Tag Archives: Venture Capital

The Power Law (Part One)

“Reasonable people…routinely fail in life’s important missions by not even attempting them.”

The Power Law

Every day for the last 15 months, I’ve sat down in front of my computer and tried to find the next great tech company. Being immersed in the daily details of e-mails and deal memos made me wonder about the history of this most unusual of industries, venture capital.


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So I grabbed a copy of Sebastian Mallaby’s excellent new book The Power Law: Venture Capital and the Making of the New Future. Mallaby traces the history of venture capital from its first deal to today, and explores the principles that drive its success.

The fundamental principle of venture capital is the power law — a small percentage of winners generate almost all the returns:

“Anytime you have outliers whose success multiplies success, you leave the domain of the normal distribution for the land ruled by the power law — from a world in which things vary slightly to one of extreme contrasts. And once you cross that perilous frontier, you better begin to think differently.”

Since just a few companies drive most of the returns, the entire business becomes about finding and investing in those very few companies:

“…each year brings a handful of outliers that hit the proverbial grand slam, and the only thing that matters in venture is to own a piece of them.”

So how should investors identify those rare businesses? Arthur Rock, who was arguably the first venture capitalist, liked to ask open-ended questions like “Who do you admire?” or “What mistakes have you learned from?”

Rock looked for founders who were realistic and determined. He avoided those who were prone to wishful thinking or who tried to please instead of being honest.

Rock’s inquisitive style led him to back Fairchild Semiconductor in the 1950’s in what was the first modern-style venture capital deal.

Founder traits are important, but hard numbers also matter. Google, eBay, Facebook and YouTube all had staggering growth figures early on.

Andy Rachleff, Benchmark partner and early investor in eBay, looks at an even more sophisticated growth metric:

“‘When companies grow exponentially, they don’t suddenly stop,’ Andy Rachleff observed later, adding that it is the ‘second derivative —the changes in the rate of growth of a company’s sales — that really tell a venture investor whether to back it.’”

Once an investor finds that diamond in the rough, he needs to own a piece, even if the price is high. Mallaby notes that Google’s seed round valuation was around $10M, high for its time.

Prone as I am to analysis, I often undervalued actually meeting investors and founders. This book taught me a lot about the importance of networking to the venture industry.

Don Valentine, founder of Sequoia, went to a Silicon Valley bar every Wednesday and Friday to chat with engineers about the next big thing. In the world of startups, investors are the specialists in connecting people with each other.

The more interesting people we meet, the better we’ll be at our job!

Mallaby provides so much great information that I’ll save the rest of the book for another post soon. In the mean time, if you’re interested in startups and venture capital, I urge you to grab yourself a copy!

More on tech:

What I Learned From an Investor Who Turned $100,000 into $100,000,000

Amp It Up

Managing a Crisis the Sequoia Way

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Managing a Crisis the Sequoia Way

Control what you can control. Be steady but decisive. And most importantly, build a sustainable business where you are in control of your destiny.

Roelof Botha, Sequoia Capital



Lately, I’ve been seeing something I’ve never seen before in the eyes of some of the founders I meet: desperation.


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Fundraising is increasingly difficult, tech has gotten crushed and the economy is almost surely in recession. Companies that were doing great just a few months ago are staring death in the face.

With that in mind, I spent this afternoon digging into Sequoia Capital’s recent presentation on what the downturn means for startups.

It offers the best advice available for startups navigating this difficult market. Sequoia’s partners advise startups to be prepared to cut back to ensure survival, if necessary.

If your runway (time until you run out of money) is getting short, you may have to make painful cuts in spending.

Do the cut exercise (projects, R&D, marketing, other expenses). It doesn’t mean you have to pull the trigger, but that you are ready to do it in the next 30 days if needed.

Doug Leone, Sequoia Capital

Sequoia also emphasizes that this crisis offers many opportunities. Many companies are more focused once they cut back and hunker down for a bear market.

What’s more, recruiting, which has been extremely difficult for many startups, is about to get much easier. As Leone notes, all of the FANG companies have hiring freezes.

This means startups can have their pick of the best possible people.

Even better yet, some of your competitors are about to go out of business! But if you carefully manage cash, you’ll survive and have a chance to dominate your market.

Look at this as a time of incredible opportunity. You play your cards right and you will come out as a strong entity.

Roelof Botha

This downturn doesn’t mean that you have to stop growing. But it may mean paring back side projects to focus like a laser on driving efficient growth in your core business.

