Startup Whisperer

Tootsie Roll Pops and Term Sheets

Remember that old commercial with the owl and the Tootsie Roll pop. The commercial asks the question how many bites does it take to get to center of a tootsie roll pop. Maybe its because I am near the end of my fundraising cycle, but this commercial had me wondering about how many VCs does it take to get to a term sheet?

Everyone has a different answer so I thought that I would ask several prominent entrepreneurs about their experiences.  I talked (emailed) to 7 startup CEOs in Seattle. The questions were:

1. Average number of VCs that you approached per each round for Series A: ___  Series B:___  Series C: ____  Series D and higher ____

2. Number of total term sheets that you received per round for Series A: ___  Series B:___  Series C: ____  Series D and higher ____

3. Total amount raised per round:  Series A: ___  Series B:___  Series C: ____  Series D and higher ____

4. Please indicate whether I can include your name/company in the blog post:  Y or N

Overall, the data was very interesting.  This is a small sample and data can be skewed.  The categories were across several different verticals: Internet consumer, enterprise, and B2B software.  Also, the results could be skewed because each CEO had different levels of experience as a CEO when they raised their rounds.   But, this is an interesting proxy for the reader.  The next time you see an entrepreneur smiling, seemingly without a care in the world, consider these numbers:

• 21 VCs for their Series A round
• 31 for the Series B round (hmmm, I wonder why everyone calls it the 'bitch' round)
• 23 for Series C - the numbers dropped amongst the group on average
• On average each round generated ~ 2 term sheets.  It was interesting to note that a couple of the respondents that had lower numbers of total VCs that they talked to actually had 3 term sheets per each round.  This implies that they must have been consistently harvesting relationships as well as focusing on quality conversations.
• I didn't publish how much they raised because there was a huge variance between the raise amounts per round.  The median amount raised was around $45M across the Series A, B, and C rounds.  There was one friend of mine in the D range that would have thrown the numbers way off (huge round).  I'd be interested to look at more data across more verticals.  I wouldn't be surprised to look at the timing of when the money was raised -- usually you don't want to raise money when you need to so that is a factor as well as general economic conditions.

Raising money is tough work.  You hear no 90% of the time.  The best operators play off like its not a big deal but it really isn't that fun.  It is a sales process and it is time consuming.  I want to thank the folks that contributed to this post (everyone asked to be anonymous). 

Venture Capital 2.0

I will be blogging some more about venture capital in the next couple of months.  In the meantime, there has been an increasingy bit of chatter about the changing world of Venture Capital.  Call it "Venture Capital 2.0."  The current model is not unlike the entertainment industry where returns occur within a firm's portfolio from a few winners.  In addition, just like the ever-growing squeeze of the middle-class in the US;  there is an ever-growing discrepancy between the returns from the "best" firms verses the also-rans. Michael Butler, chairman and CEO of investment bank Cascadia Capital, recently wrote an interesting piece called The Death and Re-Birth of Venture Capital.

If you ask ten different entrepreneurs about venture capital, you will bet many different responses about the importance of it (how much you should take and when, valuations, etc).  I do think that we'll continue to see the increasing trend of earlier stage companies bootstrapping their ventures.  It is just a lot cheaper to start a company with the advent of open source software and enterprise class Web services. I tend to think that the correct answer is actually better answered by the type of business it is and the style of the entrepreneur. 

So what do you think?  Are the top firms going to corner the market forcing the other firms to verticalize and specialize on a region or a category?   Are you running a venture that has opted to not take venture capital?

Do you have the tenacity of Abe Lincoln?

When my fellow entrepreneurs opine to me that starting a business is hard, I certainly agree but I also know that its some of the most rewarding work one will do.  The one thing that really defines success for entrepreneurs is tenacity.  Sure, you need a talented team, a great idea, and some luck. 

We all know the stories of the young wunderkind that hits on that great idea, lands on the cover of Fortune and amasses huge sums of money.  The reality is that it takes time and most of us entrepreneurs spend many years building real businesses.  The "quick" flips that you hear Joe Startup talk about at industry parties certainly happen but are not the way to build a real business (especially when quick flips don't happen that often or that fast). 

