Capital Factory 2010-apply now

Last year, I participated in the first-ever Capital Factory “summer” for start-ups here in Austin, Texas.

SpareFoot was one of the 5 companies that participated.  And out of that experience, SpareFoot received Series A investment from Silverton Partners and Maples Investments and is executing well today. Based on that alone, Capital Factory 1.0 was a huge success. Beyond Sparefoot, I worked with folks at Famigo and other companies that continue to make good progress…but let’s not look backwards, because:

Capital Factory 2.0 registration is upon us!

Capital Factory is looking for passionate technology entrepreneurs that we can accelerate towards success. You can just have an idea on a napkin or you could have a working product with your first paying customers. The mentors in the program (and there are some great new mentors as well) have started from scratch and found their market fit and they have also scaled their businesses and even taken a few public.  ACT NOW!

Only 2 weeks left to apply!

Slow Capital and Capitally-Disciplined Start-ups PART 2

NOTE: I just changed themes; if you like the blog, please subscribe over there to the right, near the top. Thanks.

In the last post, I framed up the relationship between the “Slow Capital” concept and the characteristics of a capitally-disciplined start-up.

This post describes the implications of each high-level characteristic of both concepts because I think they’re closely coupled the MOST IMPORTANT behavior in a start-up.

I believe that perhaps the most important behavior required of early-stage start-ups is a capacity for informed, forward progress in the face of all challenges.  How capital flows into and out of a start-up in order to drive such progress is absolutely critical in today’s start-up environment because of the risks associated with too much / too little / poorly-applied capital.  An overview of “informed progress with purpose” will be the next post after this one.

Why is progress so important?  Based on my personal experience, I firmly believe that 99% of the time in a start-up, the model and/or product you initially founded and funded the company on will change.  It may simply evolve a bit or it may not remotely resemble where you started…but it will change.  Funny things happen while hacking and slashing your start-up’s path to success.

If such fundamental change is natural, your start-up better learn, evolve, adjust, invest and execute as crisply as possible.

Let’s peel the onion a few layers on the implications of each high-level characteristic of a capitally-disciplined start-up:

It raises just enough (plus or minus some margin of error) to move to the next business / financeable milestone

  1. First, a hangover still lingers from the days when software companies could raise 7-figures before building a product and even consider how to sell that product or develop a little customer feedback. Today, raising money to pursue a “if-we-build-it-they-will-come plan” is generally un-fundable in my opinion.
  2. “just enough” means the minimum amount required but not “absolute minimum.”  So the raise could be none, $20k or $20million depending on stage and state.  Different stages and situations present different capital requirements; of course, different stages require different business proof points and validation as well.
  3. “just enough” is also helpful because it minimizes the amount of equity sold, demands better clarity in decision making & sharpens focus within start-ups.
  4. “just enough” also minimizes your investor’s capital risk; this is good in two ways: (a) it allows them to engage with (fund) your company when there is more risk than they would otherwise be comfortable at higher raises & valuations; (b) it advances the notion of an acceptable outcome for investors in a healthy, step-wise manner.  In other words, the more one raises, the larger the outcome must be in order to make a venture firm’s economics work.
  5. Finally, this characteristic is highly aligned with early-stage programs such as Y-combinator, Tech Stars, and Capital Factory.  In these cases, “just enough” capital is augmented by mentorship and business guidance that should further accelerate getting to that next business milestone.

it practices a lean-oriented, customer-development / minimum-viable-product strategy in order to make progress with purpose

  1. I’m not going to summarize each of these important concepts; please search and read the associated posts…there is a tremendous amount of quality discussion out there on these topics.
  2. In any case, in order to make informed progress with purpose, one must be INFORMED. Customer development and MVP strategies are, fundamentally, strategies for accelerating learning. The biggest challenge in making progress is clearly defining where you’re going and why.
  3. At a high level, the idea is that these practices minimize or eliminate waste.  Wasted time, wasted focus, wasted features, wasted money…all such waste increases the operational risk within start-ups.

it is focused on investing to maximize the business opportunity independent of timeframe

  1. if you accept my assertion that 99% of the time your model/product will change, it’s logical that some opportunities and strategies become apparent only as a consequence of execution over time.
  2. You might have to find, open and walk through one door before the door to your huge opportunity becomes apparent.
  3. This sort of process takes time…years, in many cases.

