Like a lot of students, I went into business school a decade ago with a set plan to start a company coming straight after graduation in co-founding an internet startup (… again). During the following two years I did a number of things which prepared me for that endeavor, but then also in retrospect, I completely missed out on a number of opportunities and valuable resources immediately in front of me which I didn’t recognize at the time. My alternative working title for this post was: “Eight things I kind of knew and only mostly followed as an entrepreneur during b-school.” My own circuitous path graduating a couple years later intentionally without a job (see bullet #1) eventually led me onto the venture capital investing side of startups, but I still regret not fully taking advantage of the two years that only a business school environment (and calling card) can provide. Recognizing the academic year is starting now for MBAs (as well as all other entrepreneurial-minded students, for that matter), I wanted to articulate a set of recommendations for b-school students looking to start a company immediately after graduation:
- Commit to graduating without a job. It’s a challenging leap of faith to take, but entrepreneurship requires a full all-in effort. If it’s there’s an irresistible urge to hedge a bit in exploring alternative paths or engage “just a bit” in on-campus recruiting for traditional roles, then it’s better to fully pursue one of those routes (at least for now) than be distracted by an entrepreneurial pursuit which won’t materialize.
- Master the coursework basics, but then develop soft-skills rather than specialized ones. Part of the benefit of a generalized MBA program is developing a broad fundamental skillset across many areas of functional expertise, from finance to marketing, and everything in between. After those core skills are developed, however, it’s more advantageous to spend additional classtime developing higher-level softer skillsets which will be used throughout the entrepreneurial process rather than deeper point-solution “hard” expertise which can be hired or learned on-the-job as needed (e.g. take Interpersonal Dynamics not Global Financial Reporting.)
- Take classes from the best “star” professors. You’re paying quite a bit of money for this education, and the different between star instructors and the solid overflow ones is step-function not incremental. For example, Irv Grousbeck and Mark Leslie at the Stanford GSB fundamentally changed my thinking about life and business, and unsurprisingly Felda Hardymon has the reputation for doing the same at HBS. Regardless of school, there are always the premier professors. Use your entrepreneurial drive to go around “the system” to get into those specific classes – beg, borrow, and steal to do so. Camp out at their offices. Or just show up for the classes and literally take the course twice, once with the star (unofficially) and the “standard other” instructor officially. It’s worth it. Really.
- Go outside the business school to meet co-founders. Business schools are very insular islands, but they’re surrounded by an ocean of students in all disciplines. Your developed skillset won’t be much different from your immediate classmates’, but it certainly will be from someone in engineering or computer science. “Recruit” your co-founders there; it’s more difficult, but that’s the point. Diverse thinking will create better thinking.
- Go off-campus with your student ID. Your “student” calling card immediately disarms and can open all sorts of doors which won’t be as inviting the second you have a diploma in hand. Proactively and persistently reaching out to people directly who could add insight and credibility, as well as potentially initiate a process for company-making deals, for your startup. In our NextView Ventures portfolio, Eliot Buchanan (Founder CEO of Plastiq) was the master of this approach and was able to bring on high-profile partners (think: Mastercard) to his business before even graduating from undergrad!
- Immerse yourself in domain to develop authentic idea. Rather than whiteboarding different potential business ideas, think about your own previous work experiences to solve problems for constituents in that business which you know first-hand. If nothing comes out of that exercise, spend time truly immersing yourself in a specific industry or domain.
- Do what you’re classmates are not. MBAs are notorious for sheep-herding towards a particular category of startups (recently, daily deals and online new e-retailing). Aim for the upper right quadrant on the the consensus/non-consensus vs. right/wrong 2×2 matrix and develop a (hopefully correct) thesis that’s not following a common assumption.
- Take a summer internship to hone expertise or a functional skillset, NOT for resume padding. Once you start a company, nobody will care what you did for ten weeks one summer. Really. But the chance to just drop into a company and industry for a couple months, without any strings attached, can help develop real knowledge and facilitate connections. For example, in the NextView Ventures portfolio, Fred Shilmover worked at Salesforce.com before starting SaaS-based InsightSquared straight out of school… and now Salesforce.com is an investor in the company, too.
