11 Reasons We Didn’t Invest in Your Company

11 Reasons We Didn’t Invest in Your Company

Phil Nadel, Sep 5, 2016.

Like most VCs, we often review dozens of deals each week. We have developed a funnel that enables us to quickly eliminate those that do not fit our general investment criteria (e.g. industry, stage, model).

The deals that survive this initial culling process are subjected to much greater scrutiny and due diligence. This process includes a thorough review of the deck, financial statements and projections; discussions with the founders, customers and other investors; and a review of third-party information relevant to the company, its product and industry. Companies are eliminated from further consideration during various stages of this process and, in the end, we ultimately invest in a small percentage of the deals we review.

When we decide not to invest in a company, we always take the time to explain to the founders the reasons for our decision. The purpose of this article is to provide a review of the 11 most common reasons why we choose not to invest in companies in hopes that some founders will find it helpful in improving their chances of raising capital.

#1 Lack of transparency/candor. If we detect that a founder is not being forthright, we immediately lose interest. Venture investing is based on relationships; being opaque makes for an inauspicious beginning of a relationship.

#2 Nothing proprietary/defensible. If a company doesn’t have something that is proprietary that makes it defensible against potential competitors, then its success will lead to its downfall.

What do I mean by that? Without a moat, the company’s success is easily replicable. The more success it has, the more competitors it will attract. But if it has a secret sauce — which could include technology, processes, knowledge, relationships, etc. — its odds of sustained growth are far greater. And while first-mover advantage is helpful in the early stages, it usually doesn’t mean much in the long run (e.g. Myspace).

#3 No proven, scalable paid marketing channels. We like to invest in companies where our capital can be used to fuel revenue growth. If a company has not yet identified cost-efficient marketing channels that are scalable, they are more likely to burn through our capital experimenting and testing to find them.

We prefer to invest in companies that have already done at least enough of this initial testing so they can use our investment to scale the channels that are working. And we have a strong preference for founders who intimately understand paid customer acquisition and don’t reply to our questions about growth by saying “We’re hiring a growth hacker.”

#4 Don’t know your Key Performance Indicators (KPIs). We find there is a direct correlation between the depth of a founder’s knowledge of the company’s KPIs and the company’s success.

First, founders must demonstrate they understand which metrics are important to their business. Second, they must demonstrate they are properly measuring and calculating those metrics. Finally, they must know which levers to pull to affect each KPI and which KPIs need to be tweaked for the business to succeed.

#5 Short runway. When we invest in a company, we like to see that it will have at least 12 months of post-close runway. Raising money requires a lot of time and effort and distracts founders from growing the business. We want the company to have adequate resources to enable the team to focus on growth without having to worry about quickly raising another round. Also, the next round becomes much easier to raise if a company has demonstrated 12 months of improving KPIs and growth.

To calculate post-close runway, founders must know the current cash burn and must have formulated detailed projections of how they will spend the funds they are raising and how much cash they will be burning each month post-close. This calculation can be done assuming: (1) zero revenue, (2) current revenue with zero growth or (3) reasonable revenue growth based on historical trends.

#6 TAM is too small. We often see companies that have innovative, sometimes ingenious, solutions to a problem faced by a relatively small group. For a company to achieve exit velocity, it needs to be addressing a large enough market to make its upside revenue potential meaningful to an acquirer. If a company can’t demonstrate to us that the size of the market that its solutions address is reasonable (for us, that is usually north of a $1 billion-per-year market), we usually pass.

#7 Pre-revenue or pre-ship. We find there is a disproportionate decrease in investment risk relative to the increase in valuation when a company makes its first sale. In other words, the risk decreases more than the valuation increases once a company graduates from pre-revenue to building and shipping a product for which someone is willing to pay. Thus, we think it prudent to invest after a company has made this first sale and has shown some early evidence of product-market fit.

#8 No vision. We like to invest in companies whose founders have a clear vision for how to grow the company to 100x its current size. While getting there will certainly require the company to deviate from this vision, not having a vision makes it infinitely more difficult. A North Star keeps founders on track, even in the craziest storms.

#9 Don’t intimately understand your competition. Companies often tell me “we have no competitors.” I generally find this difficult to believe and push back with “How is your target market currently solving the problem you intend to address? That’s your competition.”

Beyond this rudimentary knowledge, founders should thoroughly understand the solutions being offered by their competitors, which market segments they are addressing and how they are selling. A company’s potential customers will be comparing the company’s product against other available solutions, and sharp founders will have properly positioned the product for success.