I think the notion of a start-up having capital discipline goes hand-in-hand with the notion of Slow Capital.  According to Fred Wilson, Slow Capital…

1. doesn’t rush to conclusions and doesn’t expect entrepreneurs to do so either

  1. This is an interesting statement because, in general, “delay” is the friend of the investor and the enemy of the start-up.
  2. Let’s not call it “delay” because that sounds negative; let’s call it “not rushing.”  “Not rushing” allows time for other cards to be turned over: is the start-up continuing to execute well?  How is the competition doing?  Are other investors interested in this start-up?  Can the start-up stretch their existing capital if necessary?  Not rushing allows more time to answer these questions and better inform the assessment of risk relative to a start-up.
  3. All things being equal, entrepreneurs would prefer not to rush either.  That said, in the vast majority of cases, not rushing is NOT an option: gotta pay the rent, gotta beat that competition, gotta finish that feature and get it tested and deployed.  I’ve never known a successful entrepreneur that doesn’t feel like their hair is on fire and if THAT THING doesn’t happen in the next 30 seconds the world may well end. Frankly, I want the entrepreneurs that I invest in to feel that sense of urgency.

2. flows into a company based on the company’s needs, not the investor’s needs

  1. a company’s capital requirements change over time as the model and product are proven out and the go-to-market strategy is fully understood.  Of course, the best time to add significant capital is when a start-up can demonstrate that capital is basically the only thing gating scale and growth; getting to this point should take much less capital than scaling for growth going forward.
  2. From the previous post on this topic:  What sort of needs do investors have to PUT money into a start-up?

VC firms need to return to their investors all the money they raised in the fund plus a significant margin above that.  Therefore, if your VC is investing out of a large fund, putting $3m into a company and getting $30m out (a truly great 10x return) probably doesn’t constitute a drop in the bucket relative to what they need to return to their limited partners.  Therefore, firms with large funds really “need” to put at least $10m-$20m into that same company and hope for at least a $100m-$200m exit in order to have a chance at a “good” return over the life of the fund.

3. starts small and grows with the company as it grows

  1. this point is very related to point #2 because capital requirements should scale over time as good execution illuminates the areas and timing where investment positively impacts the business.
  2. “slow capital” is (certainly should be) “risk-adjusted capital” because it allows investors to fund your company earlier in its life than otherwise — when there is more risk than they would typically take at higher raises & valuations
  3. If the investor continues to flow money into a start-up as it executes, increases it’s valuation, and raises money from other investors…then they should own more at a lower cost because of the risk they took by getting in earlier.
  4. Finally, while I really like this concept, it’s hard to do when there is significant competition deals. Why? Because increasing the valuation and size of funding are the weapons that firms use to fight such competitive battles.

4. has no set timetable for getting liquid: slow capital is patient capital

  1. The #4 characteristic above says it all.  This is a very entrepreneurially friendly characteristic of Slow Capital; however, I believe that it has an implied qualifier of making “informed progress” (next post) along the way.  I have yet to see (or be) a patient investor who is faced with bad execution within one of their companies.

5. takes the time to understand the company and the people who make it up

  1. clearly, this goal of this characteristic isn’t to create a warm, fuzzy, “let’s go have some hot chocolate together” sort of moments.  Although, I suppose that could be a consequence.
  2. I believe the intent of this characteristic is to understand the more qualitative elements of what makes a company successful. Revenue, expenses, cost of goods sold, conversation rates are all substantially quantitative. The culture, people, and interpersonal dynamics of a start-up are far more qualitative but still critical (perhaps the most critical) accelerators or detractors of good execution.

I also mentioned that I thought a couple of concepts were left out of the Slow Capital Discussion… Slow Capital ALSO…

6. comes with stage-appropriate strategic and operational assistance

  1. it’s hard to do this well if you’ve never been an operator.
  2. Stage-appropriate means more assistance for early-stage companies and less as the company grows…but in all cases, such assistance must have substance and follow-through in order to cut through the “we’re smart money” cliché that is carelessly thrown out time and again.
  3. If nothing else, the perspective and best practices from investors whose job it is to look across industries, companies and strategies can provide unique insight when coupled with a start-up’s view from “in the trenches” of their day-to-day business.
  4. While this can be a slippery slope if the investor does not spend enough time to fully understand the business dynamics for companies they’re trying to assist, this sort of involvement can ensure there is lock-step agreement on the company’s execution, business requirements and capital needs (see characteristic #2).

