Entrepreneurship, Funding

Why is it so difficult to raise money for tech startups outside the valley? And how to fix it

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I was in Chicago on Friday for a startup event at 1871. The accelerator and co-working space is the most happening place in that city. Over 100,000 sq. ft. of awesome startup space. Imagine 350+ early stage tech companies, a few investors, small teams from larger F1000 companies, a developer coding academy and great event space all rolled into one.

That’s the future for all cities, which I see increasingly – Denver has Galvanize, Provo, UT has Boom startups and Austin has Capital Factory.

These hubs concentrate the tech startup activity and provide a critical mass of community, local engagement and evangelism for startups. I was super impressed with 1871 and left very excited after the session at Boom startup and Capital Factory as well.

The one consistent theme I have heard from most of the founders is how hard it is for them to raise money in all those locations. Outside of the valley, funding in New York, Utah, Austin, Chicago and Seattle takes twice as long and you dilute twice as much.

On average Silicon valley companies raise about $491K (Angel list data with cross-reference from Crunch base) for their seed round, which takes about 3 months to close. Since most of them raise a convertible note, it is fairly hard to understand seed stage dilution in the Silicon Valley.

Outside of the valley, which was reinforced with entrepreneurs from Chicago and Austin, there’s a real push from angel investors to have “sustainable revenue” and “proven product”. The average company outside the valley (in the US alone, in the top 7 cities – Chicago, Austin, New York, Boston, Seattle, Los Angeles and DC – raised about $230K for the seed round and took about 5 months to close.

From the 11 entrepreneurs who I spoke with in Chicago alone, the average dilution at the seed stage alone was about 15%. In the valley it would be closer to 8-10% would be my guess.

That roughly equates to twice as long and 1/2 as much money and I would bet that it would be that they diluted twice as much as well.

Comparatively, Bangalore companies would take even longer from my experience – 7-8 months, and raise the same amount of money as the average in the US, and dilute in the range of 20% at the seed stage.

Outside the valley, everyone is in the same slow boat, to raise funds, as an entrepreneur.

The angel investors are slow moving, have little motivation to invest at the early stage and have a very high bar for “funding”. It is not unusual to expect to have serious, sustainable revenue from startups before angel investors fund the company.

It is no wonder that most entrepreneurs outside the valley think they are the ones with bad luck.

This is the same in other cities such as Philadelphia as well.

Funding, one of the critical parts of the ecosystem is underdeveloped and very difficult for early stage startups, outside the valley.

Just to be clear, it is hard to get funded, in the valley as well.

If you are from one of the “it” companies, like Google or Facebook and have built a network of colleagues who you have worked with, who again, because they are in those companies, have done well, financially, and are willing to fund your seed round, then things are relatively smooth.

Else it is a pain.

On the flip-side, I hear from my angel investors that the ideas are “poorly formed” and have a lot more risk than other “safer” investments they have in place. Also, in many cases the local seed investors prefer to fund “known” businesses and not take a risk with unproven models.

So what’s the solution in other cities?

I suspect there’s no easy answer until you get some “winners” – both startups and investors who make it big and decide to “give back” by investing. Or forward thinkers who decide to “pay it forward”.

Until then, here are a few things that you can do:

1. Build relationships with investors way before you need their help. I would advice future entrepreneurs to build deep relationships with potential investors 2-3 years before you start if you can. Meet them at events, volunteer for their projects and show / prove to them that you can deliver.

2. Start with a kickstarter campaign. This may not be a perfect option for many types of projects, but you will be surprised with the diversity of crowd-funding models and types of companies that get funded.

3. Help organize local “angel list syndicates”. Get a bunch of folks who invest in the stock market to help them diversify into startups – this is a role that angel groups tend to do but they do a largely poor job of it.

4. Organize entrepreneur-driven funding showcases and invite (beg, cajole and excite) investors from Silicon Valley, who have possibly connections to your city to come.

5. Get local large companies (the F1000 in your city) to kickstart a pooled fund model, with some initial funds annually. The budget for this could come from their innovation funds. Find a way to help solve that companies problems with local startups.

Entrepreneurship, Focus, Funding

How #investors judge #entrepreneurs. Yes it happens all the time.

Over the last 2 weeks I had the chance to do what I like best. Meet and learn from entrepreneurs at the earliest of early stages. Hear about their ideas, learn about their problems and find interesting new ways they are tackling problems of funding, building products, hiring and managing teams and getting users and customers.

