone wants to sell their shares (or tokens) in a property, there is someone willing to buy it. If you don’t have a deep pool of potential buyers, you end up with an asset like small cap stocks: easy enough to buy but hard to sell (especially in a down market!)

The possible exception to this rule are companies like Harbour who focus on tokenizing high-end trophy properties. These are the blue-chip stocks of the real estate world. There will likely always be smaller investors willing to own a piece of the Empire State Building. So giving its owner the ability to sell part of it to a mass market rather than to the current small circle of big players who can afford to invest at that scale both greatly increases marketplace liquidity and reduces transactional friction, unlocking (at least in theory) significant value for the building owner.

It’s a lead gen site for commercial real estate

I have the utmost respect for lead gen and, given the size of these transactions, there is potentially a lot of money to be made selling leads to landlords and their brokers. The trick is getting the tenant to start their search on your site… and you need to do it in a way that your competitors cannot immediately copy or else your cost of customer acquisition will be bid up until your margin is gone. Put another way, if you are using Google AdWords to drive traffic to your site, so can your competitors.

Zillow, for instance, succeeded in creating a site that residential buyers know to go to at the very startup of their home or apartment search by aggregating and cleaning up messy, fragmented public data and presenting it to the public in an easy to use interface. In theory, anyone could have done this but they moved first and fast, creating brand equity that’s hard for a potential competitor to displace without either creating something a quantum level better or spending a lot of money on advertising to launch a competing brand.

Our app helps community residents get in touch with their representative and get more active in local politics

If they wanted to do that, wouldn’t they start by at least voting? This is an example of civic tech backwards think: instead of creating an app to fill demand, they want to create demand with their app. And since here too, people have been banging their heads against this wall for nearly two decades, if you still think the public is just dying for an app like this, it’s very possible that you are “that (other) guy.”

We are a chatbot for residential brokers

It is telling that these startups rarely include successful real estate agents on the founding team. Converting a productive buyer into a client is mission critical, especially in an industry with little competitive differentiation. Agents convert products with personalized service and emotional rapport. A chatbot is the exact opposite of this and, as a result, agents are extremely reluctant to rely on them for this stage in the conversion funnel.

The rental side of real estate, especially on the lower end of the market, can be a brutal, time-consuming slog. Most agents transition from representing renters to other parts of the market as soon as they possibly can, leaving this segment to newbie agents or high volume / low service shops so it’s conceivable that a chatbot for renters’ agents might have legs….

We make 3D models from 2D floor plans

There’s value here if you can pull it off but there’s just not enough data in a 2D model to get to something buyer-ready automatically. So either the landlord has to customize the raw results a lot (too much effort for them) or the startup does a lot of post production (and becomes a service industry selling man hours rather than a scalable tech startup).

(Dis)Honorable mentions:

While not full-fledged startups, these phrases were often enough to make us gag all by themselves

Blah blah blah… drones!

Yes, drones are pretty cool and they do have the potential to change a lot of things, both in construction and real estate and the world in general. But if your startup is basically a glorified drone piloting service, you are selling man hours (not a model that VCs like to back), have no competitive advantage and no barrier to entry. To us, you are basically a taxicab company.

Blah blah blah… AI

So what exactly makes it AI (or Machine Learning for that matter) as opposed, for instance, to a simple database query? As the famous quote goes, “I do not think that word means what you think it means.

… and the user gets a dashboard…

My car has one dashboard. Why would you expect a property manager to want 6 or 7? I’ve head the phrase “dashboard fatigue” a lot lately…

Instead of covering them another dashboard, integrate with their existing dashboard or, better yet, automate the responses to the data you collect so they don’t have to check a dashboard at all… or even think about it. Just. Make. It. Happen.

We’re Houzz meets Uber meets Robinhood


Here’s a hint: the Hollywood style analogy should get you an instant “Ah, I get it.” If the investor has to think about it to understand what you mean, it’s a #fail. I don’t care how cool you think it sounds, skip it and cut to simple description.


Acknowledgments: I’d like to thank Aaron BlockJohn GilbertMay Samali… and all my other less brave colleagues who opted to contribute to this piece anonymously 🙂

Great Entrepreneurs Are Like Guided Missiles

fortune-logoNote: A version of this post appeared in Fortune magazine’s Entrepreneur Insider network under the headline “The Difference Between a Great Entrepreneur and a Really Bad One”

Great entrepreneurs are like guided missiles. If you point them in the right direction, nothing is going to stop them from hitting the target.