You can still sign up customers in a downturn if you have a strong value proposition. Since I mostly invest in SaaS, I found this passage on proving value to business customers especially helpful:

Three reasons why people buy regardless of market conditions (enterprise POV):

● Drive growth

● Save money (real, hard ROI)

● Reduce risk

● Everything else is fluffy “

Carl Eschenbach, Partner, Sequoia Capital

Finally, it’s important to remain hopeful even if things get hard!

“Whatever we are facing today, it can’t be any worse than the uncertainty we faced at the beginning of the pandemic. We will prevail.”

Alfred Lin, Partner, Sequoia Capital

You created your company for a reason. You have a mission to fulfill.

A downturn doesn’t change that. You just have to manage it correctly and seize the opportunity it presents.

The very best of luck to all you brave founders!

What challenges are you seeing in startupland today? Leave a comment at the bottom and let me know!

More on tech:

TALKING STARTUPS AND TODAY’S FUNDRAISING PULLBACK

TALKING ABOUT TODAY’S STARTUP MARKET ON THE ACCELERATOR PODCAST

THE BURN MULTIPLE: WHAT IS IT, AND WHAT CAN IT DO FOR YOU?

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Photo: “Sequoia Capital” by isriya is licensed under CC BY-NC 2.0.

Dealgrace: Uber for Everything Else

Uber is great for rides and food. But what if you need an oil change?

You’re stuck wading through Google listings and making phone calls, trying to find an affordable option that isn’t 20 miles away. Until now.

Dealgrace is basically Uber for everything else. Request an oil change through the app and you get a text within minutes with an excellent price at a shop near you.

Dealgrace can help you with auto repair, home repair, moving, even finding a dentist! It replaces the painful, time consuming process of comparison shopping with a slick app that gets you what you need right away.


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The team at Dealgrace carefully vets every business on the platform to be sure you get awesome service. And the prices are very hard to beat.

I think the opportunity for Dealgrace is huge and I’m delighted to be an investor in their recent seed round. They’re live in over a dozen cities so far and are adding more every day!

Check out Dealgrace and save yourself time and money!

More on tech:

Have a great weekend everybody! 👋

Why Tech Stocks Are Oversold

Talking Startups and Today’s Fundraising Pullback

The Autonomous Weapons of the Future…and Present

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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

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. 

Hedge Fund Tiger Global Losing $136 Million a Day, Down 52%

The pain continued in May for Tiger Global Management. The hedge fund giant is losing money at a rate of over $130 million a day and most of its capital is gone.

From a Bloomberg report that broke this morning:

Losses at Tiger Global Management reached 52% this year, prompting the firm to cut management fees and create separate accounts for the illiquid wagers of customers who want to redeem. 

The firm’s hedge fund sank 14.2% last month, buffeted by losses in several stocks and substantial markdowns in its private assets, according to an investor letter seen by Bloomberg and a person with knowledge of the matter. 


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This comes after massive losses in April:

By April, the hedge fund’s 44% tumble, along with losses in its long-only and crossover funds, wiped out about $16 billion.

These figures put Tiger’s capital at the beginning of 2022 at around $36 billion. After April’s loss, a further 14% slide in May represents a $2.9 billion wipeout for the month.

May’s losses came to about $136 million per trading day. Every day.

As colossal as these losses are, they may be an underestimate of the true damage. Tiger has taken markdowns on its shares in private tech startups, but we have no way of knowing if those markdowns reflect reality.

Another large late stage investor, Fidelity, has taken only minor markdowns on its portfolio, including a 13% haircut on Stripe. Block, a similar fintech giant that happens to be publicly traded, is down 70% from its August high.

Tiger too may be engaging in this sort of wishful thinking.

If that wasn’t bad enough, Tiger may soon face attack from other hedge funds. It has allowed investors to pull out more money than usual, which will require huge stock sales.

Other funds are likely to short Tiger’s positions, knowing that Tiger has to sell regardless of price. This could make Tiger’s losses even worse.

So what’s next for Tiger? Their high-water mark means that until the fund recoups all its losses and a lot more, fees will be minimal.

Those fees pay the fat bonuses hedge funders are used to. Without them, many employees may jump ship.

Indeed, Tiger could shut down completely, daunted by the need to more than double their fund just to get back in the black. Melvin Capital Management recently closed after facing a long future with no juicy performance fees.

I expect to see Tiger’s losses grow as other funds attack its positions. However, a sudden, major run-up in tech stocks could save them at the last minute.

One thing I do know: I’m glad I don’t have any money in Tiger.

