Tag Archives: Silicon Valley

Inside a Startup Accelerator Demo Day

Yesterday, I attended the Remote Demo Day for the latest class from the Launch Accelerator, a startup accelerator run by noted investor Jason Calacanis. We hear a lot about accelerators (also known as incubators), from famous programs like Y Combinator or Techstars to small, local outfits.

One thing most of them have in common is a demo day. This occurs at the end of the accelerator program and gives the startups an opportunity to pitch their company to investors.

So what goes on at these demo days?

Seven companies had three minutes each to present. A panel of judges (investors at venture firms) and members of The Syndicate (Calacanis’ investment group) submitted questions. Founders then had two minutes respond. Finally, both the judges and syndicate members voted on their favorites.

Here are some interesting trends I noticed from the meeting:

1) Business-to-business companies got a better reception than business-to-consumer companies. Business customers are less fickle and more likely to remain customers once acquired. They also have deeper pockets, and if you can show them that a technology clearly saves them money or gives them an important new capability, they’re likely to buy. Consumers are harder to pin down.

2) Startups are very diverse now, in terms of race, gender and geography. Two of 7 founders were female, and two were minorities. This isn’t equal representation, but it is progress. The companies came from all over America, from the usual suspects (Bay Area, NYC) to the South and even Europe.

3) It’s not all software companies. My favorite was actually a beverage company. Show investors some substantial recurring revenue and fast growth, and you may find checks flying back at you. What’s more, so many companies these days have a tech angle. This company sells their beverages online in a subscription model.

4) Everyone’s nice. Despite stereotypes of grizzled money guys telling you “It’ll never work!” the reality is that reputation is critical in this industry. Expect specific questions that might be hard to answer, but don’t expect (or tolerate) jerks.

Expect specific questions that might be hard to answer, but don’t expect (or tolerate) jerks. #startups

5) Even early stage companies fresh out of an accelerator have real products and revenues. There were no companies just trying to get an idea funded or still working on a prototype. They wouldn’t have made it into the accelerator in the first place, and even if they had, they wouldn’t have attracted any investor interest. Investors help business scale. They don’t help ideas become products.

So, who got funded? That remains to be seen, but if there’s enough interest from syndicate members, several could potentially get the nod. I know I’m interested in investing in two of the startups I saw.

We are so fortunate to live in a country that produces incredible entrepreneurs with such regularity. This was the 21st class to go through the accelerator, and there will be many more!

Congrats to all the great founders that presented, and a happy weekend to all my readers!

Dig into these posts for more on startups:

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Photo: “Great white shark” by Gussy (Luke) is licensed under CC BY-NC-ND 2.0

How Do You Know If a Startup Is Getting Traction?

Investors look at a lot of startups before laying a bet. But how do we know if the company’s product is catching on, or has failed to find traction? And as a founder, how do you know if you’re headed in the right direction or…nowhere?

In a recent episode of the superb podcast This Week in Startups, investor Jason Calacanis and guests Craig Zingerline and Allen Chen broke down a key metric: customer retention.

Do you have product-market fit? There’s no one better to answer that question than the people who use your product every day. Here are the customer retention numbers to look for, over a 6 month period, for different types of startups:

  • Consumer social (think Instagram): 25% is good, 45% is great
  • Consumer transactional (think Uber): 30% is good, 50% is great
  • Consumer SaaS (think Netflix): 40% is good, 70% is great
  • Small and medium business (SMB) and midmarket SaaS (think Freshbooks): 60% is good, 80% is great
  • Enterprise (big company) SaaS (think Oracle): 70% is good, 90% is great

As you can see, business-to-business products should be a lot stickier than business-to-consumer ones. Consumers are fickle and their investment is minimal. At the other end of the spectrum, major corporations don’t adopt new software lightly. It’s a process that sometimes takes years and costs a fortune. So they don’t switch often, either.

The panel emphasized that you don’t have to get to these numbers right away, but that they should be a goal. Good luck!

For more on startups, check out these posts:

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Photo: “Jason Calacanis” by jdlasica is licensed under CC BY 2.0

“Everybody Thought I Was Crazy”: How Brian Armstrong Built Coinbase

“Everybody thought I was crazy.”

That’s Brian Armstrong, CEO of Coinbase. When he started the company in 2012, it was a small and quirky startup. Bitcoin had only been in use for three years and remained relatively obscure.

