Category: entrepreneur

Lessons From MCA

On Friday Adam Yauch of the Beastie Boys died of cancer.  He was 47 years old.  In my case, the drag is that this is one of the bands that was just starting out when I was in college.  It is a stark reminder to me that the clock keeps ticking.  I guess were are reminded about that all of the time.

In this case there are a number of things worth recalling about the Beastie Boys when they came on the scene and learning from.

Foremost, the Beastie Boys were completely revolutionary.  A bunch of white guys fusing rock and rap – it almost didn’t make sense.  And yet they connected.  They did something completely original and found an emotional level that has resonated for more than three decades.  A lesson that completely translates into Entrepreneurship – be original, do something that gets to a base need – duh.

Maybe you don’t know this, or maybe you did – for the first couple years, the band couldn’t play a note. It took MCA and the boys a couple albums to acquire those chops.  They relied on producers, studio musicians and samples of other peoples music (which was hugely popular at the time).  As we translate this into Brooklyn Startup speak, I wouldn’t go as far as to say ‘no technology, no problem’, but I do think building a demo or a mobile app can be outsourced for a short time until technical talent is brought in house. Initially, (for some companies) that’s just not the most important part.

Let’s finally touch on talent.  I wouldn’t call them talentless, but come on, “you gotta fight for your right to party”?  And the truth is they weren’t exactly melodic. It sounds like kind of barking into a microphone.  They essentially made something out of nothing.  At first they did it by force of energy and enthusiasm.  They did it by perseverance.  They did it by hustle.  Then they backfilled. But the thing is… they did it.  They took a chance. They had a vision.  If you have a vision – now is the time because the clock keeps ticking.

And finally, the Beastie Boys were (and are) from Brooklyn.  They were proud of it.  They were the epitome of that gritty, tough, smart, working class and creative class that we often brag about today.  They are part of the identity of Brooklyn.  That’s plenty.

RIP MCA

Work Backwards

Sometimes I hear from entrepreneurs, “Well, we are not sure how much we want to raise.”

So the obvious thing is… have a little conviction.  Know your business.  Know your goals.  Know your needs.  If, as the founder of the business, you don’t know what you need, then I as the person funding the business for sure don’t know.  And by the way, my level of confidence in you just went down. Oh yeah… and why would you sell more of your company at a lower valuation than you absolutely had to?

Hopefully you wouldn’t.  What I can do is give a little guidance about how you should think about what you need.  Besides management bandwidth, the most important input (at the beginning) is cash.  So managing the business from one cash inflow to the next is reasonable.  Let’s take an example:

Let’s say that a company is going to raise a Seed round.  How much should they raise?  After the Seed round, the next cash input will be the Series A funding.  Logically, the company should raise enough money to merit a Series A funding plus a little cushion.

What merits a Series A funding?  There has been a lot written about what VCs expect in order to lead a Series A.  You can Google that.  Or better yet you can personally ask VCs as you cultivate relationships in advance of the first priced round.  You should be getting to know VCs well before hand.  So ask them what it will take to merit a Series A funding.  When the time is right to raise a Series A and you return with the list completed it will be that much harder for the VC to say ‘no’.

For the purpose of this example, a Series A would be merited if the company has a working beta product and proof that either a sufficient number or a sufficient quality of customers would be willing to pay for the product.  The backfill is that the market is large, in need of disruption and you have some competitive differentiation.  We will assume that this is the case.

Okay. The amount of the Seed funding is enough to get the company from where it is today to where it needs to go in order to merit a Series A, plus a little cushion.  How much time does that take?  How much rent?  How much labor?  How much infrastructure?  How much travel?  Budget everything plus 20% more, plus a little cushion.

That’s how much you should raise and not much more.

If a VC wants to give you more, think about how that moves the bar of what you need to accomplish.  Think about how that effects valuation and timing of the next cash input.  Make sure that this is acceptable and achievable.

Work backwards.

Laundry List

Now that I’ve been thinking about the Brooklyn Startup Scene for a while this is the list of what I’m going to try to do help push things forward:

1) I’m going to create a pitch deck about the New York startup environment highlighting its strategic advantages and strengths, opportunities as well as what still needs work.  Actually I’ve been working on this for a while (just slowly).  I’m going to post this pitch online and allow anyone to use it or modify it for their own purposes.  I think some perspective, some statistics and a little framework can be help in understanding why this environment is thriving right now.

One thing the pitch probably will not describe right now is how things feel.  I read a blog post the other day from an entrepreneur moving his startup back from SF.  He said the New York scene “feels like a movement”.  It’s one of those times when you can feel something happening and you just want to be a part of it.  I agree with that sentiment.  I hope that this is one of those special times that people will look back on and think ‘wow – that was a pivotal’.