It starts with passion. At Dreamit, we will always back a missionary over a mercenary. Founders who are in it for the economic opportunity will always quit when the going gets tough. An entrepreneur who is driven by the need — not the desire — to change the way the world currently works will stick with it through thick and thin.

Then it takes empathy — not sympathy. The difference between the two is the difference between feeling bad for someone vs. knowing exactly how that person feels. With empathy, a good founder can look at a feature and intuitively know that it solves a user’s problem. An empathic entrepreneur not only knows that something is a problem in his industry, but he can get so far inside the mind of the specific decision-maker that he knows the buyer will look at the service and think, “This is exactly what I’ve been waiting for.”

A great entrepreneur is neither a weathervane nor an anchor. He has well-reasoned but lightly held opinions. There is so much bull**** out there, with so many people pretending to be mentors who have absolutely no business being one. A good entrepreneur almost never adopts advice without reflection. If somebody gives him feedback that is contrary to his current hypotheses, he digs into the reasoning behind that feedback and, if and only if the logic and evidence are good, he changes his hypotheses.

The best entrepreneurs are quick learners and even quicker doers. You often hear them saying things like, “So I taught myself X,” or, “I’ll figure that out.” They love to learn, but they also know when it’s time to tear themselves away from the books and start doing. You never have to tell them to do anything twice, and sometimes not even once. For instance, a potential customer was talking to one startup in the Dreamit program and suggested that the team look into becoming an approved vendor. When they were done, I mentioned to another startup in the room that they might also want to look into it, whereupon that founder turned to me and said, “I’m already halfway through the application.”

Lastly, the best entrepreneurs have failed before. If you find someone who has never failed, odds are they never really pushed their limits.

Bottom line: When you know what to look for, the best entrepreneurs aren’t hard to find.

Angel Profile: Toan Huynh

alleywatch-logoNote: Angel Profiles is my semi-regular column appearing on AlleyWatch.  

Angel At A Glance-Toan Huynh2

Why do you angel invest?

I started out as an entrepreneur—just like you—and learned the hard way that sometimes, VC money is not all that it appears to be. It can make you feel like you gave your shirt, your house, your car, and your shoes away. I know what it takes to be an entrepreneur and put everything you have: your blood, sweat, tears, ALL your time and sleepless nights, into a startup. So to have an angel come in and support us would have been a godsend. This perspective probably makes me more sympathetic towards entrepreneurs than it does non-entrepreneur investors. VC money is good for some ventures, but just be very clear about what you are getting into, especially if you are post revenue and can get better funding elsewhere.

I’ve done three startups and they’ve grown. Angel investing, if done correctly, can be a wealth generation tool, but it is not an exact science. A lot of it is your gut. A lot of it is your experience and your belief in the product, the person, the team, or the market.

What was your first angel investment? How did it turn out?

Wow, this was a while ago – let me think. I started in my late 20’s. I invested in a Mexican “white glove service” bank that catered to well-heeled Mexicans in the US. These guys are very well off, they travel to the US all the time and when they do, they expect the same level of service that they get in their home country. and there was a gap: there was nobody doing it. There was a pay out a last year so, yeah, I’d say that this investment went pretty well.

What investment do you most want to brag about?

Yes! How did you know? The one that I really want to brag about is actually a company I invested in called New York Distilling Company. It is an artisanal gin and whiskey distillery right here in Brooklyn and was co-founded by folks from the Brooklyn Brewery. I just love the idea of supporting local jobs and food and it has been great to watch them grow. Another is Hayward, one of the first American lifestyle luxury brands – they make stunning bags and accessories and is getting ready to open their first retail experience location in NYC!

Can I tell you about another company I invested in? The other one is a Vietnamese-style sauce company The Saucey Sauce Company. They produce all natural, artisanal Vietnamese inspired sauces and ketchups – they are awesome and makes everyone look like a rock star home chef!! I use it daily when I cook. I am proud of that one because I’ve seen it really seed and grow as a family endeavor.

Any notable or amusing train wrecks? Any lessons learned?