What do you think lies ahead for Tiger? And what hedge fund will be next?

Leave a comment at the bottom and let me know!

More on markets:

Hedge Fund Giant Tiger Global Losing $28 Million an Hour

$6B Hedge Fund Cut Off from Trading As Investigation Looms

Citadel Adds Millions to AMC Options Bet

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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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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. 

Photo: Tiger Global CEO Chase Coleman

Why Tech Stocks Are Oversold

It’s no secret that tech stocks have gotten kicked in the face in the last 6 months. The NASDAQ index of tech stocks is down 26% since November:

I’m convinced that public tech stocks are oversold right now. That’s been my gut feeling for at least a month, but today I came across some fascinating statistics.

Sequoia Capital, the best venture capital firm in history, released some stunning figures in a recent presentation to its founders:

– “61% of all software, internet and fintech companies are trading below pre-pandemic 2020 prices”

– “That’s despite many of these companies more than doubling both revenue and profitability”

– “⅓ are trading below COVID lows, when uncertainty and fear was peaking”

“- Growth-adjusted multiples [valuation divided by revenue] have fallen even further and are well below the 10-year average and pushing the 10-year lows”


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If a company doubles its revenue and profits but actually trades for less money than before, that is a bargain! If you liked it at $100 a share and $10 a share in earnings, for example, you have to love it at $75 a share and $20 in earnings!

But what about interest rates?

The NASDAQ is actually cheaper now than it was when the federal funds rate hit its recent peak in July 2019. At that time, the NASDAQ had a PE ratio of around 30 with the federal funds rate at 2.4%.

The current federal funds rate is a paltry 0.33%. Even if you look at rate expectations, they’re only around 2.8%.

Meanwhile, today’s NASDAQ PE is just 22.

And don’t forget, the Fed may not raise rates as much as expected.

Companies are laying off workers, the economy is on the edge of recession, a war is raging in Europe and COVID may return in the fall. There are many potential reasons why the Fed could back off.

Could tech stocks fall further? Absolutely.

But with every company and household pulling back at once, I think inflation will begin to moderate soon. And if it does, the Fed has a lot less reason to raise rates further, putting more pressure on tech stocks.

Fundamentally, here’s the question you have to ask yourself:

“Do I think the value of technology companies will be greater in 20 years or less in 20 years? Will they have more innovative products and paying customers, or fewer?”

The answer is obvious. Technology has transformed every industry and will continue to do so, resulting in massive profits.

And I want to be there when it happens.

What do you think is ahead for tech stocks? Leave a comment at the bottom and let me know!

More on markets:

Hedge Fund Giant Tiger Global Losing $28 Million an Hour

$6B Hedge Fund Cut Off from Trading As Investigation Looms

Credit Suisse May Need Up to $1 Billion After Huge Losses

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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. 

Photo: “Nasdaq Take 4” by bfishadow is licensed under CC BY 2.0.

Talking About Today’s Startup Market on The Accelerator Podcast

I had the pleasure of chatting with angel investor Michael Conniff on his The Accelerator podcast recently! We talk about how to find a great startup to invest in, some of my recent investments, and the robot pizza future.

I’ve provided some links to key parts below. Enjoy!

3:28: What I look for in a startup

4:50: The technique for judging startups quickly that I learned from Jason Calacanis

6:31: Why I like SaaS

7:00: Problems with D2C companies

9:00: Why I invested in VADE, which is changing parking forever

13:29: My recent investment in Fathom, which is letting us search podcasts the way we do text

15:52: Why I invested in Capbase, the best way to start your start-up

19:17: Will robots make our pizza in the future? 🍕

22:35: Why I started this blog

25:06: What sectors I invest in

What did you like about the podcast? What did we miss?

And would you like to see more podcast content like this? Leave a comment at the bottom and let me know!

More on tech:

Talking Startups and Today’s Fundraising Pullback

Why Investors BS You

Robot Pizzas and the Future of Fast Food

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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. 

Talking Startups and Today’s Fundraising Pullback

Hey everyone! 👋 Hope your Monday is going great.

I gave a talk at the Starta Accelerator in NYC last week. It was a lot of fun!

I talk about how the venture capital market works, my investing approach, and today’s pullback in fundraising. And a lot more!

Here are some interesting parts:

9:06: When I invest without traction, and David Sack’s latest startup, Callin.