2) I’m going to work to centralize some of the resources that are available.  I’ve recently heard from entrepreneurs that they didn’t know where to look to find office space or startup jobs in Brooklyn or where to go and what to read to get plugged in.  There are a lot of resources out there.  There are a lot of great companies that write interesting blogs.  There are a lot of great VCs that cater to startups at this level.  At the very least I’m going to create a couple lists of links on that can serve as a resource for people who are just getting their feet on the ground. Hopefully I can evolve this blog into a more centralized site that covers this type of stuff in more detail.  My revolutions are currently limited in that respect.

3) I’m going to try to figure out a way for the community to invest in itself.  What I’m thinking of is something like a Founders Fund.  Those that have been successful here, or those that are passionate (hate that word) about the Brooklyn Startup Community to  invest back into companies that startup in Brooklyn.  I’m thinking about seed stage investments and some mentoring and introductions to give some companies a boost.  A way to let these entrepreneurs know that the community is invested (no pun) in their success.  I haven’t fully figured this one out yet so I’ll let you know as I incubate this idea.

The three legged stool is: great entrepreneurs, great talent and capital.  If we can elevate the levels of these in the community we can continue to foster development.

Don’t get me wrong.  This kind of ground work is currently being laid in Brooklyn by a number of folks.  I want to contribute to it.  And while I’m on the subject, I would like you to contribute as well.  If you want to get involved, please reach out.  The reason for the ‘Laundry List’ is to start a dialog for those who can contribute.  Thank you.

Navigating Angel Groups

A seed round is often times a good idea either after a ‘friends and family’ raise or in place of it.  A seed round tends to have less strings attached.  People always say the clock is ticking once you have taken a Series A from a VC.  A seed round is serious, but typically you haven’t proven you idea can work – you are still kind of testing it. So often times it is just more appropriate.

One of the reasons Angel groups are a good source of seed funding is not because of their skill or professionalism but simply because of the concentrated access to self-identified investors that they provide. Finding 10 to 20 angels willing to write a check of, for example $25,000, from an entrepreneurs own network would probably take quite a bit of time, even if the ‘hit rate’ on a percentage basis might be higher. So the odds of raising a seed round of between $250,000 and $500,000 seem higher and additionally the time commitment of the entrepreneur is likely lower than in a 1:1 meeting scenario.

Conversely, the value of an Angel group to its members is that they get deal flow. More sources of deals means more investment choices and ought to mean better investments and better returns.  It actually doesn’t, but that’s a different blog post.  The point is that for an entrepreneur pitching to an Angel group is a competition.  Entrepreneurs may not be thinking about it this way but they should.

As an insider here are some hints that can help improve your odds of winning this competition:

1) Market to your audience.  That means know your audience and don’t try to use a one-size-fits-all pitch.  Simple right?  Apparently not always.  Check out the individual bios.  Ask what the groups other investments have been.  Meet with a member of the group 1:1 before hand to understand some of the quirky do’s and don’ts.  Chances are you’ll find out that the group is old and white and male.  That’s changing slowly, but it’s still true today.  That means keep the initial interface with the group at a high level. Don’t go diving into the intellectual property as some entrepreneurs are prone to doing.  Use analogies.  I’m not saying this crowd is simple – they are not!  They are not all that tech savvy especially across lots of categories.  Finally, plan for less presentation and more Q&A. Let the investor be in the driver seat.

2) Keep the message simple. If the presentation has a bunch of ‘eye charts’ or lot’s of builds, or even too many slides, that is a sign the message hasn’t been boiled down to its essence.  Ben Franklin once wrote a letter to a friend concluding it with something along the lines of  ”I’m sorry this correspondence is so long, it would have been short if I had more time to consider it.”  Essentially this means don’t brain dump!  Think about what is most important and how it is best said.

3) Find a champion within the group.  Let’s say you are one of 20 companies getting screened, one of 10 presenting to the Angel group and 1 of 3 that gets brought back for final investment consideration.  Think about how terrible those odds are.  Three opportunities to get nixed, lost in the shuffle, fallen through the crack or not properly remembered and considered.  I estimate that a good idea gets unknowingly screened out monthly.  So find a champion within the group. Get someone to help you keep your pitch alive by reminding the group about your business and why it is different and good.

