VC Minute: One Word You Should Never Say While Fundraising

By Universe

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 Universe

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.


By Universe

I have strong, mixed feelings today.

I was a trader on 9/11, safe on midtown but still watching live on CNBC. It was scary as hell. 3000 people died, include acquaintances of mine.

The men who conducted the attacks were from Saudi Arabia, Egypt, Lebanon, and the United Arab Emirates. We went to war with Iraq, and later Afghanistan.

It’s estimated that on March 31, 2020 the deaths in NYC due to COVID-19 surpassed the NYC deaths of 9/11. And as a country we are at war… with ourselves.

I have such profound sadness at the loss of life from both. And such anger at the bungled leadership responses to both. I have pride that our country could come together so quickly and resolutely in the face of extremism in 2001. And shame that our country is dominated by extremism 19  years later.

Series A Super Crunch

By Universe

Originally posted on the SpringTime Ventures blog.

A few weeks ago, I was on the phone with a SpringTime portfolio company and shared my thoughts about the fundraising environment in the coming year. This is far from a well-researched, evidenced-based analysis and more of “breadcrumbs in the forest.” I have an opinion on where the breadcrumbs lead, so I’ll share that perspective and let you decide.

Seed Funds Are Making New Investments

The growth of new Seed funds has been extraordinary. SpringTime is proud to be part of a new wave of first-time fund managers (the experience of our partner Rick and CFO John notwithstanding). I would expect nearly all the funds that raised capital in the last two to three years still have enough left to deploy in the coming months. Many small funds (outside of the Bay Area) deploy capital over four to five years, and even if that’s shortened to three years, the growth of funds in the last two years plus the number of investments still being made says to me that there is money available in the Seed market.

This could lead to more new companies getting funded or the current portfolio companies receiving follow-on funding. Either way, there may be fewer failures than we’re all anticipating, which means more companies competing for late-stage Seed funding.

The media’s consensus seems to be that venture funds are done making new investments to allocate capital to their existing portfolio, ensuring their current companies make it through the tough times ahead. Since it’s on the internet, it must be true, right? The media also rarely distinguishes between Seed and “Seriesed” (A, B, etc) and that is key difference. How a $100MM fund operates is very different from the so-called Micro VC’s of $50MM and definitely not for sub-$25MM funds.

A very informal poll of the Colorado venture funds (including many micro-funds) via a group Slack channel showed that those with capital are still making new investments. What I’m seeing is a lot of Seed money on the sidelines, waiting to get in the game. This is the only good news I have to share—a least from a fundraising perspective.

Series A Raised the Bar

We recently saw multiple investment opportunities where Series A investors left a company at the altar—term sheets either rescinded or never delivered. We’re hearing this is happening broadly. In these cases, the funds in question had done an evaluation and decided to raise the bar for where they would invest, specifically related to revenue.

If this holds steady for the next two years, that means your Series A round is that much farther away. And once again, more companies competing for late-stage Seed funding.

Fewer Early Exits

An interesting trend in recent years has been an early exit to a private equity (PE) firm. We saw this happen with fitness-related startups in Colorado in particular. PE firms have been playing the roll-up game for decades, and in recent years smaller firms started dipping down into the startup market. These roll-up plays were scooping up startups for valuations well under $100MM, often under $50MM. For all intents and purposes, these exits replaced Series A rounds, sometimes coming quickly on the heels of late-stage Seed rounds. Expect these exits to dry up as PE firms shore up their current investments, looking to turn profits on their portfolios at any cost.

This means another post-Seed opportunity is farther away.

Series A Super-Crunch

I feel like every other year we hear about the “Series A Crunch” meaning there’s not enough Series A capital to fill the appetites of all the startups looking for it. I would argue this is normal, to be expected, and even healthy. If there is too much capital in the market then it gets spent wildly and deployed poorly.

With more Seed funds than ever before in the last three years, and Seed funding still available, there are more Seed-stage startups than ever before. Series A investors have raised the bar for what they will invest in, and sub-$50MM exits to PE roll-ups are  all but off the table. With the goalposts farther away, the available seed money will dry up in the next two years. What’s worse, it may be harder to raise new venture funds, meaning less funding in the Seed phase in 2022 and beyond (but that’s our problem to worry about, not yours).

As much as I think the phrase is overused, I think we’re coming into a Series A crunch like has never been seen before. Post-Seed financing is going to be extremely competitive, harder to achieve, and leave many companies dead or stagnating. This is the Series A Super-Crunch.

Ready For Your Seed 4 Round?

What do you do to survive the next two years?

Get ready to raise Seed 2, Seed 3, Seed 4, whatever it takes to keep the lights on and the business growing. To do this, you must keep your investors close. If you’re not sending quarterly updates (monthly or bi-monthly if you can manage it) to all investors, start this right now. You’ll need those investors in the next two years.