7. …I’m sure there is another characteristic…more soon.


Pitch Deck: Funding Ask Slide

This post has been updated and can be found here.

The post covers the one of the final 3 slides: Funding status/ask.  The original outline is here: THIS is the OUTLINE.

Slide 10: Funding Status and Ask Slide

Funding Status and Ask

Funding Status and Ask

The funding ask slide requires a bit of finesse as you are starting a set of discussions that could turn into negotiations if your potential investor turns into your actual investor.

In this slide, a little back ground is very helpful.  Make sure you let your audience know who you have raised money from in the past and at what valuation. This is not “secret” information; be open and transparent.  If you seed funded your company, that’s a good story, make sure you talk about it.  You should also talk about the structure of any prior formal investment by a third party: who, how much, when, format (common, preferred, convertible debt, etc).

It’s important to get right to the punch line of this slide; You MUST be prepared to address the following (have data, be thoughtful, use a clear explanation):

  1. how much money would you like to raise?
  2. why that amount?   (what will it be spent on? how long will it last?  what value will you create in your business using it?)
  3. could you do what you need to do with less?   what might you do with more?
  4. are you actively working with anyone else on this round?

When it comes to timing, it’s important be realistic. If this is the first time you have met with this firm, it’s typically just the beginning of a process that will almost certainly involve multiple meetings over weeks if not months. For larger VC firms, you will not receive a term sheet until you’ve run the gauntlet of their Monday partner’s meeting…if you’re dealing with a top 25% firm, you’re not even close to “done” until you’ve got the Monday invite.  Smaller firms are able to be much more dynamic and efficient…however, that doesn’t guarantee that they will.

If the conversation is going remotely well, you’re likely to be asked about your valuation expectations.  If you have raised money at a particular valuation in the past, that is your starting point…but in this current macro-economic environment previous valuations do not guarantee ANYTHING.  If you have a number in mind that is based on data that is realistic – don’t be shy – flop it out there.   It’s important to understand enough about the VC business to know that investors tend to model their business on investment exits, cash returned to their limiteds…and consequently ownership percentages in their portfolio companies at the time of exit.  Given this, it’s reasonable to approach a valuation discussion by starting with “how much of the company you’re comfortable selling in this round of financing.”  Fixing the amount raised and how much you’re comfortable selling implies a valuation.  Raising $300k while targeting selling 25% of your company imples a valuation of $1.2m.  This is a useful way to have a valuation discussion because if the round size happens to go up (not uncommon) as the round & syndicate come together, you can at least make an argument for raising the valuation. No guarantee it will work.

Pitch Deck: Financial Details

This post has been updated and can be found here.

The post covers slide #9, Financial Details, out of 12 total slides (11 + thank you slide) in THIS outline of a minimal investor pitch deck.

Slide 9: Financial Details

Financial Details

Financial Details

Independent of the stage of your company, communicating simple and clear financial details is critical to an investor’s understanding of the current state of your business. What they care about is very simple:

  1. current revenue and expense trends,
  2. projections for the same going forward,
  3. current equity situation (who owns what, option pool, near-term option usage), and
  4. current cash position.

…Cover these these items clearly and you’ll be answering their questions before they get asked.

For early stage companies, I believe that a “one quarter ago, current quarter, and 4-quarters-out” view presents a reasonably complete set of financial information.  With such a time frame, you’ll show a bit of history, where you are today, and a reasonable guess  at what is going to happen in the next year.  I think a simple auto-generated excel graph help quickly communicate the ramp in both expenses and revenue.

If the company is really early stage and doesn’t have revenue or limited expense detail, it’s still far better to say something is explicitly zero (or unknown) than not mention missing/needing important data.

This example chart is a bit busy as it combines both the graph as well as a screen-grab from the company’s financial model spreadsheet.  If you have a longer operating history or feel like you need to communicate more detail, it makes sense to break this into two slides: a graph (the reader’s digest version) and the spreadsheet detail.

