Playing "hot or not" with investors

This morning I was recapping with the TechStars founders about their first 2 weeks and preparing them for what to expect in the next 11 weeks and beyond.  One question raised is how to deal with raising funding.  In addition to some other advice I offered, I made a strange analogy:

 

A key part of getting financing is managing your reputation: gaining traction and momentum in the technology and venture community is like....becoming the popular kid at school. 


In high school, I learned (the hard way) that if Jane tells Cindy that Tommy is "hot," it influences Cindy's view of Tommy and after this occurs a few times....guess what.... Tommy becomes the most popular (i.e. hottest) kid in the class.  This high school process of "who is the hottest" is pretty similar to what occurs amongst investors with startup companies.

 

In addition to developing a great product that customers want to use, having a business plan, and being able to pitch well etc., it is equally important to generate strong buzz about your company among the venture and technology community.  Sometimes an off-handed remark at a cocktail party from one angel to another saying "have you seen what XYZ company has been up to? It looks cool (i.e. hot) to me" is all you need to get your company some traction with investors.

How to quit your job at a startup?

In the last month or so, I've had the good fortune of witnessing high level employees quit from 2 startup companies. In both cases, the employees were well meaning honest folk who did a poor job of communicating to the management of the start up. 

if you find yourself in the position of management at a startup (or for that matter any company) and wanting to quit, I would encourage you to notify the management as soon as possible that you are thinking about leaving the company and some of the life factors that are making you consider leaving. 

This early warning step is the one that people screw up most -- and often has the most negative effects on the entire process. It often makes employers feel burned when they don't have fair warning or opportunity to correct bad employment circumstances. Why is this so important? Two reasons: first, because startups need to be able to plan for effective transition and second, managers want to feel like they have an opportunity to communicate or respond to market dynamics with a counter offer.  Without adequate warning, managers end up feeling burned and can take defensive or punitive actions in response. These only aggravate bad communication and bad feeling between employee and mangement left at the company. 

Top 5 entrepreneurial moving offices tips

Sorry for the slow week of posts last week. But I was engaged in moving to our new offices in South Lake Union. The office already has a nickname -- "the Easy"....it's a working name based on the fact that we have a speakeasy in the basement.  

Like most start-ups....and unlike most big companies.... We moved ourselves. We rented a U-Haul and a couple hand strollers. We got lots of used furniture. We negotiated with internet providers which was a pain in the ass because Comcast doesn't service our neighborhood. We put the furniture on our backs and moved. My back is tweaked -- it's hard for old guys that sit in front of computers to move stuff. 

The upside of all the moving and sweat is the new space we're in.  We're setting up office this week. Trying to get things tidied up for the start of TechStars. Stay tuned for pictures, parties, and open houses. 

Special thanks to Kayla and Danny for making the move happen. We couldn't have done it without you...or your siblings. 

oh yea -- and now for my top 5 tips for those people considering an office move:

  • Home Depot has tile board that makes for great whiteboards
  • Used chairs can be acquired for $20
  • Pizza plus $200 worked for payment for a full day of movers
  • Make sure to start the internet gets signed up for before you sign a lease
  • Negotiate an "out" to your lease -- having a buyout with 6 months notice is a good practice for any startup!

The benefits of RevenueLoan

I've been meeting and talking with lots of entrepreneurs about funding needs and getting feedback on RevenueLoan. We're learning that RevenueLoan really helps companies for the following reasons:

  • RevenueLoan is different in type. It's neither equity nor debt strictly speaking. This different type of investment is attractive in lots of situations. I've heard from small business owners that the concept is simple and aligns investor and entrepreneur interest better than alternatives. 
  • RevenueLoan plays nicely into existing cap table and doesn't require dilution of existing shareholders.
  • The capital is flexible.  Because the money is not tied to specific ratios and doesn't require fixed coupon payments, entrepreneurs can use the capital in the best ways he/she sees fit to grow revenues and the business. 
  • A number of entrepreneurs use RevenueLoan as an alternative or an addition to traditional lines of credit. RevenueLoans can be good insurance policies on sustaining a growing business through situations that are cash tight. 

