VC Minute: Talking About Exits

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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.

VC Minute: Being Too Early

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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.

VC Minute: One More Word You Should Never Say

By Startups

Let’s talk about one more word you should never say while fundraising: bridge.

Saying you’re raising a bridge round immediately conjures this question in investors’ minds: “is it a bridge to nowhere?” Investors will ask this of themselves or of their colleagues. It’s gone from being a joke, to an old joke, to simply an expected next question. 

If you say this while fundraising it immediately puts you in a defensive position, having to explain why this is not a bridge to nowhere. 

If you never want to call your funding round a bridge, what do you call it? 

The beauty of the current seed fundraising environment is that it’s a phase. You may raise a Pre-Seed, Seed, a Seed 2, a Seed Extension all before you raise a Series A. None of those is a “bridge” and none should ever be labeled as such. It may seem minor, but investors can no more stop themselves from picturing “a bridge to nowhere” than you can prevent yourself from thinking about a pink elephant no matter how emphatically I tell you not to think about a pink elephant. 

Good luck raising your Seed 2 round!

Listen to the whole episode here:
Startup of the Year Podcast Episode #0046 – Zvi Band Talks About Scaling a Company

On this episode of the Startup of the Year Podcast, Frank Gruber talks with Zvi Band, the co-founder CEO of Contactually, a top CRM which empowers professionals in real estate, consulting, and other professional industries to build authentic relationships. He is also the author of the book Success is in Your Sphere.

VC Minute: One Word You Should Never Say While Fundraising

By Startups

Let’s talk about one word you should never say while fundraising: conservative. 

Your pro forma financial statements are not conservative. Your revenue projections are not conservative. They are complete fabrications… and that’s OK. The point of your pro forma financials is not to accurately forecast how you get to $10MM in MRR by year 3. The purpose is in the name:  “Pro Forma” is Latin for “for form” as in, something done for the sake of doing it.

Whether or not I believe you are going to get to $10MM in MRR by year 3 is beside the point. The point is in the exercise of doing it. I want to see where you think that revenue is coming from, if your cost of sales is realistic, what your staffing plan is, and more. Show how you get from here to there and let me better understand the drivers of growth. 

When you say your projections are conservative, it says two things to me: first it reinforces the fact that you haven’t been through this process before. Second, if they’re conservative projections then why are you presenting them to a growth investor? 

The lesson here is that you don’t need to label them at all, because you have already done so. They are pro forma. And they should reflect the growth that you can reasonably expect to achieve. 

Listen to the whole episode here:
Startup of the Year Podcast Episode #0042 – Startup Stories with Kara Goldin, CEO of Hint, and Bestselling Author of Undaunted

On this episode of the Startup of the Year Podcast, Frank Gruber talks with Kara Goldin about her journey as an entrepreneur and her new bestselling book “Undaunted,” which was just released in October of 2020.

VC Minute: The Magic of the Soft Circle

By Startups

Let’s talk about the magic of the “soft circle.”

On the last VC minute I talked about treating your fundraise like a sales process. But there are a few critical  differences between fundraising and sales, one of which is that in fundraising there’s an important stage called the “soft circle.” 

The soft circle is broadly, every investor you’ve talked to that has not yet said yes or no. So, the “maybes.” More specifically, it should be investors that have expressed interest and there’s a reasonable chance you can get them to commit to the round. 

The way you get an investor in your “soft circle” grouping is by asking direct questions: “If we were to close the round on Friday, would you invest?” The answer here is going to be some shade of “maybe” and that’s OK. The follow-up question is, “what concerns do you have?” This opens up a dialogue about where to go with that investor.  And you can specifically ask them, “is it OK if I count you in my soft circle group?”

Here’s the critical piece of why “soft circle” is so important: you use it to show one investor the interest that other investors have in your raise. For example, you could say something like, “We’re raising $750k with $500k committed and another $400k soft circled.” The investor you’re talking to knows that you won’t close everything in your soft-circled. 

I usually take that soft circled number and divide it by three to make a rough estimate of where you’ll end up. And that’s OK. You’re showing that there is interest in your raise, and if they want in, they’ll have to act. 

One quick caveat: don’t fudge these numbers and don’t lie to yourself about who’s really soft circled. Your reputation can take a ding if you stretch or overstate your numbers. If you say you have $500k committed, you better be sure that’s $500k and not $100k. 

Listen to the whole episode here:
Startup of the Year Podcast Episode #0041 – Valuable Lessons from GrubHub Founder Mike Evans

On this episode of the Startup of the Year podcast, Frank Gruber talks with Mike Evans at our 2020 Summit. Mike shared his story behind starting and taking GrubHub to IPO. He also talked about his new startup, and forthcoming book Hangry.