Friday, May 30, 2008

about elevator pitch

By Matt Weston, Tuesday 13 January 2004

(1) The Dyson is simply a bag-less vacuum cleaner that, because it doesn't have a bag, has far more suction than any other vac.

(2) Apple's iPod is simply a new kind of walkman that can store and play over 10,000 songs.

(3) Ikea's furniture is all flat-packed for self-assembly, so that it can keep its costs very low, and pass the savings on to you.

The three messages above work because they offer a single, simple benefit - and they're all just a sentence long. And messages as simple as these spread - the first time I heard about Dyson wasn't from an advert, it was from a friend.

It's all very well having a great product or service, but if you can't find a simple way to communicate your idea to the audience you want to buy it, you haven't got a chance of making money.

The mistake many new small business owners make is over-complicating the message. In fact, from my experience, I'd estimate that as few as 1 in 4 of us get it right. As a customer I need to understand straightaway exactly what you can do for me, otherwise you'll lose my interest.

Attention spans are short: when you walk into a supermarket up to 10,000 different products are vying for your attention, whilst the attention span of people browsing the web has been calculated at 9 seconds (around that of a goldfish).

And the key to appealing to this ever-scare resource - customer attention - is to stick to just one clear point. Instead of trying to say everything about your product in one single breath, focus on the single most important benefit, solution or value that your business embodies.

How Tesco became Britain's most profitable retailer

Tesco has stuck like glue to one key formula over the last 12 years: Tesco equals Value.

It started with the blue-and-white striped Tesco value range; and now every TV ad featuring Prunella Scales and Jane Horrocks drives the message home - shop with Tesco and you'll be left with money in your pocket.

Since it started using the value message, Tesco has overtaken market leader Sainsbury's (so dominant in the 80s and early 90s); it now holds over 25% of the grocery market and is Britain's largest and most profitable retailer.

I like the idea of the Elevator Pitch: you're stuck in a lift with Bill Gates (or some other deep-pocketed business leader); you've got just 30 seconds to convince him about your business before the doors open; what do you say?

Clearly you need to keep it simple. You're severely constrained by time, so why dilute your message down further by trying to make more than one point? How do you expect to get your message across if you're pulling Bill in 5 different directions?

No, you need a single hook - a reason for him to take interest and perhaps give you 15 minutes of his time at a later date.

Let's face it – the chances of you or I bumping into Bill Gates in a lift are more than a million to one. I bet he doesn't even take lifts any more for fear of bumping into someone like you or me with a carefully honed elevator pitch ready to roll out.

But the point is still important: the simpler and easier your pitch is to take onboard, the more likely you are to get your point across. You may have different pitches - one for your customers, one for investors, one for new employees - but the principle is the same: stick to just one key point, and drive it home.

So how do you choose your key point? Firstly, as always, start with the audience you're communicating with, whether it be a prospective customer, employee or investor. Put yourself in your listener or reader's shoes.

Now write your Elevator Pitch

It's pen and paper time: thinking from your customer's point-of-view scribble down (in no more than one sentence) the answers to these questions:

(1) What is the single most interesting benefit your business, product or service offers?

(2) What is the most unique or unusual benefit your business, product or service offers?

(3) What is the most innovative benefit your business, product or service offers?

You can be pretty much 100% sure that your focus needs to be on one of the three answers you've written down. Try them out on colleagues, friends, family – and then prospective customers. Which works best?

The Elevator Pitch is a really useful tool – one that I use almost every day. For every new business brick I write I try to focus on a single, actionable point: advice that can be summed up in a sentence, and driven home in an email.

However good what you are trying to sell is; if you can't get it across in the first 30 seconds or the first sentence, you're not going to get it across at all.

how to pitch VCs

a must see!

Tuesday, May 27, 2008

The Hardest Lessons for Startups to Learn

via Ycombinator
April 2006

(This essay is derived from a talk at the 2006 Startup School.)

The startups we've funded so far are pretty quick, but they seem quicker to learn some lessons than others. I think it's because some things about startups are kind of counterintuitive.

We've now
invested in enough companies that I've learned a trick for determining which points are the counterintuitive ones: they're the ones I have to keep repeating.

So I'm going to number these points, and maybe with future startups I'll be able to pull off a form of Huffman coding. I'll make them all read this, and then instead of nagging them in detail, I'll just be able to say: number four!

1. Release Early.

The thing I probably repeat most is this recipe for a startup: get a version 1 out fast, then improve it based on users' reactions.

By "release early" I don't mean you should release something full of bugs, but that you should release something minimal. Users hate bugs, but they don't seem to mind a minimal version 1, if there's more coming soon.