Not being extremely knowledgeable about these other options and differentiating your product accordingly is a recipe for failure.

#10 Lopsided founding team. Products need to be built and products need to be sold. These tasks require vastly different skill sets that are rarely possessed by the same people. We prefer to see a founding team with experience in a variety of disciplines, from engineering and development to sales and marketing.

Having all disciplines baked in from the founding of a company helps ensure that it creates both great products and products that can be sold. Yes, companies can hire talent in areas in which they are deficient, but then that deficient area is not really part of the company’s DNA. Plus, it’s always preferred if the folks managing the hired hands have experience in the relevant area.

#11 No skin in the game. We want to see that founders are 100 percent dedicated to the company before we jump in. At a bare minimum, they need to be working full time on the business. Ideally, they have invested a relatively significant amount of their own money in the company, as well. Paul Graham wrote that once founders take steps such that it becomes “unthinkably humiliating to fail,” they quickly become “committed to fight to the death.” We agree.

This list is not exhaustive, but hopefully it gives founders a helpful checklist to make sure they are addressing some of the most common reasons why we (and probably other early-stage investors) pass on deals. And, by the way, if you’re doing all of these things right, we’d love to hear from you.

Read the original article by Phil Nadel here. Click on “Tiếng Việt” on the menu for the Vietnamese translation provided by 500 Startups Vietnam.

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San Francisco, CA 94103, USA

© 2010-2019 500 Startups

The Ideal Email Deck

The Ideal Email Deck

Since I wrote a post on how you’ll need multiple pitch decks, I’ve gotten a number of questions around what should go into them.

Today I want to spell out the ideal email deck – at least, ideal if you’re sending it to me. 🙂

Short & sweet
~5 slides is sufficient
Should be skimmable in 10-30 seconds; E.g.
Fonts/colors that are easy to read
Not too much text/content
Include your contact info

The purpose of your email deck is just to get a meeting. It’s not to try to convince me that I should invest. That comes later.

What should go into your 5 slides?

Your email deck should cover the basics. There isn’t a hard-and-fast rule around what “the basics” means. But, for most companies, it will cover something like this (not necessarily in this order):

  • Problem
  • Solution / Your Product
  • Traction / Your Unit Metrics
  • Team
  • Market

Problem – Interestingly, most people glance over this slide. But of all the slides, this is the one that is probably the most important to address and spend the most time on.

How you articulate the problem accomplishes a few things:

  • It gets me excited about your opportunity
  • It gives me a sense of how much you’ve thought about the problem / know what you’re talking about
  • It gives me a sense of your communication skills – your ability to articulate something complex into just 1-2 simple sentences

For example, one of 500 Startups’ portfolio companies called EnvoyNow does on-demand food delivery to the college market. Just when you thought you could not possibly invest in yet another on-demand food delivery company, they were convincing in articulating the problem. Simply: College students order a LOT of food, but existing on-demand delivery companies cannot locate and/or access on-campus locations including dormitories and specific buildings.

Their articulation of the problem not only is very specific and easy-to-grasp, but it also addresses the elephant in the room: there are so many existing on-demand food delivery companies – why would you need another one?

Solution – I see too many companies attempt to address all their features with this slide. Just make it simple. Follow the user experience. Step 1, step 2, step 3, voila!

Traction – Most companies who send me decks don’t include a traction slide. I think it’s because people are embarrassed that they are not very far along or they actually haven’t yet tested the waters.

First off, there’s nothing to be embarrassed by. I’m a seed investor – what would I expect? Any investor who is investing at the seed stage needs to be comfortable with the fact that there’s really not a whole lot of data at this stage, and if seed investors are not cool with this, they really should not be playing at this level.

Secondly, I think it’s important to understand what investors are looking for in this slide. I’m not looking for traction for traction-sake. Every company at this stage – regardless of whether they made $1k last month or $100k last month – is early and far far far away from being a billion dollar business. So, what I want to understand are your customer learnings.

If you are super duper early and don’t have meaningful revenue, show me what you’ve learned by testing the market. This is something that EVERY company should be able to do quickly even without a product.

What customer acquisition channels did you test?
Ads?
Cross-promotions?
What was the cost to

  • Get a signup?
  • Get a free user?
  • Get a paying user?

What has the retention been so far (if you know)?
What is the engagement?
Are people coming back everyday?
For how long?