3 drop dead simple tips for job seekers in technology startups

I've been looking for some marketing assistance for RevenueLoan and the process has hi-lighted the most simple of tips for applicants:

  1. Make sure your resume is easily opened by Microsoft Word.  A number of people sent me .pdf file formats which is fine but don't open reliably in Google docs. 
  2. Make sure you say something short and interesting in your email that the gets a recruiter to open your resume.  Remember that job one is converting your email into a resume opener. 
  3. If you're in the technology field, having a vibrant social network on facebook, twitter, and linked in is an obvious filter. I use these three services as screens for all technical and business applicants. 

The slog of business

We have a saying around Founder's Co-op which is "chop wood, carry water"....which is a saying that comes from monk's practice in the monastery.  It is intended to get at the fact that much of business is not sexy. The day to day practice of business is a slog. The trick for most entrepreneurs is to be able to do that slog work day in day out for many years while keeping an eye on the excitement of the original vision behind the company. This is not easy to do!  People's sense of time as an entrepreneur was skewed during the 1990's internet revolution and is skewed by massive successes such as Facebook or Zynga. Most businesses don't grow to $1b in 2 or 4 years. 

I'm writing this post on Monday morning which is when the slog of chopping wood and carrying water starts. Personally, I'm excited about my work this week even though much of it is oh so unsexy! 

Keep your head down, put one foot in front of the other and you'll get there! Have a good week. 

The value of raising prices

Just spoke to an entrepreneur who took the unusual step of increasing monthly prices by 2.5 times approximately. They saw a slight 5% drop in conversion rate. My reaction? You didn't raise prices enough and I encouraged him to do A/B testing to try and get a sense of the demand curve for his service. It's the wonderful thing about web businesses -- you can actually draw out demand curves and really hone one of the hardest challenges in business: setting price!

Miscommunications in negotiations can be very dangerous

I have been negotiating a business contract with someone. I had my attorney write edits in a red lined version of the contract. The person I was negotiating with read that contract and believed that I was asking for about 2 times the money I thought I was actually asking for. We communicated back and forth via email while letting this miscommunication grow. He was thinking WTF. And I couldn't understand why he cared about the point. It never really became a major issue because we met for drinks last night and understood the miscommunication. That said, it reminded me of the danger of miscommunications while negotiating. Very hazardous. It's worthwhile to make sure that both parties are talking and understanding the same thing!

Business is a momentum game

One of the most powerful forces in business. It's important to one's career. And it's really important to a startup's success.  The important thing for a startup is to create some business momentum. That often comes in the form first of team and product and ultimately (hopefully) translates into revenue momentum.  

I think that companies that gain momentum make the most profit when they've got full momentum. Think about Apple. I think it was the ipod and the iphone that gave the company momentum -- but right now there's not much stopping them from making money.  When you lose momentum, it's hard to regain it -- just ask Microsoft. I love the company -- it's a critical northwest pillar, but they've lost some of their momentum. What's interesting is that, they had so much momentum 10 years ago, they're still making insane amounts of money today despite losing business momentum and mindshare. 

Now back to the world of small companies and entrepreneurship - -think about momentum and how you plan to generate it for your business. Once you get some, be sure to foster it!

Being Number 1

The recent hysteria about Lebron James and the potential payouts being offered to him have reminded me of the value of being #1.  It doesn't matter what game you're playing there's always a premium paid for being #1.  

I'm writing this in my blog as a reminder to all those entrepreneurs to focus on becoming #1 in whatever market it is that they're playing in.  

It's stupid obvious -- but sometimes stupid obvious requires a call out. 