There are several reasons it pays to get version 1 done fast. One is that this is simply the right way to write software, whether for a startup or not. I've been repeating that since 1993, and I haven't seen much since to contradict it. I've seen a lot of startups die because they were too slow to release stuff, and none because they were too quick. [1]

One of the things that will surprise you if you build something popular is that you won't know your users.
Reddit now has almost half a million unique visitors a month. Who are all those people? They have no idea. No web startup does. And since you don't know your users, it's dangerous to guess what they'll like. Better to release something and let them tell you.

Wufoo took this to heart and released their form-builder before the underlying database. You can't even drive the thing yet, but 83,000 people came to sit in the driver's seat and hold the steering wheel. And Wufoo got valuable feedback from it: Linux users complained they used too much Flash, so they rewrote their software not to. If they'd waited to release everything at once, they wouldn't have discovered this problem till it was more deeply wired in.

Even if you had no users, it would still be important to release quickly, because for a startup the initial release acts as a shakedown cruise. If anything major is broken-- if the idea's no good, for example, or the founders hate one another-- the stress of getting that first version out will expose it. And if you have such problems you want to find them early.

Perhaps the most important reason to release early, though, is that it makes you work harder. When you're working on something that isn't released, problems are intriguing. In something that's out there, problems are alarming. There is a lot more urgency once you release. And I think that's precisely why people put it off. They know they'll have to work a lot harder once they do. [2]

2. Keep Pumping Out Features.

Of course, "release early" has a second component, without which it would be bad advice. If you're going to start with something that doesn't do much, you better improve it fast.

What I find myself repeating is "pump out features." And this rule isn't just for the initial stages. This is something all startups should do for as long as they want to be considered startups.

I don't mean, of course, that you should make your application ever more complex. By "feature" I mean one unit of hacking-- one quantum of making users' lives better.

As with exercise, improvements beget improvements. If you run every day, you'll probably feel like running tomorrow. But if you skip running for a couple weeks, it will be an effort to drag yourself out. So it is with hacking: the more ideas you implement, the more ideas you'll have. You should make your system better at least in some small way every day or two.

This is not just a good way to get development done; it is also a form of marketing. Users love a site that's constantly improving. In fact, users expect a site to improve. Imagine if you visited a site that seemed very good, and then returned two months later and not one thing had changed. Wouldn't it start to seem lame? [3]

They'll like you even better when you improve in response to their comments, because customers are used to companies ignoring them. If you're the rare exception-- a company that actually listens-- you'll generate fanatical loyalty. You won't need to advertise, because your users will do it for you.

This seems obvious too, so why do I have to keep repeating it? I think the problem here is that people get used to how things are. Once a product gets past the stage where it has glaring flaws, you start to get used to it, and gradually whatever features it happens to have become its identity. For example, I doubt many people at Yahoo (or Google for that matter) realized how much better web mail could be till Paul Buchheit showed them.

I think the solution is to assume that anything you've made is far short of what it could be. Force yourself, as a sort of intellectual exercise, to keep thinking of improvements. Ok, sure, what you have is perfect. But if you had to change something, what would it be?

If your product seems finished, there are two possible explanations: (a) it is finished, or (b) you lack imagination. Experience suggests (b) is a thousand times more likely.

3. Make Users Happy.

Improving constantly is an instance of a more general rule: make users happy. One thing all startups have in common is that they can't force anyone to do anything. They can't force anyone to use their software, and they can't force anyone to do deals with them. A startup has to sing for its supper. That's why the successful ones make great things. They have to, or die.

When you're running a startup you feel like a little bit of debris blown about by powerful winds. The most powerful wind is users. They can either catch you and loft you up into the sky, as they did with Google, or leave you flat on the pavement, as they do with most startups. Users are a fickle wind, but more powerful than any other. If they take you up, no competitor can keep you down.

As a little piece of debris, the rational thing for you to do is not to lie flat, but to curl yourself into a shape the wind will catch.

I like the wind metaphor because it reminds you how impersonal the stream of traffic is. The vast majority of people who visit your site will be casual visitors. It's them you have to design your site for. The people who really care will find what they want by themselves.

The median visitor will arrive with their finger poised on the Back button. Think about your own experience: most links you follow lead to something lame. Anyone who has used the web for more than a couple weeks has been trained to click on Back after following a link. So your site has to say "Wait! Don't click on Back. This site isn't lame. Look at this, for example."

