Tag Archives: Founders

Business, Technology

Have We Reached SaaS-turation?

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Like many investors, I love a good SaaS business. But have we flooded the market with so many startups that customers are about to rebel?

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I was amazed when I saw how many subscriptions this founder was paying for…just for himself! That leads us to an interesting thread by Molly Wood, Managing Director at venture firm LAUNCH and co-host of This Week in Startups:


But if we look more closely at Gergely’s example, we find something interesting. He’s actually happy paying for all these subscriptions!

Automating so many tasks with SaaS may be why Gergely can keep this a 1 person business. Otherwise, it might be a 20 person business with way higher costs.

And while any business may look to cut subscriptions when times are tough, Gergely notes these subs are one of his smallest expenses. For him and many other CEO’s, cutting them may do more harm than good.

I agree with Molly that tech startups can be over-SaaSed. Many startups look to other startups as their first customers.

After all, startups are early adopters and can make a quick decision. That makes them an ideal first market for a SaaS product.

But in the economy as a whole, I think we’re actually dramatically unde†rusing technology.

Take SailPlan, an amazing SaaS company that tracks emissions from ships.

Competitors just provide a rough estimate after the fact. SailPlan tracks emissions in real time and can even give you suggestions of how to lower them.

And of course, lowering those emissions means lowering your fuel bill.

Before SailPlan, most emissions tracking was done with rough estimates in spreadsheets. If ships used a SaaS solution, it was basically a tarted up version of the same spreadsheet.

Shipping is an industry that desperately needs technology. And it’s not hard to think of 100 others.

Oh and by the way, Molly and I just happen to be co-investors in SailPlan! 🙂

Like any industry, I think SaaS will face headwinds in 2023. But a scalable software product, high margins and recurring revenue are a winning combination.

And with much of our economy barely touched by technology, they have a lot of room to run.

What do you think the future holds for SaaS businesses? Leave a comment at the bottom and let me know!

Have a great weekend everyone!

More on tech:

Is 2023 the Best Time to Invest in Startups?

The Magic of Milestone-Based Funding

Is SBF Laundering Money As We Speak?

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Business, Technology

Inside the Seed Funding Slowdown

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Every morning for the last couple of months, I see the same thing: fewer deals in my inbox. So it’s no surprise that new data from Pitchbook show a drop in seed funding for the second quarter:

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From an analysis of the data that just came out in The Wall Street Journal:

Even funding for seed-stage deals, often the first source of outside financing for companies still developing their products, has taken a hit. U.S. deal volume dropped 11% to $3.9 billion in the second quarter compared with the year-earlier period, the first such quarterly drop on a year-over-year basis in almost two years, according to data from PitchBook.

“The seed and Series A funding environment is the toughest I’ve ever seen in my career managing a fund,” said Jeff Morris Jr., who manages a crypto-focused early-stage fund called Chapter One. “It will be painful in the short-term.”

Remember there’s a big lag in this data. Even in the boom times, a round could take 2 or 3 months to close.

Now, I often see deals sitting out there for 4 months or more. So we won’t see the full extent of the slowdown for another quarter at least.

That’s probably why Pitchbook shows an increase in seed valuations. Deals in the market today are priced lower.

I’m seeing around a 30% drop in seed stage valuations. The typical seed round is at $8-12 million post-money.

These valuations are for strong companies with rapid revenue growth. They often have $250,000 or more in annual revenue.

Those companies might have commanded $20 million or more last year.

In this environment, founders are changing their focus. From The Wall Street Journal:

Amid the chilled environment, investors say even the youngest startups are now being expected to demonstrate they have a clear path to generating revenue and profits.

I see portfolio companies of mine retooling to focus on revenue. They know that user growth alone won’t cut it anymore.

They’re also changing their fundraising approach:

Some seed startups are already struggling to raise Series A rounds, an investment stage where investors typically expect businesses to show clear signs of traction among customers. Many of these companies are now raising extension rounds, capital usually offered from existing investors at the same price as the last round, according to Ms. Achadjian and other venture capitalists.