Lookstat founders are growing up

Just had lunch with the LookStat founding team.  They're a little annoyed that their numbers of users and revenue haven't taken off as much as they'd like. In response to this, the team spent some time this week asking themselves "why"?   Well, they came up with some great answers.  Turns out they've been selling features not benefits. Also, turns out they haven't explained to users "why" they should use their product at all. Lastly, turns out that users don't know what to do when they first come to the web site. These insights are spot on -- and relatively easy to start fixing and addressing. Lesson learned in business: every breakdown is an opportunity for a breakthrough. Go Rahul and Casey -- you guys have game. Business game that is ....not golf game :-) 

The first big door dinner meeting is in the books

Just returned from a lovely dinner with Brad Feld at Foundry Group, Keith Smith and Jeff Malek of Big Door.  The meeting had 2 bottles of wine, 7 plates of food, and 3 desserts. Good food and drink helped make the conversation flow. 

The meeting was interesting to me for a lot of reasons. First, from a big door investor perspective, I think Keith and Jeff are really onto something. The response from the market in terms of interest in what Big Door has built is awesome. It's made Keith giddy and busy just trying to keep up with responding to the interest. Now, the trick for the company is to figure out what the conversion rate is going to be of leads to customers and customers to revenue. A year from now, we should be able to look back and see what an ideal customer is and what the average expected lifetime value of a customer is. We'll also be able to state what makes a bad customer fit. All of these facts are very important to learn and all impossible to know today. So the conversation at dinner was about how best to deal with this ambiguity and at what rate to respond to what appears to be real demand in one's product. Brad made an interesting point that when demand is real entrepreneurs often make the mistake and constrain growth because of capital (i.e. they don't lean into demand enough). He's also seen entrepreneurs make the opposite mistake in the 90's -- spend in the absence of real demand. So the trick here is to figure out how real the demand is.... 

Second, as a person running RevenueLoan, the conversation was totally relevant to me there too. I've been impressed (not quite giddy) with the amount of interest and demand in our company and I found the conversation about Big Door instructive with how I should think about aggressively pursuing demand. 

Notes from second founder only meeting at Founder's Co-op

We had our second founder only meeting last night at Founder's Co-op.  You can see the video that was produced from the first meeting here. This meeting was even better. We had about 16 attendees. The agenda was the same as last meeting

  • Opening toast and optional shot of Maker's Mark
  • 1 word answer to how you are feeling right now
  • 3 minute update of business and personal high and low
  • open discussion

We really started to get into sharing around core issues of sales and marketing as well as partner dynamics (either hiring or firing).  At the end of the meeting, I asked what we could do better so attendees got even more value. People made the following observations:

  • Request for more regular meetings -- happy hour fridays so informal sharing and social building increases
  • Even though we share an office, actually sharing tactics and know how is hard. As people understand what each company does and what each founder knows, people are really excited to collaborate more!
  • Have focused meetings on specific topics like SEO, white labels, infographics, AWS, etc. 
  • Play more beer pong.  

The latest from our friendly landlord

Given the amount of feedback on the last email from my landlord re: the office barbeque. I thought you'd enjoy seeing this email which I received today.  We had about 1 week of no hvac and a very warm (despite Seattle's current weather) almost hot office. 

ANDY:

It turned out that the second problem with the HVAC system was the result of your people on site fooling around with the thermostat.  We had previously set them and locked them up and they were locked again by the tech after his first visit.  After the tech was there the first day some of your people took it upon themselves to unlock the system and reset it on their own, with the result that it did not work properly.  Some of the people on site admitted to the HVAC tech that they had gone online and researched the info on how to break through the lockout.  The result this was a second visit to the site for a cost of $328.50.  Please send a check in that amount payable to the ...... to my attention and instruct the workers on-site that they are not to do this again in the future.

Any suggestions on responses ?

Show me the money. Show me the cupcakes.

My friend John Scrofano of Nearlyweds and Rahul Pathak of LookStat encouraged me to inform you of the following:

I've been having a lot of meetings these past two weeks with TechStars and Founder's Co-op and RevenueLoan. In those meetings, people want me to show them the money and the love. You know what I love? 

  • Cupcakes - Trophy or Cupcake Royale
  • Chocolates from Theo's
  • Ice Cream from Molly Moon
  • Pizza from Serious Pie
  • Maker's Mark . 

