Tag Archives: Entrepreneur

Business, Technology

Hot Deals

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I was working late into the night, researching a very hot deal. It was 2021 and I was amped — until I found out I couldn’t get an allocation!

I was really disappointed. The founder was first rate and the co-investors were Silicon Valley legends.

Surely I was missing my billion dollar opportunity!

Fast forward two years…

The company I was so excited about got sold for a small sum. This “acquihire” provided a soft landing for the team and got the investors their money back.

But those billions remained elusive.

We investors think we need to win allocation in the hottest deals. But my best performers were pretty chilly when I found them.

My Top Performers

Let’s take my #1 performing company. Even though I invested in 2021 at the height of the boom, the round wasn’t the least bit competitive.

It grabbed some solid investors. But most anyone who wanted a piece could’ve walked into that deal.

They just couldn’t see it.

How about #2?

I almost passed on #2, but the founder scheduled a second call with me to show me just how special his product was. I’m very grateful to him — he was right.

And #3?

This marketplace had great early traction, but again the deal wasn’t remotely competitive. Anyone who contacted the founder probably could’ve invested.

In all three deals, I got the full allocation I wanted.

My Hottest Deals

When we turn to the hottest deals I’ve been in, the picture is much less rosy…

Deal # 4 was a great company with strong early traction. The investors included a scout for one of the best venture firms on earth.

I could only get some of the allocation I asked for. I took it, grateful to get anything!

Deal # 5 was a very innovative SaaS company. The round was hot — again, I only got part of what I asked for.

Despite very hard work by the founders and teams, neither of these companies quite caught on. They were acquired for small sums and I got my money back, but nothing more.

Wrap-Up

Looking at every company I’ve invested in, not one of the hot deals has performed well.

Meanwhile, the big winners got a cool reception from VC’s. Perhaps what they proposed was too radical.

But it worked.

Better yet, because I got the full allocation in the successful companies and didn’t in the others, my returns are better!

I’ve invested in 20 companies so far. The sample size is hardly scientific.

But I’m done worrying about getting into the next hot round. Instead, I’m looking for great businesses that need someone to believe.

Do you like hot deals, or do you avoid them? Leave a comment and let us know!

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Business, Technology

The Too Hard Bucket

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Every now and then, I meet a hardworking founder with some great tech. But I know I’ll never invest in their business.

Despite founders’ best intentions, some companies develop serious problems. Those problems can make a startup untouchable for investors.

We put those companies in the “too hard bucket.”* And we move on to the next deal.

Let’s run down a few of those nightmare scenarios so you can avoid them!

Debt

I recently saw a cool early stage company addressing a big market. I was interested — until I found out they were almost $1 million in debt.

Early stage companies must avoid debt like the plague. It will weigh your company down like nothing else.

Investors will not touch an early stage company with debt. We want our capital to fund new growth — not pay for past mistakes!

For companies like this, the best option may be bankruptcy. Into the “too hard bucket” it goes.

Cap Table Problems

Cap table problems won’t bankrupt you, but they will stop you from ever raising a dime of venture capital.

Some startups give a huge slice of equity to a dev shop or venture studio. If someone other than founders and investors own 40% of the company, it cannot be financed.

The founders own way too little to be incentivized. And if they’re not incentivized, how will we make a return?

Maybe the cap table could be fixed with the right agreements. But most investors will put that in the “too hard” bucket and move on to the next deal.

Down Rounds

At the peak of the market, countless companies raised at huge valuations with little or no revenue.

Now, it’s time to pay the piper.

If a company raised at $100 million, it will need around $10 million a year in revenue to keep that valuation today. Otherwise, it’s looking at a down round.

Many venture firms don’t want to deal with down rounds.

Let’s say the new price is $50 million. The founders and all the prior investors will hate the new investor for “taking away” half their paper wealth.

Who wants to walk into that situation?

So, many firms put down rounds in the “too hard bucket”. Now, the formerly hot company can’t even raise a down round.