Similar to the Mazlov’s hierarchy of needs I have formed a mental model of entrepreneurs and their categories or types based on what they think they “need” from me. Most of them have an ask – connections, funding, advice or referrals. Which is expected, after all I am asking the question with an intent to help.

The hierarchy of needs are fairly similar to most entrepreneurs but the most self assured ones behave differently and ask different questions. They seeks perspectives on the problems they are facing and guidance on their choices.

The rest seek funding.

If your answer to the question “How can I help?” is ” all I need is money”, then you have lost the plot. I think most investors wIll judge you right there and drop you down 2 or 3 notches on their scale. That’s tough to hear but that’s the truth.

If your answer to that question is “I need to get connected to x customer, or y potential employee or a person for a partnership”, you will be viewed as a tactician. Nothing wrong with that, but hey just like entrepreneurs judge  investors, they do the same.

If your answer is “We are facing these challenges  and would love your take on how you’d solve the problem, you will be viewed as a smart, talented and open-minded entrepreneur.

If you answer the question with “I want to start a company but I don’t have a good idea yet”, then you will be judged as a wannabe. Someone that always fantasizes about entrepreneurship but never does anything about it.

Angel investing, Entrepreneurship, Funding

How to get on an venture investors “radar, then their “shortlist” and finally on the “spotlight”

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If you are looking to raise your post seed round or series A, I would highly recommend you find a way for venture investors to seek you than you seek them. The process is much quicker and you get better terms. How do you do that?

First you have to understand how the venture process works – like most other processes, they go through stages. For the purposes of our discussion, I am going to define the process into 3 steps.

Venture investors have associates or principals, who are smart young folks whose job it is to do due diligence, source new deals and keep their eyes and ears on the ground to new opportunities. Many folks malign them, but they are good folks mostly and have their heart in the right place for most parts.

Many of them are from a Ivy league B school and most likely have been at a management consulting firm after that like Bain or McKinsey. They tend to think very much top down, but I have know a few folks to hustle and pound the pavement as well.

I spoke with 5 associates and principals over the last week to understand their role and the new changes so I thought I’d share some of their thinking to help you.

Venture principals have “categories” of companies on their radar or “spaces”. Given their background in management consulting, that’s to be expected. They think top down – what are the meg-trends, which are the big industries ripe for disruption and which sectors are ready for startups to innovate in. This is important to know. They may have a few companies, but many a sector is likely in their radar.

The associates then spend about 2-6 weeks doing a “deep-dive” on that sector – meeting entrepreneurs, talking to companies, reading research reports (not necessarily in that order) and forming an opinion. Most of them will pick a theme or category based on their experience and some level of “comfort”.

Then, they would present their findings to the “partnership” meetings on Monday. If all looks good, (and I am grossly simplifying), they get a “yellow” light to go ahead and source / look at companies. Not a “green light”, mind you, that’s only given if they have already a list of 3-5 companies identified on their “shortlist”.

After the partnership meeting, they will be assigned a “executive sponsor” partner – someone who can make decisions to write a check on behalf of the firm. The associate has to provide a weekly status update to the partner, who in turn will brief the rest of the folks if they find something “hot” to invest in.

With the yellow light, the associates then tap into their “network” to get proprietary deal flow – usually folks they went to college with, or folks they met at some conference or others they read about on blogs like Geekwire, TechCrunch, etc. In the last 2 years, many folks are also sourcing from angelList or other platforms.

That’s the opportunity for you. Meet with the associates and principals, because not many folks take them seriously. They cant write checks, so most folks ignore them. They are the most crucial part of the equation to get on the “shortlist of companies” within the radar. Typically 7-10 of the 30-50 companies the associates meet will make the “shortlist”.

The best way to make the shortlist is to get you other startup friends and CEO’s to recommend what you are doing to the investors.

The next step is the “spotlight” – the executive champion and your associate will usually meet the 7-10 companies for 2-3 meetings and finally pick 1-2 to bring to the entire partnership.

The process I explained above works “most of the time”. It may happen that the entire process is completed in days as well. I had a chance to speak to 3 partners at venture firms as well, and they attributed about 40% of the deals to this part of the process. The rest were the partner’s networks and recommendations from invested company CEO’s legal partners, etc.