If you don’t have a lot of information, at a minimum, you can tell me about your unit economics. I.e. What is happening w/ the few customers / signups you do have? What do those numbers look like right now?

At a bare bare bare minimum, everyone can create a coming-soon landing page and drive traffic to it and articulate the results for that. The traction slide needs to give me some idea that this is a product that people want and more importantly how badly.

If you are a post-seed company and you have quite a bit of data, graph your revenue (or users if you’re a pure-consumer company).

Note: please don’t graph cumulative revenue – this is a noob mistake! I understand that your numbers may not go up every month. In some cases, the time period of “months” may not make sense and you should slice and dice your data differently. For example, if you’re an adtech company, perhaps it might make sense to graph your results by quarter since budgets are on a quarterly basis for most ad buyers.

Tl;dr – tout your unit metrics. If you’re a post-seed company, I also want to see your data over time.

Team – You don’t need to list your whole team. Just the founders is sufficient. List only your notable advisors. If you/your co-founders have domain experience, definitely mention this on this slide. Also list out key accomplishments. This slide is fairly straightforward.

Market – For your market slide, you don’t need to do a crazy analysis on this slide. In fact, I would be ok with a slide with just one big number in the middle in size 108 font. E.g. “$5B market”. For me, I also don’t need it to be a $$$ number per se. It could be something like, “2B people suffer from X”. I just need to get a sense that this could be worth a lot AND GET CONVICTION.

If you are finding that investors do not have conviction about your market and are not open to meeting, you may need to re-position the problem (hence why that problem slide is so important) or find different investors to approach.

Lastly, in addition to these 5 slides, you’ll also want to make sure your contact information is on the slides. Decks do get forwarded around. For example, if let’s say someone sends me a deck for a fintech deal, I’m going to defer to one of my colleagues who specializes in that. You’ll want to make sure there’s a way for him to get in touch with you.

Fundraising is a nebulous process that I aim to make more transparent. To learn more secrets and tips, subscribe to my newsletter.

Read the original article by Elizabeth Yin here. Click on “Tiếng Việt” on the menu for the Vietnamese translation provided by 500 Startups Vietnam.

San Francisco
814 Mission St., 6th Floor
San Francisco, CA 94103, USA

© 2010-2019 500 Startups

The only 10 Slides You Need in a Pitch

The only 10 Slides You Need in a Pitch

The purpose of a pitch is to stimulate interest, not to cover every aspect of your startup and bludgeon your audience into submission. Your objective is to generate enough interest to get a second meeting.

Thus, the recommended number of slides for a pitch is ten. This impossibly low number forces you to concentrate on the absolute essentials. You can add a few more, but you should never exceed fifteen slides – the more slides you need, the less compelling your idea.

The ten slides are:

1. TITLE
Provide company name, your name and title, address, email, and cell number.

2. PROBLEM/OPPORTUNITY
Describe the pain that you’re alleviating or the pleasure you’re promoting.

3. VALUE PROPOSITION
Explain the value of the pain you alleviate or the value of the pleasure you provide.

4. UNDERLYING MAGIC
Describe the technology, secret sauce, or magic behind your product. The less text and the more diagrams, schematics, and flowcharts the better. If you have a prototype or demo, this is the time to transition to it. As Glen Shires of Google said, “If a picture is worth 1,000 words, a prototype is worth 10,000 slides.”

5. BUSINESS MODEL
Explain who has your money temporarily in his pocket and how you’re going to get it into yours.

6. GO-TO-MARKET PLAN
Explain how you are going to reach your customer without breaking the bank.

7. COMPETITIVE ANALYSIS
Provide a complete view of the competitive landscape. Too much is better than too little.

8. MANAGEMENT TEAM
Describe the key players of your management team, board of directors, and board of advisors, as well as your major investors. It’s okay if you have less than a perfect team. If your team was perfect, you wouldn’t need to be pitching.

9. FINANCIAL PROJECTIONS AND KEY METRICS
Provide a three-year forecast containing not only dollars but also key metrics, such as number of customers and conversion rate. Do a bottom-up forecast, not top down.

10. CURRENT STATUS, ACCOMPLISHMENTS TO DATE, TIMELINE, AND USE OF FUNDS
Explain the current status of your product, what the near future looks like, and how you’ll use the money you’re trying to raise.

A word about liquidity: no entrepreneur knows when, how, or if she will achieve liquidity, and yet many include a slide that says, “There are two liquidity options: an IPO or an acquisition.” Duh. If an investor asks about your exit strategy, it means he’s clueless. If you answer with these two options, you have a lot in common.