They can’t raise at all.

Always keep your valuation reasonable. And make sure the money lasts long enough to hit your milestones.

Wrap-Up

Founders have to understand the investor’s perspective. At any given time, there are 20 deals in the investor’s inbox.

If your company has serious problems, an investor isn’t interested in how they can be fixed.

He just puts your company in the “too hard bucket”. On to the other 19 deals…

So stay out of debt, keep a clean cap table and raise at reasonable prices. That gives you the best chance of success!

What kind of companies are in your “too hard bucket”? Leave a comment and let us know!

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The AI Gold Rush

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Right Founder. Wrong Market.

*thanks to Chamath Palihapitiya for coining this term

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Business, Technology

Right Founder. Wrong Market.

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I have a problem. I invested in an amazing founder.

But he’s in the wrong market.

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His name is Jim. He runs a consumer SaaS company.

Actually, his name isn’t Jim and that’s not his market either. This is a composite.

Jim works really hard. He’s also quite innovative.

Jim finds customer service people at Home Depot. He picks whoever is most helpful and makes them associates in customer success at his startup.

It’s a genius idea!

But Jim’s company is barely growing. They’re also burning a great deal of money.

Being in consumer, their customer acquisition cost is extremely high. After the iOS 14 update in May of 2021, it quadrupled.

They have fought tooth and nail ever since to get it back to a manageable level.

And they succeeded! Thing is though, Google is about to do the same thing this year.

And it starts all over again.

Jim also deals with an enormous amount of customer churn. Individuals love to try a product for a little while and then leave.

I recently subscribed to HBO Max so I could watch Succession. After just a couple of weeks, I cancelled it.

They even offered me a free month. I declined. I know, I’m extremely cheap.

So are a lot of other people. That’s a big problem for Jim.

Remember, when I told you Jim works really hard?

Normally, that’s an incredibly good trait. But not this time.

Being really hard working and unwilling to give up is actually a huge problem here. Jim keeps beating his head against the wall.

Nothing is working…much. The company is growing a little and burn is down. But still, it’s not really going anywhere.

What would I like Jim to do?

Fire everyone but the co founders. Trash the existing business completely.

Use whatever cash is left to find a totally new business. Start with a blank sheet of paper.

Someday, Jim might do this. But probably not.

After all, he never gives up.

None of this is Jim’s fault. But that doesn’t change the fact that our goal of creating an enduring, multibillion dollar company isn’t happening.

So Francis, why don’t you talk to Jim? Why don’t you tell him what you’re saying to us here?

I’m a minority investor. I’m not on the board.

I have no right to say this to a founder. And even if I did, they would never listen to me.

So instead of telling him, I’m telling all of you.

Are you a founder? Be like Jim.

Be tenacious. Work hard. Innovate.

But when something is only kinda sorta working for a very long time, don’t be like Jim.

Give up. Start over. Start fresh.

It’s gonna hurt big time. But it’s what you have to do.

Are you a Jim? Do you know one?

Leave a comment and let us know!

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From $10 Billion to Zero — Late Stage Ice Age

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From Seed to $10M ARR

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Business, Technology

From Seed to $10M ARR

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I hadn’t heard from one of my companies in over a year. I was starting to get worried. Turns out, they were busy.

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When I heard from the founder yesterday, I was stunned. The little seed stage SaaS company I backed in the summer of 2021 was now doing $10 million a year in revenue.

Wow!

When you see one of your companies go from a fledgling startup to a significant business, it’s an incredible feeling. Here are a few things I learned along the way:

Have a Clear Value Prop

I can’t get into specifics on what the company does. But its value proposition to customers was very clear.

Customer after customer dramatically increased revenue with their software. It pays for itself many times over.

When you have a clear value proposition, sales gets a lot easier. And as that sales team cranks, your company grows fast.