There are two things you have to do to make people pause. The most important is to explain, as concisely as possible, what the hell your site is about. How often have you visited a site that seemed to assume you already knew what they did? For example, the corporate
site that says the company makes
enterprise content management solutions for business that enable organizations to unify people, content and processes to minimize business risk, accelerate time-to-value and sustain lower total cost of ownership.
An established company may get away with such an opaque description, but no startup can. A startup should be able to explain in one or two sentences exactly what it does. [4] And not just to users. You need this for everyone: investors, acquirers, partners, reporters, potential employees, and even current employees. You probably shouldn't even start a company to do something that can't be described compellingly in one or two sentences.

The other thing I repeat is to give people everything you've got, right away. If you have something impressive, try to put it on the front page, because that's the only one most visitors will see. Though indeed there's a paradox here: the more you push the good stuff toward the front, the more likely visitors are to explore further. [5]

In the best case these two suggestions get combined: you tell visitors what your site is about by showing them. One of the standard pieces of advice in fiction writing is "show, don't tell." Don't say that a character's angry; have him grind his teeth, or break his pencil in half. Nothing will explain what your site does so well as using it.

The industry term here is "conversion." The job of your site is to convert casual visitors into users-- whatever your definition of a user is. You can measure this in your growth rate. Either your site is catching on, or it isn't, and you must know which. If you have decent growth, you'll win in the end, no matter how obscure you are now. And if you don't, you need to fix something.

4. Fear the Right Things.

Another thing I find myself saying a lot is "don't worry." Actually, it's more often "don't worry about this; worry about that instead." Startups are right to be paranoid, but they sometimes fear the wrong things.

Most visible disasters are not so alarming as they seem. Disasters are normal in a startup: a founder quits, you discover a patent that covers what you're doing, your servers keep crashing, you run into an insoluble technical problem, you have to change your name, a deal falls through-- these are all par for the course. They won't kill you unless you let them.

Nor will most competitors. A lot of startups worry "what if Google builds something like us?" Actually big companies are not the ones you have to worry about-- not even Google. The people at Google are smart, but no smarter than you; they're not as motivated, because Google is not going to go out of business if this one product fails; and even at Google they have a lot of bureaucracy to slow them down.

What you should fear, as a startup, is not the established players, but other startups you don't know exist yet. They're way more dangerous than Google because, like you, they're cornered animals.

Looking just at existing competitors can give you a false sense of security. You should compete against what someone else could be doing, not just what you can see people doing. A corollary is that you shouldn't relax just because you have no visible competitors yet. No matter what your idea, there's someone else out there working on the same thing.

That's the downside of it being easier to start a startup: more people are doing it. But I disagree with Caterina Fake when she says that makes this a bad time to start a startup. More people are starting startups, but not as many more as could. Most college graduates still think they have to get a job. The average person can't ignore something that's been beaten into their head since they were three just because serving web pages recently got a lot cheaper.

And in any case, competitors are not the biggest threat. Way more startups hose themselves than get crushed by competitors. There are a lot of ways to do it, but the three main ones are internal disputes, inertia, and ignoring users. Each is, by itself, enough to kill you. But if I had to pick the worst, it would be ignoring users. If you want a recipe for a startup that's going to die, here it is: a couple of founders who have some great idea they know everyone is going to love, and that's what they're going to build, no matter what.

Almost everyone's initial plan is broken. If companies stuck to their initial plans, Microsoft would be selling programming languages, and Apple would be selling printed circuit boards. In both cases their customers told them what their business should be-- and they were smart enough to listen.

As Richard Feynman said, the imagination of nature is greater than the imagination of man. You'll find more interesting things by looking at the world than you could ever produce just by thinking. This principle is very powerful. It's why the best abstract painting still falls short of Leonardo, for example. And it applies to startups too. No idea for a product could ever be so clever as the ones you can discover by smashing a beam of prototypes into a beam of users.

5. Commitment Is a Self-Fulfilling Prophecy.

I now have enough experience with startups to be able to say what the most important quality is in a startup founder, and it's not what you might think. The most important quality in a startup founder is determination. Not intelligence-- determination.

This is a little depressing. I'd like to believe Viaweb succeeded because we were smart, not merely determined. A lot of people in the startup world want to believe that. Not just founders, but investors too. They like the idea of inhabiting a world ruled by intelligence. And you can tell they really believe this, because it affects their investment decisions.

Time after time VCs invest in startups founded by eminent professors. This may work in biotech, where a lot of startups simply commercialize existing research, but in software you want to invest in students, not professors. Microsoft, Yahoo, and Google were all founded by people who dropped out of school to do it. What students lack in experience they more than make up in dedication.

Of course, if you want to get rich, it's not enough merely to be determined. You have to be smart too, right? I'd like to think so, but I've had an experience that convinced me otherwise: I spent several years living in New York.