I see some of my companies doing this, even strong ones. But unless there’s a new investor coming in to price the round higher, I usually stand pat.

I want the startup’s progress to be validated in the market before doubling down.

One interesting nugget in the report: NYC is booming. The Bay Area has done 1,692 deals this year to NYC’s 1,156.

The Bay Area’s share of funding remains much higher. But this likely reflects big checks going into late stage companies.

A decade ago, you had to be in the Bay to create a major startup. Today’s late stage companies were founded during that time.

Now, the market is more distributed. I think you’ll see the New York area catch up as our companies mature.

In all, the Pitchbook report is concerning but not disastrous. If you’re focused on signing up customers and making them happy, you’ll do great!

What are you seeing in today’s funding environment? Leave a comment at the bottom and let me know!

More on tech:

The Top 5 Things I’ve Learned from Angel Investing

Twilight of the Quick Delivery Startups

Did LinkedIn Just Build the Future of Work?

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Business, Technology

How to Write Investor Updates

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You did it!

You closed a big funding round! Time to pop the champagne!

But you still have one little problem: what are these pesky investor updates?

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If there’s one thing that really confuses founders I meet, it’s investor updates. Many big investors require regular updates as part of a funding round.

Meanwhile, founder after founder has no idea what’s expected of them.

Updates can and should be simple. This is what I want to see:

  1. Revenue
  2. Burn
  3. Cash in Bank
  4. Runway
  5. Highlights
  6. Lowlights
  7. Next month’s plan
  8. Asks for investors

Here’s an example update I wrote. It’s for my favorite startup, Uber (yes, even now).

The information is completely fictional, but here’s how it should look:

Uber – June 2022 Investor Update

Hello,

June was a great month for Uber! We saw significant growth across markets:

Burn: $75,000/month
Cash in Bank: $1,082,453
Runway: 14 months

Highlights:

  • Major growth in new New York City market brought us our highest monthly revenue ever
  • Hired 2 new engineers to build out user profile function
  • Reduced CAC from $45 to $35

Lowlights:

  • Cease and desist order in Austin, Texas. We are appealing.
  • Departure of a strong front-end engineer

Next month’s plan:

  • Expand to New Jersey
  • Hire 2 more front-end engineers

Asks:

  • Intros to strong front-end engineers with experience in Python
  • Lobbyists with connections to taxi boards in major cities

Thank you,

Travis Kalanick

Many founders update their investors only rarely, if at all. And when they do, there’s way too much information!

This update gives investors all the key data points about your startup. But it doesn’t take tons of time to write or to read.

So what can updates do for you, as a founder?

Updates get your existing investors excited about your progress. This makes us eager to invest more even before you ask! 💰

You also get to put those moneybags to work for you! Your investors have tons of connections and expertise just waiting to be harvested.

Go with monthly updates, or at least quarterly. If we only hear from you quarterly or even less, that’s fewer opportunities for us to help in a timely fashion.

Even if the terms of your financing don’t require any updates, send them anyway! You want your investors engaged, excited, and helping you.

Finally, investor updates are a good idea even for companies with no investors! Call it a “Company Update” and make sure every potential investor you meet gets it in their inbox like clockwork.

Once they see your diligence and your company’s progress, they’ll be breaking down your door to invest.

What questions do you have about investor updates? Leave a comment at the bottom and let me know!

More on tech:

Talking Startups and Today’s Fundraising Pullback

Are You a Venture Scale Business?

Talking About Today’s Startup Market on The Accelerator Podcast

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Books, Business, Technology

The Power Law (Part Two)

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“When in doubt, take the shot.”

Doug Leone, Managing Partner, Sequoia Capital

The partners from prestigious venture firm Accel stood outside an office in Palo Alto, waiting to take theirs.

These were the offices of a young startup called thefacebook.

Most startups would’ve killed to meet them. But thefacebook’s young founder gave the Accel partners the cold shoulder.

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This didn’t stop them. They lurked outside and buttonholed any thefacebook employee they could find.

Eventually, they got the meeting with founder Mark Zuckerberg. And they won the deal, a $10 million check into the company’s Series A round.