Metrics Matter

On any conceivable SaaS metric, these guys were crushing it when I invested. Revenue was growing 25% month over month, LTV was 50 times CAC, and the company was already at breakeven.

The companies that were most successful before you invested continue to be the most successful afterward.

Don’t let anyone tell you the numbers don’t matter. They matter a lot.

Did I Help?

Honestly, I’ve probably added less value to this company than practically any other in my portfolio.

Why? Because they never need any help!

I introduced them to a few engineers early on. But by and large, I’ve just sat tight.

My most successful companies usually have few if any asks for investors. That said, I’m there for them if things ever turn tough.

No Distractions

I’ve never seen this founder on Twitter. He has yet to turn up at a networking event.

Sometimes the most vocal people aren’t the ones who are really crushing it.

The team also never got distracted.

They built a relatively simple but very useful product. Then they relentlessly scaled it.

They didn’t have a metaverse strategy. They never released an NFT.

They just stuck to their knitting and signed up more customers.

This is Repeatable

What struck me more than anything is how repeatable this investment is. I wish I could tell you I had a “Eureka!” moment and saw the future clearly.

I just reviewed the product, looked at the traction, and met with the founder. The product seemed very useful, traction was great, and the founder impressed me.

So I gave them some money. Simple as that.

I don’t see any reason why I or another investor couldn’t find 3 more of these. In fact, I intend to!

What have you seen in highly successful startups? Leave a comment and let us know!

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Business, Technology

Why I Still Love Silicon Valley

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Every day, I read about another venture firm that won’t touch Silicon Valley. This is a mistake.

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As VC’s and angels, we have one goal: invest in the next Uber. Or Snowflake. Or Google.

Of the 100 largest tech companies on earth by market cap, 61 are in the US. Of that 61, 35 are in the San Francisco Bay Area.

That’s 57% of US tech giants.

It’s great to look at startups in many cities. But if most of what you’re looking for is found in City A, you have to look in City A as well.

This is especially true now that valuations for Silicon Valley startups have fallen. From a new report in The Wall Street Journal:

One of the biggest drivers of investing far from a venture investor’s base has always been the search for places where there was less competition for deals, said Olav Sorenson, faculty director of the Price Center for Entrepreneurship and Innovation at the UCLA Anderson School of Management.

 “The number of people writing checks right now in Silicon Valley has gone down,” Dr. Sorenson said, adding, “For those who are still investing, it makes it more attractive to stay local.”

I have 19 investments and I’m finalizing a 20th now. 8 are based in the Bay Area, or 40%.

This is below the historical representation of the Bay among megacorps. That makes sense because post-COVID, companies have spread out more.

I suspect the trend of VC’s avoiding the Valley is driven by marketing. A venture fund has to distinguish itself from others in order to raise money.

One way to do that is say “You know that place where most of the great companies are? We’re actually not going to look there.”

It may help you raise money. But I doubt it will help you get a return on that money.

This doesn’t mean founders need to be in the Bay. Show me any company in a huge market with rapidly growing revenue and a great product, and I don’t care if it’s in San Francisco or Sandersville, Mississippi.

In fact, I think the best place to build is a small town. It lowers your burn, especially critical in a down market.

You can supplement that with fundraising trips to Silicon Valley. Most investors are still there.

As for me, I’m going to keep investing nationwide. Only a big net will catch a big fish.

What do you think of Silicon Valley startups? Leave a comment and let us know!

The next blog will be on Tuesday, April 11. I’m taking off for Good Friday tomorrow, and on Monday I have an acting gig! 🙂

Have a wonderful Easter weekend everyone! 🐇

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Ace Your Investor Meeting

Which Accelerator Should You Choose?

Putting the Cart Before the Horse

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Books, Technology

Putting the Cart Before the Horse

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A founder’s time is the world’s most valuable resource. And every day, I see them waste it.

Let me explain…

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Investable vs. Not Investable

All day every day, I get pitches from ambitious entrepreneurs. I love talking with them — but they usually have the same problem.