But now, it’s safe to say not many people think Armstrong is crazy. His company just went public yesterday and its valuation currently sits at $66 billion. Coinbase holds $200 billion in cryptocurrencies, around 11% of all crypto in existence. So how did Armstrong go from lunatic to visionary?

Armstrong had to build interest in his new product. He settled on a cost effective and attention getting marketing tool: send people free money. But not just any money; bitcoin, of course! He sent tiny amounts of the cryptocurrency to countless people. One of them was angel investor Garry Tan, who became one of Coinbase’s first backers. His $300,000 bet turned into $2.4 billion yesterday.

In an interview with Jason Calacanis on This Week in Startups, Armstrong emphasized the importance of entrepreneurs being scrappy and doing whatever it takes to get the job done. His original approach to investors, repeated countless times, paid off in a major way and Coinbase was accepted to Y Combinator, the most prestigious startup accelerator in Silicon Valley. Armstrong’s resourcefulness and persistence definitely inspire me.

To build a major business, Armstrong had to make sure not to run afoul of regulators. Unlike, for example, a social media app, finance is heavily regulated. Armstrong ditched the anonymity most people expect from cryptocurrencies, abiding by “know your customer laws.” In turn, he offered users a much more secure way to store their cryptocurrencies:

The selling proposition here is security—security conspicuously lacking at some of the exchanges with which Coinbase has competed. The Mt. Gox exchange in Japan went bust in 2014 after hackers spirited away coins worth $480 million. Customers of QuadrigaCX, which was one of Canada’s largest exchanges, have been unable to retrieve $150 million in crypto since the founder supposedly died suddenly in December 2018, holding the only set of keys to unlock their money. They now want the body exhumed.

Armstrong wasn’t afraid to reimagine the crypto business in a way that could grow big, and he doggedly pursued anyone who he thought could help him do it. I find his extraordinary career quite instructive.

For more on Coinbase and crytocurrencies, check out these posts:

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The Ultimate Score: Turning $300k into $2.4 Billion on Coinbase

In 2012, investor Garry Tan got an e-mail. A young Airbnb engineer named Brian Armstrong had sent him a tiny fraction of a bitcoin, worth just a few cents. But this message piqued his curiosity. How many people send you money for nothing?

Tan happened to be one of the few people other than Armstrong paying attention to bitcoin at the time. The digital currency had only been in use since 2009. Tan had actually bought some before, using a janky website called Mount Gox. The process was frustrating. He knew there had to be a better way.

So Tan tried Armstrong’s new system. He found buying and selling bitcoin a breeze, and happily wrote a $300,000 check to Armstrong’s nascent company, Bitbank. That company became Coinbase, which went public today on the Nasdaq. Its current market cap is nearly $100 billion.

Tan’s initial investment is now worth $2.4 billion, making him one of the wealthiest men in America. But why did he spot Coinbase when other investors turned them down?

Tan’s familiarity with cryptocurrencies and the problems in buying and selling them was a major factor. He could see Coinbase’s technology was better than what he and other users had had to put up with, so using it would be a no brainer for others. He had also studied the removal of the gold standard in 1971 and was convinced fiat money was risky.

What do I take from this experience, as an investor? It tells me to look for products in sectors I’m familiar with, and use the product myself if possible. And if a product solves a problem for me, it’s likely to solve it for others as well.

It also makes me want to read widely and keep up with current technologies as much as possible. The more familiar I am with the new technologies businesses are using, the more good shots at a great investment I will have.

I hope to have my own 6,000x bet some day!

For more on startups, venture capital and crypto, check out these posts:

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Venture Funding Just Doubled in 1 Year

I came across an incredible stat last night:

Worldwide venture funding has nearly doubled YoY reaching $125B and grew by half QoQ in Q1 2021, according to Crunchbase. On average, two startups crossed the unicorn valuation threshold each working day during the first three months of the year.

Users increasing their engagement with online tools due to the pandemic, along with easier exits via Special Purpose Acquisition Vehicles (SPACs), were two big factors in this extraordinary increase. I’d also be willing to bet that a big jump in the money supply, which is showing up everywhere from meme stocks to cryptocurrenices, is a factor.

In startups I’m looking at, I’m seeing valuations in the $10-15 million range even on seed stage companies. A few years ago, that might have been $5-6 million. I can’t say I love those higher prices, but if a company achieves a valuation of $1 billion (not to mention $10 or $100 billion), whether you got in at a $5 or $15 million valuation may not matter.

I’ll be watching to see if these trends continue or if the industry is setting itself up for a crash. With consumers becoming more and more used to doing everything online during 2020, along with loose monetary policy, I think that any downturn is probably quite a ways off.

