Posts Tagged: Investor

The investor’s role in a founder’s three key priorities

It’s often said that a CEO should focus on three key things: Do I have the right people on the team? Are those people working on the right thing? And is there enough cash in the bank to keep the lights on?

The right investor should help a founder with all three of those questions:

1. Do I have the right people on the team?

The best investors are instrumental in helping founders recruit the perfect team. For key positions, they should jump in and pitch a candidate to join a portfolio company. Secondly, investors should spend enough time discussing hiring priorities with the CEO, as well as help craft target profiles for senior-level hires.

2. Is the team working on the right things?

An investor should serve as a critical sounding board during strategy discussions…Do we have the right strategy, are we focusing on the right priorities, are we growing fast enough (or maybe too fast), and when should we expand into other verticals or geographic territories? In those discussions, the best investors are great listeners and rather ask the right questions than provide all of the answers.

3.  Is there enough cash to keep the lights on?

Making important early introductions to follow-on investors is one of the best ways to make sure that a portfolio company will be in a good position to rase the next round of financing. Great investors have a large network to pull from and make very specific introductions.

When I first started out as an investor fresh from operating my own start-up (AbeBooks), I often focused on helping founders figure out operational details and processes. I’m sure I was somewhat helpful in these cases. But after years of experience, I’ve come to realize that I would have provided more value and my time would have been better spent by serving as the best possible sparring partner in these strategic matters.

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Investors need to actually use their portfolio products

PayPal President David Marcus recently stirred up the hornet’s nest with a memo scolding employees for not installing and using the PayPal app. In part, the email read: “Everyone at PayPal should use our products where available. That’s the only way we can make them better, and better.” (you can read the complete text of the email here). While Marcus’ memo touches on numerous high-level debates like passion vs. paycheck, there’s one important message for start-ups, managers, employees, and investors alike: Eat your own dog food.

Investors, really? Should an investor really be expected to use the 10, 15, or 20 products in his or her portfolio? I say absolutely. After all, a great product is the basis for a successful company and an investor who doesn’t understand, know, or use the product is most likely a sub-optimal sparring partner and advisor.

A PayPal spokesperson further clarified the message of the memo: “We really want to be driving the best customer experiences that are possible. And part of that is having every employee be the customer and utilize our services wherever you can, and if you see a problem, highlight it and tell people to get it fixed.”

As an investor, using a portfolio company is easier when dealing with consumer apps and companies. For example, I’m a regular, sometimes heavy, user of Frank & Oak, Indiegogo, Indochino, Escapio, Clarity, Smore, tindie, and Twenty20. My wife uses Julep and Chloe & Isabel.

It’s naturally tougher to be a user for business apps, particularly vertically-focused apps. For example, Figure 1 is a photo-sharing app for medical professionals and Clio offers practice management software for lawyers. And I’m neither a doctor nor a lawyer.

In these cases, the investor should at least sign up for the service to get a high level impression of the workflow and user experience. As a start-up founder, you should make it a priority to include product presentations in board meetings or schedule separate sessions to go through the product demos.

At the end of the day, the more hands that touch your product, the greater the opportunity to improve the user experience. And you don’t necessarily want to trust the opinion of advisors who have never used or tried your product.

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A good story is the key to any pitch

When it comes to putting together your pitch deck and preparing for an investor meeting, there are countless articles and advice you can refer to. For example, we have a list of articles on our Resources page (see under “Pitching”). And one of my favourite blog posts is Tomasz Tunguz’ “7 questions a startup should answer in their fund raising pitch.”

These types of articles do a great job of telling you what to cover, but they don’t necessarily dig into how to deliver your message. And let’s face it. Bullet points alone rarely inspire; it’s the way your pitch flows and how you unveil information that gets your investors and customers excited.

Each day we connect with multiple entrepreneurs. Without a doubt, the ones who stand out are the ones who share a great story. We are more engaged when we hear a narrative of events as opposed to a list of facts, because we immediately decode the words into something meaningful to us.

If storytelling can make or break a conversation, pitch, or demo, how do you make sure you are telling your story in the most compelling way possible? Here are a few tips:

1. Tell your organic story

Fifty start-ups may have a relatively similar business model, so what makes you and your team unique? As investors, we want to hear the back-story: how is it that you came to the idea for your product and startup? For example, were you looking to solve a pain point that you experienced firsthand? That’s a great validation of both the need for your product, as well as your understanding of the space.

