My partners and I at NextView talk a lot about how fundraising is about finding the true believers rather than convincing the skeptics. The energy that it takes persuading someone who starts with a bias not to invest is much better suited searching for additional prospects who want to believe in what you’re building. We’ve observed it repeatedly in our portfolio as Founder/CEOs seek additional rounds of financing: the engaged skeptics just never quite get there, but the entrepreneurs who cast the nets wide enough find someone who believes.
Because of this learning, we counsel our seed companies when raising a Series A to run a full & synchronized process with a broad array of firm sizes, types, and shades to determine what profile will become believers… and the same recommendation is true for seed stage startups raising their first round of capital, institutional or not. It’s not until you have had a broad array of conversations are you able to tease out the profile of (and subsequently specific) firm(s) which will be attracted to your company.
There is a challenge with the “believer approach” mindset, however. At some point, if a company is unable to raise an additional round of capital after speaking with numerous potential funders, the market will have spoken. In these situations, there are strong diminishing returns to approaching a new source of capital once there is a reasonable conclusion that the round is in jeopardy. And with the focus on searching for a believer, there is risk in an entrepreneur (and existing investor-set) convincing themselves that going just a bit broader, initiating just one more conversation, speaking with just one more firm will a new (and better) result.
I’ve seen both outcomes in a prolonged “believer” search. Just when an entrepreneur had felt as though all options were exhausted, a bluebird firm appears to swoop in and lead a new (up) round of financing. But I’ve also seen entrepreneurs continue to slog it out with yet another umpteenth VC meeting when in reality those efforts were better served determining an alternative course of action.
How is a CEO to know if it’s time to pull the plug on fundraising or keep searching for that would-be believer out there?
Keep searching to find believer when:
- There have been numerous final full-partnership meetings at different firms that there’s the likelihood that another reaching the same point in the process will result in a different answer.
- The company has made substantial milestone progress since the start of the fundraising process.
- The company truly is disruptive and hard for investors to wrap head their around because it’s so different. (This one is the hardest to be accurately self-aware.)
It’s time to pull the plug when:
- The type of firms approached varied exhaustively by size, scope, profile, prestige, and other dimensions.
- The company has spoken with literally multiple dozens of VC firms.
- You’ve heard feedback that your startup is being perceived as “yet-another-XYZ” company (even if that perception is genuinely unfair).
- The fundraising process with almost all firms rarely proceeds past first or second meeting stage.
- The competitive landscape of the space you’re in is crowded or there’s a well-funded primary competitor (…VCs are having a tough time discerning your advantage over the (multitudes) of others).
- There is an unnecessary amount of time on VCs part spent in diligence on minutiae (financial models, sales pipeline forecasts) rather than discussion on big-picture direction.
- The prospect firms are qualified in that they “get” what you’re building and seem to understand the space or category, but still don’t believe.
- There is enough cash in the bank to make additional progress or accomplish specific milestones which will make the investment opportunity more attractive at a future date.
At the end of the day, lack of fundraising traction is due to either reasons which can be ultimately addressed (approach/strategy, positioning, traction/progress, etc.) or reasons which can’t be addressed (founding team DNA, market size perception, etc.). Timing can change the former, but only a believer can see the latter differently.
Recently, we surveyed our Boston-based NextView portfolio Founder/CEOs asking them about which service provider firms they’ve been using. The goal was to assemble data in order to share it back to our portfolio companies (especially the newer ones) so that they didn’t have to recreate the wheel in determining a short-list of firms to talk to when evaluating new options. Although these startups are very diverse businesses themselves, they face similar requirements (especially in that they’re currently all in the seed to Series B range of company stage). Plus, my partners and I saw entrepreneurs repeatedly starting from square-one each time, which just didn’t seem efficient if we could help in some small way.
And the results were pretty interesting, especially as they clustered with meaningful overlap among companies. But rather than just keep the info internal, wouldn’t it be more productive to publicly publish the aggregate results for the whole community? When we took the poll itself, one founder said: “This is a great idea. We would have loved to have it when we were getting started.” The following, then, is the list of service providers in Boston which are popular within the early-stage startups in our NextView Ventures portfolio:
CORPORATE LEGAL COUNSEL
- Tie for most popular: Mick Bain at WilmerHale
- Tie for most popular: John Chory at Latham Watkins
- David Broadwin and Gil Arie at FoleyHoag
- Jon Gworek at MBBP
- Jeff Engerman at Gunderson Dettmer
- Bill Schnoor at Goodwin Proctor
- Michelle Basil at Nutter McClennen & Fish
HANDLING VARIOUS FINANCIAL MATTERS: OUTSOURCED BOOKKEEPING / (TAX) ACCOUNTING / CFO-FOR-HIRE
- Calvin Wilder at SmartBooks
- Supporting Strategies
- Boston Finex Group
- Eric Collard
- Tom Trometer
- Scott Goodwin at Wolf & Co.