To this day, it remains one of the greatest investments in the history of venture capital.

As an angel investor, I always assumed that the prestigious firms like Accel or Sequoia had it easy. The best founders must be falling all over themselves to meet them!

Nothing could be further from the truth. As Sebastian Mallaby chronicles in his superb new book The Power Law: Venture Capital and the Making of the New Future, the greatest firms are also the scrappiest.

Sequoia Capital, perhaps the greatest VC firm in history, wrote their own code to find the most downloaded new iOS apps. One day, it flagged a small program called WhatsApp.

Sequoia partner Jim Goetz sent e-mail after e-mail to WhatsApp’s founder. For months, he never heard a word.

Finally, Goetz was able to get a meeting with WhatsApp’s founder, Jan Koum. In time, Sequoia won the deal.

The investment made Sequoia $3 billion, and WhatsApp is now ubiquitous throughout the world.

So what does this mean for small fries like me?

Even the greatest have to vigorously pursue deals and handle rejection, so don’t give up on an awesome company! If Sequoia isn’t too cool to cold-message a founder on LinkedIn (psst: they’re not), neither am I!

And when I find that rare, incredible startup, I’ll be repeating Leone’s words to myself: “take the shot.”

More on tech:

The Power Law (Part One)

Managing a Crisis the Sequoia Way

Talking Startups and Today’s Fundraising Pullback

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Business, Technology

What the Best Founders I Know Have in Common

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Hi everyone, hope you had an awesome weekend! Today, I want to talk to you about some of the smartest people I know.

As an angel investor, I meet with a lot of startup founders. As I took a walk on the Hudson today, it occurred to me that the most successful ones all remind me of each other.

So what distinguishes the best founders from the rest? Here are a few thoughts:

1) They have all the facts at their fingertips. Whenever I ask them a question, they tend to know the answer cold.

I could be asking about a product feature, customer acquisition strategy, or a metric like gross margin. Whatever it is, they’ve thought about it already and know all the relevant facts.

2) Strong customer focus. The most successful founders I’ve seen are obsessed with their customers.

They know everything about them and what they need. And they tailor their product ever more carefully to those needs as time goes on.

What are the less successful founders focused on? Often their competitors, someone “stealing their idea,” or endless fundraising.

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We should always remember that the business’s goal is to serve the customer. Don’t let distractions take you away from that.

3) Openness to questions and criticism.

The best founders I’ve seen gladly answer any question an investor asks. They’re eager to show off their awesome product and happy customers!

The less successful ones evade questions and try to convince investors the business is going better than it really is. I sometimes suspect they’ve convinced themselves too, at their peril.

If we’re forthcoming with information and open to constructive criticism, we can learn from others and improve!

One of the most exciting moments for me as an investor is when a new founder reminds me of one of the best I’ve met. That’s when I start to salivate and reach for my checkbook. 🙂

The good news is that the best founders have a lot to teach all of us about how to up our game, if only we’re willing to listen!

What do you think makes a great founder? What did I miss?

Leave a comment at the bottom and let me know!

More on tech:

The Startup Pitch Checklist

Amp It Up

How to Write a Deal Memo

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Business, Technology

How to Answer Investor Questions

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There’s tons of advice out there on how to pitch investors. But what about what comes next?

After any pitch, investors are likely to ask numerous questions. How do you answer them in the most effective way?

Here are some tips:

Pacing

One of the biggest mistakes I see founders make is taking too long to answer a question. The answer should be about the same length as the question.

When you take too long answering one question, you run out of time to address others. You’re also more likely to start rambling and lose the investors’ attention.

Be Direct

Investors may have some tough questions for you.

Tough as they may be, you should answer these questions as directly and specifically as possible. If someone asks for your churn figures, give them numbers, not a story.

Whenever I sense a founder isn’t giving me the information I need to make a decision, I start mentally moving on to the next company.

Don’t Get Defensive

For early stage startups, no one is expecting you to have everything dialed in just right. If you had that, you wouldn’t be a startup.

You’d be a Fortune 500 company!

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So when investors ask the tough questions, don’t feel like we’re attacking you. We’re not.