It’s still too soon to say if there are any train wrecks yet. That said, there are some that are struggling and pivoting. An example is a curated personal healthcare “birch box” concept – we thought it would be snapped up quickly by the big box pharma chains but that hasn’t happened.

I have found that a good way to manage your angel investments is at the beginning of the year you say to yourself, “Here is my bucket of money for angel investments this year” and it makes up a certain % of your overall investment portfolio And you tend to be generous at the beginning of the year – as the year progresses, angels may start to think, “Wait, I invested here, I invested there, my portfolio’s filling up. I don’t have room for more investments.” So you have to be more picky and do more due diligence.

Any startups you backed that should have hit but didn’t? Any idea why not?

Yeah, there was a social media site, like a digital “Dear Abby” for the young women of today. Say you get a text from a boy and you don’t know what it means. You post it and all the lady friends you know log on and comment. You also have male ambassadors commenting as well. Essentially, it allows you to crowd-source advice about dating based on texts guys send you. They had a movie deal with major networks, they had a series deal, like they had all this stuff kind of going on. Those projects probably are still in the works and will probably grow in the next several years as consumer trends change .I’m still waiting for the up, though. [laughs]..but I am patient!

Most humbling experience (related to angel investing)?

Humbling? Well, I am turned off when an entrepreneur is obnoxious enough to say that you cannot invest unless you write a huge check. Entrepreneurs like that sometimes miss the point of angel investing. It is not just the money. It is the entire network that that person could bring to bear – if they care about you and buy into your vision, the angels can bring a lot to the table. But humbling? Gosh, I don’t know.

What’s the smartest thing someone pitching you said or did?

Once I asked an entrepreneur, “Tell me what I would miss if I don’t invest.” He said, “Look, if you didn’t invest – and I get why you are not investing – but just picture this: 5-10 years from now, I’m going to be here…. I’ve put it all on myself. I’ve put in all my life savings.” He understood that in order for me to buy in, I had to understand my return pretty explicitly and that he was willing to be in that ride with me.

One of the first red flags for me when evaluating an investment is to understand how much money the founder has put in himself. This is actually pretty key, because you want them to have skin in the game, right? You have to make sure you understand the motivation behind a business and that you agree with it.

What financial returns do you target for an angel investment?

I don’t have lofty dreams for angel investment, to be honest. If I or anyone else gets a 10x or 100x return, it’s a rarity. You look for a 10x plus return, knowing that you are lucky to get a 2x plus return. And I’m pretty realistic on time frame – between 3–7 years. I know the funds are locked up and I’m not going to see that money any time soon.

What makes you better than the average angel?

Hmmm, I don’t know if I am better than the average angels. but I manage the angel investment like a portfolio. It’s an investment vehicle; it’s not emotional. My husband and I agree this is what we have and that’s it. If later anyone finds something really interesting, we’ll say, “Look, we can’t do it this round, but maybe next year.” We run it like a little PE shop.

Sometimes, when you get excited about an idea or a team, you do make emotional investments. When it is emotional, I cap it.

I do have specific expertise in cloud technologies, food tech, fintech and a personal interest in education and women’s and children’s health – so I have view points on these that might be helpful.

Pretend that it’s 2019 and complete this sentence, “[Technology X] is less than 5 years old and now I can’t imagine life without it.”

I think that five years from now I’m going to have a home device or office device that can actually know my habits: know what I want, know what I need, know what I do in what order, and help me manage my personal and professional life in a meaningful way. A life assistant – you know what I mean? I would love to see a product like that.

What’s the best way for entrepreneurs to reach out to you?

Check me out on LinkedIn.

If you are an active NY-area angel (or know someone who is) and would like to be profiled for AlleyWatch, please contact me here.

The 8 Types of VC Fund Investors

I’d raised money for startups before. How different could it be? Just add a zero or two to the ask, right?

It turns out that raising money for a venture fund is a heck of a lot different than raising money for your startup… and certainly not any simpler.

You see, angel & VC investors are all pretty similar when it comes right down to it; we want you to make us money. Show us good odds (by startup standards) to make a lot of money and we’re in.