4) Help find a lead investor. This one seems weird but it can be really helpful.  A bunch of times an Angel won’t be as good at valuing a startup or deciding on a term sheet.  If there is someone out there willing to set the terms and the valuation that accomplishes  two things: lets the group know that there is conventional wisdom that this is a good idea, and also helps make the investment decision easier for the rest of the investors by providing some guidelines about what the investment will look like.  Of course, finding a lead is the hard part, but Angel groups tend to be better at filling out the round than being in the driver seat.

I’ve seen a lot  of blogs that talk about how the deck should look and what the presentation style should be.  I think you should take that advice as well.  But, if you truly have a good idea for a business and you work the system I think your odds go way up.

D3 (DUMBO Demo Day)

I went to my first Demo Day in Brooklyn. It was a source of pride for me. It was sponsored by NYU-Poly Incubator (who else).

What I liked about it was probably what others in the audience liked. It had a less formal feel to it. These companies weren’t pitching to raise money. They were pitching to let people know what they are creating, and that they are hiring, and that anybody that wanted to be involved should get involved.

The companies that pitched were all Brooklyn companies (nice right?). They included:

Knodes – a social data analysis company. The CEO, Ron Williams, killed it as he laid out the company’s plans to build an infrastructure of users and developers around what the company is doing. As an ‘analytics guy’ I can see plenty to business models and I can’t wait to see which one is optimum.

Docracy – a crowd sourced document availability and management company. I first saw the co-founders John and Matt at Techcrunch Disrupt last summer when they were still fleshing out the idea and getting ready to take the leap away from project based work. It was nice to see the progress made as well as the roadmap for new services.

HowAboutWe – a venture backed dating and relationship site. The management presenters were just the right amount of quirky as they talked about the sign up process and challenges of national expansion.

I did miss one presentation, as I had to leave early.

All these three have successfully raised funds – Knodes has support from Quotidian Ventures, Docracy also has support from Quotidian Ventures as well as RRE and HowAboutWe has raised two sizable rounds from RRE and Khosla Ventures.

I though all the companies did a good job. The venture capitalist in me wanted to hear more about the business model and the challenges and opportunities for growth. But, at least so far, that is not the Brookyn way.  These guys seem to know that if they make something cool they will be able to take it to market.  And I’m sure I’ll get to ask my questions at some point.

I’m already looking forward to the next one!

Speed Dating – The Entrepreneurs Side

Back on February 7, 2012 I had just come from a pitch event where I was listening to entrepreneurs speed pitch their companies and I tried to provide advice to make life easier for an entrepreneur in the event she/he wants to attend an event like this.

The advice essentially boiled down to be concise and be conversant in both your company and your industry.  One of the entrepreneurs who attended that Funding Post event read my post and offered to provide his opinion of the process.  I suggested the following parameters for discussion…

  • Talk about what you were hoping to accomplish.
  • Talk about what you think you did accomplish?
  • Compare this, if possible, to other events you tried before.
  • Assess if this event was a good use of your time?
  • Discuss whether the Angels and VCs gave you actionable feedback?
  • Did you learn anything for next time?

The following guest post addressing the ‘Speed Dating’ topic from the perspective of the entrepreneur is from Ken Kiarash, Co-Founder MiiWee:

I am the co-founder of a start-up in NYC and wanted to share my experience of recently attending the NYC Venture Capital and Angel Showcase, sponsored by the FundingPost. I attended with a friend who was also looking to meet some VCs and Angel investors, to make connections with not only potential investors, but also other entrepreneurs as well. I have attended many such events in NYC and Silicon Valley, some smaller in size and more ‘intimate’ while others have been larger ‘social‘ events.

The event was generally well organized and easy to navigate, but there are a few things that both organizers and participants can do to meaningfully improve it. Let’s start with the registration and post-registration issues: The event’s site is very confusing and poorly organized/written. There were two types of tickets: 6-9PM cocktail reception for $135 or for $425, you would get a ticket to the reception plus an optional pitching workshop. Not only the information on Fundingpost’s site was confusing to decipher, but also my subsequent to communicate with them was just as confusing. I attended the evening reception, but found out that the afternoon ‘workshop’ session was well worth the additional cost due to ability to get a lot more face time with the VCs.

Regardless of which session you attended, from an entrepreneur’s perspective, there needs to be more clarity and transparency of what a particular VC fund and or Angel investor is interested in and what they won’t invest in. I spoke to a VC fund, that although I thought we would have a good connection through our alumni network, it ended up being a super-brief pitch, followed by ‘we don’t invest in consumer-oriented companies’, something that could have easily been avoided had they mentioned that in their bio or even on their site (I am not going to go into a tangential discussion of reviewing VC sites, but let’s just say most can do a lot better than the generic pages they have created from boilerplate templates!).