For more on venture capital and startups, check out these posts:

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Photo: “Rocket Launch SpaceX” by Schwabenknipser is licensed under CC BY-ND 2.0

Key Metrics for Startups: Consumer vs. Enterprise SaaS

I listened to a fascinating podcast this morning in which Jason Calacanis, an early investor in companies including Uber and Calm, broke down how to measure startup success. The key metrics depend on what kind of company you’re looking at:

Consumer companies:

  • Of the biggest users, how many are retained? For example, if someone used the app 3 times a week on average last month, how likely were they to return this month? Much of your app engagement is driven by the most active users.
  • What is the customer acquisition cost versus the revenue from each customer? Half to two thirds of the spending of fast growing consumer companies is marketing, even outpacing staff salaries! And that makes sense if you’re customer acquisition cost is $50 but you can get $100 from them. You should do that all day. This is also relevant for SaaS startups.
  • For marketplaces, how often do transactions happen? Higher revenue transactions, like booking an Airbnb, can be less frequent. Low revenue transactions, like taking an Uber, need to be more frequent.
  • Also for marketplaces: what is the take rate? How much money do you get from each transaction?

Enterprise Software as a Service (SaaS) companies:

  • How many customers “land and expand”? Since enterprise SaaS tends to have a lower churn rate (customers leaving), how many become customers and then buy more licenses (“seats”) for more of their staff is key. Another way customers can expand is if you start selling more products and they buy those too.
  • Churn rate is less relevant. You don’t see as many customers cancelling because businesses put more consideration into a software purchase and then rely on it for their company’s success. A consumer is much more likely to take a flier on a Hulu membership than a company is to do so on a SaaS product. This means if you keep selling enough licenses and new, adjacent products to existing customers, you don’t even need to increase customer count much. This is less true for consumer startups.

Bonus: Dating apps face some special challenges. Facebook and Instagram sometimes ban them from advertising, and it’s very difficult to get them approved in the Apple app store. This may be because some are used to scam people and companies want to protect their users.

Some great info in this podcast! I’ll definitely be using it to guide my investment decisions. On the whole, SaaS seems a lot easier. Customers are less fickle, have deeper pockets, and are more willing to pay for something than consumers who have been trained that if it’s on the internet, it’s free.

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Photo: CEO of hot startup Clubhouse, “Paul Davison” by jdlasica is licensed under CC BY 2.0

Unicorns Are Being Minted Faster Than Ever

On average there are 7x the number of billion dollar exits now than a decade ago.

This was Eric Feng writing in September 2018. Since then, this staggering increase in startups hitting that magic “unicorn” $1 billion valuation has only accelerated. Data indicates the number of unicorns has nearly doubled again since Feng’s writing. That’s a growth rate almost twice the prior period.

What’s driving this staggering growth? The biggest factor may be capital flooding the market, making it more likely for companies to be able to raise bigger and bigger rounds of financing at higher valuations, and also making it easier for them to build and scale faster.

What’s more, changes in technology have made it easier to create a startup than in the past. You can host and scale your computing needs via cloud computing, including with no servers, which was a pitch I saw Friday. You can find engineers on LinkedIn, create a website with SquareSpace, and manage your cap table easily with software. We are getting closer and closer to having a “startup in a box.”

For more on startups and venture capital, check out these posts:

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Photo: “Unicorn Attack!” by Sam Howzit is licensed under CC BY 2.0

This Is How Startups Pitch Investors

You walk into the room, palms sweating. You go over your script in your head. You pray to God your computer doesn’t crash. Eyeing you skeptically are a bunch of grey haired money guys. Don’t screw this up.

At the very least, that may be how the public imagines the meetings where startups pitch investors. The reality isn’t quite so dramatic, especially now that virtually all meetings are conducted via Zoom. I just got off such a meeting myself with a Software as a Service (Saas) company that was looking to raise about half a million in funding. While I can’t discuss the specifics of the company, here’s an overview of what these meetings are like:

1) Intro: The founders describe what the company does, what the market is like, and how the company has grown so far.

2) Deck: The founders go through a slide deck (PowerPoint presentation) that provides further details on what their product does, what makes it different from its competitors products and the size and growth of the market.

3) Demo: This is when the founders actually show you the product in action. I found this part the most interesting. I remember doing software demos myself when I worked in the field, and invariably, something seems to go wrong that worked in rehearsal 1,000 times. But investors understand that, especially if you can get it working in a few minutes.