Learn more about The Art of the Start 2.0 at GuyKawasaki.com

Read the original article by Guy Kawasaki here. Click on “Tiếng Việt” on the menu for the Vietnamese translation provided by 500 Startups Vietnam.

San Francisco
814 Mission St., 6th Floor
San Francisco, CA 94103, USA

© 2010-2019 500 Startups

Thinking Beyond VC Funding

Thinking Beyond VC Funding

The word ‘startup’ is currently used to describe technology companies or technology-enabled companies that have the potential to get funding from angel investors or VCs. However, using that definition for a startup narrows the possibilities that the entrepreneur can pursue as a business because the kind of companies that VCs can invest in is a very small subset of the many kinds of businesses that entrepreneurs can pursue.

While many ventures can be good businesses for the entrepreneurs, they need not necessarily be a good investment for VCs. And to understand why that is so, it is important to understand the business model of angel investors and VCs.

The VC Business Model

Possibility Of An ‘Exit’ Is Critical

Investors make money when they sell shares they hold in your company. NOT when they buy the shares by investing in your company. So, unless there is a reasonable chance that they will be able to sell the shares to someone else – next round of investors, strategic buyers or, in very rare cases, IPO, there is no reason for the investor to invest, even if the venture becomes a reasonably successful business.

There Must Be A Reasonable Chance To Get More Than 10x Returns

Because many of the ventures they invest in will fail, unless the few successful ones return 10 – 20 times the amount invested, the investor won’t make money on the overall portfolio.

Market Leadership Is Important:

To get 10-20 times return on the amount invested, the venture must achieve a commanding position in a potentially large market … else the next round of investors won’t have any reason to buy the earlier round investor’s equity at a significant premium. So, even if a venture is a reasonably profitable company, but not in a reasonably dominant position, the investor will not be able to sell shares (certainly unlikely at a good premium) even if the business is a reasonably satisfying one for the entrepreneur.

Scale Is Important

Else the numbers just won’t work for the investors to get a decent return on their investment.

And therefore, the only kind of businesses that angel investors and VCs can invest in are businesses that can scale up massively and who can have a dominant position in a very large market and in which they can sell their stake to someone else for 10 – 20 times the amount they had bought the stake at.

Not all businesses will qualify on these criteria, even if the venture is a reasonably happy outcome for the entrepreneur. So, when entrepreneurs start with VC funding as a focus for their business, it narrows their choices to a small sub set of possibilities rather than a large number of possibilities that an entrepreneur can pursue if VC funding was not a criterion.

A restaurant or a handmade shoe making company or a boutique or a furniture store or a jewellry brand or an ad agency or a manufacturing unit, or indeed any legitimate business that the founder is happy doing and satisfied with the financial outcomes is a good business. But these, and many other businesses, may not qualify for venture capital. And that is okay.

In my view, any legitimate business that creates employment and generates wealth (to whatever extent that is satisfactory to the founder) is an entrepreneurial venture i.e. a startup.

My advice to entrepreneurs is to think of the business they will enjoy doing, assess if the financial returns that the business can give will satisfy them, and then access the right funding option for that business. If your venture is not fundable by VCs, and many good businesses will not be, think of how else you can fund your aspirations. Some pointers:

  • Many businesses can get to profitability with very, very limited initial capital.
  • Focus on getting to profitability the quickest, focus on profitability rather than ‘scaling up’. If you sustain, you will get a chance to participate in the market as it evolves.
  • It takes a decade to become an overnight success. Don’t be in a hurry. Build a strong business patiently. If external capital is not available for growth, scale up as best as you can with internal accruals.
  • Be frugal in your expenses. Spend on what’s necessary.
  • Creative marketing ideas necessarily must cost a lot.
  • Venture debt and collateral-free loans for working capital are now available… not as easily as one would want it to be, but things are getting brighter on this front.
  • Crowdfunding is an option in certain categories
  • Some ventures may be able to attract initial investments from strategic investors i.e. companies that may benefit from what the venture does. E.g. a pharma company may find value in investing in a startup that is creating a network of doctors.

Read the original article by Prajakt Raut here. Click on “Tiếng Việt” on the menu for the Vietnamese translation provided by 500 Startups Vietnam.

San Francisco
814 Mission St., 6th Floor
San Francisco, CA 94103, USA

© 2010-2019 500 Startups