You can lose quite a lot in the brains department and it won't kill you. But lose even a little bit in the commitment department, and that will kill you very rapidly.

Running a startup is like walking on your hands: it's possible, but it requires extraordinary effort. If an ordinary employee were asked to do the things a startup founder has to, he'd be very indignant. Imagine if you were hired at some big company, and in addition to writing software ten times faster than you'd ever had to before, they expected you to answer support calls, administer the servers, design the web site, cold-call customers, find the company office space, and go out and get everyone lunch.

And to do all this not in the calm, womb-like atmosphere of a big company, but against a backdrop of constant disasters. That's the part that really demands determination. In a startup, there's always some disaster happening. So if you're the least bit inclined to find an excuse to quit, there's always one right there.

But if you lack commitment, chances are it will have been hurting you long before you actually quit. Everyone who deals with startups knows how important commitment is, so if they sense you're ambivalent, they won't give you much attention. If you lack commitment, you'll just find that for some mysterious reason good things happen to your competitors but not to you. If you lack commitment, it will seem to you that you're unlucky.

Whereas if you're determined to stick around, people will pay attention to you, because odds are they'll have to deal with you later. You're a local, not just a tourist, so everyone has to come to terms with you.

At Y Combinator we sometimes mistakenly fund teams who have the attitude that they're going to give this startup thing a shot for three months, and if something great happens, they'll stick with it-- "something great" meaning either that someone wants to buy them or invest millions of dollars in them. But if this is your attitude, "something great" is very unlikely to happen to you, because both acquirers and investors judge you by your level of commitment.

If an acquirer thinks you're going to stick around no matter what, they'll be more likely to buy you, because if they don't and you stick around, you'll probably grow, your price will go up, and they'll be left wishing they'd bought you earlier. Ditto for investors. What really motivates investors, even big VCs, is not the hope of good returns, but the fear of missing out. [6] So if you make it clear you're going to succeed no matter what, and the only reason you need them is to make it happen a little faster, you're much more likely to get money.

You can't fake this. The only way to convince everyone that you're ready to fight to the death is actually to be ready to.

You have to be the right kind of determined, though. I carefully chose the word determined rather than stubborn, because stubbornness is a disastrous quality in a startup. You have to be determined, but flexible, like a running back. A successful running back doesn't just put his head down and try to run through people. He improvises: if someone appears in front of him, he runs around them; if someone tries to grab him, he spins out of their grip; he'll even run in the wrong direction briefly if that will help. The one thing he'll never do is stand still. [7]

6. There Is Always Room.

I was talking recently to a startup founder about whether it might be good to add a social component to their software. He said he didn't think so, because the whole social thing was tapped out. Really? So in a hundred years the only social networking sites will be the Facebook, MySpace, Flickr, and Not likely.

There is always room for new stuff. At every point in history, even the darkest bits of the dark ages, people were discovering things that made everyone say "why didn't anyone think of that before?" We know this continued to be true up till 2004, when the Facebook was founded-- though strictly speaking someone else did think of that.

The reason we don't see the opportunities all around us is that we adjust to however things are, and assume that's how things have to be. For example, it would seem crazy to most people to try to make a better search engine than Google. Surely that field, at least, is tapped out. Really? In a hundred years-- or even twenty-- are people still going to search for information using something like the current Google? Even Google probably doesn't think that.

In particular, I don't think there's any limit to the number of startups. Sometimes you hear people saying "All these guys starting startups now are going to be disappointed. How many little startups are Google and Yahoo going to buy, after all?" That sounds cleverly skeptical, but I can prove it's mistaken. No one proposes that there's some limit to the number of people who can be employed in an economy consisting of big, slow-moving companies with a couple thousand people each. Why should there be any limit to the number who could be employed by small, fast-moving companies with ten each? It seems to me the only limit would be the number of people who want to work that hard.

The limit on the number of startups is not the number that can get acquired by Google and Yahoo-- though it seems even that should be unlimited, if the startups were actually worth buying-- but the amount of wealth that can be created. And I don't think there's any limit on that, except cosmological ones.

So for all practical purposes, there is no limit to the number of startups. Startups make wealth, which means they make things people want, and if there's a limit on the number of things people want, we are nowhere near it. I still don't even have a flying car.

7. Don't Get Your Hopes Up.

This is another one I've been repeating since long before Y Combinator. It was practically the corporate motto at Viaweb.

Startup founders are naturally optimistic. They wouldn't do it otherwise. But you should treat your optimism the way you'd treat the core of a nuclear reactor: as a source of power that's also very dangerous. You have to build a shield around it, or it will fry you.