Follow up with your current investors to know and understand their follow-on strategy and allocation. Some questions to consider: Do they have a portion of the fund reserved for current portfolio companies? Did they raise or lower that percentage? How much is left in their reserves? What are their criteria for investing in follow-ons?

Seed Is a Community

The thing that I love about Seed phase investing (note: “phase” not “stage” is intentional) is that it’s a community activity, as opposed to Seriesed stage investing which can be competitive between firms. At the Seed phase, no one firm has enough capital to take a whole round, so we all put our chips in together. The downside is that this can lead to group-think or herd mentality (if you’ve never heard my psychology of fundraising talk, get on my calendar and I’ll share with you). The upside is that we, Seed funds, are accustomed to working together. As you’re talking with your current investors, ask for referrals to funds that are not on your cap table.

The (arguably misunderstood) maxim, “a startup should always be fundraising,” is especially true in this environment. I think people take that too literally as though the CEO should always have a term sheet in hand. A better way to think of that is is to keep investor networking as part of your regular activities. It’s not an all-out-effort, but just a regular soft-circling via updates and check-ins. Just a little bit of time spent building new relationships now will pay dividends later.

Alternative Capital

This last item may not be a fit for everyone. Because we invested in your business we want to live in a world where your solution exists, serves its customers, and employs good people, I’m sharing some information about alternative capital. The rise of revenue-based financing in recent years is incredible. I believe this capital structure has great potential for businesses that are not a fit for venture capital. It has also historically been a bridge between venture rounds. It may be worth considering if this is a fit for your business in the coming months. Here is a list from TechCrunch with some of these firms. And I recently heard a podcast featuring Clearbanc that made some compelling points for their model. And Lighter Capital is also worth checking out as their model is specifically built to work between venture rounds.

The Things You’re Already Sort Of Doing

You’ve made some cuts. You’ve adjusted projections. You’ve froze hiring or prepared to balance it against matching growth. You’re doing the things. It may not be enough. I heard a great podcast the other day from a founder who had startups in both previous downturns and is a CEO of a fund-turned-startup right now. Dave Balter, CEO of Flipside Crypto is interviewed here. The big lesson I took away: when it comes time to cut, prepare to cut deep.

Breathe Through Your Ears

I’ll leave you with this one last bit of wisdom I heard somewhere along the way. A young distance runner asked her coach, “should we breathe through our mouth or our nose?” The coach responded, “breathe through your mouth, through your nose, breathe through your ears for all I care, just get oxygen into your system.”

Cash is the oxygen of business. Breathe through your ears for all we care, just get it into your system,

Letting the Air out of the Bull Run Bus

By Universe

Coronavirus is everywhere. Well, if you listened to the news you’d think that it was everywhere: in every home, on every corner, in every convention center, and on every flight. In truth, it’s still spreading, slowly, but spreading indeed. At the time of writing this, it is not an epidemic in the country. But you think it was based on the reaction of the general populous. The reaction to COVID-19 is spreading like… like a virus, only worse: a virus that can transmit from one person to one million in a single tweet.

Conference Cancellations

The first chip to fall in what could be the economic downturn of 2020 was Mobile World Congress. Driven by fears of contagion, a couple of big organizations pulled out. And then the rest of the world pulled out. So the organizers canceled it.

Next up, the corporate conferences started cancelling. Facebook. Adobe. Google. Microsoft. IBM. More. And then Expo West Natural Foods had major players pull out, followed by the entire conference cancelling. Then HIMSS.

Corporations are restricting travel. Mayors are declaring pre-emptive emergencies. (Does that defeat the purpose of declaring a state of emergency?)

And the 400,000 people that go to SXSW are holding their breath as they watch the mayor of Austin, the Austin City Council and SXSW organizers dance around the word “cancel” like it was forbidden fire. No one wants to be the one to cancel the event that brings $350+MM into the city each year.

Update 3/6 – they stopped dancing and the city cancelled SXSW.

All of this has me thinking about the economic impact to the country and the world.

Corporate Actions

First let’s unpack the corporate actions. Restricting travel and cancelling your own conference (that is purely a cost center) is a very rational thing for a company to do—not because of the health and safety concerns but because of the fiscal responsibility. The coronavirus provides the perfect scapegoat for saving a significant sum of money. Cutting your developer / marketer / influencer conference and saving $1-10MM in hard event costs “out of an abundance of caution” is a perfect excuse. Same with cutting down all but essential travel. This is a once-a-decade opportunity for big businesses to scale back costs without hurting employee morale, and you damn well better believe they’re going to take it.

With or without a SXSW, F8, MWC, Dreamforce or whatever your conference of choice is, corporations scaling back travel wil have ripple effects throughout the country. Those ripples alone are probably not enough to let the air out of the tires on the Bull Run Bus. Couple that cutback with media-fueled fears of large groups of people, and add in a solid dose of big businesses getting more restrictive with spending—done out of caution in case of an economic downturn—and we’ve got the making for an economic downturn.