20:01: How long I take to make a decision to invest

23:11: Why Jason Calacanis’s syndicate is the best one out there

29:07: Fundraising in a tougher environment for startups

34:09: Conspiracy theories on Peloton and Sex and the City’s Mr. Big. 🙂

41:02: Why investors BS you

45:21: How I help the startups I invest in

52:37: Jason’s book Angel and other great books on venture capital and startups

59:00: Why single founders are sometimes ruled out by investors, and why they shouldn’t be.

What information here was most useful to you? What did I miss?

Leave a comment at the bottom and let me know!

Have a great week!

More on tech:

Why Investors BS You

Inside Today’s Early Stage Venture Market

The Burn Multiple: What Is It, and What Can It Do for You?

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Save Money on Stuff I Use:

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. 

Why Investors BS You

Ever had a conversation like this?

Investor: This is an incredible concept! You guys are going to change the world!

You: Thank you so much! So, how much do you want to invest?

Investor: Well, actually, I couldn’t get my partners there. But you guys are going to do great! Keep me posted and let me know how I can be helpful.

You: *Scratches head*

We investors ply startup founders with big smiles and happy talk. Star fruit, anyone?

Many founders hear nothing but compliments but come away without a check. Why do investors do this?

As someone who nodded and smiled at founders for a good long while, allow me to pull back the curtain…

Preserving Optionality

Or in plain English, “keeping your options open.”

Maybe an investor thinks that a startup they meet with is not going to make it. But they could always be wrong.

Really wrong.

If the company takes off in a major way, the VC may find himself begging to get into the Series A when he missed the seed round. And if that happens, he doesn’t want the founder angry at him because he was too candid at a meeting 2 years ago.

Reputation

As an angel investor or VC, your reputation is everything.

If I tell a founder the hard truth that his company is burning too much money and may go out of business, he might accept that as constructive criticism. But he might also get very upset with me.

Founders talk to each other. If that entrepreneur tells two dozen others that I’m a jerk, there goes my deal flow.

It is in the interests of the founder for the investor to be honest. It can help the founder improve her pitch or fix issues in her business.

But it’s not in the investor’s interest! He’s more interested in avoiding a hit to his reputation than in helping a struggling founder.

Tell Them Why Their Baby’s Ugly

After hearing complaints about happy-talking investors from some of the best founders I know, I’ve changed my approach. When I’m not interested in their company at this time, I’ve started trying to tell founders in a direct but polite way.

I also try to explain why they don’t meet my criteria for investment and how they might meet it in the future. As noted angel investor Zach Coelius said, “You have to tell them why their baby’s ugly.”

The Time for Honesty Is Now

Being honest with founders is especially important right now. The fundraising environment has gotten a lot worse for startups in the last few months.

Many startups will not survive this. If giving a founder some constructive criticism prevents a business from dying and a bunch of people from losing their jobs, that’s a risk we investors need to take.

We have to remember why we’re really here: to build the ecosystem and help new companies grow and thrive.

Please remember this when an investor gives you constructive criticism: she’s actually taking a risk she doesn’t really have to take. Whatever decision you make, at least consider the investor’s ideas.

What frustrates you about dealing with investors? Leave a comment at the bottom and let me know!

Have a great weekend everyone! 👋

More on tech:

The Burn Multiple: What Is It, and What Can It Do for You?

Inside Today’s Early Stage Venture Market

What the Best Founders I Know Have in Common

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Save Money on Stuff I Use:

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. 

The Burn Multiple: What Is It, and What Can It Do for You?

Today, I want to talk to you about a startup metric you don’t hear much about: the burn multiple. The burn multiple measures how efficiently you’re using your cash to drive growth.

This number is more important now than it’s been in many years. We are in a more difficult fundraising environment and investors are heavily scrutinizing how companies use cash.

In the boom times we’ve had for the last couple years, high growth startups could get funded no matter how inefficiently they spent. Shoot, even startups with no revenue or product often raised big rounds!

Those days are over.

The NASDAQ is in a bear market, late stage funding is down, and investors are asking themselves not just “Who will thrive?” but “Who will survive?”

The startups that make it will be those who know how to use money to efficiently drive growth.

So now that you know why the burn multiple matters, how do you actually calculate it?

It’s pretty simple. For any period (usually a quarter or a year), divide burn (losses) by new revenue added in that period.

Burn Multiple:

Net Burn / Net New Annual Recurring Revenue (ARR)

Your burn multiple calculation should account for the length of your sales cycle.

If it takes you around 2-3 months to close a new customer, it’s appropriate to compare burn in Q4 2021 to new ARR in Q1 2022, for example. If your sales cycle is 6 months, compare Q3 2021 to Q1 2022.