The shielding of a reactor is not uniform; the reactor would be useless if it were. It's pierced in a few places to let pipes in. An optimism shield has to be pierced too. I think the place to draw the line is between what you expect of yourself, and what you expect of other people. It's ok to be optimistic about what you can do, but assume the worst about machines and other people.

This is particularly necessary in a startup, because you tend to be pushing the limits of whatever you're doing. So things don't happen in the smooth, predictable way they do in the rest of the world. Things change suddenly, and usually for the worse.

Shielding your optimism is nowhere more important than with deals. If your startup is doing a deal, just assume it's not going to happen. The VCs who say they're going to invest in you aren't. The company that says they're going to buy you isn't. The big customer who wants to use your system in their whole company won't. Then if things work out you can be pleasantly surprised.

The reason I warn startups not to get their hopes up is not to save them from being disappointed when things fall through. It's for a more practical reason: to prevent them from leaning their company against something that's going to fall over, taking them with it.

For example, if someone says they want to invest in you, there's a natural tendency to stop looking for other investors. That's why people proposing deals seem so positive: they want you to stop looking. And you want to stop too, because doing deals is a pain. Raising money, in particular, is a huge time sink. So you have to consciously force yourself to keep looking.

Even if you ultimately do the first deal, it will be to your advantage to have kept looking, because you'll get better terms. Deals are dynamic; unless you're negotiating with someone unusually honest, there's not a single point where you shake hands and the deal's done. There are usually a lot of subsidiary questions to be cleared up after the handshake, and if the other side senses weakness-- if they sense you need this deal-- they will be very tempted to screw you in the details.

VCs and corp dev guys are professional negotiators. They're trained to take advantage of weakness. [8] So while they're often nice guys, they just can't help it. And as pros they do this more than you. So don't even try to bluff them. The only way a startup can have any leverage in a deal is genuinely not to need it. And if you don't believe in a deal, you'll be less likely to depend on it.

So I want to plant a hypnotic suggestion in your heads: when you hear someone say the words "we want to invest in you" or "we want to acquire you," I want the following phrase to appear automatically in your head: don't get your hopes up. Just continue running your company as if this deal didn't exist. Nothing is more likely to make it close.

The way to succeed in a startup is to focus on the goal of getting lots of users, and keep walking swiftly toward it while investors and acquirers scurry alongside trying to wave money in your face.

Speed, not Money

The way I've described it, starting a startup sounds pretty stressful. It is. When I talk to the founders of the companies we've funded, they all say the same thing: I knew it would be hard, but I didn't realize it would be this hard.

So why do it? It would be worth enduring a lot of pain and stress to do something grand or heroic, but just to make money? Is making money really that important?

No, not really. It seems ridiculous to me when people take business too seriously. I regard making money as a boring errand to be got out of the way as soon as possible. There is nothing grand or heroic about starting a startup per se.

So why do I spend so much time thinking about startups? I'll tell you why. Economically, a startup is best seen not as a way to get rich, but as a way to work faster. You have to make a living, and a startup is a way to get that done quickly, instead of letting it drag on through your whole life. [9]

We take it for granted most of the time, but human life is fairly miraculous. It is also palpably short. You're given this marvellous thing, and then poof, it's taken away. You can see why people invent gods to explain it. But even to people who don't believe in gods, life commands respect. There are times in most of our lives when the days go by in a blur, and almost everyone has a sense, when this happens, of wasting something precious. As Ben Franklin said, if you love life, don't waste time, because time is what life is made of.

So no, there's nothing particularly grand about making money. That's not what makes startups worth the trouble. What's important about startups is the speed. By compressing the dull but necessary task of making a living into the smallest possible time, you show respect for life, and there is something grand about that.


[1] Startups can die from releasing something full of bugs, and not fixing them fast enough, but I don't know of any that died from releasing something stable but minimal very early, then promptly improving it.

[2] I know this is why I haven't released Arc. The moment I do, I'll have people nagging me for features.

[3] A web site is different from a book or movie or desktop application in this respect. Users judge a site not as a single snapshot, but as an animation with multiple frames. Of the two, I'd say the rate of improvement is more important to users than where you currently are.

[4] It should not always tell this to users, however. For example, MySpace is basically a replacement mall for mallrats. But it was wiser for them, initially, to pretend that the site was about bands.

[5] Similarly, don't make users register to try your site. Maybe what you have is so valuable that visitors should gladly register to get at it. But they've been trained to expect the opposite. Most of the things they've tried on the web have sucked-- and probably especially those that made them register.