- Andrew Goloboy
PAYROLL & BENEFITS
OTHER COMPLETELY UNPROMPTED MULTIPLE PROACTIVE SHOUT-OUTS
- Silicon Valley Bank for banking was most popular by far
- Bruce McDougall at WGA and EBS Capstone for insurance
- Scalar Analytics and SVB for 409a valuations
HUGE DISCLAIMER. While informative, this data is merely a reflection of only the firms who our portfolio companies work with directly as shared in a non-exhaustive quick four-question survey… so of course there is meaningful selection bias and missing data-points here. It’s by no means inclusive of all of the options available in the local ecosystem (i.e. there are many high-quality people and firms who aren’t on this list), and by no means was it intended to be comprehensive. Moreover, we at NextView Ventures certainly ourselves don’t make any decisions on who our portfolio companies use… each and every one them evaluates their options individually.
Mobile is changing the world.
As a startup-tech industry, we’ve been talking about it coming right around the corner for well over a decade. And now, it’s actually happening. Really happening.
I am not going to spend time in a blog post detailing figures & charts about this mega-trend which will astound you, despite the fact that intellectually you know it is happening. I’ll leave that to the analysts. And more analysts. And our friends over at HubSpot.
For us at NextView Ventures, we see this transitioning happening first-hand in our portfolio. Not just in our “mobile-first” companies, but all of them. And we’re thematically making new investments in startups which ride this momentous wave, like our two most-recently announced ones in Sunrise and tapCommerce.
However, the consistent challenge which we’re observing in the mobile ecosystem is acquiring customer distribution. End-user adoption is always tricky, but on mobile (with the added friction of native apps and technical challenges like the lack of cookies) it’s even more difficult.
So in putting together the program for the upcoming Web Innovators Group event on this Monday June 24th, I wanted to add something beyond the typical format which addressed this issue. As it’s a salient one for any and all startups in our space. In addition to demos from two great Main Dish startups, Flightcar and Sold, I am excited that we have two absolutely great keynote speakers:
- Wayne Chang, Founder of Crashlytics, recently acquired by Twitter for $100M+.
- Micah Adler, Founder of Fiksu, Boston’s white-hot mobile app marketing startup.
Both Wayne and Micah know a thing or two about mobile distribution, to say the least… they’re masters at it. And they’re going to reveal their secrets to mobile growth during their talks.
Over the past eight years, I have thoroughly enjoyed organizing the Web Innovators Group. What started as an impromptu gathering of a dozen people at a bar in Central Square in Cambridge has now grown up to a quarterly event drawing nearly a thousand people from the entrepreneurial ecosystem. It seems like most people in the community have been once or twice over the years, and there’s a devoted following of regular attendees. Given the special speakers and format for this upcoming one on Monday, it’s one worth coming back for or checking out for the first time. I know that I’ll see all of the friendly faces of our regular attendees there.
Plan to attend by signing up on our registration page so we can appropriately size the seating in the ballroom.
It isn’t a secret that there is a huge platform shift underway as consumers transition from the desktop web to mobile + tablet devices. Yet when you look at actual the figures, it’s truly astounding: this year mobile e-commerce sales will be triple that of what it was just a short time ago in 2011, with tablets driving much of that spending growth. Mobile is literally eating the world. For consumers, the process and experience of shopping on these devices is fundamentally different than on the desktop. So consequently for retailers, attracting and retaining customers is an inherently different challenge. And it’s further exasperated by technical obstacles (e.g. lack of cookies) and unique decision tradeoffs (e.g. native app vs. mobile web) which weren’t issues on the previous generation’s platform.
Our latest investment at NextView Ventures, tapCommerce, is dedicated to helping mobile brands to deliver customers, revenue, and ROI across mobile devices. As an ad-tech company, tapCommerce provides e-retailers with an array of services for acquiring and keeping customers on the mobile + tablet platform… and tapCommerce’s website does much more justice to their offering than my short blog post can.
As we were spending more with the company, all three of us at NextView introduced Founder/CEO Brian Long to e-retailer contacts in our network to socialize their offering. The feedback which we received wasn’t just positive – they all wanted to immediately become customers! Unsurprisingly, over just a few short months since founding, tapCommerce has started to work with commerce brands with very sophisticated mobile marketing chops, like JackThreads, BustedTees, and 1-800-FLOWERS.COM.
What really compelled us about making an investment, however, was what we learned about the team. With many of the co-founders having worked together at places like CNET, Pontiflex, and Demdex; on paper it was the right mix of mobile, ad-tech, and online media DNA. But what we heard from people who had worked with them in the past was resoundingly positive… my favorite was one reference who called them “the Real Deal.”
Today tapCommerce announced its $1.2M round of seed financing, which included NextView among our co-investors RRE Ventures, ENIAC Ventures, and Metamorphic Ventures. More importantly, the company is unveiling its mobile retargeting solution and recent partnerships with leading mobile commerce brands. We’re excited to be a small part of something big by investing in tapCommerce, as capturing customers stampeding to mobile certainly is the Real Deal.