Their company isn’t ready for investment yet.

Their product isn’t finished. They have no customers. They have no revenue.

And they all want to raise venture capital.

I get it, we all need money! But consider the investor’s perspective.

Every year, I look at over 2000 deals. I choose around 10, or 0.5%.

At that point, I’m going to pick companies that are launched with some paying customers, right?

It’s an easy way to narrow down the list. Paying customers also show they can build a product people want.

Given the available deals, why would I put money into a company with no product and no customers? It just wouldn’t make sense.

There is the rare investor who wants to invest as early as possible. But they seem to be even more elusive than the unicorn startups we’re all chasing.

Capital Raised Per Hour

Consider your precious time. For every $1 million in capital you raise, how many hours will it take?

If you have a launched product making $20,000/month in revenue, perhaps it takes 200 hours to raise a $2 million seed. That’s $10,000 per hour.

Now, what if you are pre-product?

The odds of raising at all are very slim. Even if you did, it’s likely to be a much smaller pre-seed round of, say, $500,000.

What if that takes up half your time for a year? Perhaps you’re working 70 hour weeks, and spending 35 on fundraising.

That’s just $275/hour, about a 97% lower yield than the founder with some traction.

What Do I Do for Money in the Mean Time?

Accelerators are a great choice. They’re used to working with early stage companies and typically provide $100,000 to $150,000 plus a great network.

But even most of them want to see a finished product. So get that out the door as soon as you can!

But I Need Money to Build the Product!

Time for the hard truth. If your team doesn’t have the technical skill to build an MVP, investors won’t touch it anyway.

You can’t make a software company without people who know how to make software.

But all is not lost!

You can learn coding. And you can also use amazing no-code tools like Bubble to get an MVP out the door.

Wrap-Up

Raising money isn’t the best use of your time at the earliest stages. Especially in a down market, you’ll be beating your head against the wall.

Do you want to have Zoom after Zoom that goes nowhere? Or do you want to build an awesome product and get some paying customers?

Once you have that, we investors will be calling you.

Best of luck!

What are your experiences with fundraising? Leave a comment and let me know!

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More on tech:

Which Accelerator Should You Choose?

Scare the Sh-t Out of VC’s

Ace Your Investor Meeting

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Fundrise

This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

Misfits Market

I’ve used Misfits for years, and it never disappoints! Every fruit and vegetable is organic, super fresh, and packed with flavor!

I wrote a detailed review of Misfits here.

Use this link to sign up and you’ll save $15 on your first order. 

Business, Technology

Which Accelerator Should You Choose?

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If your startup has a couple of customers, you’re at a crucial point. Your product is beginning to catch on, but fundraising is still tough.

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Your best path may be an accelerator. But which one?

Let’s run through a few great options:

Y Combinator

This is the granddaddy of accelerators.

Founded in 2005, it’s been around longer than anyone. Its track record is amazing, having produced companies like Airbnb, Stripe, DoorDash and Instacart.

YC invests $500,000, more than most accelerators except perhaps LAUNCH (more on that below).

YC’s only real downside can be a lack of individual attention.

There are 268 companies in the current YC batch. That’s way more than many other accelerators, who often have fewer than 10.

There’s a big difference between being one of 7 companies and one of nearly 300.

That said, YC produces amazing startups regularly. My last two investments have been YC companies.

LAUNCH Accelerator

This is my personal favorite. I’ve invested in 6 LAUNCH Accelerator companies, by far the most of any accelerator.

LAUNCH invests $100,000 for 6% of your company. It usually puts another $500,000 or so in when you raise your seed round.

In all, LAUNCH likely provides the most money of any accelerator.

It also provides individual attention. There are just 7 companies per batch and the LAUNCH team works intensively with them.

Founders I know who have gone through the program met everyone — Sequoia, Craft Ventures, you name it.

The only downside is it’s not as big of a name as YC. It’s much newer, but it already has 1 unicorn in GRIN.