[6] VCs have rational reasons for behaving this way. They don't make their money (if they make money) off their median investments. In a typical fund, half the companies fail, most of the rest generate mediocre returns, and one or two "make the fund" by succeeding spectacularly. So if they miss just a few of the most promising opportunities, it could hose the whole fund.

[7] The attitude of a running back doesn't translate to soccer. Though it looks great when a forward dribbles past multiple defenders, a player who persists in trying such things will do worse in the long term than one who passes.

[8] The reason Y Combinator never negotiates valuations is that we're not professional negotiators, and don't want to turn into them.

[9] There are two ways to do work you love: (a) to make money, then work on what you love, or (b) to get a job where you get paid to work on stuff you love. In practice the first phases of both consist mostly of unedifying schleps, and in (b) the second phase is less secure.

Thanks to Sam Altman, Trevor Blackwell, Beau Hartshorne, Jessica Livingston, and Robert Morris for reading drafts of this.

Here Comes Another Bubble v1.1 - The Richter Scales

so cool

Monday, May 26, 2008

history of bubbles

via Star-up blog

Tulip bubble – 1630's tulip's sold for more than houses!

South Sea Bubble – 1720

Bull market of 1920's - resulted in the great depression

Japanese asset price bubble – Commercial real estate selling for US$1.5m per square meter!

Real estate bubble every 10 years or so… You've just lived through one!

Tech wreck (dot com)– Companies with negative cash flow valued over 1 billion!

Sub prime / hedge fund bubble 2008 - We're yet to see all of this…

Green Marketing bubble ? – This one's coming watch out!

Mobile advertising: from big to huge

Juniper Research has released a report on spending on mobile search advertising, predicting it will hit $445 million this year and rise to more than $2 billion by 2013. The analysts predict that total spending on mobile advertising will grow from $1.3 billion this year to $7.6 billion in 2013—by these figures mobile search advertising will lose some percentage points of the total market, but will still make up a significant chunk. Interestingly, Juniper predicts that mobile search revenues including data charges will reach $4.8 billion by 2013, which implies the lion's share of the revenue will stay with the carrier even if only through data charges.

Spending on mobile advertising will be highest in the Far East/China region, followed by Western Europe and North America. Juniper said that successful mobile advertising campaigns will use a number of channels, and predicted that nascent channels such as MMS and idle-screen advertising attracting a combined annual adspend of more than $1 billion within five years.
Going the other way Nielsen reports that companies in the mobile phone business spent $4.088 billion on advertising in 2007, a 12 percent increase over the amount they spent in 2006. Most of it was on network television. Last year the carriers focused on promoting data services, putting $959 million (25 percent of the total) into promoting data compared to $734 million (19 percent) promoting their voice services. I don't know what else was advertised, but the figures do indicate that carriers are seeing data as increasingly important.

PR Secrets for Startups

to be read on TechCrunch here PR Secrets for Startups

F|R Crib Sheet: The Term Sheet Glossary

I work as an attorney to a lot of company founders, and I know from experience that when the time comes to negotiate a round of funding, entrepreneurs often find themselves at a disadvantage. Much of it has to do with language. There is an array of terms and issues that investors and lawyers work with regularly and understand, but that entrepreneurs deal with only once in a while. It would take many posts to cover all of them, but here is a Crib Sheet of 10 Key Terms that clients most often ask me to explain when they receive term sheets from prospective investors.

Let's start with the basics of valuation. The three biggest questions I get are: How much is my company is worth? How much of my company will I have to give up? How is that calculated? Three valuation terms you need to know are:

1. Pre-money valuation: Investors will assign a valuation to the company and its shares before they even think about dropping a dime on it. Your "pre-money valuation" is what your company is worth before the VC deal happens.

If the pre-money valuation is $10 million and there are 4 million shares outstanding, the investors are offering to pay $2.50 a share for the company.

2. Post-money valuation: This is what your company is worth after the deal. If the investors then put in $5 million, the post-money valuation will be $15 million and the investors will own one-third of the company.

3. Fully diluted capitalization: This is how that 4 million share number is calculated. It's not necessarily obvious. You may have issued 3 million shares to your co-founders and early employees. However you'll need to issue more shares (in the form of stock options) to future employees, so you budget for those by creating a share pool consisting of 1 million shares. The 1 million shares have not been issued, but they are treated as if they've been issued when the valuation is calculated. Thus, 3 million issued and outstanding shares plus 1 million reserve shares set aside for future stock options grants equals 4 million fully diluted shares.

Once you have a command of the valuation being placed on your company, you'll need to comprehend the many other preferred rights you'll be asked to give your investors in exchange for their money. This will matter when you get to a liquidation event, because not all shareholders will get paid equally.