Compared to most other areas of finance, venture capital is practiced as more of an art, as opposed to a science. For that reason, it’s often said that VCs learn the business best through an apprenticeship model, under the wing of a more experienced pro. The art of venture capital also means that for entrepreneurs raising it, there isn’t one definitive playbook which can be used as a guide. Rather, over time, a series of collective experiences has solidified into a set of conventional wisdom which is shared repeatedly. Many common rules of the thumb are absolutely true (maximize the outcome of a fundraising process by approaching many firms simultaneously; deals should accelerate towards a close), but there are a handful of ones which just aren’t so:
MYTH: Entrepreneurs need a “warm introduction” to a venture capitalist to get a meeting.
REALITY: A warm introduction is neither necessary nor sufficient to get a meeting with a VC. What really matters is getting a VC’s attention. A truly “strong trusted endorsement” will do so, but that’s much harder to obtain than just a warm introduction. Otherwise, what I’d call a “credible introduction” is sufficient provided there’s also an additional piece of information (key founder background, specific space, etc.) It doesn’t matter how well the referrer is known, how “warm” it is, as long as it’s credible. The exception is if the referral is coming from a trusted inner circle and it’s a meaningful recommendation, not just an intro.
MYTH: VC’s need 20% ownership in their investments to make money.
REALITY: VC ownership targets depend on many factors and aren’t set in stone. The myth has been discussed and discredited in blogs for years, yet it continues to persist. And it manifests itself in pernicious ways. To make money, VCs should aim to have meaningful target ownership in their portfolio investments, but 20% is by no means some kind of magic number. The impact of a single investment on a fund depends on ownership percentage, as well as the fund size and the portfolio size (i.e. number of investments). A larger fund will want to have larger ownership targets than a smaller one for any given exit outcome to make an impact (… even larger than 20% for mega-funds). A seed fund with fewer investments will require smaller ownership than one with a broad portfolio to make the same impact. Entrepreneurs should remember that while these targets are real, they’re just that – targets. VCs who swear publicly that they’ll never make an investment with less than 20% ownership show up on cap tables in the teens… the 20% pronouncements are just posturing for negotiation.
MYTH: Goal of entrepreneur’s VC fundraising is a term sheet.
REALITY: Goal of an entrepreneur’s VC fundraising should be a closed investment, which includes both partnership conviction and an agreement of key terms. My recent blog post digs into these details.
MYTH: Venture capitalists are looking to replace founders with “their guys.”
REALITY: The earlier-stage an investment is for a venture firm, the more the bet is on the team, the more reticent they are to want to change the core DNA of the company. (The caveat here is for later-stage venture investments, the Founder/CEO role is sometimes seen by investors as a hired role which is currently being held by someone who has been there since inception but doesn’t need to persist indefinitely.) However, any early stage venture capitalist knows that many of the most transformative companies (read: profitable investments) in history are those which are founder-led throughout. At the early stages, the primary investment thesis rests on the team, rather than the idea or market (which are less unique and more easily fungible). When a VC backs a founding team, she’s doing just that, backing a founding team.
MYTHS: VCs add no value -or- VCs add indispensable value.
REALITY: Common polar viewpoints of either venture capitalists being literally useless beyond the cash they invest or VCs solely transforming their portfolio companies are vastly exaggerated – the truth is always somewhere in between. Even the most elementary venture capitalist has the privilege of serving on boards of a number of startups. That set of experiences alone provides a unique perspective about companies facing similar challenges which adds constructive diversity to board room discussions. More importantly, a handful of VCs are indeed truly engaged supportive partners with entrepreneurs in building their businesses. They contribute in ways from opening their personal networks to providing counsel during important strategic decisions. But hyperbolized claims about “platform offerings” replacing key team functions or the ultimate success of a startup hinging on an individual VC’s contributions are vastly overstated.
MYTH: Entrepreneurs should avoid larger VCs in seed rounds because of “signaling risk.”
REALITY: Larger VCs in seed rounds do indeed alter dynamics of future financings, but not always for the worse. Although the negative signal potential of a larger VC which participated in a seed round not continuing forward can damage the prospects of raising a subsequent round, there are both benefits to their participation and ways to mitigate those effects. A recent CB Insight study concluded that the highest follow-on rate occurred when BOTH a multi-stage VC AND seed VC participated in a seed round.
MYTH: The venture capital model is broken.
REALITY: Venture capital is a business driven by asymmetric outcomes and therefore asymmetric winners. People are accustomed to normal distributions, as they’re both intuitive and commonplace. Along many dimensions, the structure of venture capital is anything but normally distributed. Most entrepreneurs who seek venture financing don’t receive it, yet for the ones who do there is immense competition from multiple sources vying to invest. Most entrepreneurs who raise venture aren’t successful, yet those who are, are wildly. Typically one to three of these winners within a VC’s portfolio significantly drive overall fund returns, not the median investment set. And those winners aren’t normally distributed across firms and funds, so as an “asset class” VC performs poorly. But within the space, there are entrepreneurs, VCs, and LPs who all benefit… just not on average. Rather, the distribution of everything in VC is asymmetric, not broken.