In all, LAUNCH is an excellent choice.

Entrepreneur’s Roundtable Accelerator

I started paying attention to these guys when I invested in an ERA company, Rilla. It quickly became one of my top performers.

ERA invests $150,000 for 6% of your company. Like LAUNCH, the batch size is small — just 15 companies.

Although ERA is newer than YC, it already boasts 4 unicorns.

The people who work there are serious and focused. That’s who I’d want on my side.

I’m looking forward to investing in more of ERA’s awesome companies!

Techstars

Techstars is another longstanding accelerator with a great track record. Founded the year after YC, it has produced 11 unicorns so far.

Techstars is in person, but it has programs all over the world.

I’ve invested in one Techstars company so far, with more sure to come.

Wrap-Up

I think accelerators are the best path for most pre-seed companies. Top accelerators provide a built in network, great mentorship, and a brand name that can help with fundraising and recruiting.

But don’t go just anywhere.

Avoid accelerators with no name recognition. Also avoid any accelerator that doesn’t actually invest.

The right program can take you to the next level. But the wrong program can waste your time and space on your cap table.

Best of luck building the great companies of the future!

What has your experience been with accelerators? Leave a comment and let us know!

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Scare the Sh-t Out of VC’s

“How Can I Be Helpful?” Gets Put to the Test

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Fundrise

This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

Misfits Market

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I wrote a detailed review of Misfits here.

Use this link to sign up and you’ll save $15 on your first order. 

Business, Technology

Scare the Sh-t Out of VC’s

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Pitching investors can be nerve-wracking. But what if you flip the script and scare the sh-t out of them?

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Last week, I sat down to coffee with an aspiring entrepreneur. As we brainstormed together, he came up with a great concept for a startup.

What about a platform to make finding wellness providers like acupuncturists easy?

I liked it — but encouraged him to go further. He could start with a few wellness providers, but what about taking on medicine as a whole?

We all hate doctors’ high costs and opaque pricing. What about a marketplace where you always knew up front what you’d pay?

In time, rather than supplementing insurance companies, he could replace them.

This could be an awesome business. And there’s another cool benefit…

It’s a big idea. And if there’s anything that scares the hell out of venture capitalists, it’s missing the next “big thing.”

VC’s always want to identify and ride a trend before everyone else.

It’s how they make money. But perhaps even more importantly, it’s how they say “I told you so!”

And what if they miss that next big thing?

Their fund languishes and they become irrelevant. And more than anything, angels and VC’s fear being irrelevant.

Otherwise, why would they constantly promote themselves on Twitter, podcasts, and blogs like mine?

Back to our young entrepreneur.

He could present investors with a nice platform for booking acupuncture. They’d smile politely and thank him for his time.

And he probably wouldn’t get a check.

But what if he shows them the exact same thing with a very different vision? Today acupuncture, tomorrow Prenuvo scans, and eventually all of medicine?

That’s a trillion dollar company. And that’s what VC’s want to invest in.

If this business fails, the VC’s downside is minimal. But what if they miss another Google?

The biggest opportunity in that investor’s professional life goes up in smoke.

Paint a compelling vision of how your company can be another Google, Uber, or Airbnb. It is never a straight line and you won’t get there tomorrow.

But show up with a big idea. And make that investor terrified he’s going to miss it.

That’s how you get a big check. It’s also how you change the world.

How do you pitch investors? Leave a comment and let me know!

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AI: Capital Bonfire?

Where Should Startups Put Their Money Now?

“How Can I Be Helpful?” Gets Put to the Test

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This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

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If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

Misfits Market

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Business, Technology

SVB Fails

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When your founders’ butts are on the line, don’t be loyal to a bank. Be loyal to your founders.

That’s my biggest lesson from the chaos at Silicon Valley Bank. SVB was just shut down by the FDIC.