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Now you know what your burn multiple is. But how can you tell if it’s good or bad?

Use these benchmarks from a superb post by David Sacks, one of the leading SaaS entrepreneurs and investors:

Burn multiple is especially relevant for SaaS companies with their sticky revenue. Burning cash to get lots of revenue that sticks around makes sense.

But the burn multiple is still quite relevant for all startups. It helps you understand if the cash you’re burning is actually building your business.

I recently saw a deal memo for a company that had burned about $1.1 million in a quarter to add just $80,000 of new ARR. That’s a burn multiple of 14.

A burn multiple like that is an emergency!

So let’s say you’re that company. What should you do?

Get that burn down right away! If you can’t show cash efficient growth, it’s going to be hard to raise money right now.

You’ll want to extend your runway (time before you run out of money) as much as possible. This gives you time to figure out the issues in your business before the cash runs out.

Another advantage of knowing your burn multiple is that you can share it proactively with prospective investors. Especially if you’re a seed stage company, your awareness of this important metric alone will impress investors.

Of course, you’ll impress them even more if you can show a good burn multiple!

I’m writing this because I want to see your company survive and even flourish! But we won’t get there with happy talk alone.

Calculate your burn multiple regularly and act when it gets out of line.

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

More on tech:

Inside Today’s Early Stage Venture Market

What the Best Founders I Know Have in Common

The Startup Pitch Checklist

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Save Money on Stuff I Use:

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. 

Venture Capitalists Don’t Invest in Ideas

A few months back, a very nice young lady contacted me. She had an idea for a software product and wanted me to hear it.

I had to think of a very polite way of explaining that…

Venture Capitalists Don’t Invest in Ideas.

Many people think that angels and VC’s spend their days evaluating ideas. When they find an interesting and original concept, they shake hands and write a big check.

This isn’t how it works.

There are countless ideas, but only a skilled and determined founder can turn her concept into a real product. And then it takes even more perseverance to find customers who need the product and get their money.


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Traction Over Everything

So rather than attempting to read the tea leaves and find out which idea will work, most investors look for evidence that it’s already working. That evidence is called “traction.”

If you have several thousand dollars a month in revenue coming in the door, growing 30% month over month, there is clearly a very strong demand for your product. You’ve proven its value in the market.

If you can show an investor traction like that rather than just a deck or even an MVP, your odds of getting funded skyrocket.

Why are investors so stingy? Because they know that most startups will never even get to dollar 1 of revenue.

If investors dump cash on too many companies that don’t succeed in the market, they will soon have no more money left to invest. And then, even the best startups won’t be able to raise capital.

Venture Capital Is to Help You Scale, Not to Help You Start

Venture capital is really for scaling a business, not starting one. If you clearly have strong demand for your product in the market, we can help you staff up and meet that demand.

But few investors, if any, want to give you money to build a product.

What we’re trying to avoid is a team that raises money, works on the product, but misses their launch date. The date is postponed, and they miss it again.

Soon, they’re back asking for more money with no real progress to show.

But What About Pre-Seed?

Even for pre-seed deals, most investors want to see a Minimum Viable Product (MVP) built. Without that, it’s difficult to tell what you’re even investing in.

It’s also hard to say if the founders will ever be able to deliver on their plans.

Even the Best Bring More Than an Idea

Last year, I got a deal memo in my inbox for Callin, a social audio app co-founded by David Sacks.

Sacks is part of the famed PayPal Mafia and served as the company’s COO. After that, he founded Yammer and sold it to Microsoft for $1.2 billion in 2012.

He has a stronger track record than almost anyone. But even he didn’t show up with just an idea.

Sacks and his team had a nicely functioning app in private beta available for iOS. Numerous users were already creating podcasts on the platform.

Alas, the round was massively oversubscribed and I never got my allocation. But I did come away with an interesting lesson.

Wrap-Up

If you want to raise money, show up with more than an idea. Show up with an MVP you can show investors.

Better yet, come with a couple of customers and a little money coming in the door. Nothing impresses investors like real customers and real revenue.

Building an MVP with minimal resources and finding customers on your own is very hard. But so is contacting investor after investor with little chance of success.

What misconceptions have you seen about fundraising? What still mystifies you about the process?

Leave a comment at the bottom and let me know!

Have a wonderful weekend everyone! 👋

More on tech:

Inside Today’s Early Stage Venture Market

What the Best Founders I Know Have in Common

Amp It Up

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