Gigolo’s, Prom Queens and Venture Capital
A Few Thoughts On Raising Capital As First Time Entrepreneurs
Like everything else in life, there’s an easy way and a hard way to raise capital. We hear a lot about the easy way: Apply to Y Combinator, get accepted, build a pitch deck and demo, get funded at an insane valuation. Simple. But this isn’t the only way it works — even if it is the archetype. Not everyone with a good idea gets accepted into Y Combinator. Or maybe you’re like my co-founder and me, and you have a family you can’t just pick up and move to the Bay area. There are lots of reasons that your path might look less like the easy way and more like the hard way — and that’s OK. There are some things to learn in confronting the challenges that await you. But, as someone who has taken a more difficult path to raise capital, I want to share some experiences that could save you time and help to avoid some fatal missteps.
Here is a quick check-list of things you should already have before you start fundraising:
- The big idea — one that’s tackling a real problem with a HUGE market opportunity
- A financial model — this is to learn the different variables that make the business work
- Your pitch deck — my best advice is that less is more here
- A product demo — showing is always better than telling
- Register your Delaware C Corp.
- A technical cofounder — your B-school creds alone will not get you far in Venture circles
- Quit your day job — if you can do this near the top of the list, you will move faster and be more committed to solving the problems that inevitably arise in doing a startup.
If you can’t get through most of this list, you are probably a wantrepreneur; someone who dreams and talks big but struggles with buckling down and doing the work. If that’s you, I suggest not giving up the dream, but go to work at a startup for a few years and see if it creates the type of drive and understanding of the work you’ll need to do to get started.
First Steps on a Challenging Road
In July of 2011, my co-founder and I had gotten through most of this list when we finally quit our day jobs. We were still building a prototype of our peer-to-peer storage system and coming up with a visual way of showing the magic of the Reed-Solomon Erasure Codes we were using on the backend to make data stored on the network indestructible. But we had enough of the list done to start fundraising.
My co-founder wasn’t Eduardo Saverin — he didn’t come from wealth — and we were both raising young families, so financing this ourselves or living in our parent’s basement weren’t options. I think bootstrapping is excellent and if your situation allows, you should seriously consider doing it for as long as you possibly can. But, it wasn’t a path open to us, so we felt increased pressure: We needed to raise Venture Capital quickly to support ourselves, our families, and to build Space Monkey as a viable technology and company.
For many first-time Entrepreneurs in similar positions, this is where they get stuck. Plenty of people have come to me saying, “I don’t know any VC’s and I’ve tried reaching out to them on social media, but they don’t respond.” In the beginning, we tried that too. In 2011, we hit up a few high net-worth folks we knew, but it was pretty clear they didn’t have a clue how to invest in tech startups. I often see young entrepreneurs make this mistake and accept “dumb money.” Dumb Money is generally defined as non-sophisticated investors that will request a-typical terms on their investment — for example, demanding high dilution for a disproportionate investment in a tech startup. Taking on these a-typical terms will hurt you sooner AND later in the fundraising process. If you are going to take dumb money, do it after you’ve established terms with a lead investor or an Angel who will set traditional terms.
Beware the Startup Gigolos
Without a network of VC’s or Angel investors, we decided to attend a few startup conferences both in the Bay Area and at home in Salt Lake City to meet potential investors. Usually, these conferences will have a few speakers, either investors or newly minted unicorn CEO’s. I think attending these conferences to listen to the speakers has value, but sticking around after to network with investors for thirty seconds makes you feel like you are desperately trying to sell your idea for a quick buck and a slick pitch. Or, as I like to say, you feel like a gigolo. There’s usually a crowd around the investor, and you’re waiting your turn to ask a couple of leading questions you hope will turn into an opportunity to pitch your company. You might get a business card, but probably not, he’s all out. You will probably get a comment like “email my office” or “connect with me on LinkedIn.” Those are all death traps that usually lead to a black hole.
And if you keep it up, it can get worse. Investors remember that you were at the last conference or meetup they attended and that’s a bad signal; you’re probably spending more time at meetups and less time grinding away at your startup. This makes you a startup conference gigolo.
It didn’t take long for us to realize that startup conferences were not going to be the place to have a serious conversation with a potential investor. What we discovered is that there’s a simple way to avoid being a gigolo and get meetings with VC’s: Network with other startup founders that have been funded. Most early-stage startup founders are willing, even eager, to share their advice and network of investors. It is a win-win. Startup founders want to pass on knowledge and share war stories from their recent experiences; Investors are looking for personal recommendations on the next big idea. This is what saved us from becoming full-on gigolos in 2011. We reached out to a few friends and acquaintances in the Bay area to give us feedback on our investor pitch, and the people we met liked what we were trying to do and felt confident about making introductions. Investors will respond to a startup CEO, especially the ones in their portfolio; this is the simplest and most effective way to get a meeting.
We were able to land countless meetings and even our first two investors through this process. Your next wave of investor meetings will likely come from the early investors in; they’ll have an extensive network and a great beat on others that like the market you are in. We also used AngelList; at the time it was relatively new, but it was a great way to signal to other investors we were getting traction on funding.
Word to the wise: Don’t ask VC’s for introductions to other investors unless they are investing in your startup. It sends the wrong signal to investors when another investor is passing on your company and then sending an introduction to someone else. We made this mistake. It’s not fatal, but it is a total waste of time.
Everyone Wants to Date the Prom Queen
Everyone wants to date the Prom Queen, especially Venture Capitalists. What’s a Prom Queen in the tech world? Look at some of the companies getting funded out of Y-combinator or the ones getting hyped in TechCrunch, The Verge or other startup watering holes. It’s the company that investors want to start a relationship with, and other startups want to be.
One thing that almost always follows a Prom Queen is what might have been called ‘gossip’ in high school — but now we would call good word of mouth or organic publicity. Everyone has heard of them, and their name is on the tip of your tongue. We were lucky enough to have a Prom Queen moment on stage at the LAUNCH festival in 2012; it was a surreal experience winning a highly publicized startup competition, press buzzing about our project and having investors come out of the woodwork to fund Space Monkey. This kind of organic publicity — where investors are coming to talk to you instead of you chasing down investors — is the best way to get your Prom Queen moment. It happens when you are riding the wave of a trend that is getting lots of attention, like Fintech a few years back, blockchain and cryptocurrency more recently, or AI and Machine Learning even more recently. You can’t be merely in the space to get publicity — there were a lot of p2p knock-offs when we were building Space Monkey; you have to be a leader in the space doing something bleeding edge or grabbing the type of traction that makes you a market leader.
Ultimately, being a Prom Queen is rare, but possible. As we all know from high school, the title only goes to the few who have captured the hearts of those around them with their natural charisma. This doesn’t mean that you should sit around and wait for everyone to realize how brilliant you are — it means you need to put in the work and ride the big gnarly wave your market is creating. You need to hustle, as every successful startup — and Prom Queen — has hustled before you. The best ways to do this and be successful are not to take on dumb money, stop spending too much time at start-up conferences, and most importantly network with other founders and use their feedback to improve your pitch or product. When they love what you are doing, they’ll introduce you to their circle of investors, and you will be on your way to your own Prom Queen moment. It’s time to burn the ship, my friends!
I’m so sad and lonely
Sad and lonely, sad and lonely
Won’t some sweet mama come
And take a chance with me
’Cause I ain’t so bad — David Lee Roth, Just A Gigolo.