The fact that there were two reps from each fund made the line of eager entrepreneurs move a lot quicker, but there were a few tables with reps that were simply not ready for the crowd, including some who were too young and too inexperienced to handle the deluge of various ideas being thrown at them in the rapid-fire format. One firm had even decided to send two extremely junior reps who jointly listened to each and every individual, letting them pitch for 10 minutes or more, making it almost worthless to wait in line for your turn.

As frustrating as the fund-raising process may be, those seeking capital need to do a better job themselves. First and foremost, be prepared! You must do your homework before you get to these meetings. There were 37 funds represented at this event and we spent nearly two days researching each and every one of them. You should get to know who these VCs or Angel investors are, types of companies they invest in and see whether it is even worth your time to stand in line and pitch your idea. Some invest in very early stage ventures, some only do so after you have an established product and even generate some revenue, and others may only invest if you are in a particular city/state, etc. If you’re looking for small seed money, you may be better off spending your time and resources elsewhere.

Next, you must have a pitch deck ready for these events. If you don’t have one, Google is your friend: search, find, read many, and finally write one. The deck is not only something to give to the VCs/Angels but, just as importantly, should be used as a tool for you to crystalize your idea and be able to pitch it more efficiently. You only get a limited amount of time and if your deck is done properly (short and concise), you will be able to pitch your idea to any investor in under 2 minutes.

Finally, prepare to answer key questions, and if you have spent enough time preparing a good deck, you should have most of the generic topics that come up in a short ‘elevator’ pitch covered: What is your product? What is the problem you are trying to solve? Your solution, market size, competition, who is in your team, how do you make money, what do you need the money for, and lastly, how much do you need (hopefully you can answer this with a pre/post valuation as well, as it is a sensitive subject for many Angels)

If you need to, have a drink to calm your nerves, but keep it moderate and leave the hangover-inducing version to later at night when you need to deal with all the rejections. And generally, don’t forget to have a good time. Talk to as many people as you can. Introduce yourself to strangers and exchange cards, even if you don’t get to talk to them about your idea in detail. These events are probably as important for their networking opportunities as they are for meeting potential investors. Lastly, be prepared for lots of rejections, as they are extremely normal in the industry. If you TRULY believe in your idea, such dismissals should give you a sense of where you need to tweak your plan, whether it lacks management depth, execution issues, or the idea itself needs to be refined. Having said that, even you should recognize if an idea is a really bad one and cut your losses short.

Wishing you all a successful fundraising year… Ken Kiarash Co-Founder MiiWee

Thank you, Ken, for your perspective.  I think this is a sound perspective and good advice.

Venture For America

A little less than a month ago I blogged about Code For America.  Part two of that piece is  Venture For America.  It is a program for young, talented grads to spend 2 years in the trenches of a start-up with the goal that these graduates will become socialized and mobilized as entrepreneurs moving forward.  Instead of coding, VFA fellows are tasked with joining a startup. They’re guaranteed a salary of $32,000 to $38,000 anually, and at the end of a summer training program (this year to be held at Brown), they’re matched with startups around the country. Locations vary, but although VFA is based in New York, both NYC and SF were intentionally left off the list in lieu of cities that may have a more difficult time luring talent: think Cincinnatti, Detroit, and New Orleans.

There are some early success stories from this program.  If you want hands on and you are not named Gates or Zuckerberg (meaning you have the innate talent to drop out of Harvard and go on to found a multi-billion market cap company), this could be the way to go.

The upcoming deadline is February 20, 2012, so get on it!

Talent Shortage

The tech industry in DUMBO (Brooklyn) is growing fast.  But it could be growing faster.  Like a lot of places in the country seeking technology talent – the right skill sets are scare. US schools are not turning out enough engineers or programers.

A push by city officials to bring talent to NY is well documented.

  • Cornell University and Technion- Israel Institute of Technology won a New York City contest to build an engineering campus with a grant of land on Roosevelt Island and $100 million for infrastructure improvements.
  • NYU-Poly is working with New York City to get access to the MTA Headquarters on 130 Livingston Street here in Brooklyn to expand it’s engineering school.
  • The city has even organized an academy (high school) for software engineering.

Of course this won’t help solve the scarcity issue for years.  And by the time it has an impact, the problem is likely to be way bigger.

Computer software engineer employment is projected to grow by a whopping 32 percent between 2008 and 2018, representing much faster job growth than most other occupations in the U.S., according to the U.S. Bureau of Labor Statistics. For instance take my tech sector of choice – Big Data.  McKinsey Global Institute projects that the U.S. needs 140,000 to 190,000 more workers with “deep analytical” expertise and 1.5 million  more data-literate managers by 2015.  And that’s just a single data point.