Fund investors are far more complicated. Prospective Limited Partners (“LPs”) have a variety of motivations and each type of LP needs to be approached differently. Here are the 8 different types of LPs I have encountered in the course of raising money for the fund DreamIt uses to invest in the startups we accelerate:

1. Maximizers
2. Allocators
3. Institutionals
4. Pipeline Fillers
5. Strategics
6. Economic Developers
7. Impactors
8. Fund of Funds

Type: Maximizers
Winning strategy: Show them the money

Maximizers are the most like angel investors. They are sector agnostic; they don’t care if the investment is in real estate, a cupcake shop, a tech startup, or your fund – you are competing with every other opportunity out there for their investment dollar. They just want the biggest bang for their buck. To win, you need to show that your fund’s combination of risk, reward, and time frame is the best. Don’t waste too much time on strategic differentiation. Cut to the chase and stress the overall performance of your sector vs. other sectors, your team’s past performance and other relevant experience, and (if you’ve already started investing) the performance and potential of the companies already in your fund’s portfolio.

Type: Allocators
Winning strategy: Be best in class

Allocators are typically individuals or family offices who take a top-down view of their portfolio and have decided that they want a certain amount of “exposure” to VC. You have to show them that you are the best option in your venture asset class. It often helps if you can redefine the class somewhat. Make it narrower and it’s easier for them to see how you come out on top. For instance, DreamIt doesn’t simply position itself as a VC fund investment. We are angel stage investors and in that extremely early stage there aren’t many alternatives; there are just a handful of other top accelerators with funds. Beyond those, the Allocators’ only other options are second tier accelerators and direct angel investing. Allocators are allergic to the former and don’t have the time or skills for the latter.

Note that, while you don’t have to sell your sector to Allocators, it does help if you can show that your sub-sector outperforms. Fortunately for us, overall VC returns for the past decade plus have been pretty dismal whereas early stage / angel returns have been stellar.

Type: Institutionals
Winning strategy: Be best in class… and be patient

Institutionals (e.g., pension funds, endowments, insurance companies) are essentially very large Allocators. They are run by professionals and tend to have standard (and often slow & painfully thorough) due diligence processes, in part because they tend to be more conservative and focus heavily on preserving capital. Their challenge is to keep a lot of money at work at all times. Small investments are the same amount of work to assess for them as large ones are but even super returns just don’t move the needle for them unless their initial investment is big enough. At the same time, most institutions don’t want to represent more than 10% of your fund. So if their minimum check size is $5M and you have a sub $50M fund, you are likely wasting your time.

One caveat: Pre-existing relationships are very important to Institutionals so if you expect that your next fund will be in their strike zone, it pays to set aside some time to meet them anyway and to start building the relationship,

Type: Pipeline Fillers
Winning strategy: Create portfolio envy

Pipeline Fillers are looking for dealflow. They may be later stage VC or PE funds who know that it is extremely hard to get into the hottest deals if you are not already on the cap table. Or they can be large family offices or corporations who like to invest in particular industries but don’t have the skills, connections, resources, or inclination to invest in raw startups. For Pipeline Fillers, you need to understand their investment focus first and then show how your portfolio matches their need. You also want to highlight how they will get access to your portfolio. At DreamIt for instance, we stress the early introductions we make such as invitations to session kickoff events and “LP Day” where our investors get a preview of the newest DreamIt startups well before the general public meets them on Demo Day. We also point out that, as a relatively small fund, DreamIt rarely invests beyond the B round which leaves a lot of pro rata investment rights for later rounds that we can make available to our LPs.

Type: Strategics
Winning strategy: Show portfolio fit

Strategics want to know what disruptive technologies are just over the horizon. They are often corporations who want an opportunity to partner with the best startups before their competition gets to them. They may even want a chance to make some targeted investments and/or acqui-hires. Portfolio fit is critical here. Selling a generalist fund is difficult because only a small share of the startups will be relevant to that particular Strategic but pitching a fintech focused VC fund to a bank or an IoT/smart device fund to a large electronics conglomerate makes a lot of sense. While return does matter, they are largely buying insight so focus your pitch more on your deep industry knowledge and your access to disruptive seed stage startups in that space.