4. Preferred stock: Founders and employees of companies get common stock, which gives them bare ownership rights. Investors get stock with rights that are in some way superior to those of common stock; we call this preferred stock. At a minimum, preferred stock gets its money out first, so if there isn't enough to go around, preferred has dibs and common gets the scraps.

5. Liquidation preference: This is the right to "get out" (get paid) first if the company is sold, merged or otherwise liquidated. What someone is paid usually starts as the amount invested per share ($2.50, in our example).

6. Liquidation multiple: Investors may ask to be paid a premium on their liquidation preference, meaning the company may have to pay back $5 for every $2.50 invested, before common stockholders get anything. That's a liquidation multiple.

7. Participating and non-participating preferences: A liquidity event produces the potential for a "double dip" for the preferred shareholders. They get paid once in their liquidation preference, and then have the option to get paid again as if they are common shareholders. There are two buckets of money: After the liquidation preference is paid, whatever money is left over gets distributed among common shareholders and those preferred shareholders who wish to "participate." Non-participating preferred holders take their preference payment, then let the common stockholders take what remains.

So, if the company from our example is bought for $20 million, the preferreds will get their $5 million back (this is without a liquidation multiple) before the remaining $15 million goes to common shareholders. And if they're "participating preferreds," they'll get a share in the remaining $15 million, too. Bottom line: You want non-participating preferreds if you're a founder!

Bear in mind: liquidation multiples and participating preferreds are most common in high-risk, troubled company situations. If your VCs are using these terms, be careful.

8. Right of first refusal: Investors want to make sure (i) a company's shares stay within a small group, (ii) that they get an advantageous crack at additional financing rounds. They'll ask for a clause in your investment documents saying that before you can sell additional shares, you must first let the company and/or the investors buy them at the price offered by the third party.

9. Co-sale right: This further locks things up by saying that if for some reason both the company and the current investor pass on the next round, the current investor can still benefit by selling his shares to a third party, alongside the founder.

10. Participation right: This says that the investor has the right to invest in any new offerings the company conducts.

These are some of the key terms that appear in VC term sheets. I'll add to this crib sheet over time, so: What terms do you need help understanding?

Thursday, May 08, 2008

Angel Financing

via FalsePrecision

In a few months Lijit Networks will be two years old. We started the company in a fairly common way, finding employees that wanted that "ground zero" experience, having the seed of a good idea, and finding Angel Investors that would invest and keep the idea alive long enough to germinate. It wasn't easy but we got it done. A question I get a lot from new entrepreneurs is "how do you find Angel Investors?"

Many young startup entrepreneurs tend to look at Angel Investors as a group of people with more money than sense (which sometimes is true) but generally not. They give no thought to the motivations of their Angels, what their Angels should get from the relationship, or simply why the Angel should be interested in investing. Like anything, understanding your audience is half the battle. Don't trivialize your Angels Investment by rationalizing the money isn't important to them; I find that $25K is important to everyone.

I have been on both sides of the Angel Investment table. Lijit was Angel funded for the first year of its life. We raised approximately $900K from a combination of friends, family and seed professional investors. On the flip side I have made several Angel investments in other local companies – with varying success. Based on this sample set plus other random data I have collected along the way, I have established a basic way to look at Angel Financing.

Types of Angel Investors:

The Family Investor: The Family Investor is likely not really a classic Angel Investor at all but rather a supportive family member that "knows you". Their motivation is likely out of support (sometimes guilt), but their basic investment thesis is they trust you. For me these are the worst type of investor because you likely have intimate knowledge of their financial situation and whether or not they 'should' be investing. Likely, they have no inherent feel if your idea is good or not, but may have changed your diaper at one time or another and have overcome that experience to hand you a check for $25K or $50K. Personally, I like this category of investor the least because the investment is totally emotional and personal – and that sucks in business. But based on the financial situation of the individuals involved and the relationships this can work ok if everyone comes into the situation with their eyes open, but go out of your way to make sure.

The Relationship Investor: The Relationship Investor is probably one or more co-workers from a previous gig or business friends you have known for a while. They may or may not understand what your new company is doing but they have had a track record working with you. They want to be supportive, but are looking for a return. You won't lose them as friends if things go bad, but the investment for them is likely not 'trivial'. In my experience these are good Angels to have, again as long as their eyes are open going in. These people can also be wildly supportive of you in terms of finding employees and other resources.

