Dear Founders,

We do not believe that last week’s letter from Y-Combinator (Letter: Economic Downturn, May 19, 2022) was aimed at creating panic, but that companies need to look deeper at what they’re trying to achieve, how they’re spending, and how they plan to raise capital throughout the “economic downturn”.

We are not endorsing Y-Combinator (YC) and we believe the letter was generic. Unfortunately, because of this, not all founders will understand the letter, and/or not know how to act on it. We urge you to get an advisor and make a plan.

Shot Ventures’ Trent Lapinski, says: “YC is correct about raising money now. Whatever you’re going to ask for, double it. But, you need to be recession proof and also well on your way to transitioning to Web3. That’s fairly complex for founders to think about: If you raised $5 million recently, and aren’t Web3, you may have challenges incentivizing new hires. Web3 is competing with big tech and Web2, and cash isn’t the only thing on the table. So, not every founder will understand where they fit in and know how to respond to the YC letter.”

The letter from YC did not say that VC money was unavailable, but that it would potentially cost more or be more carefully invested. This also means, investors will think more opportunistically and founders need to understand what constitutes a fair equity position during these market dynamics.

As these shifts play out and a mark down in valuations is expected in VC, PitchBook’s economic modeling currently suggested about a 20% chance of a US recession in the next 18 months. So, as YC said, “change your plan”.

We feel that optimizing your plan might be a better way to look at it. What does this mean?

• Get guidance to get a better deal, whether you’re raising now or in the future
• Identify the right source of capital. It may not be who you think, and there may be non-equity/non-debt options that may need to be identified.
• Reassess capital considerations: when, how much, and why
• Understand impact of Web3 and consider transition opportunities
• Create a roadmap to capital for defined, growth needs

Addressing point #5 in the letter, YC said, “Understand that the poor public market performance of tech companies significantly impacts VC investing. VCs will have a much harder time raising money and their LPs will expect more investment discipline.”

Anticipate that VC funding will continue to see more capital that is intentionally aimed at higher risk, especially with the downturn in the housing markets and primary markets. This is a big reason for the influx of Family Fund monies into the VC world, as they look for new ways to invest.

Point five in the letter continued, “Note that the numbers of meetings investors take don’t decrease in proportion to the reduction in total investment. It’s easy to be fooled into thinking a fund is actively investing when it is not.”

What YC said above is generally true, however, this doesn’t always mean you may be being fooled. Here’s why reaching out to investors may still make sense:

• Get to know them before you need capital, develop relationships beforehand, and don’t wait for the need to raise capital before initiating a conversation
• VCs can invest via a fund, directly invest, or introduce other forms of equity opportunities, like fellow VCs, family offices, angel investors, alternative capital sources, and even debt financing
• VCs can introduce strategic partnerships, including buyers
• For investors, capital isn’t the same as cash, which means it can take shape in other forms that may dramatically increase growth

Our partner, Sherry Hoskinson, says, “Capital still needs to work. Smart capital will be seeking smart(er) investments. This means you need to be prepared to be the smart choice for those looking to invest. Capital still follows a great deal. That’s why we’re advising founders and getting them prepared.”

After reading the comments and emails from concerned founders, I wanted to make sure to give founders something to act on. I hope you’ll share my letter, and I’m thankful for the input from our partners, founders, and investors over the last turbulent week.

If you would like to talk more, please send me a note, and I wish you growth and success.

Yours,

Dominique Villela

The list of professionals that may save you from failing.

A Quick Intro

In the last 5 years, Shot Ventures has supported over $350MM in venture funding for external venture capital, first-time founders, and former tech executives who were starting (or acquiring) their own companies. In that time, I’ve listened to investors who have shared their reasons for saying “no”, and while each capital raise is different, it’s often my job to provide feedback to founders and help guide them forward. The problem is, a lot of the feedback includes more obvious (and obnoxious) failure points that investor’s are, frankly, sick of seeing. That’s why our firm exists — to invest, sure — but also to provide investor guidance and save everyone time and money.