We just need certain info to make a financial decision.

It’s Okay to Not Know

An investor might ask you for some very specific info in a meeting.

It’s perfectly okay to say you don’t have that information in front of you. What’s important is to promptly follow up and get the investor the information they asked for.

Always Be Honest

Many founders have wanted to put a company logo on a slide when that company isn’t really a customer…yet. Or maybe claim a big name investor is in the round when in reality you’re just talking with her.

Don’t give into these temptations. When you make presentations to investors as part of a fundraise, you’re opening yourself up to serious legal liability.

If you make a knowingly false statement, you could go to prison for securities fraud.

Most founders would never cross this line, but for those who might be tempted, I urge you to protect yourself and just give the truth.

Be Glad for the Grilling!

Answering a ton of questions can be really tough! But be glad for each one.

One of the surest signs I’m not interested in a startup is when I don’t ask any questions. I’ve already ruled the company out.

I often ask questions when I’m wondering if there’s any reason not to invest. And I’m not alone.

Wrap-Up

These investor questions are often the last step before a check.

Keep your answers brief, concise, and factual. When founders crisply answer questions with detailed information, I find it enormously impressive.

Best of luck!

What has it been like for you answering investor questions? What did I miss?

Leave a comment at the bottom and let me know.

Have a great day everyone!

More on tech:

The Startup Pitch Checklist

Growing Veggies on Mars

Startups’ Secret Marketing Weapon: Blogging

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Business, Technology

The Startup Pitch Checklist

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Last Thursday, I was preparing to judge a startup pitch competition. I thought to myself, “How can I make sure every startup hits the key points?”

Then, it came to me: a checklist!

Every time you pitch investors, you need to give them certain key pieces of information. Without those details, they may just move on to the next company.

Make sure that never happens to your business! Whenever you pitch, make sure you check off these 6 key elements:

1) ☑️ Problem. What problem do you solve? For example, Uber solved the problem of expensive, hard to get taxi rides.

2) ☑️ Solution. How do you solve that problem?

Uber makes it easy to get a ride with a simple smartphone app. You always know exactly what you’re paying and where your driver is.

3) ☑️ Traction. Show us a chart of your revenue, broken down monthly or quarterly. Also, compute a growth rate using a tool like this.

Investors want to see a strong growth trend. Make absolutely sure you give them that, if at all possible.

Don’t have revenue yet? Show us monthly active users, signups, etc.

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4) ☑️ Market + Competitors. How big is your market? Who do you compete with?

I don’t get too hung up on complicated market size calculations, but here is a resource on how that is typically done.

I’m more interested in your competitors. Who do you lose deals to? Who do you beat for deals? And why?

Hint: “we don’t have any competitors” is rarely the right answer. Maybe no company does exactly what you do, but who is close?

5) ☑️ Team. This is especially critical for early stage startups. At this point, there usually isn’t a ton of performance to sell.

So you have to emphasize the quality of the team. Why are these the best possible people to take on this challenge?

6) ☑️ Ask. Here’s one of the strangest things I see: a founder telling a great story with solid traction, and then saying “thank you” and sitting down.

Umm, don’t you want something from us? 🙂

Never forget to tell the investors exactly what you’re asking for! Tell us how much you’re raising, at what valuation, and specify if that’s pre or post-money. (If the valuation includes the money you’re raising, that’s “$X post-money,” also referred to as “$X cap.”)

It’s also good to specify what type of fundraise you’re doing. Is it a SAFE, a priced round, or a convertible note?

Say something like this: “We are raising a $1 million SAFE at a $10 million cap.”

If you hit these 6 key elements, you’ll have a solid pitch that gives investors the details they need. You’ll also have a leg-up on other founders who provide incomplete or unhelpful information.

Best of luck on your fundraise!

What do you think makes a great pitch? What did I miss?

Leave a comment at the bottom and let me know!

More on tech:

How Startups Can Dominate the Elevator Pitch

How to Write a Deal Memo

Startups’ Secret Marketing Weapon: Blogging

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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!

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I wrote a detailed review of Misfits here.