- Find yourself. Taking two years out of the workforce before fully pursuing an entrepreneurial endeavor grants a luxurious amount of time for self-reflection. Utilizing this time to better recognize and appreciate not just your strengths and weaknesses, but also your underlying motivations and intentions, will help prepare you for the many challenges of starting a company.
You’ve just closed your seed round. Other than starting to build, hire, and take over the world, there are a bunch of mundane things to do right away. The following is a first pass at a checklist of items for Founder CEOs to take care of in the first couple weeks after they’ve closed their initial round of seed funding.
- Figure out your PR strategy for announcing the round to get your plan in order.
- Remember that a number of reporters scan Form D filings for fundings which include notable venture firms in order to preempt funding “scoops”; talk to your legal counsel about the timing of your own filing.
Communications with New Board & Investors
- Ensure all of your investors have all legal documentation of the round, including an electronic version of the final cap table.
- Figure out a Board of Directors meeting schedule & cadence acceptable to everyone joining in person. Publish dates & times in advance for the next nine months so it’s set in everyone’s calendar in order to avoid the hassle of coordinating scheduling multiple parties every month or two.
- Proactively solicit input to create a board deck template and metrics dashboard to present at the first Board Meeting, so that you’re able to set a strong in-control tone.
Foundation for New Employee Hires
- Formulate and socialize with the Board acceptable compensation bands (both salary and equity options) for new employees. This best-practice will help set expectations all around about the compensation-level for hiring, so that there will be less need to consult the Board on standard hires, only for executives which are exceptions.
- Hire a firm to conduct a 409A valuation to set a strike price for your employee stock options, which needs to be at or above “fair market” value.
- Explore HR/healthcare/payroll options… as it’s entirely likely you’ve held off formalizing to-date but now will need these in place for attracting and hiring employees.
- Obtain Directors & Officers insurance; you and your fellow Directors want it, and your docs may necessitate it.
- Switch to more than just a bookeeping firm (or upgrade from merely Quickbooks); instead engage an accounting firm so that you don’t have to think/worry about it down the line. But a full time CFO and even a CFO-for-hire may overkill at this point.
- Send a personalized thank you note to the half-dozen people outside the company who helped you during the fundraising process.
- Take the whole company (presumably pretty small at this point) out for a Thursday night drink – you have a lot of work ahead of you but it’s worth it to celebrate together in achieving this first fundraising milestone of many to come.
Please leave additional suggestions in the comments, and if there’s a critical mass of content, I’ll likely repost the blog in the future.
I’ve always wondered why funding begins with fun. Those three letters. F. U. N. Fun. For entrepreneurs, seeking seed capital means meeting with numerous VC firms and sometimes dozens of angels… fun? Telling the same pitch over and over again… taking time away from more immediately impactful endeavors like recruiting and customer development… the endless follow-ups and inevitable radio silence… fun? And then there’s hearing “no” constantly – perhaps that’s why funding ends in “ding,” as it’s the repetitious sound of hearing reasons for why not, instead of why.
Maybe fundraising isn’t supposed to be fun, after all. But that doesn’t mean it can’t be productive beyond obtaining the capital itself:
- Running a great fundraising process involves crafting real story and not just a pitch. This end-result can take additional time to develop, but having completed it, it can be beneficial in more than dealing with just potential investors. Having a crisp story about the vision behind a business can be leveraged multiple times with other constituents to effectively reach customers, partners, press, and even potential acquirers with the right communications message.
- Fundraising encompasses trial-by-fire circumstances which almost always necessitates professional development. Unless Sales just runs in the blood, running a fundraising process will naturally hone those skills. These soft-skills of persuasiveness undoubtedly make one a better leader.
- A process which is inherently about meeting people… provides an excuse to meet people. Fundraising is about evangelizing a vision. Along the way there will be encounters where the story resonates in conjunction with a real personal connection. Sometimes these people don’t become investors, but rather than quickly moving on, these people can be co-opted into useful allies to help in other ways. Introductions to customers, long-term advisors, business development partners can result from the fundraising process, as those early conversations turn into real relationships.
