The "Series A Crunch" survivor's guide
Got a ton of feedback on my email from Christmas Day titled "There is no Series A crunch." But if headlines, and people's attention spans for them, allowed for completer arguments, the headline could have been expanded to: "There is no Series A crunch for startups with these characteristics."
Besides, headlines are best when they seduce you with only partial information. What's the fun of getting all the facts in one line and moving on with your life (like we're doing with the LAUNCH Ticker)?
Much of the feedback I've gotten over the past 48 hours came from both sides of the tables: founders and investors, and of course some bloggers and "social media experts." Of course, social media experts should be renamed "people who talk a magnitude more than their experience entitles them to," but I digress.
The following is specifically directed to founders who are not able to raise a Series A. If you're an investor, you can't read this.
Okay, founders, time for some #realtalk: If you can't raise a Series A, you've learned it's probably because of some combination of the following:
a) Your team lacks a track record. b) Your product execution is not competitive with other products investors are seeing. c) You lack product traction. d) The market you're addressing is not big or "important" enough. e) You're fishing in a recently poisoned pond (e.g., the deal space pioneered by Groupon). f) Your valuation doesn't match reality. g) Your burn is unjustified, scary, or lacks discipline. h) You lack clients.
How many of these do you have? Well, I can tell you that almost every startup I angel invest in has the majority of these at any given point in time. They're supposed to, after all, as you can't have a huge win if you're not willing to take a huge loss. In order to slay the dragon, you have to be willing to have the dragon eat you.
Heck, my four startups (Silicon Alley Reporter, Weblogs Inc, Mahalo, and ThisWeekIn) have had all of these qualities at different points in time. And that's great, because none -- yes, none of these things -- are permanent. We can even solve for your lack of a track record.
There are lots of little hacks to make these things work, and I'll give you each of them now.
a) Your team lacks a track record. No track record, no problem! You have three ways to fix this:
First, you can hire folks who do have a track record. How do you do this? You look at the successful version of yourself from the last cycle and hire from them. Building a next-generation LinkedIn? Well, find the folks who built LinkedIn or Spoke, or who worked at a major HR consulting firm and hire them.
Then you bring them to investor meetings and have them answer the question "Why did you join this company after having been at LinkedIn?" Just say in a meeting, "Hey Roelof, this is John Doe, and he spent four and a half years working in sales, and he is now joining our startup for half his pay rate.... John, can you tell Roelof what attracted you to our project?"
Second, if you can't afford these folks, make a "working advisory board." A working advisory board works like this: two-year deals, a half to full point depending on the person (sounds rich, I know), four people, and a standing monthly phone call (say 10 calls a year).
On that call you give them a quick update on the state of the business and then just tell them your biggest challenge and listen. They should speak for 50 of the 60 minutes, and your management team should shut up and just listen. Afterwards, your team should talk for another hour about what folks said, and if it applies. This will cost you 2 to 4 points, but it will give you a deep bench that actually adds value and earns their shares in your startup.
Finally, you can take the "connect the dots" approach, which is to give an update on key metrics every 60 to 90 days to investors you've met with before. Nothing pleases an investor like passing on an investment, being proven wrong by the team and being able to correct that error by buying shares. Mark Suster has the definitive pieces on betting on lines not dots on his excellent blog.
b) Your product execution is not competitive with other products investors are seeing. This is so easily solved it's silly. Investors, advertisers, and partners love shiny new objects -- so give them some!
First, go find a domain name you can buy that is 50 times better than the stupid, unprofessional one you sometimes have to live with when you're on a budget. For example, if you were building a bookmarking site and had del.icio.us, you would find out if delicious.com was available and get the price. Say it's for $250,000. Great! Now you can bring that fact to rich investors showing you know how to invest money wisely. For bonus points you could make a deal for $1,000 to have the option to buy the domain for the next six months at that price -- showing you know how to make deals and put together a frugal plan.
Second, take your ugly-ass site and hire a real designer -- a world class one -- to refresh it. Just a one-page refresh and you're done. Redoing your entire site might be $10,000 or $20,000. One page of your site? Maybe three to five days and $3,000.
Language: "Hey George Zachary, you've seen our crummy looking MVP. But I wanted to show you our new design and, well, boy...it's really exceeded our expectations. Here it is. Oh yeah, we have a killer domain and Twitter handle we're buying... You're not going to believe this, but we have inside.com and @inside!"
Sound crazy? Well, I can tell you that when I started explaining what my new project was and a) showed the iPad Mini design of Inside, b) told the story of how I got the inside.com domain (after 10 years of trying) for $60,000 and c) that I now had the @inside twitter handle, folks immediately started saying stuff like, "This is your best idea ever -- and I've heard ideas from you for the better part of two decades Jason."