My Role In Supporting Venture Capital Is Best Compared To (You) Going Out On A First Date…

When you meet with your potential match for the first time, anything could happen. But if you aren’t successful in landing a second date, you may not ever find out what went wrong. They won’t sit and debrief with you after the date, and usually they don’t call you explaining that they didn’t like your shirt (or something you may have said) or tell you how to improve yourself for date two. But, do you know who they will tell? They will get home and call their best friend, someone they trust, and someone they feel safe with…and they will share just about everything.

At Shot Ventures, I often play that “trusted friend” role with investors, and let me tell you — founders often say some stupid things on their “first date” with potential investors. Fortunately, we connect with investors on a deeper level long before pitches even happen, and investors trust our transparency. Investors share their interests with us, explain their perspective, and get creative with our team about opportunities. But, for a variety of reasons, they aren’t usually open to sharing so intimately with founders (especially if they don’t know them). In turn, that’s the core value that our firm offers to founders who plan to raise capital: early(er) investor feedback.

Unless You’re Pitching, Shut Up. Please ;)

Being successful on a first date — or any future date — is about learning to hone your intuition and listen closely. Sometimes, this means also listening to things that aren’t said — and that is no different when raising capital.

You’ll need to listen for every nuance, and try and collect as much feedback as you can in the course of reaching out and pitching to investors. If you‘re lucky, you’ll hear feedback that could either 1) serve as guidance to adjust your business model — which is most often the case — or 2) simply improve your communication and re-craft your pitch.

Take it all in and practice removing your ego. Do not react to input, but be deliberate and write it down (yes, all of it), and sort through it later (of course, you will need to sort out the good and the bad). Treat each person you encounter with respect and understand that their input is not “everything”, but that feedback will be of extremely high value to you.

Unfortunately, the amount of direct investor feedback you get as a founder, albeit raising capital, will usually be limited.

You’ll Need Professionals

There are very few people (read: super-humans) that can manage a business, while selling their products and services, and simultaneously manage a capital raise. You’ll need advisement and you’ll consistently need mentorship. Some of your most valuable feedback can come from other experienced professionals, and/or better yet, founders who have successfully raised capital before in your market.

It’s a full time job to raise money — and if you plan on raising more than friends and family money — you’ll need someone to lead (and properly coordinate) that effort. That person should have a history of raising capital successfully, and you are very likely not that person. You need to know what you’re good at, and what you’ve never done before. Sure, bootstrap your business with all those hats, but don’t bootstrap a capital raise or it will cost you. Yes, you should pay…and pay for experts.

Paying Professionals Cash < Early Loss of Equity

Let me start again by saying that it is very rare that you can complete an entire capital raise on your own, especially with no cash in hand. I won’t get into why this is hard on founders, significant others, families, and all involved.

When founders are successful WITHOUT putting any cash into their funding campaign, this only means that the investor (or other service providers) assumed the transactional cost (I.e., consulting, financial modeling, legal, etc.) and weighed that into the deal.

If you’re lucky, it won’t influence the investor’s request for equity. But normally, if your business needs any “fixing” (I.e., rebuilding your legal documents) or added work on behalf of the investor to complete due diligence (or get your bookkeeping in order), you’ll end up paying for it in one way or another. The last thing you want to do is give up 10–20% additional equity (on top of their base equity ownership for the investment) because you weren’t prepared or didn’t have any cash on hand.

The need for cash on hand may vary, but in most cases, I would recommend between $50,000 to $100,000 in cash available to pay for various professional services (and roles) you’ll need along the way. This may (or may not) include the cost of any investor websites, digital crowdfunding campaigns, creating advanced demos, extensive financial modeling, or traveling extensively.

Don’t exchange equity for services if you can help it. Pay cash instead. If professionals that you hire want commission only (or that’s what you’re offering), you will undoubtedly induce a mindset which will warp their ability to be transparent, cloud decision-making, and likely reduce their effectiveness throughout the deal. Not to mention, venture capitalists don’t typically like success-based agent-broker types.

Which Professionals Do You Need?

Note: 2–3 of these roles may be combined into the same person. Our firm, Shot Ventures, combines these roles, while partnering with external legal teams.

