By Alan Brody
Speakers: Ian Sigalow, Partner, Greycroft Partners, Stephen Brotman Managing Director, Greenhill & Co, Graham Lawlor, Founder, Ultralight Startups
As we continue our Job Generation series of matching senior execs to Start-Ups, we had the June event to take stock - from the VCs perspective. Our featured speakers, 2 active New York investors spilled the beans on the money side while our dean of agile Start-Ups kicked in with confessions from the entrepreneur side.
The result is an eye-opener - and if you are looking to boost your Start-up or work with one, pay attention.
1. Very few companies get funded.
2. Angel-funded companies still have to grow to the next level – there is a very small chance of a follow-on round if you do not grow dramatically
3. Your best chance for breaking through is by building a savvy, connected team that includes some industry veterans. But you need to make it worth their while to come over to your side.
What we learned from the two VCs who do $500K - $2 million deals, is that you need to have high-growth potential in a rapidly growing marketplace in order to have a chance at funding. Then, the best way to get their attention is to have other people in the industry rave about you because word gets around in this community’s echo chamber. Getting a savvy player on board can help make the connection and will help you when they come calling.
The problem is that very few companies qualify for this kind of funding. Some get lucky and find an investor of one kind or another. This is not always to their ultimate benefit if they don’t use the money wisely and they don’t grow - but at least they have raised capital.
For everyone else, listen up, there are still plenty of opportunities. Some part of this is domain knowledge and experience – if you really know your business and you’re savvy, you will generally prevail. But a certain kind of faith and positive flexible vision is also key. Why - because you have to believe that you can prove yourself with whatever resources you have. Money is not everything. Too much of it can kill a company. Also, most start-ups find their real business or revenue opportunity down the road and it is usually starkly different from what they anticipated. So, being able to change direction to catch the right wind is key and investors have to feel comfortable that you will find that wind and adjust accordingly. Passionate amateurs tend not to do that.
Luckily for us, Ian Sigalow, a partner at Greycroft, LLC, Alan Patricof’s venture fund was on hand to break it down.
The single biggest thing he looks for is market size. If it’s not in the billions and growing rapidly, don’t bother. They need to make 10x within 5-10 years. In reality, they are searching for deals that are more likely to make them 100x. Seriously, is that you? If not how could you steer your enterprise toward that goal?
First, don’t be desperate. It takes at least 3 months to structure a deal usually longer. Your credibility is a huge issue. This is true even if you are the first to a huge new market. Who you are and what you bring to the table a big issues because if you fail to execute, there are so many others waiting in the wings to jump on your market.
That is one of the reasons that VC money tends to go to serial entrepreneurs. People who have done this before and succeeded are always preferred. They get the big bucks, the quick deals and even have the right to do a “me-too” company just because it is assumed they can execute.
If this is your first start-up you need help. You need to create buzz and then you need to have at lest two VCs looking at your deal to raise values and create a sense of closure. Otherwise, you wind up with meaningless phone calls, useless meetings and 90 day lockups. (Preferred no-shopping clause is 30 – 45 days)
VCs often refer promising companies to angels if they are pre-revenue and still working on their product development. That is usually a good thing. However, when VCs do their own Angel round that has its own special danger because unless you succeed spectacularly you are not likely to get follow on rounds from anyone other than the VC who may be even more disappointed than everyone else when you don’t beat projections.
[For the record:
Series A requires revenue and 3-4 customers
Series B 10 – 20 million valuation
Series C $100MM+]
Valuations – so here’s a big secret – go for a convertible note. Angels will ways try to hold you to a valuation. The lower the better. VCs on the other hand are more likely to prefer that you took a convertible note at a discount to the series “A” valuation – typically 25%. That means the company is more accurately valued and they know they are getting the best deal while you, the entrepreneur get to keep more of your company to sell to the VC. This is where find out how angelic your investors are – by whether or not they will accept the convertible note.
Know thy VC: do your homework. Know what kinds of companies they fund and why. Funds must be also be active – with the economic hiccups, many are walking dead.
Steve Brotman, the Managing Partner at Greenhill SAVP was quick to concur and we got to hear about his investments. Once again, your research is everything. VCs have areas of interest and their own theories of the marketplace. If you understand how they think you can determine who to go to and how to present your idea. Greenhill, and to a large extent, Greycroft, favors technology platforms that help automate services. Advertising can be transformed this way, so can financial products, even search engine optimization. If your product does something spectacular in those areas, and the market is getting B-I-G, they will probably want to hear from you. Or better yet, hear from a few of your credible fans.
What you need to know about VCs is that most exits are M&A driven at between $50 – 100 million. They want to see a minimum 10x and preferably 100x returns, so you can see how sharp the numbers have to be to get their interest. On the other hand, Steve spilled the beans on negotiating from the book “Hacking the Human Mind”: time pressure, lack of information and perceived opportunity can make otherwise intelligent people do strange things.
[For the record: Snapshot of Greenhill Investments
5 year old company growing faster than Twitter.
Medical metadata co. for testing.
Yellowjackets to consolidate IMs on trading floor.]
Graham is the founder of Ultralight Startups which is a lively forum for the kinds of agile companies that are sprouting everywhere. Graham quotes the patron saint of the movement, Steve Blank whose book, “4 Steps to Epiphany” lays out the case for these companies. They key issue is that it doesn’t take much to start a company today, whereas ten years ago it cost plenty. Making them work is lot like using the steps taken by savvy corporation in a successful product roll out. The problem is that everyone seems to be starting a company because they can, and in the noise, some key issues are forgotten. The point about a successful roll out is having something customers seem to want and not just something you are able to make. So step one is having a minimum viable product. You learn from early adopters what they really want and pivot your development around their actual needs and desires of these people. Then you build your customer base with leases and marketing and then you build a company.
That’s the theory. In practice, the market throws a lot of curve balls and the interest of the early adopters may be very different from the later adopters. So being nimble and agile and listening to the market and also knowing when not to listen is a whole other issues.
Bottom line: anytime there seem to be a lot of buzz as a promising market emerges and you get people to talk about you, investors will come calling.
Hal Charych has RFID automated gates for ski resorts. Generally seemed like it was a great idea but ought to be aimed at much broader markets. New York is not a ski investors market.
Alex Combos, EventNow. This site enables event planners to put their events out to bidding rather than having to go chasing after venues for pricing. Seems like a great idea but there are many big name like eVite that seem to be lurking in the wings.
James Mancuso, a former executive and CTO at Platform Computing Inc. a, Financial Services company in NY gave these Start-Ups helpful advice about growth and positioning.
COMING JULY 28 – The Exploding eBook/iPad Marketplace