But back to right here, right now.  The Business Improvement District in DUMBO says there are now 17 tech company’s trying to fill some 329 Web, app and gaming tech-related jobs.

Take Huge for example.  Their Washington Street headquarters has grown from eight employees 6 years ago to 350 today.  They currently have 50 open jobs. Or Wireless Generation, and educational-software company and one of DUMBO’s largest employers – who claim to have 150 openings.  DUMBO’s flagship company Etsy has 50 openings.

These businesses are just a few of the more than 65 startups operating in the five-block hub of digital office space in DUMBO.  Publicly acknowledged or not I would wager most of the rest are hiring as well – if they can find talented people.

To attract talent, companies are adding unique benefits to really good salaries.  Certainly they are allowing flexible hours and working remote.  I would argue that Brooklyn specifically and New York in general are good selling points in their own right.

My question to the blogosphere is “what does it take, these days, to get the right person?”  Please leave a comment.

Founders Card

By now most founders seem to know about this.  In case you don’t, this card (FoundersCard) seems like it makes good sense to me.  FoundersCard is a membership organization for entrepreneurs and innovators. Launched in January 2010 by Eric Kuhn, FoundersCard provides access to members-only networking events as well as access to travel, lifestyle, and business benefits. Membership, which offers opportunities for both personal and business use, provides Members access to more than 150 exclusive travel, lifestyle, and business brands such as American Airlines, W Hotels, Virgin Atlantic Airways, and Rackspace.  In addition, FoundersCard features a collection of opportunities with select emerging companies, generally founded/created by a FoundersCard Member.

BTW – you can use code FCLAW377 for 40% off the annual fees.

Speed Dating

Tonight I attended the NYC Venture Capital and Angel Showcase.  It is a much hyped event sponsored by Funding Post among others. I was one of the 37 angel and venture organizations that were there to hear short entrepreneur pitches.  Tonight in particular I was representing NY Angels.

My job was to spend a couple minutes with each entrepreneur to determine a reasonable business opportunity, a realistic view of the capital requirements and decide if there is a potential fit with The New York Angels.  If the answer to these 3 questions turned out to be ‘yes’ I needed to make sure that the entrepreneur was invited to put their information into Gust, (the portfolio management system many angel groups use) and given a proper screening by the broader angel group.

Here are my stats: in 80 minutes time I screened about 20 companies (about 4 mins. per).  Of those 20 companies, 4 were strong candidates, 2 were questionable and the remaining 14 were either not properly developed, not properly pitched, unrealistic or a bad fit.

One might expect that a 20% plus hit rate is pretty high, but in reality that is low.  The reason is that these entrepreneurs had to pay for the privilege of pitching investors.  That means they should have been bringing their ‘A’ game – or else they were wasting their money.  And if they had all been top-notch pitchers, chances are the hit rate would have been higher.

Here’s what I was looking for:

  • Concise description of the business – if the investor consistently interrupts you while describing the business you are not concise enough.
  • High level competitive differentiation.  In the world of ‘speed dating’, the answer should be “We are most differentiated by X”.  That’s it.  No more unless asked to elaborate.
  • How do you generate revenue?  This is not an answer that needs context.  Advertising. Subscriptions. Direct sales.  Then wait for a follow up.  Let the investor drive the conversation.  He/she knows what they have to find out to qualify an investment.
  • Back of the envelope math.  Be able to answer some financials like expected revenue this year, expected revenue next year and normalized gross margin and operating margin. The investor is just trying to get an idea of how profitable the company can be.
  • Most important: How much are you raising? Again, just answer the question.  The correct answer is, “we are raising $xxx,000 to build out our xyz.”  The incorrect answer is, “well that depends…” or “I’d like to know what you think”, or “I’m open to a conversation.” And it is absolutely not, “I’m not really raising right now.” As an entrepreneur, know what you want you to accomplish and the inputs required to do so.  Have a vision.

Of course there are many more potential question including:

  1. Tell me about the competition.
  2. How do you expect to exit?
  3. What’s the IP?
  4. etc.

But if an entrepreneur can’t perform strongly on the bigger questions above, the subsequent questions don’t matter.

What I find is the entrepreneur knows a ton about his business and wants to communicate everything.  This is not a situation where a brain-dump works in the entrepreneurs favor. Stay short and sweet and leave them wanting more.

Moral of the story… if you choose to speed date, be prepared to do it well enough to get asked for your digits!