All Posts By

Rich

VC Minute: Your Fundraising Competition

By Startups No Comments

Let’s talk about your fundraising competition. 

I’m not talking about your direct competitors in your industry. I’m talking about the half a dozen or so other startups I have in my diligence process at the same time as you. When it comes to securing a commitment, that may also be your competition. 

You’re not necessarily going to lose out on an investment just because a VC has a lot in their pipeline. But like you, we only have 24 hours in the day and only so many hours that we can spend working, so we want to always be sure we’re working on the funding rounds that are the highest priority for us. In other words, we’re constantly ranking companies internally to reprioritize and refocus our efforts. 

If you’re getting the SHITS from an investor it may be that they have a backlog of diligence and you’re somewhere in the middle of the stack. The danger is that the longer you stay in the middle of the pack, the more likely you are to move down or possibly never hear back. 

You benefit from staying top-of-mind with your potential investors. You can do this by sharing updates. Updates about your round, for example, that you got a commitment from another firm. Or sharing wins such as, you just landed a new client or that new hire came on full-time.

Keep the communication flowing. If enough has changed since you last spoke, offer to set a 15-minute update call. And don’t be afraid to ask questions about where that fund is in their diligence process on you. 

Keep your investor process moving forward because when it stalls, it dies.

Listen to the whole episode here:
Startup of the Year Podcast Episode #0051 – Tim Draper Tells Stories From His Life As A Venture Capitalist – Startup of the Year Podcast

On this episode of the Startup of the Year Podcast, we listen to Frank Gruber’s interview with Tim Draper at the Startup of the Year Summit in the fall of 2020. Tim is a top global venture capitalist, founder of Draper Associates, DFJ and the Draper Venture Network, a global network of venture capital funds.

Back to the VC Minute main page

VC Minute: SHITS

By Startups

Let’s talk about the SHITS.

Nothing like potty humor to get your attention. In all seriousness, SHITS is an acronym I heard along the way that perfectly describes the VC slow roll. It stands for Show High Interest Then Stall. This is a legitimate venture capital strategy, even if unintended. It’s less effective in coastal fast-close environments, but still happens with great frequency throughout the country. 

The rationale behind this, from the VC perspective, is that before I write a check time is my ally. As soon as I write a check, time is my enemy. The longer I’m on the sidelines the more information I get: the more I learn about you, your company, competitors, traction, and team. I may be genuinely  interested but if there is no immediate need to commit to a round, I’m going to sit on the sidelines, and wait, and watch. 

When an investor has conviction they will give you a firm no, a firm yes, or even a conditional yes, such as “as long as we can hit our ownership percentage, we’re in whenever you get a lead.”

Unfortunately, the most likely scenario and one you may be accustomed to getting is the SHITS. This is not the mark of a bad investor, just one that lacks conviction about your opportunity. You can’t force conviction, but you can drive action. 

You can drive action to a decision in a few ways. First you can ask direct questions about what it takes to get to a “yes.” Next you can show additional interest in the round—and I’ve talked about this in previous episodes. When a round is coming together I need to know if I’m going to get off the sidelines and get in the game, or pass altogether. And finally, you can drive action through deadlines. There’s nothing like a deadline to get people to take action—on anything.

When you have enough interest, including from VCs giving you the SHITS, set a deadline and start pulling the round together.

Listen to the whole episode here:
Startup of the Year Podcast Episode #0050 – Meredith Fineman Teaches Us How To Brag Better

On this episode of the Startup of the Year Podcast, we listen to Frank Gruber’s interview with Meredith Fineman at the Startup of the Year Summit in the fall of 2020. Meredith is an entrepreneur, writer, best-selling author, speaker, podcast host, and women’s advocate. She is also the founder and CEO of FinePoint, a leadership and professional development company with a focus on visibility and voice.

Back to the VC Minute main page

What I Got Wrong Last Year – In One Chart

By Startups

Last year I wrote an impassioned post meant for SpringTime Ventures portfolio companies, but really for startups everywhere. I was warning about an impending Series A Super Crunch.

After the dust settled on the first few months of quarantine it looked like the economy was not going to collapse, but we were in for a long haul. What was perhaps worse was the prospect of that “long haul” being for an indeterminate period. During this time I saw the convergence of three major factors in the startup ecosystem that had me worried. They were:

  1. More seed funds + more seed dollars = more companies at the seed stage
  2. Series A raising the bar = harder to raise the next round
  3. Private Equity raising the bar = harder to get an early exit

To me, that all added up to a huge fundraising bottleneck in everything leading up to Series A. In the second half of that post I offered advice to founders on how they can keep their business afloat until things settled out.

What happened over the next few months was more like a feeding frenzy and nothing at all like a crunch. At SpringTime we saw coastal funds get comfortable investing via Zoom and thus widening their aperture to include startups all over the country. That made funding rounds even more competitive than they had ever been, at all early stage levels.