Yes, often the best part of fundraising is the end of it. That’s the fun part – getting back to spending 100% the time building a company. But there can real benefits that come out of a fundraising process if you’re proactively seeking them as a by-product beyond just adding cash to the bank account.
One Jackson is a new online children’s clothing retailer which is surprisingly fresh – all of its designs were created by independent designers and then curated with love from its community of parents. The results are high-quality fashionable creations at an affordable pricepoint – which look great and are uniquely different from mass clothing brands. Today the company announced that it has raised $2M from a number of investors including us at NextView Ventures. We’re of course are very excited about working with the team and what’s ahead for this company. For us, the investment is certainly fresh and newest in our portfolio, but it also feels familiar.
The company’s familiarity is along what we consider to be the three most important criteria for an investment in a seed-stage startup – team, market, and product:
- Team – Two of the co-founders were well-known to the NextView partnership years before a line of code was even written. CEO Anne Raimondi and my partner Rob were colleagues together at eBay in the early 2000’s before she went on the lead product and/or marketing at many household internet names like Zazzle, InsiderPages, and SurveyMonkey. Her co-founder and CTO Yee Lee worked with both my partner Lee Hower and myself (at PayPal and Venrock, respectively). And Board Member James Reinhart is already part of the NextView family, as CEO of portfolio company, thredUP.
- Market – Through our existing investment in the largest online consignment store for kids clothing, thredUP, which has begun to scale, we were already familiar with the children’s clothing market. Including how large it is – there is $15B spent on U.S. children’s apparel annually, and online retail sales overall are growing 10% year over year. And as a new parent myself, I have first-hand experienced the consumer opportunity for great clothes with fresh designs.
- Product – Lastly, what makes One Jackson unique is the source of the original clothing designs – a community of independent artisans. And while this design sourcing strategy is a unique approach to this category, at NextView we’re very familiar with, and have been actively pursuing investments that fit into a theme of a distributed creative workforce. At our portfolio company CustomMade, we’ve seen the power of a skilled artists community making everything from jewelry to furniture which delight the consumer. Similarly at GrabCAD, where CAD engineers collaborate and create in a community, the collective output has been remarkable. So given our experiences with these businesses which very much rhyme with One Jackson, the familiarity lead us to excitement about another company taking this social-enabled model to a different vertical.
Many of the inputs going into this investment were known to us at NextView. But the end result is something extraordinary, and beyond our expectations. The company has already quietly run a handful of design contests with spectacular results – one-of-a-kind clothing creations, some of which you can purchase right now as part of their initial back-to-school launch line. Through harnessing an intimate community of designers, and a broader one of parents to providing input on their favorite designs, One Jackson has already begun to create a crowd of loyal followers to their brand and unique children’s clothing. Including us here at NextView.
As more transparency to seed-round funding transaction details have emerged, especially with the advent of Angelist and accelerator programs (which both educate and even sometimes set terms & structure for graduating companies), I’ve noticed an increasing number of entrepreneurs signal pricing expectations much earlier in the seed fundraising process. By communicating pricing expectations with potential lead investors, I mean sharing either an “ask” or even stated floor for the pre-money valuation of the company (with a priced preferred round) or explicitly stating a valuation cap (for convertible note round). Sharing these expectations early in potential lead investor discussions fundamentally qualifies the conversations, but it also runs the risk of prematurely losing a potential financing partner or reducing options to maximize a financing process outcome.
Like any economic transaction, the pricing of a startup’s seed round ultimately depends on the equation of perceived supply (the quality of the team, product, & market) and demand (how many competitive alternatives there are to any one given funder, including non-consumption). In theory, there are three levels of pricing for an entrepreneur to potentially signal to a prospective investor:
- Lower than “market.” This approach is almost never a good idea. Although some investors will certainly recognize value in a startup which is raising at a modest valuation level, sharing this aspect as a feature to the investment (which I have seen) will likely result in the perception that the company is weak and undeserving of additional capital.