Hiring, Learning, Management

How to be a better manager – providing feedback to your direct reports and employees

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There are 3 types of behaviors when it comes to managers giving feedback to the people that work for them.

1. I’ll give you no feedback – little praise, no criticism until the year-end when I have to do reviews.

2. I’ll give you unvarnished feedback immediately when I hear something from others you work with or from my own interactions. As it happens, often and early.

3. I’ll watch the interactions, notice behaviors and patterns and give you feedback every so often – weekly, monthly, quarterly and avoid “the last thing I heard syndrome”.

It is obvious that #3 is the best way you can be a manager. Feedback is very important to employees. They want to know what they are doing well and what they need to improve. As a manager you are at one of the best positions to tell them that. After all most people spend more interaction time with their managers and peers than their spouse (which is unfortunate, but true).

The rule of thumb to follow to give feedback as a manager is to watch for “lines not dots“. I love that phrase from Mark Suster.

Ideally you have the chance to talk to, watch and get feedback about an employee over a good period of time (ideally a month, but I have seen folks do it over a week or even over a quarter) and then make sense of the patterns.

The first kind of manager is absolutely useless, but tragically more folks like those exist in the corporate and startup world that we’d like to admit. This kind of manager is obsessed with “results” alone to provide no developmental feedback to their employees. If numbers are good, they will let employees get away with murder (figuratively) but if they are bad, then everything is suspect.

The second kind is sightly better, but not by much. They give raw, unvarnished, ball-by-ball, running commentary on the employee’s actions – from others, from their own interactions and from random folks as well. The reason it is useless is because they dont help detect patterns – they only remember the “last” thing someone said and repeat that. So, if there was something about an employee not responding to one email, that one person said, on time, this type of manager would rake your coals over that, even if that’s not the usual pattern of that employee.

The third type of manager is the evolved one. They listen, keep notes and keep both anecdotes and feedback for the employee in a file or in email so when the monthly or quarterly review period comes, they can provide both data and concrete examples.

These types of managers will be the most appreciated in your startup. They “invest in the lines and not the dots”. They look for patterns and observe behavior over a period of time, instead of giving conflicting feedback over even a small period, and unwilling to understand the behavior of the employee.

It takes a lot of effort to be that type of manager. They are very valued because they invest in their employees.

The trick I use to keep track is send myself emails with the Subject line having the name of my direct report. I have filters setup for the name as well. Every so often (I do it monthly) I will go and review all the emails I sent to myself about that employee and look to summarize the feedback. Then I also keep not of the anecdotes so I can help them recall behavior and suggest some corrective action if it needs to happen or kudos if that’s in the order.

What is the hack you use to help provide feedback to your employees?

Personal, Review

#MicrosoftBand review; What I like, what I’d like from it in the next revision

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I have been sporting the Microsoft Band for a bit now. I am an avid #fitbit user and I love #MyFitnessPal. I am apparently the target audience for the band – I run 13 miles daily and I am mostly careful about what I eat.

For more context, I had given up wearing watches for 12 years now – initially because I would forever be looking at the time to stop meetings and other discussions abruptly, but also because it became inconvenient. The watches I wanted only told time and I preferred to have my cell phone to do that.

The band was recommended to me by several folks and I initially resisted, but caved in after I was told it would be a good way to see if it solves my “data entry” problem with fitness.

There are 3 primary things I wanted from a fitness device initially and 3 things I really would love to have:

1. Track all my activity accurately – not just walking or running – sleep tracking should be “automatic” instead of me having to tap a button or remember to do it.

2. Integrate with my other apps – MyFitnessPal at the least, but also MapMyRun if possible.

3. Provide me relevant recommendations – look at my eating preferences and tell me if I am eating less protein, more sugar and suggest what I should be eating based on my patterns.

I have used the FitBit Flex, Nike Fuelband and also tried the Jawbone Up before. I am still not 100% comfortable with the wrist form factor for many reasons, primarily because it feels like a load on my hands and gets “stuck” when I take off and wear on my jacket / sweatshirt / hoodie.

Anyway, I am mixed on the Microsoft band. What I like:

1. I love the crisp and multi-mode display. The display size provides me quick access to 2 things at the same time – time and one more thing – either my steps, distance, heart rate or calories burned. Compared to my fitbit zip, where I have to tap to get more than one thing.