The industries that are most exposed right now are anything reliant on travel, groups, or personal interaction. And then closely followed by consumer products, and its sister industry: advertising. But more important is the understanding that all industries are subject to belt tightening, and thus the most at-risk startups are those not mindful of their cash.

Drilling Down

My friend Eric Marcouliier on his website, says that the CEO has only 3 jobs: 1) sell the vision, 2) hire the best people, and 3) never run out of money. Right now, #3 is all that matters.

As the cases of the coronavirus spread and grow, the fear factor will only get worse. As I write this, my mom is going through chemo and has a compromised immune system. I worry about her, though I know she and my dad are taking precautions. I live 2000 miles away (CO to Pgh) but if I lived closer, I would be very careful about going over to see her. And I sure as heck wouldn’t go see her after coming home from SXSW (and yes I’m still going to SXSW) . And if I lived with her, I wouldn’t go to SXSW at all. I’m not worried about me getting coronavirus—if I get it, I’ll fight it off and recover because our bodies are built to fight viruses. She might not. How many people are having the same thoughts?

Let’s play this out on a larger scale. Corporations cut travel. Conferences are cancelled. General public cuts exposure to large groups of people. The country turns inward, online, and closes its doors. For every 1 person that gets sick, another 10,000 are paralyzed by fear. Schools are shutting down—preemptively or reactively. With children at home instead of at school many parents will be unable to go to work, which puts financial burdens on the lower and middle classes. Many of those people do not have the financial resources to withstand missing work. Household spending begins to dry up. The economic ripples begin turning into waves.

Travel industries and tourist locales are going to get hit hard this year. Retail is going to take it on the chin, again. Events–whether sports, concerts or conferences–will suffer. As these ripples out into the economy more people will become unemployed. Families will spend less, resulting in lower consumer spending, and that is a massive driver of our economy right now. When consumer spending falls, so falls the economy.

It doesn’t help that supply chains are getting disrupted right now—and I mean “disrupted” in the classic “breaking” sense not the startup “innovation” sense. With less stuff to buy and fewer bucks to buy it with, the secondary effects kick in: less advertising. Lower marketing budgets. Less dollars to go around in that industry. (Poor AdTech, can’t win in a bull market, going to get slaughtered in a bear market.)

Side bar: I can imagine an alternative scenario for adtech where everyone stays home and digital ads and digital video ads take off. This is with the added disclosure that I’m an investor in an awesome video ad tech startup, Brandzooka.

I digress.

Bull Run Bus

My belief is that the underlying business fundamentals of most businesses are strong. That is, the Bull Run Bus has been based on solid fundamentals and not the “eyeballs” of the late 90s. And as far as I know, there’s no financial manipulation happening by Wall Street as with the 2008 crash. Even better, the public market is not buying the “cult of the CEO” shit (WeWork, Uber) any more. My hope is that there is truly no funny business being done by bankers (whether of the fed or goldman variety) that has created unnecessary risk exposure beneath the surface.

The reason we’ve experienced an unprecedented bull run is because we continue to unlock human potential by replacing humans. When Edwin Hubble proved that other galaxies existed and the universe was unimaginably massive, he did so by sending the data of his observations to humans (mostly women) who computed the results using pencil, paper and slide rule. Human computers. (h/t to Answers with Joe) We now have all that computing power in our pockets, and more. That is unlocking human potential by replacing humans. That cycle is accelerating. For this reason, I’m a long term bull.

But even with solid fundamentals, as consumer spending dips, as consumer sentiment is driven by fear, and all these little ripples sync up turning into waves. Add in businesses curbing spending—starting with travel budgets being cut—and the economy will take a hit.

Advice for Startups

Startups, now is the time to take a hard look at your cash flows. The venture capital model is predicated on a company continually raising more capital at higher valuations in every subsequent round. The underlying message is: growth at all costs. That is certainly one strategy. Another strategy, and more fitting in down cycles, is to keep the lights on at all costs.

What will it take to stretch your runway between rounds from 12 months to 18 months? From 18 to 24? What do you do if your revenue is cut in half? What happens if you can’t raise at the next higher valuation? Who is prepared to take salary cuts? What projects need to be cut? How will you handle all of this as a leader? Now is the time to buckle down, figure this out, draft a plan, and be prepared to move quickly, nimbly.

It’s been fun, bull run. I’m a long-term bull, but I’m ready to ride the bear this year.

Turkey Hat

As Nassim Taleb said, “you can’t make a prediction without being a turkey somewhere.” We’ll see where I end up being a turkey…

Consumer goods
Physical retail
Marketing and advertising

Remote work enablement
Streaming services

Could go either way
Supply chain
On-demand economy
Digital advertising

Originally written Tuesday March 3, 2020. Updated Friday March 6, 2020.