In addition, tell us why you and your team will be the ones to solve the problem and transform the industry. Why are you passionate about this space? What do you know that others don’t? And what have you and your team learned along the way of building your startup?

2. Know your audience

Entrepreneurs often tell me that, “Every VC wants us to modify our deck and see different metrics.” That’s true: every investor will have their own focus and interests and a good storyteller knows how to cater the story to their audience.

Do some homework on each investor beforehand to see what makes them tick. I personally like data and one can easily find that out after spending a few minutes on Google or LinkedIn. If you can’t find any details on the investor ahead of time, start the meeting by letting the VC tell you about him or herself. Then, use your improv skills to describe your product in a way that s/he can personally relate with it.  Don’t make the mistake of assuming that the investor has experience with the pain point you are trying to solve.

3. Why, how, and what

There are 3 elements to your story…why, how, and what. “Why” is your motivation and vision. “How” is your plan to achieve the vision (aka, your roadmap). And “What” is the product itself. Great storytellers touch upon all 3 parts. It’s the “Why” part of the story that will inspire investors, teammates, and users, while the “What” grounds us to the reality of the goals at hand.

4. Find the balance between features and pipe dreams

Imagine an idea spectrum where on one end, the story is too small and on the other end, it is too big. You don’t want to paint too narrow of a picture where you’ll be perceived as a collection of features and specs instead of a company. On the other hand, good investors won’t take you seriously if you offer a naïve pipedream instead of a realistic goal.

A good storyteller can strike a balance by illustrating that their current product is an MVP with many opportunities to grow into the overarching vision.

5. Nail your one-sentence pitch

Conciseness is important. By the end of the pitch, investors should be able to describe your business in one sentence. You can accomplish this by crafting one sentence, key message, or tagline and weaving it throughout the presentation.

Be as original as possible. You don’t just want to be the stoppers that plug the holes of a leaky bucket. You want to be a new bucket. In addition, be cautious of using the “We are X for Y/This for That” taglines (i.e. “AirBnB for Boats”), since it’s hard for us to get excited about these comparisons. If you haven’t already read it, check out Fred Wilson’s recent blog post about this.

6. Open and close strong

As all good stories go, a pitch needs a strong opening to capture the audience’s attention right out of the gate. Come out with a lot of energy in the first few seconds. Most importantly, you’ll want a strong closing to bring everything around full circle. So much of investing is rooted in intuition. Think carefully about what you want the investor to feel as he or she leaves the meeting. Then, be sure your closing point does everything it can to foster this feeling.

Final thoughts

The perfect pitch doesn’t come naturally to anyone; it’s planned, practiced, and tweaked. Practice telling your story several times in front of different friends and colleagues. See which aspects resonate and where you start to lose their attention. When it comes to adjusting your pitch, use your best judgment: you want to be flexible and open to feedback, without straying too far from your vision.

 

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What makes a great investor?

As someone who is still relatively early in his investing career, I often think about what qualities set successful investors apart from the rest. Good investing doesn’t just happen. And while luck may help at times, it’s not the answer. Here are few key ingredients that I consider important for being a great investor:

Live in the future

Paul Graham advised start-ups to “Live in the future, then build what’s missing.” Once you’re living at the leading edge of a rapidly changing field, you’ll see things that are missing…challenges or frustrations that need to be solved. And, once these problems are solved, they’ll seem very obvious in retrospect. This same advice applies to investors as well. You can only create above-average returns if you invest in companies that are ahead of the mainstream.

Have a well-defined investment thesis

Fred Wilson once wrote, “So many folks in the venture capital business are sheep that just want to follow the herd. They are momentum investors purchasing highly illiquid investments. That is a recipe for disaster.”

In order to not follow the herd, you need a strong set of convictions to serve as the foundation for making bets, and then following through on them. For Version One, I’ve created a map of what particular areas we should focus on and where they’re going over the next few years. Then, I can evaluate each potential investment within the context of this map/thesis.

Stick with it

Not every investment is going to be wildly successful right away and one of the hardest things to do in the venture capital is hence to stick with a struggling investment. However, if you’re going to be successful as an investor, you need to realize that once you are in, you’re in. There’s no turning back, or ignoring a flailing start-up until it just goes away. Of course, it’s much easier to stick with your guns, if you’ve made the initial investment based on your own core principles/investment thesis, rather than simply reacting to market trends and current momentum (point three).