Data that investors will always want to clearly understand include: what is your current and future headcount (this equates to your burn rate as headcount is almost always the biggest expense)?   what is your current monthy/quarterly burn rate and how does that ramp over time?   what is your current revenue and how does that ramp over time?  How quickly are you approaching a cash-flow breakeven point?  What’s your revenue run-rate 12 months from now?  What’s the net loss / gain over the same period?

Pitch Deck: Customers, Pipeline, Partners Slide

This post has been updated and can be found here.

The post covers slide #8 out of 10 in THIS outline of a minimal investor pitch deck.

Slide 8: The Customer, Partner, Pipeline Discussion

Customer, Pipeline and Partner Slide

Customer, Pipeline and Partner Slide

Perhaps more than any other slide, this example can take a variety of forms.  The “punch line” for this slide is to communicate what ever progress your company has made relative to actual customers, the future customer pipeline, and partners that help your business be successful in some capacity. Logos are always nice to look at but don’t get hung-up on anything other than clearly communicating your current status.

You may not have customers yet; or your customer base may be every consumer in the world. In any case, you need to communicate the current status of how well your business is working and customers (because they pay or should pay you money) are a great metric for investors to use to judge your progress so far.  Revenue is, of course, the most binary judge of success…but revenue from a top-tier, brand-name, market-leading customer is (to some real degree) more valuable than revenue from a no-name company because markets tend to follow (adopt the same solutions in a similar time frame) the market leaders.  Alpha or Beta (or non-paying customers) should be called out explicity.

The discussion of your company’s “pipeline” is basically a description of how customer acquisition is going.  Whether you’re an Internet consumer application or building widgets to sell directly to other businesses, how efficiently your company acquires new customers is material to investors as they judge the state of your business and what could / should happen if they choose to fund you.  How, exactly, do you acquire customers?  How much does it cost to acquire them?   What is your average deal size?  How could your business make the average deal size go UP?   What is the average deal size of other companies in this same market?  Does this information align with the Market Size / Market Context data from Slide #3 ? (hint: it should)  Once you have a customer, can you sell them MORE stuff more easily?  Why / why not / how much / when will you have it to sell?  What is the expected life-time value of a customer (be careful to think about this relative to the cost to acquire a customer)?

Partners are a necessary evil in most businesses.  “Evil,” because in general, a company’s life would be much easier if it ran and scaled just fine without help from any other company. Partners might be a critical part of your business/market ecosystem; they might give you efficient access to potential customers; they might provide a critical part of your overall solution; they might actually sell your product or service for you.  What ever they “might” do, the one thing that is for certain is that they require some level of “care and feeding” and that equates to time and money for your business.  Make SURE they are worth it.  And remember that all partnerships tend to fail in the long term if both sides are not benefiting to approximately the same degree relative to their business. What did the partner commit to, if anything?  What did your company commit to?  Do you need more than one such partner?  How long will it take for you to measure partnership success?  What is required to ensure they are effective?  How might this partner accelerate, add scale, or de-risk your business and your execution?

One concept that we’ll keep coming back to is the concept of scale and, in particular, scaling your business. Investor’s excitement about your business is predicated on their beliefs regarding how your business scales from where it is today to something much larger and much more valuable in the future. Desire for scale in your business is, without question, is applied most directly to revenue. That said, there are many other factors related to scaling your company:  business processes (go-to-market, sales, manufacturing, testing, etc), hiring, geographical expansion, and general awareness of your company / product / service. Of course, all these factors are related to revenue scale in some direct or indirect way.  Think through the discussion generated by this slide as a tool to proactively address questions regarding how your business scales.

…two more slides to go.

Pitch Deck: Competition & “secret sauce” Slide

This post has been updated and can be found here.

…almost done!  Again, THIS is the link to the outlining for a minimal investor pitch deck.  This post covers the details of slide 7  with enough commentary to give you a sense of what you need to think about during a discussion on competition and your unfair advantage in this market.

Competition and "Secret Sauce" slide

Competition and "Secret Sauce" slide

It’s important to realize that investors (any many other people) will begin to understand what your company does by ANALOGY.  Having seen many different companies over time (and understanding how THEY operate), understanding your company is largely an exercise in figuring how how you are similar to dissimilar to the companies that investors know well.  Framing up a set of similar and/or dissimilar companies is one of the key purposes of the competition chart.