You've got to be tenacious about your companies vision and goal.  Whenever, I have had a tough day I think about Abraham Lincoln.  Man, you'd have to be tough to run this marathon of failures and/or absolutely believe that you are on the right track.  Check this out:

Failed in business - 1831
Lost election for legislature - 1832
Failed again in business - 1834
Sweetheart died - 1835
Nervous breakdown - 1836
Lost second political race - 1838
Defeated for Congress - 1843
Defeated for congress - 1846
Defeated for congress - 1848
Defeated for US Senate - 1855
Defeated for vice President - 1856
Defeated for US Senate - 1858
Elected President - 1860

So, the next time you feel like you are having a tough time.  Just look at the career timeline of
Honest Abe. 

Are you a Batman CEO or an Iron Man CEO?

Every CEO needs to be armed with his/her own set of essentials when he/she hits the road.  I wonder what Bruce Wayne or Tony Stark would take on a business trip?  Send me your ideas. 

btw, I am a huge Batman fan as evidenced by this picture.  I'll do anything for press and the Puget Sound
business Journal featured me in my full suit over a year ago. 

There is some really cool reading on the science around Iron Man.  It is a great read for all of us super hero geeks or gadget freaks.  Of course, in a battle I would have to say that Batman would win.  Here is a fun link that categorizes every Batman gadget ever used.  Trust me its very cool (but its older and needs to be updated for Batman Begins).

Brand Positioning Clift Notes

There are many great books on positioning.  Starting out in my career, I read a ton of Al Ries and David Aaker.  Aaker is really a guru on brand and has delivered many great books on branding over the years.  He's a Professor Emeritus at the Haas Business School.

A couple of books that I recommend are Aaker's "Building Strong Brands" and Al Ries', "The 22 Immutable Laws of Branding".  Each deliver very clear and concise perspectives on how to get your company and brand positioned in the minds of consumers. Really that is what its all about.  Its about developing a "Unique Sales Proposition" or USP as us marketing hipsters like to refer to it. 

There is a lot of work that goes into building clear and concise brands.  When developed successfully brands deliver much better return for investors and your company.  Imagine many different elements being integrated a concise positioning statement that clearly puts you the right market segment with a specific value that is different than your competition. 

Before you look at this attachment (Download sample_positioning_framework.pdf) , you have to do the pre-requisite work around identify the market opportunity, target market within the market, and customers wants-and-needs  assessments.  There isn't fluffy stuff.  You need to make sure that you've identified the right market and segment that is addressable by your product as well as being big enough to become a big business.  In other words, you could slice down a target market so small that considerable market share becomes too small to be interesting or its too limited in scope and it wont be defensible as more competition enters your space. 

That said, you want all of this work to culminate into a couple of different work products - the most important is the positioning statement and the marketing statement (the words you use for the elevator pitch).  They mean the same thing but the semantics are different because no investor would get excited about a "Market leader in long tail-based publishers using sophisticated yield management algorithms.  Huh? The doors will close in the elevator without any interest in your idea. 

Here are some quick steps to think about and a worksheet to help you deliver on some key points for your product or company.

• Positioning statement - you will typically want to tout a key aspect of what you can proverbially hang your hat on in terms of leadership (market share leadership, operational efficiency, or quality).  Each of these imply certain elements.  Market leadership is typically focused on in startups for the obvious reasons -- with scale you can grow topline revenues and margin.  Operational efficiency usually implies margins efficiency (e.g, JetBlue), and quality typically implies solid topline revenue with lower profit margins (e.g, Nordstrom).    

You want to pick a statement that truly reflects your operating strategy.  It has to be unique in that you can clearly define what you are good at in the right market space. 

• Positioning Proof Points - I always like to pull out three unique benefits that are proof points for your positioning.  They are the things that are unique only to you whether its the largest audience dedicated to women  or the best ROI for CRM;  pick out 3 things that define you.  Then pivot those areas by audience. Different audiences care about different things.  For example, suppliers don't care as much about  consumer differentiation, they typically care about conversion and ROI. 

Do the work upfront and you'll have a clearly differentiated product or company in the mind of consumers, suppliers, and investors.