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Business, Technology

How to Write a Deal Memo

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Everyone running a startup knows about the deck.

There are countless tutorials about how to write this PowerPoint presentation that forms a key part of a startup’s pitch. Shoot, I’ve even written one.

But what about the deck’s mysterious cousin: the deal memo?

Founders generally send potential investors a deal memo along with the deck when they’re trying to raise money. You would generally send one once you’ve confirmed some interest from the investor. (For the first introduction, a short deck is good.)

But when an investor is ready to take a serious dig into your business, it’s time for the deal memo. So what does a good deal memo look like?

I see over 200 of them every month as an investor. Here are how some of the best look:

Length

Generally more than 2 but fewer than 10 pages. About 6-8 pages is good.

More important than the exact length is that you cover important elements thoroughly but concisely.

Which brings us to…

Topics

Here are the sections I like to see, ideally in this order.

A paragraph or two for each section is good.

  • Deal Terms: How much are you raising at what valuation? And what type of security is it (SAFE, priced round, etc.)?
  • Prior Investors: Who has invested before and who is investing in this round?
  • Company Description: What do you do?
  • Traction: Show us your revenue growth in a monthly or quarterly chart. If you have no revenue, at least show us user growth. You should also compute the growth rate for the last 6-12 months using a tool like this.
  • Market Opportunity: How big is this market? Show VC’s that your market is big enough for you to become a billion dollar company, because that’s what they’re looking for.
  • Why Now?: Why is now the right time for this company to dominate? Why is the market ready? For example, imagine starting a videoconferencing company in 2019 versus 2020. The 2020 market would’ve been far more receptive.
  • Why Us?: Why are you and your team the right people to take on this problem? Tell us about your skills and also why the problem matters to you. If you’re solving a problem you’ve had yourself, you’ll probably be better at it and less likely to quit.
  • Competition & Defensibility: Who are your competitors, and why is your solution better? Many companies say “We don’t have any competitors. No one else does what we do.” That’s usually not a good answer. Maybe no other company does exactly what you do, but who is close? And why are you the better bet?
  • Use of Funds: What will you use the money you’re raising for? A simple breakdown like 60% engineering and 40% sales is fine.
  • Hiring: Who are you hiring now? Investors might be able to introduce you to a great candidate!
  • Key Risks: What are the top few reasons this business could fail? For example, you may struggle to hire talented engineers in this tight labor market.

Wrap-Up

Writing a good deal memo is a lot of work. But when investors are seriously considering your company, this document can seal the deal.

Leave nothing to chance! Get the deal memo right and give yourself the best shot at a fat check.

What questions do you have about deal memos? What did I miss?

Leave a comment at the bottom and let me know!

Glad to be back with you guys for another fun week! 👋

More on tech:

How to Ace a 3 Minute Pitch

The Lean Startup

Robot Pizzas and the Future of Fast Food

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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 and returns have been great so far.

More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get your management fees waived for 90 days. 

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I thought radishes were cold, tasteless little lumps at salad bars until I tried theirs! They’re peppery, colorful and crunchy!

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Business, Technology

Why Your Startup Shouldn’t Be an LLC

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Every now and then, I see the unthinkable: an LLC trying to raise venture capital.

You want to give your startup every chance of success. So don’t shut yourself out from venture capital with this rookie mistake!

Repeat this mantra every night before bed: “investors want a Delaware C Corp.”

Why Don’t Investors Like LLC’s?

Here are a few reasons:

1) Issuing stock options to employees is difficult and expensive.

Almost all startups use options to recruit and retain employees. You don’t want your legal structure to make that nigh impossible.

2) Investor taxes become a nightmare.

3) The venture fund’s own investors won’t have it.

These limited partners (LP’s) who put their money in the venture fund don’t want to deal with the tax complexity of LLC’s.

What’s more, many LP’s are tax exempt foundations and endowments. They don’t want the taxable income an LLC will pass through to them.

4) LLC’s don’t qualify for a big tax loophole.

Qualified Small Business Stock (QSBS) can shelter up to $10 million in capital gains from any taxation whatsoever. Pretty sweet, eh?