4) Q&A: The other investors on the call asked a lot about the competition. How is this company different from others in its area? What stops larger companies from shoving their way into the market, elbowing you aside?

I was immediately struck by what a small room one of the founders was in during the call. His chair appeared to nearly touch the door behind him. This brought a smile to my face: they’re not using investor money to pay themselves exorbitant salaries before the company is a clear success.

The other co-founder mentioned getting a refund of $30 from a vendor that accidentally overcharged them. I don’t think he was trying to make any particular point with this story…it was an incidental detail to a larger narrative. But it made a strong impression on me: these are frugal founders that will be good stewards of the capital they’re raising.

I can’t say for sure, but I think this company has strong odds of being funded by our investor group. The round is led by other investors and they’ll already be getting a substantial sum from them, in any event.

The competence and frugality of the founders, coupled with year-on-year growth in the hundreds of percent, is likely to convince a large number of investors.

For more on startups, check out these posts:

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Photo: “Rich Uncle Pennybags” by Sean Davis is licensed under CC BY-NC-ND 2.0

UBiome and Theranos Are So Similar It Will Shock You

The co-founders of lab testing startup uBiome are under indictment for fraud and are currently on the run. Listening to a podcast about uBiome this morning, the parallels between it and Theranos struck me as uncanny:

  • The two co-founders were romantically involved, just as Theranos CEO Elizabeth Holmes was with COO Sunny Balwani. Perhaps its easier to keep secrets in the context of a romantic relationship?
  • Both companies surrounded themselves with high profile advisors with little scientific expertise. People like this create a halo of legitimacy but don’t have the background to ask the tough questions.
  • Unlike most Silicon Valley startups, it was in the hard sciences. It’s a lot harder for investors to verify the technology works than with an app they could download and play with themselves. And fewer investors have expertise in that area.

There are some incredible tidbits in this podcast, including the fact that the photos used in patient testimonials were Shutterstock stock images. It occurs to me that savvy investors could do a Google reverse image search of any such photos from a company’s slide deck and find out if they’re doing the same. It would only take a few minutes. I think I’ll do the same in the future with startups that pitch me.

Another important point is that this company went through the very prestigious accelerator Y Combinator. But accelerators don’t do deep due diligence. The checks they’re writing, usually in the $100,000 range, are too small to justify it. So don’t take that as an indication a company isn’t a fraud.

For more on Theranos and startups in general, check out these posts:

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Photo: “LEWEB 2014 – CONFERENCE – LEWEB TRENDS – THE REINVENTION OF HEALTHCARE – JESSICA RICHMAN (UBIOME)” by LeWeb14 is licensed under CC BY 2.0

7 Companies Had 3 Minutes Each to Pitch Us. This Is What Happened.

I had the privilege of watching 7 excellent startups present at The Syndicate’s Remote Demo Day. All are seeking early stage funding for their company from the investment group, which I’m a part of.

I came away from the meeting amazed at the quality of companies out there now. While I can’t share specifics about the companies (yet), here are a few things that struck me:

  • This was a pretty diverse group. It’s not all a white guy’s club anymore. I’m grateful because I don’t want to miss out on any good ideas! Diversity is on a lot of people’s minds right now, and I see things changing.
  • These are real companies. The public may think of startup funding as someone walking into a meeting with an idea and asking for money, but that’s not what it is. Every company had a real product in the market and many had millions in revenue. Some are even making a profit already. They need money to scale, not to start.
  • It’s not all software. One was a hardware solution for growing indoor gardens!
  • What the companies had in common: they were all focused on somehow making things easier, whether that’s working out with friends, growing food, etc.
  • Incredible growth rates. Many companies had year over year growth rates of 100%, 200%, even 500%.
  • Quality of companies is incredibly high. We have a lot of transformative innovation to look forward to very soon.
  • Many make opportunity available to anyone, whether that’s by monetizing your car or van, helping you pay for college, etc. This could be a real antidote to inequality.
  • My favorite company: a startup in the income sharing agreement area, which lets people sell a share in their future income to pay for school. This can replace expensive and hard to access loans. You only pay if you make a good living after graduation.

Most are likely to be funded by our investment group, especially the software companies that act as a platform or marketplace. It’s a tried and true strategy that certainly worked for Uber and Airbnb, and that trend seems to be continuing.

Congrats to all the amazing companies involved!

For more on technology and startups, check out these posts:

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Photo: “Great white shark” by Gussy (Luke) is licensed under CC BY-NC-ND 2.0