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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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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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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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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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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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:

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.

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.

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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.

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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. 

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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.

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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!

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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.

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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. 

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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.

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