The Idea Investor: The Idea Investor is probably very familiar with the space your company is targeting. These are in some ways the very best types of Angels because to some degree they validate your idea. There investment is based on the Idea and there is little emotion around the table (always good). If you can get them onboard they can open doors into partner relationships and just generally good advice. You will spend most of your time convincing the Idea Investor that you and team are the right people to attack this problem (as they likely don't have a strong relationship with you or the team). Often an influential Idea Investor makes a good early board member for the company.

The Once Removed Investor: The Once Removed Investor is likely connected through a personal or professional relationship with either the Relationship Investor or the Idea Investor. They likely don't know you, and they likely don't have a clue if your idea is good or bad but they have translated the trust in the investment to the person they know. This is a great way to get additional Angel Investors onboard, but without a solid Relationship Investor or Idea Investor it just isn't going to happen.

I personally have never seen an Angel Financing come together without some mix of the first three investor types plus a few Once Removed Investors. Be warned that the Once Removed category of investors will also supply the softest money in the upcoming financing. Simply put - as you verify amounts before close, the Once Removed guys are the ones that tend to "go away" or "get smaller" as the deal progresses. A friend of mine that has successfully financed several companies gave me the rule of thumb that most investors will end up being about half of what they initially committed to. This is definitely true of Once Removed Investors; I once had a $400K guy turn into $50K guy, and $50K was like pulling teeth.

Finally, there is a concept I refer to tongue-in-cheek as the Arc Angel. An Arc Angel is a Relationship Investor or Idea Investor that has a track record of success making other Angels (and perhaps non Angels) money. These people are valuable as they can be very influential attracting quality Once Removed Investors. If you can find this person and get them excited about your deal, do it.

The bottom line on Angels, spend your time looking for solid Relationship Investors or Idea Investors, they are the ones that will get you over the hump. Bring a few Family Investors along for the ride if they won't get sick on the Rollercoaster and hope that you can mix in a good set of Once Removed Investors.

Size of Investment

Next, you have to consider the size of the investment. Money never goes as far as you think it will. My experience is you need to raise between $500K and a $1M to do almost anything. Using Angel Investors to achieve this goal you are likely looking at investments all over the board but usually in the $25K to $100K range. You may have a few smaller and a few larger but in my mind you have to target having no more than 10 to 15 total investors in an Angel round. It's just too hard to herd the cats when the group gets larger than this.

Pre-Money Valuation

A friend of mine with much more experience then myself told me, Angels should get a good deal. They are putting money in at a time when presumably no one else will and they are taking a huge risk. I can't tell you how many people have said, "Yeah, but its only $25K and they have lots of money". That's total bullshit; show me someone who lights $25K on fire for no reason.

Having been on both sides of these kinds of deals, I totally agree that Angel Investing is very high risk and the road ahead as an Angel is fraught with investment disaster. Lots of wonky things can happen to the Angels when VC's come into the company including investment preferences that take away the Angel Chocolaty goodness. I have also, unbelievably, had meetings with entrepreneurs where they are indignant I won't accept their pre-money valuation on their imaginary business. I always tell them the same thing, if my money is so unimportant, do it with yours. If you feel compelled to twist the valuation screws do it in the A round with the professional investors.

Investment Mechanism

There was a period of time where nearly every startup was doing convertible financings. This is where as an Angel you invest as if the investment is a debt type financing but can convert to an equity investment based on some outcome or the will of one party or the other. I tend to think these deals kind of suck. They are usually setup to attract money fast, and often in the case of the entrepreneur are empowering some kind of fantasy that the investment could be paid off based on success of the company and he won't need to give any equity away. As an investor that's the last thing I want because that just turns my investment into a very high risk bank account. The only time I saw this work well was a company that had plenty of investors around the table and incented them to invest early to get the company jump started faster. Early investors got some warrants to make it worth their while to have their money show up to the party sooner (and deal with the risk of being the first money in). Just skip this stuff, get all your Angels aligned, do one close, and make it a pure equity round. If you aren't ready to sell equity in your idea, finance it yourself.


With the exception of possible investors in the Family category, Angels are not in it to finance your dream indefinably. You would not think it to be the case, but I have had several conversations with people approaching me for Angel investments who simply could not articulate how I would ever get any money back. They were so focused on getting money from people they forgot 'they are an investment', and investments have terms. Almost without exception, I don't want to own your dream, I want to make money and have a little fun along the way. If you never sell the company, I never realize a gain.


There are probably 5 more posts I can do on this subject but my goal was simply to put together a primer on this subject. So many people approach me not understanding the dynamics of early stage financing. Brad Feld has written good stuff in this area on his blog as well as some quality stuff on AskTheVC. Use these resources to understand the numbers, but don't forget to understand the motivations.