Founders RAW: The Definition Of A Fundable Founder

I recently sat down for a Founders RAW conversation with Marc Weiser, a VC who started the investment firm RPM Ventures after a successful run as an entrepreneur.  If anyone knows a thing or two about the desired qualities of a founder, it would be Marc.

During the conversation I asked him what he looks for in founders the consider investing in.  His answer is great, and if you are thinking about raising money from outside investors you need to listen to what Marc is saying.  He’s right on the money (no pun intended).

Go here to watch the entire Founders RAW conversation with Marc.



Will AngelList Help Or Hurt Startup Fundraising?

Fall 2013 will be looked back on as the turning point in fundraising for early stage startups.   The JOBS Act, along with the acceptance of  “General Solicitation” has indeed changed the game for founders looking for startup capital.

Although changes in government regulation will have an impact on startup funding, I believe the biggest impact will come from innovations in the private sector – more specifically the Seed/Angel community.

AngelList has emerged as a black swan in the investment community and is opening up funding channels founders never dreamed of even just a few short years ago.   It allows well known entrepreneurs, advisors, and angel investors a digital network to follow startup activity and quickly jump into investment deals with new hot companies.  This makes it quite a bit easier for startups to close a round of seed funding.   The days of hitting Sand Hill road in hopes of simply getting your project off the ground are over.

And more recently, AngelList announced a new feature called Syndicates, where Angels can basically become “leads” and pool capital from other Angels (or Syndicates) to quickly create their own mini-fund.  They then use this to deploy into early stage companies on AngelList, with the transaction happening all through the AngelList platform.

I will not dive into details of Syndicates, please go here if you want a full description of how it works.  I simply want to touch on where this is going and why AngelList’s innovations are game changing to the larger startup community, for better or for worse.

The big question is how will this affect founders and the overall startup community?  Is it all good?  Or will there be unforeseen consequences which inevitably come with drastic changes?

Since I am not the expert I looked around to others and researched their take on the changes happening with Syndicates.

The innovations around AngelList are clearly going to benefit founders – namely to speed up the fundraising process.  Mark Suster believes it’s a net positive for the industry.  “The most obvious, syndicates can move faster in early-stage deals than rounding up 40 individual investors.”  Good, we don’t need to heard cattle as much anymore!

But what about for the angel investors?  Although it might be better deal flow, it seems market dynamics and economic factors are going to come into play on the investor side.  Hunter Walk sees interesting changes coming for angels, “My guess is there are also some angels who were popular when they represented a $25k check but won’t be as sought after if they try to push $300k into a round.”  The nuances here are not obvious and only time will tell if this is good for the angel community or not.

 Fred Wilson also believes this is good for founders.  “Angel List Syndicates are turning angels who have traditionally been followers into leads. That’s a good thing in many ways. The more folks who can lead a round, the better, at least for the entrepreneurs.”   But he goes even further to describe how it will force the investment community to grow and work harder.  “It also means that they will have to learn to lead and lead well. They will have to step up before anyone else does. They will have to negotiate price and terms. They will have to sit on boards. They will have to help get the next round done. Essentially they will have to work. That’s why they are getting carry from the syndicate, after all.”

So maybe it’s too early to tell how AngelList will affect the ecosystem but questions loom.

Is this actually going to flatten the playing field for all of us founders looking for seed capital?  Or is it just going to make it even easier for “highly connected” founders to close a deal even quicker than before?  You only get discovered on AngelList if you can float to the top by “trending” on the network.   What does “trending” mean on AngelList?  And how do you achieve that if you are not in in the Bay Area, in 500 Startups or a part of YCombinator?  Is AngelList inevitably the web 2.0 version of the Old Boys Club?  Or is it the fundraising mecca all of us founders have dreamed of when we say to ourselves “if only we had access to more angel investors!”

We shall see!

In the end,  AngelList is a new beast and we don’t know what the effect will be on the industry as a whole but I am fascinated with the direction things are going.  My hope – easier access to angels and seed capital for all qualified startups no matter their location.

In a recent Founders RAW conversation I asked Duxter founder Adam Lieb his thoughts on AngelList.

Although Tempting, Raising Too Much Money Is Not A Good Idea

A 21 year old Stanford grad recently raised $25 million before even launching his payments company.  It was said to be the largest seed round of funding in Silicon Valley history.