2. I really like some of the notifications: Especially the short text messages I get on the band without having to reach for my phone. Emails are more difficult because most are more than 1 or 2 sentences, but I like the news alerts, and some of cortana’s notifications.

3. I am happy with the accuracy of the steps tracking. All 3 of my fitness bands are within 2-3% of the steps at any point of time, so I think they are all good in doing the basics.

4. I love the heart rate monitor. It gives me a great way to ensure my levels of activity are measured.

What I am not too thrilled about:

1. Battery life: The device needs charging almost every day. This is one more charger I have to carry and remember to charge. It does charge rapidly – 2 hours is usually enough, but I have to time the charge. If I am sitting in one place for 2 hours (I never do that at all), I could perhaps charge it, but that’s rare, so I have to charge it in the night, which leads me to the next point.

2. I cant sleep with it – so the point of sleep tracking is lost. It is bulky on the wrist and that’s the only time I think I can charge it.

3. The display gets roughed up quickly and the dings and dents are very visible. With “normal” usage my band was dented and dinged up within a week. The clasp is wearing out as well. The build quality on the display needs work. Even after a year of usage, my fitbit flex looks “like new”. Although the flex has a much smaller display and only shows “one thing at a time”.

4. The email notifications are pointless because you cannot respond at all. Even if I could use one of 4-5 standard responses I’d be thrilled, but that’s not possible. I do like that you can respond to incoming calls with a message saying “I’ll call you later”.

5. I dont like that I have to “switch it on” even to see time. The device display is normally off “to save battery life”, so you have to “switch it on” to see time. That small, yet normal gesture means I might as well pick up the phone. It should be gesture based so it can detect a swift movement of the arm from its “down” position to a “view” position and turn on display to show time. Else it should have a backlit “eink” display for time, which should be on everytime.

6. It does no recommendations at all. I think if there were integrations with MyFitnessPal, which already knows what I am eating, the band can recommend (1-2 sentences) what I should eat at snack time based on what I ate at lunch and dinner and my preferences, so I can be “reminded” to avoid something with sugar, since my sugar intake for the day has been high.

7. I have to wear it “inward looking” instead of wearing it like a “normal watch” since the display is rectangular. Which means my normal gesture of wearing a watch had to be a pattern I changed.

Overall I am mixed as I mentioned. It feels like there’s more promise than its current avatar.

Would I recommend it – only if you have not used any device for fitness tracking at all before. Even then only if you still need text and email notifications in addition to tracking fitness. There are cheaper pure cloud-enabled fitness trackers.

If you have however used the fitbit flex or fitbit zip before, I would skip this.

In fact that brings me to the Android Wear watches and the upcoming Apple Watch. I suspect they will be the same – bulky, needing constant charge and “awkward” on your wrist. Although having seen the watch, with its ability to “action” notifications, I suspect it will be good, but that remains to be seen.

I have seen folks use the Android watches and hear they were not thrilled with it either. I am currently of the belief that human beings are so primitive that they still think that “digital watches are a pretty neat idea“.

Funding, Learning

Size and speed – the two most important aspects of your market, to get #venturefunding for #startups

I spoke to an entrepreneur yesterday who is focused on the health and HR markets – two of the toughest markets to target. Health has so many regulations to work with and HR has so little budget. So, take both of them together and unless you have a “head on fire” situation – aka compliance problem, they are very difficult to sell to.

Most, but not all venture investors care deeply about the market you startup is targeting. Here’s a rule of thumb – larger the market, more likely a VC is going to care about your company and to be willing to invest. Billion dollar markets are important to VC’s, and preferably large billion dollar markets. You need to do both a top-down and a bottom-up market analysis to show them that it is a large market. If it is less than a significant size, then I’d advice you not to go pitch VC’s.

In many cases, you wont know the size of the market. It could be small ($100 Million or less) or you just dont know how to position it as a big thing. Most venture investors will take a meeting, but end up not telling you that the market is too small, but tell them to “keep updated”, or “you are too early for us” or “we need to see more traction”.

When you dont know the size of the market or you know that the market is small, then I’d advice you not to go to venture investors. It does not serve your cause and wastes their time.

The second most important reason to get a venture investor on board is if the market is expected to become large “quickly”. While size of market is rather objective, the speed of the market is largely subjective. Which is why venture investors will rely on other “experts”, who understand and know the market well to help them “do due diligence”. If the market is expected to rapidly grow, it makes sense to invest as a VC. Else, your company wont grow quickly and things get difficult.