It is universally accepted that the standard “check-box” comparison chart will start with your company in the first column, having the vast predominance of boxes checked, and then proceed to list 3-4 other less-checked competitors that you’re in the process of wildly out executing.  The example Slide 7 has three examples of these charts.

While nearly cliche, such a slide still serves the purpose of listing the competitive criteria that you deem important relative to your company and this market and how other companies in your space stack up.  …and it’s probably best to NOT use the phrase “secret sauce” in your pitch…we’re using it here colloquially.

The set of competitive criteria for your company – the rows on these sort of slides – leads directly to your company’s unique competitive advantage (aka “secret sauce” or “unfair advantage”).  There are a number of standard, competitive differentiators:  being first to market, unique technology, patent protection, your amazing team, and others; these differentiators all have varying degrees of “defensibility,” which is an important concept when it comes to decribing your company’s competitive advantage.  For example, being first to market may simply illuminate the path for a larger competitor who is willing and able to fast-follow your strategy and throw huge dollars at solving the same problem.  Is that true?  why or why not?  Have your data-backed (versus emotional-bias-backed) answers ready!

The question that investors will have and that you must answer as best you can is this:  if your company is successful, how will you defend its business from competitors who see your success and want some or all of it for themselves? What can you do differently? What can you do uniquely and realistically for how long?  What CAN’T (or is really really hard to) be duplicated?

more soon.

Pitch Deck: Business Model and Milestones Slides

This post has been updated and can be found here.

Again, in THIS previous post, I outlined the high-level flow for an investor pitch deck that, in my opinion, covered the basic, necessary information required for a solid, introductory investor presentation.  Here, we’ll get into the details of slides 5 & 6 with additional commentary and advice to go along with each.

Slide 5: Business Model (aka How we make money)

Business Model / How we make money slide

Business Model / How we make money slide

The business model / how we make money slide is a critical component to the pitch deck.  Again, it can take many different forms but the punchline is the same:  our company does “this set of stuff” in order to make money.  It may be a SaaS-based web application, it may be an appliance sold directly into IT departments, it may be a freemium model…what ever it is, you must explain it clearly.

As you can see from the example slide here, the business model slide can actually be a product/solution/service description as well…as long as you’re sure to describe HOW you sell the product and the details of your go-to-market strategy and/or plan.

A core aspect of the business model slide is an articulation of how the business scales within this business “model” and go-to-market strategy.  For selling directly into IT departments, it’s scaling up a direct sales force; for a product that can leverage existing channels, it’s finding and signing up channel partners; for SaaS businesses it’s how customers “find” your company on the Internet and your cost of customer acquistion versus your lifetime value of the customer to the business.  Does any part of your business act as a “loss leader” for another, more valuable part? if yes, then say so.  Do you have two models running simultaneously?  Make sure you clearly describe and delineate between them…and hopefully describe how they benefit and support each.  You get the idea.

Slide 6:  Company Progress and Milestones

Company Timeline and Milestones

Company Timeline and Milestones

The Milestone / Progress slide is your opportunity to show how far you’ve come since the original concept for your business.

In the example here, there are two simple examples of how you can present this information.  This sort of slide gives investors a short-cut to understanding how well you’ve executed so far in your company’s life.  Important, value-creating milestones over a reasonably SHORT amount of time suggests that your company is focused, you’re prioritizing what is important to grow your company and executing against that list.

Value-creating milestones can really be anything but should clear a certain “news-worthy” bar to make a list like this. I’d suggest that the following items would clear that bar:  founding the company, funding events, launching a product, winning a customer or significant trial, signing business-affecting partners, and so on.

Importantly, this slide is also an opportunity for you to forecast what your company will do next. Nothing suggests great execution to an investor such as calling your shot and coming back later and showing that “you did what you said you were going to do.” Conversely, be very careful NOT to suggest a big milestone such a significant customer win unless you’re VERY confident.  The first question out of an investor’s mouth during any follow-on meeting will inevitably be: “so, did you land that big account?”   You never want to say “No” to that question because there is no good explanation for why not given the fact YOU are the one that told them to expect it.