But the big thing that I got wrong was this:

Capital overhang as of year
Source: Pitchbook

This is the Capital Overhang. Capital overhang is the amount of money raised by private capital funds that remains uncalled. Meaning, there is more money yet to be invested in the private sector than ever before.

With more money in the market, and with investors knowing they have more money yet to deploy, there was no bottleneck.

By June 2020 when I wrote that post, I thought I had seen enough of the trend ahead to call the shot. In October as startup investing was in peak frenzy mode, I was wondering what I got wrong. When I saw this chart earlier in the year, I knew what it was.

One startup in our portfolio I know heeded the advice I offered and focused on making it through the year on a slimmer budget than they anticipated. It turned out to be the best year yet for them, and they put themselves back on the right track. For others, they took advantage of the capital markets and pushed to raise another round. But for most, it really was business as usual, just via Zoom.

VC Minute: Talking About Exits

By Startups

Let’s talk about talking about exits.

I’ve started asking founders, “where do you see your company in five years?” The answer I hate to hear is: “we’ll have an exit by then.”

OK hold on. You and I both know that I have a fiscal responsibility to my investors to return multiples of their capital, and that I do this by having liquidity events from my investments. If you think that telling me you’ll sell the business in five years is what I want to hear, you’ve got it wrong. It actually throws up two major red flags.

First, entrepreneurship is hard. Really, really hard. If you are only in this for the money then you’re not going to have the grit to push through all unforeseen gut-wrenching, keep-you-up-at-night problems that will come your way. There are dozens of studies that show money is not a prime motivator. If you’re only in this for the money, then you don’t have enough motivation to get through the hardships.

Second, while it’s true that I am looking for exits, what I’m actually looking for are return-the-fund exits. I’m not looking for a dozen companies to return 2-3x, I’m looking for one company to return the whole fund—and then some.

Here’s some quick math: if I have a $20MM fund and I own 2% of your company on a fully diluted basis at exit, that exit needs to be $1 billion dollars to return $20MM. That’s the kind of exit I’m looking for (Actually, I’m looking for more than that, but we can geek out on fund economics later.)

Are you going to get to $1B in five years if getting an exit is your primary motivation? Hell no. You’re going to take the first $50MM private equity offer that comes your way, because you’ll get a few million dollars, which will be amazing for you and I’ll be incredibly happy for you. I just don’t want to invest in that.

I want to back founders that want to change the world, not cash their chips in.

Listen to the whole episode here:
Startup of the Year Podcast Episode #0048 – Dr. Ximena Hartstock Discusses Ideas That Change The World

Ximena is the Co-founder of Phone2Action, the world’s leading technology company for civic participation and stakeholder engagement. The platform has empowered millions of advocates to make over 40 million connections with elected officials. She is passionate about education and about empowering people to take action to make this world a better place. In addition to running her own companies, Ximena is a member of the board of directors of Consumer Technology Association which produces CES and she is also on the Forbes list of Women Crushing it in Technology.

Back to the VC Minute main page

VC Minute: Being Too Early

By Startups

Let’s talk about being too early. 

I talked to a founder the other day who was frustrated by being continually told he was too early. It’s especially frustrating when you know the people you’re hearing this from actively invest in companies at your stage. But an investor saying, “you’re too early” is not the whole story. 

There are of course cases where you are actually too early. You can vet this quickly with an investor by asking direct questions early in the meeting, such as “Do you invest pre-revenue?” “Do you invest at my stage?” And, “what do you look for in companies at my level?” With those questions you’ll know if you are actually too early, and even better you’ll know what you need to talk to in your presentation. 

When you are talking to an investor that writes checks at your level and they’re telling you that you’re too early, here’s the real problem: you haven’t sold them on your vision

Mike Maples from Floodgate says that great founders are time travelers. I love this. I’m going to paraphrase his explanation and riff on it a bit: You need to come from the future and tell the present day investor what the world is like with your product at full scale. How have you changed people’s lives? And as importantly, what are the inflection points that bring your future into existence. 

When you sell the vision you’ll have an investor who wants to bring that world into existence with you. Even if you are technically too early, you’ll have a strong lead for your next round. The earlier you are, the stronger you need to sell the vision. Even with traction, you still need to sell the vision.

Take a minute, time travel to the future, look at the world and tell me what it’s like. 

Listen to the whole episode here:
Startup of the Year Podcast Episode #0047 – Suneel Gupta Explains How To Be “BACKABLE”

On this episode of the Startup of the Year Podcast, Frank Gruber talked with Suneel Gupta at the Startup of the Year Summit in the fall of 2020. Suneel teaches innovation at Harvard University and is the author of the upcoming book, “BACKABLE,” which just came out on February 23rd. The book is rooted in Suneel’s journey from first-time entrepreneur to being named “The New Face of Innovation” by the New York Stock Exchange, and explores how to get people to believe in your ideas.

Back to the VC Minute main page