- “Market.” By overtly sharing that an entrepreneur is “looking for the best partner and will accept whatever the market dictates” -or- by stating a figure or range which falls within market, it sets the tone for the fundraising discussion about a collaborative process moving forward looking for a mutual fit.
- Above market. By definition, all entrepreneurs should think that their endeavor is truly exceptional. But, also by definition, that just can’t be the case. Directly stating a high valuation expectation up-front can, on the positive side for an entrepreneur, anchor the negotiations to a higher level (assuming that investor takes the leap of faith to invest). Setting a structure and price in advance can also expedite the negotiation process, especially when it’s with multiple parties. Yet stating a high valuation number early can risk unnecessarily disqualifying a potential investor because it can create the perception that a zone of possible agreement doesn’t exist. With finite time to spend on exploring new investments, a potential investor isn’t going to spend time on an opportunity where he doesn’t think a plausible scenario for him to participate exists.
The key to the calculus above is that an entrepreneur knows what the market range for his startup based on its current state, his ability to generate meaningful funding options, and the external funding landscape. I’ve observed frequently that situation #3 occurs not because an entrepreneur is savvy in negotiating towards a more favorable outcome, but because there was ignorance as to what the prevailing valuation rate is.
The challenge of early price signaling is further exasperated, as different seed funders are going to have varying degrees of sensitivity to pricing. Angels can be the most wildly unpredictable about how they’ll react to differing valuation levels. Probably the most price-sensitive seed investors I know are sophisticated individual angel investors. This handful of people is extremely and unabashedly cheap, as they’re fully self-aware of their role within the funding ecosystem and are accordingly systematically seeking to invest in startups at the lowest cost-basis possible. On the other end, I’ve seen the highest-priced seed rounds come from a syndicate of individual angel investors who were essentially price-insensitive (investing in a convertible note without a valuation cap). At the end of the day, this latter cohort is backing a particular entrepreneurial team and vision no matter what the financing circumstances.
Larger venture firms are probably next in line in terms of seed pricing (along decreasing variability), depending on what their stated (or implicit) seed strategy approach is. As a general rule, the more seed investments a firm of this profile makes per year, the less price sensitive they are. With an “option approach” to seed funding, larger firms worry less about ownership initially and more about just being investors in the startup to maximize pole position for later rounds of funding. Whereas, if the firm only makes a small select few seeds which it treats like a “normal investment,” the same filter for valuation typically applies for the seed rounds as it does for the firm’s later round investments.
Lastly, seed-focus venture firms are going to be least variable in valuation sensitivity. Fundamentally these firms are financially-driven with the seed round being either the or one of the few rounds of financing where they’re deploying their capital, so there is a bias to focus on pricing in the seed.
Regardless of profile and seed strategy, all investors just have differing philosophies about how to treat valuation. On side of the spectrum are those who believe that overall asymmetric returns will be derived from being an investor in the one exceptional company regardless of entry price, and on the other side are those who are especially cognizant of the exit market skewing towards moderate-sized outcomes and want to position their investments to be able to capitalize on that reality. Both profiles are valid because they’re both true; it’s a matter of how investors translate these factors into their own decision-making.
On one hand, sharing valuation expectations early can qualify an investor to ensure he is worth spending time with given their valuation philosophy. Also, if executed effectively, it can also set a positive direct tone towards all proceeding discussions. However, sharing valuation expectations too early can communicate that the search for investors is largely about price, not about finding a good partner for the business moving forward. It’s like opening a job interview by sharing salary requirements. So the communication may needlessly shy away some investors from the table who would otherwise be good partners. Over the course of a fundraising process, pricing expectations may shift (either downwards or even upwards given demand), and it’s challenging to re-open a conversation about the business when the dialog broke down early on over pricing expectations which have since changed.
Of course, as a funding conversation progresses from an initial to subsequent meetings, the topic of round structure and pricing become much more natural. A good investor relationship is born out of fundamental mutual interest in the startup itself, not the deal structure. So the foundation for that partnership begins with a discussion about the shared opportunity, not the details of the arrangement.