Companies could lose deposits above $250,000. From Bloomberg:

Uninsured depositors will get a receivership certificate for the remaining amount of their uninsured funds, the FDIC said. As the agency sells off Silicon Valley Bank’s assets, future dividend payments may be made to uninsured depositors, according to the statement.

Though losses are possible, I think it’s unlikely.

When Washington Mutual failed in 2008, no one lost a dime. WaMU accounts simply became JP Morgan accounts.

I think the same will happen here.

What pisses me off the most here is major investors who told their founders to stay in SVB. I won’t name names, but some heavy hitters gave this poor advice.

As usual, Founders Fund knew better. They advised their founders to pull out of SVB.

For the record, so did I:

The issue here is asymmetric risk. If SVB had stayed alive, you just keep your money.

If they fail, you could lose it.

So there’s little or no upside to staying with SVB. But there could be a massive downside.

And here we are, on that downside.

In talking with founders, I find most early stage companies are using Mercury anyway. Mercury’s strategy of spreading deposits between banks seems wise:

Mercury looks like a solid choice. But ultimately, the safest banks in a time like this are the biggest Too Big to Fail institutions.

That’s banks like JP Morgan, Citi, and Bank of America.

Best of luck to all founders dealing with this difficult situation. If there’s any way I can help, never hesitate to ask.

More on tech:

Venture Funding Down 65%

Beware Pre-Revenue Companies

Everything You Always Wanted to Know About Venture (But Were Afraid to Ask)

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This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

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I wrote a detailed review of Misfits here.

Use this link to sign up and you’ll save $15 on your first order. 

Photo: Peter Thiel’s Founders Fund got it right, as usual. “Peter Thiel” by jdlasica is licensed under CC BY 2.0.

Business, Technology

Build in a Small Town!

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For decades, if you wanted to build a startup, you had to be in Silicon Valley. But today, the best place might just be Tennessee.

Or Omaha. Or Little Rock.

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In today’s market, building away from the coasts offers some huge advantages:

1) Lower burn. This is critical in today’s tough fundraising market.

When I meet with companies in NYC and SF, they often have massive burn rates. Part of the reason is high cost of living.

If you rent is $2000 or $3000 a month, you have to pay yourself and your team more. But what if you could rent a 1 bedroom for $750?

In Biloxi, MS, you can!

This means your seed funding will last much longer. That gives you precious time to find product-market fit.

2) Exposure to different opportunities.

I recently met with a company in a small town in the Midwest. They’re building SaaS for meatpacking.

No one in New York or SF is going to think of that. After all, we don’t have much of a meatpacking industry!

The middle of the country simply has different industries than the big coastal cities. And they need tech too!

Would you rather sell a unique, valuable tool to meatpackers or try to sell the 10th team collaboration app to an over-SaaSed startup?

3) Global teams. In the past, you had to be in Silicon Valley or New York because that’s where the talent was.

Now, remote work is common. A startup based in Iowa could hire a developer in SF and a product manager in Brazil.

This levels the playing field, big time.

4) Fundraising is on Zoom. Today, I met with founders in Nigeria, Canada, New York and DC.

Many of the investors are still in the Bay Area and New York. But the founders are everywhere.

Even as COVID recedes, fundraising has stayed on Zoom. It’s so efficient, I don’t think we’ll ever go back.

This means that a Kalamazoo startup and a Palo Alto startup are on similar footing. They both pop up as boxes on the VC’s screen!

If you have a great product and lots of happy customers, investors will take you seriously.

Wrap-Up

There are still some advantages to being in a tech center. You can meet investors at in-person events and learn from other founders.

But balanced against the high costs, you’re better off in the heartland.

Where do you think is a better place to build, SF/NYC or a smaller town? Leave a comment and let me know!

More on tech:

Everything You Always Wanted to Know About Venture (But Were Afraid to Ask)

Don’t Go Into Debt to Fund Your Startup

Sequoia Dumps Citizen: Ruthless, or Reasonable?

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