 Make sure to show me the .... and the .... next time you come in. I'm just joking  -- but there's an important lesson to all those entrepreneurs out there.  Food goes a long way to winning people over!



When RevenueLoan is important?

I'm personally on a mission to help entrepreneurs build their businesses and be successful.  For me that means a couple of important things:

  • Stage appropriate funding
  • Mentorship
  • GFA - Get fucking aggressive

Over the past 2 years that I've been investing as part of the superangel fund in Seattle Founder's Co-op, I have seen that there are lots of opportunities where our operational expertise and desire to build real businesses makes a ton of sense to invest as an early stage equity investor.  However, I'ves een lots of opportunities where good companies and good entrepreneurs are in situations where $250K  (we do deals up to 500K and in special circumstances might even consider more) makes a LOT of difference and these entrepreneurs have no real source for cash. RevenueLoan was created to address these situations. Situations like the following:

  • Working capital because growth is happening faster than projected
  • Marketing dollars to open a new market for an already successful product
  • A cash cushion that allows an entrepreneur to make operational decisions that are in the right long term interest of the business but might have adverse cash consequences in the short run: like changes to pricing
  • Capital into the business when the cap table is delicate or not at a point where making drastic changes to the cap table is advantageous to the entrepreneur
  • To purchase key assets necessary to or increase revenue (we've looked at funding small acquisitions)

The Big Door financing history: an insiders view of Keith Smith's comeback

Founder’s Co-op has been an investor in BigDoor since shortly after its inception in2009.  The CEO and co-founder of BigDoor is Keith Smith, and Keith and I have been friends for going on seven years now.  It is a friendship forged in the board room, sales pit and the business trenches – yet cemented over drinks and political debate.  I think there is a good lesson to be learned from Keith’s story over the past couple of years, so I thought I’d tell it.

The economic tsunami of 2008 left Keith and his company in rubble. The company that once had annual revenues north of $78MM and significant monthly profits that placed its worth well over $100 MM in market value was sold in April 2009 for for pennies on the dollar.  In an attempt to save his company, Keith mortgaged his home and poured every last dollar he had into the company.  Despite those investments, all of the proceeds of the sale went to the company’s lenders and Keith’s personal fortune went the way of his company, south….way south. 

Shortly after the company he had spent a decade building and running Keith was offered the job of CEO of an Internet company located in the Midwest doing double-digit millions per year in revenue.  He then began debating whether to take this job (and go work for someone) or begin again and start his own company.  When he sought my advice, I told him that he should do what’s right for him – that he’s captain of his own ship and needs to make the call about what direction to take his career.  I told him there’s no shame in working as a hired gun for someone else. 

Keith took a trip to Cancun with the plan that he would spend a week on the beach to make a decision about what would come next. Rumor has it that he drank a fair amount of tequila and partied hard on the beaches for a week. When he returned to Seattle, he declared he wants to start a company.   He had a vague notion of starting a company focused on offers; kind of like Offerpal but aimed at non game sites. 

I told him I’d like Founder’s Co-op to lead the financing.  My rationale was simple: I wanted to bet on Keith. I think he’s one of the best CEOs I’ve met and personally he is one of those people that knows how to make money.  He’s also someone that I’d never want to bet against. My assessment had much more to do with the attributes of Keith than with his new business. I just know he’s smart enough to figure it all out – and now he has a chip on his shoulder to prove to everyone that he can do it again. 

We decide to go to Las Vegas for the weekend and try to pencil out a deal while drinking by the pool.   The negotiation was none too hard. We both put our key limitations on the proverbial table – there’s a lot of trust between us and neither of us tried to over optimize the deal.  We left Las Vegas with the following deal: 

Founder’s co-op leads a 500K investment in Big Door

  • 250K at a low valuation
  • 250K in a convertible note that will be done in Nov 2010

In November 2009, Keith & Jeff and I returned to Vegas for the annual sojourn to pubcon .  On the plane, I looked back to see Keith and Jeff in a deep conversation. Jeff twisted around in his seat talking intently to Keith in the seat behind him – who is furiously taking notes.  Upon landing in Vegas, Keith & Jeff tell me they’ve decided to alter the direction of the company. I asked them lots of questions and their thought process made sense. I encouraged them in their new direction but I told them to get a customer.  Customers will validate whether their change makes sense. 