Be both a cheerleader and a critic

There will be times when your portfolio teams need an enthusiastic backer and a quick pep talk. Then, there are other times when honest, sometimes even harsh, feedback is necessary. I think an investor needs to be a start-up’s biggest cheerleader and their most honest critic. You can’t just be one or the other: praise without honesty are just empty words. Yet, a constant focus on the negative won’t generate the results you want either.

Remember who runs the company

Successful investors are usually active investors; they show up at board meetings, respond to emails and phone calls from the founders, and constantly think about the company and the ways they can help. However, the exact level of participation is a delicate balance; an investor should never cross the boundary of getting too involved. At the end of the day, the entrepreneurs run the company; the investor is an active bystander. Founders make the ultimate decisions; investors can only advise.

Those are the five essential ingredients that I’ve been thinking about lately. If you have other thoughts, share them in the comments below…

 

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How we can improve the odds of finding unicorns

It was my first day at Version One when I realized that finding “VC-fundable” startups would not be easy.  Aileen Lee, founder of Cowboy Ventures, posted a brilliant analysis on why VCs have to look for billion dollar companies (“unicorns”) to deliver acceptable returns, and how rare it is to invest in one: “The odds are somewhere between catching a foul ball at an MLB game and being struck by lightning in one’s lifetime.”

However, despite these kinds of odds, I’ve learned there are several things we can do to improve our chances of finding the elusive unicorns:

1.  Data helps filter through the noise.

With nearly 30,000 startups on AngelList, there’s a lot to sort through. Nowadays, we can learn virtually everything about a company online, from its tagline to founder backgrounds, fundraising history, current investors, and social media traction. However, while data is ubiquitous and free for the most part, it is also fragmented, inconsistent, and seemingly disparate. This makes it laboriously difficult to identify rising stars and make comparisons within a specific vertical.

Fortunately, web apps like Mattermark, DataFox, and PitchBook wrangle, clean and organize the data so that we can focus on analyzing it. We can whittle down those 30,000 companies to a more manageable number by filtering for business models, regions, state, co-investors, Twitter mentions, Facebook likes, LinkedIn connections, iTunes downloads, unique website visitors, and/or other criteria that align with our investment thesis.

2.  Be thesis-driven.

We are often asked what industries we invest in, but it is more important to have theses on business models that serve as strong filters. At Version One, we have 6 investment themes (and more to come – stay tuned):

  • Vertically integrated commerce.  Controlling the entire supply chain brings unique product lines directly to the consumer at lower prices and better margins.
  • Vertical SaaS.  This approach helps capture the market more quickly with lower CAC and capital requirements.
  • Online education.  Mobile and social product experiences are making learning more affordable, efficient, engaging and effective.
  • Hardware renaissance.  Numerous innovations (e.g. Raspberry Pi, Arduino, etc.) are making it easier to develop hardware products.  We are interested in platforms that power this space.
  • Mobile marketplaces.  The ubiquity of mobile makes it quicker and cheaper to connect buyers and sellers.
  • B2B marketplaces.  There has been a lot of focus on B2C marketplaces, but there are still tremendous opportunities left in the B2B space.

3.  Manage your time wisely.

We challenge ourselves to think about tools that we can use to organize and manage our meetings, events, pipeline and readings.  To reduce redundancy in deal flow, for instance, we collaborate online as much as possible with web apps like RelateIQ.  To consume content quickly, I am a power Feedly user and Twitter discoverer.

4.  Be kind and generous.

When most of your time involves working with others, perhaps the most important thing you can do is build genuine relationships.  Because every meeting is a learning opportunity, I make the effort to thank others for their time by being generous with my own.  With entrepreneurs, I try to provide thoughtful feedback, always remembering that they are hardworking individuals with the courage to build a company.  With colleagues, I take note of their interests and share articles or startups with them.

Also, in a world dependent on introductions, I often thank those who make them on my behalf.  For example, in addition to writing the common email line, “Thanks for the intro to Cassidy, David (moving you to bcc)”, I follow up with the “Davids” after meeting the “Cassidys” with notes like “Hi, David.  Thank you for connecting me with Cassidy.  I learned about x, y, and z from her.”  This is a tangible display of appreciation that helps keep me in mind for future connections and deals.

Since writing my blog post on “Why VC is a perfect fit for me” on my first day, I have enjoyed every moment of this work.  I owe this to everyone who has contributed to my learning.  Thank you.  Now to get back to looking for unicorns…