Many venture investors will also tell you that they invest in entrepreneurs. They tend to focus less on themes and more on the expertise, background, success, knowledge and execution potential of the entrepreneur teams.

Taking a risk on the team is normal for a venture investor, but taking a market risk is rather dumb. If they dont (that’s the problem to a large extent, which is “their” view of the market, not yours) view the market as large or moving quickly then be prepared to have a lot of “meetings with VC’s” resulting in zero follow on meetings or investment.

Entrepreneurship

The rise and rise of coding schools – a tale of #entrepreneur opportunity

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Over the last 5 years, nearly 100 coding schools – both offline and online have sprung up in various locations around the world. Most of the students that attend coding schools are from one of 3 backgrounds:

1. They have been involved with technology – as a marketing manager or a designer or a customer service rep, and see the opportunities in their company and others to get a higher paying job by doing development

2. They are from a completely different career – pizza delivery, real estate, stay-at-home-mom, and want to get into coding and technology.

3. School students with majors outside computer science who realize that the jobs in their field of study are no longer paying well and are moving to studying coding.

A typical coding school in the US charges about $8000 (average) and promises 16-20 weeks of intense bootcamp style practice and work to get you placed at a job in a company that needs “junior developers”. Starting salaries are usually $50K to about $75K.

Who are the ideal companies that hire these hacker school graduates?

It used to be startups were the prime target, but increasingly folks like Facebook and larger companies as well who are looking for junior developers are making up a good part of the hiring – 30% vs. smaller startups – 50% and rest go to non technology companies requiring developers.

Right now we are in one of the biggest booms of technology startups so coding schools are able to guarantee 80% placements or above. When the tide turns (which I cannot predict) then I suspect that the winner-take-all approach returns, which means coding schools will take in fewer candidates since the demand for developers will become lesser.

The coding schools themselves are a great case study in entrepreneurs solving entrepreneurs problems. Which is the microcosm of an industry with its own “microclimate”.

The first few coding schools started to solve the “hiring” problem of many startups who were unable to hire good talent and were instead competing with the larger companies to hire the best. Then folks like General Assembly, Coding Dojo and others started. At about the same time, folks like Udemy, Code Academy also did to help new entrants to learn how to code.

Unlike offline schools, the online academy’s were seeing a significant drop-off in students – most folks were just not completing their courses (90% drop offs were typical).

Now, however having been to 10 coworking spaces which all have a coding school attached to them, I can see the natural fit for these spaces to want a school in their facility.

Over the last 5 years, the number of graduates from coding schools has gone from 500 per year to over 20,000 annually. As far as I can see the demand for developers will not slow down for the next 5 years. Even if there is a slow down in the startups hiring coders, the larger companies will pick up the experienced coders from failed startups, and that means new (maybe fewer) startups will end up having to hire from a hacker school.

So what type of a person actually is a good “coding school candidate”?

I think the only thing coding schools are looking for are motivated individuals who have some sort of inclination towards programming. That’s it.

Everything else is secondary.

In attending a coding school last week and speaking to the students, I found that most were excited about learning the trade, but were solely focused on getting a job, not necessarily learning programming for passion.

So, that means when the economy for “other areas” picks up I suspect many will go back to a higher paying job which they are passionate about, leaving more room for newer candidates who want to join the programming revolution.

Which is why for the next 5 years as well, I can see a constant growth curve for most coding schools and I suspect they would be a good investment as a franchise or a business if you are so inclined.

What ingredients do you need to run a successful school – a good pool of potential companies “looking to hire local junior developers”, a set of part time developers “who are passionate about teaching the craft of programming” and a large pool of talented candidates from other fields willing to learn programming and raise their salaries from their current jobs.

Entrepreneurship, Funding

Kickstarter is the new “beta” customer, “social proof” and “friends and family” round all rolled into 1 for #entrepreneurs

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I had a chance to meet an amazing entrepreneur on Tuesday at Utah, Tammy Bowers, who the founder of LionHeart Innovations. They provide a mobile platform to help caregivers of kids with chronic conditions. Think of it like a coordinated platform that everyone who cares for the kids needs to ensure they are all in sync – the mom, the dad, nurse, doctor, nanny, etc.

