Why I Hate Your Market Size Slide
A 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
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 (RealtyShares, Fundrise, RealtyMogul, Patch 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).
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 Block, John Gilbert, May Samali… and all my other less brave colleagues who opted to contribute to this piece anonymously 🙂
Stale Words and Hackneyed Ideas That Make Edtech Investors Cringe
Note: 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.
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 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.
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
Kaplan, Princeton Review, Tutor.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 Brutal Economics of Running a Startup Accelerator
Note: A version of this post appeared in my semi-regular column on AlleyWatch.
Startups, ever wonder what it’s like on our side of the curtain?
The topic they asked me to speak about was the economics of running an accelerator program. So if you ever want to know what keeps us up at night, here’s your chance:
The Three Dimensions of Pain (Points)
Note: 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.
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
Note: 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
Note: 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.
- 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.
- Use inside information. If you’re seeing the road getting bumpy, act on it.
- Don’t fill an inside straight. The irrational optimism that got you this far has no place here.
- 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.
- 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.
- 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.
- Be creative. Not all exit doors are clearly marked.
- 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.
How Not To Apply To An Accelerator
Note: A version of this post appeared in my semi-regular column on AlleyWatch.
Since first launching in 2008, Dreamit has received thousands of applications – heck, I’ve personally reviewed thousands of applications in the not quite three years since joining Dreamit. I’ve had the pleasure to read some really excellent applications that crisply and concisely showcased what made that startup shine.
And then there were those other applications. Applications so bad that I threw up a little in my mouth. Applications so awful that I still have nightmares. Admittedly, that last part is an exaggeration but they were bad enough that I am writing this essay in the hopes that you will read it and not make these mistakes.
Consider this a self-defense essay. 🙂
We respect enthusiasm but we treasure brevity.
After the first few hundred applications, every word on the page is like Velcro across our eyeballs (which, btw, is why you should never wait until the last minute to apply to a popular accelerator program). So when we come across an entrepreneur who cannot resist using 20 words when 10 would suffice, it’s painful, really painful. We start skimming, skipping, and then bailing on the application altogether. We once received an application that ran 22 pages – of text, no graphics! One reviewer flat out refused to read it. Needless to say, that startup didn’t get an interview.
But it’s not just us being prima donnas. If this was the startup’s application, can you imagine how painful their investor pitch will be? Or their sales pitch?! It’s communications 101: listener attention spans are severely limited. Knowing what to stress and what not to say is crucial.
Thanks to this applicant, we now have a character limit on all application questions. But just because you have a 400 word limit does not mean you need to use at least 390 of them. If you can answer a question in 50 words, that’s awesome. You will have our respect… and gratitude.
(a.k.a. “The Repeater”)
Dude, we heard you the first time.
Sometimes repetition drives length. An applicant will cover the same material and cite the same facts in response to multiple questions. As sleep deprived as we are, I guarantee that we did not forget your answer to the question immediately above. For instance, we ask what makes your solution special and, in another question, ask you to specifically drill down into your competition and how you are better. You don’t need to list your competition in both places. If you find yourself saying the same thing twice, stop, think about the questions, and put that material in the one place where it fits best.
Tip: take 2 minutes to read over the entire application before answering any questions. You can even copy the questions into a Word file and work on them offline.
As much as we loath long-winded answers, I’ll take a long response that actually answers the question over a short one that doesn’t.
Sometimes I wonder what question the applicant thought he was answering. Check out these examples:
Q: What is your solution? What’s unique about your solution?
A: My mission is to right the wrong, which is just putting United States back on the ideology that built our country…
Q: Tell us about your customers/users …
A: We are using a combination of all the most successful solutions around the world
Tip: After writing you answer, re-read the question and ask yourself, “Is there anything in what I wrote that is not actually answering that question?”
(a.k.a. “The Hand Waver”)
We can’t evaluate an application without specifics. We want hard data and metrics – we want proof. What we don’t want is this:
Q: How big is the problem / how much “pain” does it cause?
A: Huge problem causing lots of pain for customers
Q: How big is your market?
A: Huge / Billions
Tip: If you can answer the question with actual, relevant numbers, do it.
The flip side to the hand wavers are the compulsive footnoters who provide every statistic available or lengthy background information. We review enough applications that we have a working knowledge of the key issues in most industries and know the basic numbers by heart.
This is especially true when you are applying to a specialized program. For instance, if you are applying to Dreamit’s Edtech program and we ask you about the problem, I don’t need you to explain the failings of our K-12 school system in detail and you don’t need to footnote basic statistics like the number of students in K-12 grade in the US. Just say, “We are improving retention for the 20M university students in the US.”
If something is obvious, we don’t need it explained to us. But anything more detailed, surprising, or controversial should be sourced. For instance, one applicant claimed that 8 year olds consumed over 8 hours of digital media per day. My gut response was “no way” and there was no footnote pointing me to his source. I Googled that claim and didn’t find anything. Even if he could support the claim, his credibility was shot.
Tip: if a quick Google search confirms your claim within the top 5 results – sometimes even within the descriptive snippets shown on the search results page itself – it’s obvious enough not to source or explain in detail.
(a.k.a. The “You find it”)
Can’t I just send you my pitch deck? It’s all in there.
I get that question from time to time and it’s a fair question. The entrepreneur has put a lot of time into crafting his deck and making it look pretty. Why fill out an application if the data are in the deck?
In many cases, the data are not all there. Our application questions represent the minimum amount of info we need to feel comfortable inviting a startup to the next stage of the process. I would guestimate that well over 80% of the investor decks we see are missing the answer to at least one of our questions. These aren’t bad decks. Many are likely very effective in getting the startup a meeting with potential investors. They just don’t have all the info we want to see.
The other answer is a bit more subtle. As I mentioned, every Dreamit reviewer sees hundreds of applications over the course of a few short weeks. Even if a deck is ‘complete’, each deck would still present the information in its own way and in its own order. We would have to hunt through the deck to find where the answer to a specific question is while mentally checking off the boxes to make sure all the bases were covered. That adds time and mental load to a process that already consumes massive amounts of both of these scarce resources.
Tip: don’t respond to an application question with “Please see my deck/website/video (link here).”
(a.k.a. The “Face Palm”)
I will forgive you the occasional typo but the whoppers will cost you.
Dreamit allows applicants to link to optional video. It can be the 90 second product overview video from your website, a product demo, whatever you feel will advance your application.
I especially like the short clips taken on your cell phone, where you just talk to us and tell us why you are so passionate about the problem you are solving and why you are excited about the opportunity to be a part of the Dreamit community. I urge you to take advantage of the video. If nothing else, it gives us a sense of who you are as a person and what it might be like to work with you.
But for God’s sake, if you are applying to Dreamit, the first words out of your mouth on that video should not be “Hello Techstars!” (Yes, true story)
We get that you are likely applying to other top accelerators – it’s the smart thing to do – and we get that the applications are time consuming and that you’d like to reuse material from one application to another. But if you muck up that badly on your application, you will eventually slip up on sales or investor pitches. Attention to detail matters.
Tip: We can see filenames too. We know what “YC_vid” means. 🙂
Accelerator Application Best Practices:
- Read the entire application before starting to answer the questions
- Copy the questions to Word and compose your answers offline.
- Don’t make us look outside the application.
- Review your answers to make sure that you are actually answering the question…
- … with actual data and metrics …
- … citing sources where needed …
- … but without wasting time on the obvious (to us) …
- … nor repeating yourself.
- Then edit down your answers to make them as concise as possible.
- Sleep on it and then review your entire application with all attached material from start to finish to make sure it flows and that you haven’t missed anything big.