Type: Economic Developers
Winning strategy: Show them the headcount

Sometimes, you may even pitch your fund to the government entities that are first and foremost Economic Developers. Increasingly, the SBIC, states, and even a few of the larger cities have allocated some of their economic development budget to VC investment. This is an entirely different kind of conversation. They want to know how many jobs you will create in their region so be prepared to talk headcount, not returns. Also, there will be strings attached – limits on non-region investments, co-investment requirements, etc. You may even need to set up a side fund for their investment to exclude startups that don’t meet their mandate. Oh, and don’t expect them to move quickly either.

Type: Impactors
Winning strategy: Share their passion

Impactors make up a similar but separate group of potential investors. These may be government entities or non-profits with social goals. Often referred to as double bottom line investors, Impactors want to invest in particular types of ventures such as minority or veteran led businesses or startups targeting environmental or anti-poverty causes. Impactors vary from wanting to maximize profits while constraining their universe of investments to those that meet their mission to those who want to maximize their impact on their primary social metric while at least meeting a minimum target return. Impact investors are typically a poor fit for VC LPs unless your VC fund was constructed specifically with their goal in mind or predominantly targets a closely related industry such as environmental impact investors and a clean tech fund.

Type: Fund of Funds
Winning strategy: Finding them is 80% of the battle

The last category is Fund of Funds. Their value proposition to their LPs is that they can pick the better VC funds, justifying the fees they charge. These fees apply after the underlying VC funds take their fees. There’s been a mini revolt against “Fees on Fees” so these guys are a vanishing breed but if you do meet one, your pitch should be similar to the one you use for Institutionals, only stressing returns instead of capital preservation. Fund of funds may also be looking to slot your fund into their pre-defined set of target buckets so take some time to figure out what their buckets are and show where you fit in. Plus, if your fund doesn’t quite fit cleanly and neatly into their framework, that’s one strike against you. Lastly, because of the fee issue, be prepared for the Fund of Funds investor to ask for a discount of your management fee, carried interest, or both.
So the next time you sit across from a VC and think wistfully about how much nicer it must be to be the one writing the checks, remember this: every few years we go through the same wringer as you do and it’s no picnic for us either!

Acknowledgements: I’d like to thank my colleagues who contributed valuable feedback on earlier drafts of this piece including Skyler Fernandes (Simon Venture Group), David Teten and Katie Bluhm (ff Ventures), Sumeet Shah (Brand Foundry), Amanda Nelson (TCP Ventures), Jorge Torres (VenSeed) and Steve Berg (Antecedent Ventures). In case you are wondering, I’ve opted to list them in the order with which they responded to my request for feedback in the (likely misguided) hope that this will encourage them to answer my emails even more quickly.

Are Accelerators Just Paid Introductions in Disguise?

It was not so much a debate as a “frank exchange”.

I was exchanging emails with the founder of one of the larger startup pitch conferences.  He had asked me if I would promote his event with some of the DreamIt startups who are currently fundraising.  His events are pay-to-pitch and it’s fair to say that, as a general rule, I’m not a fan of that model.

I (politely, I hope) explained my reservations.  I’ve dealt with the issue in more depth here but the gist is that getting in front of key decision makers is a core competence for successful entrepreneurs.  If you can’t get a warm intro to early stage investors who, by and large, are some of the most networked people on earth, how will you get in front of potential customers, distribution partners, etc.?  Paying for access to investors often signals a lack of this core competence, and, more generally, an attitude that something so fundamental to their business should be outsourced.

When I was done explaining, he responded with this deceptively simple question:

“How is presenting at our program different then presenting at your demo day?  Those companies pay you with equity.  Couldn’t you make the point that if they need your services then they are [equally lacking]?”

Respectfully, I disagree.  There is a world of difference between participating in an intense 3 month program where you master key skills vs. simply writing a check.

Putting aside the heavy filtering that is a result of the intense competition for admission into the top accelerators – having seen the numbers first hand, I can confirm that it is statistically easier to get into Harvard than it is to get into DreamIt – that in itself virtually guarantees a better pool of demo day startups than pay-to-pitch presenters, anyone who has been through a top accelerator will attest to how much they have learnt.  In particular, the alumni who graduate from top accelerators leave the program fully capable of networking to investors, clients, partners, etc. Startups who use bankers or other intermediaries leave with some business cards.  It’s the difference between mastering a skill and renting it,  between going to med school or just going to the doctor.

But then again, I might be biased. 🙂

What do you think?