Their son has a health condition so their startup was born from that experience. Now, after many months of working with health organizations and other care givers, they are ready to launch their mobile app.

A decade ago, options for Tammy would have been to talk to a lot of potential customers, then raise a small “friends and family” round and then look to get some marquee investors / advisors agree to be associated with the company – to provide social proof.

Now there’s indegogo and kickstarter. Tammy put together an early funding campaign on the tool to see there were many other parents who were also interested in the tool to keep their folks in the know. Word of mouth, thanks to the indegogo campaign also got her a lot of press among bloggers, media and news outlets.

For entrepreneurs in smaller cities, getting the attention of Silicon Valley angels or investors is very difficult if not impossible. Many local investors are willing to help, but they lack the ability to validate the problem, the need and hence tend to invest in “things they know very well” or “those things that generate revenues quickly.

Enter crowd funding. If you thought it was for hardware programs alone or for creative ideas, then you need to look at indegogo and other platforms again. 7 of the 10 companies in the accelerator program at Seattle raised money on these platforms. Some of them raised $50K and others more than $350K.

There are 3 things a successful crowdfunding campaign gives you:

1. Customer validation: People (real customers, though largely early adopters) put their money where the mouth is. Not just “likes on facebook”, they commit dollars to your program.

2. Funding: If you can put a little money into your campaign, typically the crowdfunding dollars can help you generate more money to ship your product.

3. Social proof: I would highly recommend you talk to a few “influencers” who can back your campaign on these platforms, but if they dont and still notice it, then the campaign can help you generate some press, which is good social proof if you can get folks to share the press.

I am a huge fan of these programs not just for creative movies, music and hardware “maker” type products, but also for software products that are niche initially.

There are 3 important elements of a successful crowdfunding campaign, which other folks can tell you more about:

1. Create great content assets – video is usually essential.

2. Engage with potential influencers before your campaign so they can back you when the campaign launches.

3. Provide quick and constant updates to your backer so they can help champion and be evangelists for your startup.

Entrepreneurship, Management, SaaS

A #contrarian view on how the customer validation phase should fine tune your #startup business model

The trend from users (businesses and consumers) wanting to buy services – software enabled services, instead of software is accelerating more than ever in my observation. Previously things that most folks would sell as software is now being packaged and sold as a service that solves a problem and is a solution than a packaged piece of software.

In the 90’s and 00’s the solution to a business problem was to develop, deliver and sell software, which was either sold as a license or an annuity. SaaS then came about to provide a change in both the pricing model and the deployment model.

The trend is more pronounced in the consumer portion of the business. Let me give you a few examples and then go into detail of one case study that I discussed with some entrepreneurs Utah.

Take the case of Uber. A decade or two ago, the prevailing model would have been for Uber founders to build the software and then try to sell it to taxi companies and help them service their customers more efficiently. They instead chose to be a “full stack” company and own the consumer experience and recruit drivers to their program.

Another example is Zillow. Instead of providing software to real estate brokerages or individual brokers, they turned the model on its head to go direct to consumers and be a lead generation engine for brokers.

Finally on the enterprise side, HackerRank is a product as an example that a decade ago, would have sold software to companies that helps them manage, deliver and attract software developers with challenges. They prefer to directly attract software developers to their platform and then engage with potential recruiters to help match the top puzzle solvers with companies that are looking to hire them.

Note that in all these cases, the companies are purely software companies, but their business model is predicated not on selling packaged software, but a set of services to end consumers.

I speak to entrepreneurs worldwide, who have heard the phrase “software is eating the world” and then immediately assume that the only way to deliver software and build their business is to sell either a subscription business to the hosted solution or to sell packaged software (yes, there are still folks that think this is the way to go). That is no longer the case and you will find in most instances, investors will prefer full stack companies to software business models in the next decade.

Only hosting your product and providing a SaaS solution does not make your business model different.

That begs the question, how does one go about creating and building a service business instead of a purely software business?

I think the most important phase of your startup journey to figure this out, is when you do your customer development and validation.

During the customer validation phase you will find many potential customers not willing to buy what you sell them (software). That’s usually because they don’t have the problem you articulated.

There are two types of problem articulation strategies. One set of folks articulate the problem they think customers have and another set share examples of the questions potential prospects have.

Let me give you an example of a company I met yesterday.

