Startups

Let’s talk about venture capital and validation.

Lack of venture investment does not invalidate your business.

The purpose of a business is to sell goods or services. The purpose is to create something of value that people or companies will give you money for.

The purpose of venture capital is to pour rocket fuel into your business to accelerate your growth. That rocket fuel may cause your business to explode—in the “explode into a million little pieces and leave nothing behind but a smoldering hole in the ground” sense of the word.

That smoldering hole in the ground that contains the ruins of your startup hopes and dreams, is an accepted outcome of the venture capital business model.

Venture capital is a very specific financial instrument. It just so happens to be the one that the media is absolutely obsessed with and covers extensively. Generally speaking, that rocket fuel pairs well with SaaS and other hyper-scalable business models. But not all and not always.

Venture capital does not necessarily validate your business. Lack of venture capital absolutely does not invalidate your business. If and when you choose to take venture capital, remember, it’s just fuel. It has to be the right fuel at the right time for the right machine. And even then, you still have to build a business that serves its customers. 

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Startup of the Year Podcast Episode #0054 – Jason Barsema Talks About Changing The Way We Invest With Halo Investing

On this episode of the Startup of the Year Podcast, Frank Gruber talks with Jason Barsema, the Co-founder and President of Halo Investing (haloinvesting.com). Halo is the first multi-issuer technology platform for protective investment solution. Halo was founded in 2015 with a mission to provide access to impactful investment opportunities previously unavailable to most investors and is changing the world of investing by democratizing the protective investment marketplace through transparency and efficiency with the help of technology.

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Let’s talk about working with a startup lawyer. 

I’ve heard many stories of inexperienced or predatory investors ruining companies by putting non-standard terms in the term sheet. These startups could raise much-needed capital because the prior investors put in bad terms and refused to give them up.  I’ll give you a few examples.  

Occasionally a corporate investor will try to include a Right of First Refusal, a ROFR, on sale. This unnecessarily limits the exit options of the startup and with venture investors being in the exit business, any reduced optionality is a bad thing.  

In another case, I heard of an angel group that had an overreaching right to approve or deny future investments, and actually prevented a startup from raising much-needed capital. 

In both cases these were materially different clauses from a typical Right of First Refusal, which usually has to do with common stock sales.

Another case I heard recently was an investor asking for a discount on the next round of financing, which is ridiculous. 

The expectation is that every investor puts money in on the same terms in the same round. The next round gets negotiated separately. 

There are more insidious terms to avoid, too many subtleties to list here. The single best piece of advice I can offer you is to hire a law firm with experience writing startup term sheets. This is NOT your cousin that just got his JD nor is it your aunt who has practiced real estate law for 30 years. Neither are qualified to represent you in a financing round. 

Find a good startup law firm. It doesn’t have to be a big national name like Cooley or Wilson Sonsini. The startup practice at Michael Best in the Midwest is stellar, as are many local law firms. Ask around to the startups in your community for a good startup law firm, and avoid these major pitfalls that will sink your company if you don’t.

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Startup of the Year Podcast – #0053 – How Startup Founders Should Pitch a TechCrunch Reporter with Natasha Mascarenhas

On this episode of the Startup of the Year Podcast, we hear an interview from our 2020 Summit, when our Director of Strategic Operations, John Guidos, talked with Natasha Mascarenhas, a reporter at TechCrunch. Natasha covers seed and early stage founders, as well as the networks they take to get their first check. She also focuses on education amid COVID-19. Before TechCrunch, she was at the Boston Globe, the San Francisco Chronicle, and Crunchbase News.

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Let’s talk about telling an investor you’re interested. 

It may seem to you that after spending the last 30 to 60 minutes pitching your business to a venture fund that you obviously want them to invest in you. It may not be obvious. 

I heard of a case last week where a startup nearly missed out on getting a lead because the fund didn’t think the startup was keen working with them. 

I’ll share with you a story I heard somewhere along the way in my sales career. A local guy was running for a local political office. He ran a good campaign but lost. Afterwards he’s talking to his neighbor and as he’s bemoaning the loss he says, well at least you voted for me. The neighbor looks down sheepishly and says, well the other candidate asked me to vote for her and you never asked me to vote for you.

How are you going to get the sale if you don’t ask for the close? How are you going to get the investment if you don’t ask for it? 

Tie it in with why they’re a good fit for you. It can be as simple as, we think you’re a great fit for our business because of your investment in XYZ and your expertise in marketplaces. We’d like to have you involved and welcome your investment. What are the next steps in your process? 

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Startup of the Year Podcast #0052 – Dave Dworschak of Kamana Explains How to Build a Startup For Acquisition

On this episode of the Startup of the Year Podcast, Frank Gruber talks with Dave Dworschak, the Co-founder and CEO of Kamana (www.kamanahealth.com), about their recent acquisition by Triage Staffing in 2020.

Kamana is an alumni of the Startup of the Year program and was an Established Ventures portfolio company. More specifically, Kamana is is customer-centric, feedback-driven software for the healthcare staffing industry and it enables the healthcare workforce to manage their credentials and careers from a single place, and staffing agencies to hire and collaborate with the workforce far more efficiently.

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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.

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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.

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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.

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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.

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