Also in November 2009, Brad Feld (Foundry Group) and Keith met for the first time at the TechStars in Seattle event.   I facilitated an introduction over a beer and a burger. 

In January 2010, Keith closed his first customer on the revised strategy: BuddyTV.  The sale of this customer is a milestone for the company. Around this time, my confidence in Keith and the plan he was pursuing  began to increase significantly. I began to see the wisdom of the change in direction that Keith and Jeff had made.  I began making introductions for Keith to a bunch of local and non-local venture capitalists.  Keith and I both knew that the company is going to need additional capital.  Fortunately, a number of the venture capitalists got interested in the company. 

In February 2010, Brad Feld started to engage more with Keith.  They began to develop their own relationship.  . Keith closed his second customer: the Cheezburger Network.  Around this time a few other venture capitalists started to request 2nd meetings with Keith and are began to express serious interest in the company –but the chemistry and momentum and fit was nothing when compared to Foundry Group. 

In April 2010, Brad and his partner Seth came to Seattle . We had breakfast and then Brad, Seth and Keith had a 2 hour meeting with Keith.  A few days later, Keith calls me from the SFO airport and tells me he ran into brad at the airport and Brad informed him that he will not be investing.  Brad really liked the company but for a few reasons couldn’t get himself off the fence to actually invest.

Keith was a bit surprised and disappointed. Frankly, so was  I.  Up to that point, the chemistry and momentum between Brad and Keith kept pointing to a likely term sheet. I kept thinking that Brad would put a termsheet down but the valuation would be too low for Keith.  I told Keith not to give up and to reach out immediately to Brad to tell him he made the wrong decision and I told him to get on a plane and get to Colorado.  Keith reached out to Brad and Brad was receptive, so they setup a meeting for later that week in Colorado.

They meet at the Foundry offices for a few hours and by the end of the meeting, Brad had tentatively agreed to change his mind. BUT, Brad wanted to discuss the investment with his partners. I encouraged Keith to keep the heat on and to email Brad’s partners and tell them how much he wants to do the deal with Foundry as opposed to other investors. 

I also told Keith he needs to work on a backup plan. Two weeks later Brad agreed to invest.   The deal closed 21 days later (i.e. last week). 

The big lesson to learn here is; never give up.  Whether you have a company that fails, or a deal that falls apart – don’t get discouraged, don’t give up, keep going. 

Opening the door to a more imaginative future: Big Door Media raises $5 million dollars from Foundry Group and Founder's Co-op

I'm happy to let you all know that one of Founder's Co-op portfolio has raised $5MM dollars in venture capital from the Foundry Group.

As I pulled my car into the parking lot this morning and was thinking about Big Door I imagined myself getting points for getting to work on time, or for parking in the worst spot in the parking lot, or for getting to work in less than 5 minutes when my average time is 5:30 seconds.  You may think I'm a bit nuts, but working with BigDoor has me imagining the future differently (and admittedly I am a bit nuts). And the future I see is all about games.  

Keith Smith, the CEO of Big Door, pointed out the opportunity to create a platform to help publishers enable game mechanics and virtual economies.  Once he pointed it out -- I jumped on board and started to imagine life with points, points, and more points. And all I could think about was how FUN!   This post may be a bit abstract ...but it's because I'm rushed. I'll try to fill you in more as the weeks go by...if you want to see a practical implementation of Big Door check out cheezeburgers new implementation of trophies...it's powered by Big Door Media.

This investment has been a blast. Nice job Keith, Jeff and the whole team.  (Welcome back Roy)

I plan on writing a long post about the story of this company and this financing in the next week. But I am so swamped with work that I can barely make this post.  I'm busy with my own announcement yesterday of RevenueLoan which is pioneering an innovative approach to financing early stage companies (i.e. companies of 1 to 5MM in revenue).