They are folks that run a theme park who had built software to better manage their park and generate better profits and returns. They were keen to sell software that helps manage a theme park to other owners of theme parks.

When they spoke to potential customers and said they had ERP software to help with theme park management, most potential customers did not care. Their customers did not have a problem that required software.  When we got talking, and drilling down to the real problem, it turns out that 20% of a theme parks budget annually was spent on renewing customers.

So, most park owners had a marketing and a renewal problem not a software problem. When they went to the customers with an end to end solution to help streamline renewals and still had software at the back-end to manage the renewals their message seemed more appealing to theme park owners. Suddenly the problem was not software for automating the theme park but a solution to help remove a key headache and a solution to one of their key problems – Renewals.

The startup still wanted to only be a software company so they were not too keen to take on all the hassles of renewal processes, so I suggested they outsource the other aspects of the renewal process to other companies.

Having control of the end to end renewal process, now gives the company the data and analytics to build another stream of revenue to help end customers get discounts on other services they would like and give the theme park owner a cut of that revenue.

That’s the future. Software enabled services will be the primary business model for the next decade or so. Instead of selling it as a software product (either SaaS or otherwise), I encourage entrepreneurs to look at business models in more depth during their customer validation phase.

Angel investing, Funding

To raise funds for your startup use a fishing pole not a fishing net: A #contrarian view

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Most early stage find raising advice around fund raising is about casting a net as wide as possible to speak to 100’s of potential funding sources to land one investor.

Actually that’s pretty bad advice according to the data I gathered from Pitch Book.

New Investor Additions Each Year- CRM, SaaS and Home Automation
New Investor Additions Each Year- CRM, SaaS and Home Automation

Within your category or market there are far fewer relevant and willing investors than you can imagine. So casting a wide net is a big waste of time for most entrepreneurs.

Of course the larger the market (e.g. SaaS or Consumer internet) the more are the number of investors in each stage but it is still a small, finite number.

Most venture investors will share broad themes of their investment thesis so they don’t “miss” out on deals, but that does more disservice than good. So, when an investor says we invest in “consumer internet” – that purposely broad so they don’t “miss out” on any hot deals. As an entrepreneur, you need to ask more pointed questions about the sub categories within that theme.

Investors should follow the same advice they give entrepreneurs. Be niche, narrow and focused. Here’s the thing though. They are following that advice but only they don’t message or position it that way.

So the best indicator of if an investor will fund your startup is to look at what they do not what they say. Talk is really cheap I guess.

To prove this I looked at 3 segments. One older theme, one middle aged and one relatively new theme. They were CRM, SaaS and home automation. These are themes I know better than others. For CRM I looked at data from 1996 to 2002, SaaS from 2006 in home automation from 2008. Data does not exist for home automation for 8 years obviously.

I looked at total dollars invested over time  and the number of investors over time as well. Then I plotted the graph over time to look at year over year growth as opposed to cumulative growth.

Here is what the data says. There are a about of 130+ unique investors in CRM over the 8 years, 47 in SaaS and about 15 in home automation. That’s is on the venture side.

So if you have talked to one or more of these and they said no, you will be better of rethinking your business or do without going to other investors. Going to other investors who have not invested in a theme will very likely result in you wasting time. Note that the rate of addition of new investors to a theme is slow. Even in a large market such as CRM.

This also explains two other memes. One that there’s a herd mentality among us and second that venture investing also follows the Geoffrey Moore tech adoption curve.

Once one or two “innovative” VC’s finds a new space then the herd follows but slowly. This explains the fact that new VC additions to a theme rarely exceed 10% YoY even on “hot” themes.

After the innovators, the early adopters and then finally the majority follow.

I suspect, but don’t have the data yet, but a VC innovator in one theme rarely is an innovator in many other. They like to stick to their knitting. Unless they hire a new partner with expertise in a new theme. Which is rare.

So, bottom line for you as an entrepreneur is this.

There is a very short list of VC’s who will invest in your area.

Going after hundreds of potential investors is a big waste of time.

Setup a google alert for funding keyword within your category for 4-6 months before you are looking to raise money and also for “new fund” in your category. Those are your best bets.

If you have exhausted the list of potentials then you are highly unlikely to raise investment. Go back to your positioning and business model and see if you can change something to try again in 6 months with the same set of investors.

Of course there are exceptions to this rule of thumb but they are rare.

The personal blog of Mukund Mohan