But LLC’s don’t qualify. C Corp’s do.

LLC’s Advantages Are an Illusion

I know, I know, C corp’s cause double taxation of profits, both at the corporate level and the individual level. But given that most startups make bupkus for years, you don’t need to worry about that.

And yes, LLC’s are very simple to form. But if you’re issuing options and raising capital, the LLC soon becomes far more complex than the C Corp.

From Harvard-trained attorney Jose Ancer:

The amount of tax and legal analysis that has to be done to issue equity compensation and/or raise capital in an LLC is (without exaggerating) 10x that of a corporation.

What’s the Obsession with Delaware?

Simply put, it’s the standard. Delaware has well-established corporate case law and investors are used to dealing with Delaware companies.

Delaware also has some sweet tax advantages.

What If I Already Screwed Up?

I’m sending you to bed with no dinner!

Just kidding. If you initially formed an LLC and now realize you need to be a C corp, it’s okay! Just make sure to convert before raising any money.

Once you’ve raised money, converting becomes a lot harder and more expensive.

Here’s Becki DeGraw, a partner at top tech law firm Wilson Sonsini, explaining the conversion process on This Week in Startups:


How Do I Make a Delaware C Corp?

You’re in luck! It’s much easier than it once was.

There are online services that can handle the whole thing for you. Stripe Atlas is one popular choice.

Another is Capbase, which can not just form the company but manage your cap table (list of company owners) and a lot more. Full disclosure: I’m an investor in Capbase.

Whichever method of incorporation you choose for your tech startup, just be sure it’s a C Corp registered in Delaware and you’re off to a great start!

Happy building!

More on tech:

Why I Just Invested in Capbase, The Startup in a Box

How Startups Can Dominate the Elevator Pitch

The Lean Startup

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Business, Technology

The #1 Reason I Say No to Founders

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Every month, I look at over 200 startups. I choose one.

Among those hundreds of companies raising funds, I always see tons of cool ideas. So what distinguishes the companies I choose from all the others?

The number 1 reason I say no to founders is that they’re raising funds too early.

Many of the pitches I see are little more than a few slides with a lot of projections. But most investors want more than projections.

We want a track record.

For companies raising seed funding, I expect at least six months of revenue, growing month over month. For consumer products that are pre revenue, I’d like to see a similar track record of user growth.

Many companies I see trying to raise seed funding are nowhere near that. They have no revenue and often not even a product! 

What founders have to realize is without any track record in the market, how can investors tell if your company is a good bet?

Without a track record, the only thing an investor has to go on is the team. And talented as so many founders are, the fact is that most founders raising seed rounds are unknown.

They might build the next Uber or Airbnb, but they haven’t done it yet. 🙂 

Raising money without a track record in the market is much easier for serial entrepreneurs with a big win behind them. If you sold your last company for $1 billion, I’m willing to fund you a lot earlier.

Founders will make the fundraising process much easier for themselves if they build their company to at least a few thousand a month in revenue before raising a seed round. 

This gives them greater credibility among investors. It shows they know what investors are looking for.

Bootstrapping your company to thousands in monthly revenue isn’t easy. But neither is raising money without a track record to point to.

Another benefit of doing some building before the fundraising is that you’ll have a better idea how to deploy that capital because your business is more mature. A big check from a VC won’t do you much good if you don’t know how to spend it to drive growth.

Best of luck to everyone out there building!

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More on tech: 

Tech Plunge Hits Early Stage Startups

Founders Biggest Pitch Mistake

Why I Just Invested in Deft, the Best Way to Shop Online

Photo: “Startup” by Skley is marked with CC BY-ND 2.0.

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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 and returns have been great so far.

More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get your management fees waived for 90 days. 

Misfits Market

My wife and I have gotten organic produce shipped to our house by Misfits for over a year. It’s never once disappointed me.

Every fruit and vegetable is super fresh and packed with flavor.

I thought radishes were cold, tasteless little lumps at salad bars until I tried theirs! They’re peppery, colorful and crunchy!

I wrote a detailed review of Misfits here.

Use this link to sign up and you’ll save $10 on your first order.