Design = credibility. Branding (eg, domains, Twitter handles, etc.) = credibility.
c) You lack product traction. This is the hardest thing you've got on your plate. Hands down. The demo day "pump and dump" big metric push, where startups would buy traffic to build a hockey stick-ish chart, is coming to a close. Everyone knows how easy it is to buy $0.35 clicks and move the needle -- but that's as intelligent as putting lighter fluid on rocks.
What you want in the startup space, and on any good fire, is a solid and small base of kindling. Get a core group of users who love your product and with whom you regularly communicate. It might be only 10 or 50 people, but having this inside group and understanding what they’re thinking and how they’re using your product shows you understand the important organic steps of building a world-class brand.
If the founders are talking to the first 100 customers of Airbnb, Yammer, or Business Insider, they're going to know -- in large part -- what the next 1,000 or 10,000 or 100,000 will experience.
Language: "Hey Fred Wilson, thanks for taking the meeting. As you can see we have an awesome advisor team, an option to buy a great domain name that you could make happen, and a killer new design. Most importantly we did a Google+ Hangout with our top 10 users, and here is a copy of the video. Wait till you hear how excited they are about the product!"
You see what we're doing? After only doing a), b), and c) you've moved from "Series A roadkill" to the "for consideration" folder of a VC's Gmail.
d) The market you're addressing is not big or "important" enough. Many times a market doesn't even exist until someone makes something so compelling that it does. For example, the collaborative consumption movement -- lead by Getaround and Airbnb -- has created demand for a product that didn't exist before: renting your car and couch.
There was no way to figure out the "size" of this market except maybe to look at hotel rooms. However, it seems that Airbnb is not always replacing hotel rooms, but rather inspiring folks on a budget to take more trips -- and perhaps longer ones?
Same with Getaround. Folks might simply stay in the city and see a movie, but if a $30/day car is available, why not take a wine trip.
What was the market for apps before smartphones? Zero. Point. Zero. Sometimes markets manifest by the will power of product geniuses.
@Jack brought POS services to farmers markets where cash was king. Those vendors never thought they would have a service like @Square because a) the iPad didn't exist and b) the software didn't exist.
At least that's one way to get past the "too small a market" objection. Another is to say that you're going to expand into other markets -- but I supposed that is obvious.
e) You're fishing in a recently poisoned pond (e.g., the deal space pioneered by Groupon). What happens when you have a flash sale site after the fall of Groupon and Living Social? How do you get folks interested? Metrics, product, passion and performance, at least that's what worked for Jason Goldberg from Fab. Listen to this episode of TWIST where he talks about Fab's founding.
Also, remember that video services were DOA in 2000, but YouTube made them work due to Flash video, syndication, and falling bandwidth costs. What technology and market forces solve for previous failures?
Do you even know? You need to.
f) Your valuation doesn't match reality. Perhaps the biggest part of the Series A crunch is great expectations. If you've got a bunch of the problems on this list and folks don't think the ‘risk and reward’ is in balance, why not increase the reward?
Everyone is looking to do a $15 million to $20 million post in their Series A. Why not raise a $2 million series A at a $6 to $7 million post, if things are so bad out there? Undercut the market, get the best investors possible and prove that you deserve to survive winter.
Investors love a great deal, and the valuations are just brutal out there for investors.
g) Your burn is unjustified, scary, or lacks discipline. You need to look at your burn every month and ask yourself what expenses are pushing the business and product forward and which ones are legacy. Most entrepreneurs are slow to cut and fast to add costs -- when they should be doing the opposite.
I've always tried to run my startups with 18 months of cash/burn in the bank. This has worked exceptionally well for me, because it keeps me focused on the product, not the cliff. Having enough time to build intelligently is critical. Can you share office space? Can you rent extra desks for $500 each? Can you shut down some servers? Can your accounting person be three days a week?
Now, VCs are not going to care so much about this issue, but your runway is your chip stack, and as any poker player knows, it sucks to be short-stacked. VCs will appreciate efficiency, but they're not going to make an investment decision on it, unless it is really scary or shows you lack discipline/intelligence.
h) You lack clients. Clients who you love your product are the quickest way to close an A round. Cultivate deep relationships with them and get them to take surveys and share that data with your potential investors.
For example, asking them how much they would pay for your product if they built it themselves, what their total spend is in the category, or how much more they would pay for your product, are all great questions for your future VCs to see.
They also show you're not afraid of engaging clients deeply.
[Image Credit: wizetux on Flickr]