This, for him and his other founders, was a terrible mistake. Before I go into the reasons why let’s talk in broader strokes about what the first early years of growth of a company should be.

Initially, you have an idea (a hypothesis) and you sketch it out on a napkin.  You then determine who else you need on your team – go recruit them – and establish the founding group of 3 or 4 people.  After that, you build a prototype as quick as possible and you get it into customers or users hands.  Once released, you observe the usage, gauge what’s working and what’s not, keep what’s working and toss what’s not and iterate as quick as possible.

All the while, you keep your team small, lean and working efficiently running like hell and trying to keep the wheels on the car.

All this could take anywhere between 6 months and 2 years – maybe longer – but it’s the most important time in the company’s history because this is where you are testing things to find the “secret sauce” and how repeatable it can be.  Before leaving this phase you should experience a massive uptick in growth, proving you actually have something worth investing in.  That, or the reality is you just have an idea but you don’t have anything people will use/buy yet.

I explain this because it is not how Clinkle’s, the startup I mention above, story unfolds.  From my understanding – and I don’t have all the facts for sure – is they have been working on this concept for some capacity for almost 2 years, already have roughly 50 employees and just raised $25 million all the while with no product launched.

The crazy thing is the list of investors is star-studded; they are A list investors who have backed many other successful technology companies.  I don’t blame Clinkle for being naive and short sighted when you have these types of people begging you to take their money.

But the reality is they just signed their companies life over to the devil.

The devil?  Yes, they have entered startup hell.

At this point, some simple math and logic can explain. By taking $25 million this early, they just lost all leverage with investors.  They also just put the horse before the cart. When raising money at an early stage, a startup generally gives away anywhere between 20 – 40% of their company.  So, if they raised $25 million and gave away 25% of the company, it’s fair to say this unlaunched company is valued at $100 million post money.

You read that right – $100 million valuation for a startup that hasn’t even put out a product.  This is absurd and it’s a terrible situation for any founder to put themselves in.

You might say that’s too high.  Okay, so maybe it is but given this much invested this early, I have a hard time seeing investors with less than that amount so it’s fair to see the investors share 20% on the low end.

Also, it now raises the exit question.  Given such high investment it now means Clinkle will have to exit for north of $100 million to simply not lose any investor money.  More likely, a $200 or $300m exit would be needed for VC economics to work.  This is not an easy task at all.  A nice $50 million acquisition will now be seen as utter failure.  You don’t think investors wouldn’t block an acquisition offer to sell at a decent price, because it would be bad for their return?

Another thing to consider, down rounds.  Raising this much money and allowing for at least some sort of valuation on the company (even if it was completed using convertible notes there still is an implied valuation) now sets the bar for future fundraising.  Basically, Clinkle just did the equivalent of making their first skydive the Felix Baumgardner Skydive from space.  It’s a bit difficult to repeat this feat.

More to the point, if Clinkle stumbles at all with during their first $25 million and they don’t have out of this world user adoption, they will be facing a down round of funding – meaning they will need to raise another round of funding at a lower company valuation than the previous raise.  The result strips out founders ownership and gravely demotivates the entire team.

Look, I have no idea if Clinkle will be successful or not, they might end up the new Paypal or Square for all we know.  But make no mistake, these are very important founder lessons for a few reasons.

Founders’ best asset is time, in the sense that if they can buy themselves more time to figure stuff out they generally do figure it out.  They key is to figure it out while still retaining the highest percentage of your company possible.  But when you raise $25 million right out of the gate you are not afforded that luxury.  Investors will rake you over the coals if you slip up and not perform.  The problem is Clinkle has no idea how the market will adapt and adopt their product.  That’s what raising a smaller seed round over the first few years and growing naturally affords.

Secondly, the press will kill you if you come out of the gate doing something like this.  Do you want to be known as the next Color (who basically did the same thing) for the entire history of the company?  People love to find the next thing or person to pick on, and as a founder it’s not smart to bring this unwanted attention to your already stressful life.

The lesson here is – mo money, mo problems.  If you raise money at all you should raise enough for money for what you need for the next 12-18 months and be strong enough to say no to investors who don’t have your best interests in mind.

That, or sign your company over to the devil.