• A deal-maker for leading the capital raise (no, your attorney will likely not be invited until there’s a deal to be had), which may also be an advisor or firm like ours. This person will handle investor relations, investor outreach/intros, collect investor feedback, and likely negotiations. They should have a career raising Angel/VC/PE funds with a successful track record.
• A marketer to build out your investor deck, 1-pager, and executive summary (and mobile-friendly versions of each, along with a nicely organized data room).
• A market researcher to build a Total Addressable Market (TAM) study, which will give you a refined 3rd party’s findings of market data (including the data you may not want to share)
• A website designer, if you don’t already have one (yes, you will be asked for this throughout fundraising)
• A small-business attorney (early on to help with business formation)
• A patent law attorney (if any tech needs licensing worked out)
• An M&A attorney for setting up any formal letters (LOIs) or other transaction related documents
• A CPA or a seasoned former-CFO/CEO who is a pro at looking at revenue, forecasts, and financial planning. Ideally, this will be one of your advisors.
• No more than 2–3 advisors and/or mentors (which may or may not be paid; do not give away your equity or complicate your cap tables).
• Optional: An investor relations support person who will be your “scribe” throughout and manage any CRMs and investor scheduling and leads. This may be your co-founder.

Remember Your Goal: Early Investor Feedback

Self managing a capital raise isn’t smart. You will need support, especially if you haven’t raised capital before. And for those that have, please check your ego. Each capital raise is different, increases in complexity as your company grows, and raising capital will always be a part of business ownership.

And why not! ;) If you need help, find me on LinkedIn or at Shot Ventures.

— Shot Ventures is an Arizona based venture capital and strategy firm headquartered in Tucson, Arizona, with additional offices in Phoenix and San Francisco.

Since January 1, 2020, data shows Denver at $249,598,480 in venture funding, or roughly two-thirds the funding invested in Phoenix, Arizona, #8 on Inc. Magazine’s top 10 best cities for startups in the US.

According to Crunchbase data, as of August 1, 2020, there has been $383,985,321 in venture funding in Phoenix this year, to include angel, pre-seed, seed, venture capital (series A, series B, series C), crowdfunding, and private equity. Interestingly, 25% of the seed investments in Phoenix are over $1 million in funding, with one deal over $2 million. Venture capital alone is on fire in Arizona, showing over $255 million invested in Phoenix which is $44 million more than Denver!

This is a surprising figure for 2020, considering that the Arizona startup ecosystem frequently compares itself to Denver behind closed doors. Arizona should be proud of this figure, and perhaps all the excitement behind the startup scene in Tucson and Phoenix is finally catching on. Or, it could be the blistering sunshine and the 2-hour direct flights to San Francisco.

When you compare the number of companies registered on Crunchbase, you’ll also see that there are one-third fewer companies registered in Phoenix (1838) than in Denver (3083), of which 49 of those Arizona deals received venture funding (almost 3%). Whether incomplete data or not, and whether another platform like Pitchbook may have more robust investment data or not, this means that even with more companies registered in Denver, there’s a greater chance of getting funded by an Arizona venture capitalist or angel investor.

Here’s the thesis of our firm, Shot Ventures, and I’ll share this because it’s very powerful and means a great deal to local economies — ours in Arizona or yours (wherever you are out there). Much like any startup founder reading this article and as someone perpetually supporting M&A and funding activities, I, too, believe that raising capital is hard. But the more startups and investors market and share successes, wins and capital raise activities — or funding needs — the more eyes will be on the opportunity.

Consider that in 2020, there has been over $1 million in equity based crowdfunding marketed online in Arizona (that we know of). But here are a few reasons that make it even harder, and these are within our control — especially if you’re a startup in Arizona.

Before ripping open a little wound here for venture capitalists and investors, let’s address the entrepreneurs. Almost every week, we get emails from people trying to buy businesses. This week alone, we’ve had three of these requests in Arizona. Our firm tries to be responsive and helpful, answer questions, and point both investors and founders to the right resources…but there are many challenges to raising startup capital.

So, why is it so hard to raise capital and find the right investor in Phoenix, Arizona? What are Arizona founder’s faced with when they’re raising investment funds — especially during the COVID-era? Do startups have to leave Arizona to find investors out-of-state?

Arizona’s Biggest Hurdle To Attracting Capital

Even with increased funding opportunities, and world-class technology, Arizona still doesn’t tell its story. This hurts young companies and investors alike. It dampens entrepreneur success, while constraining investment dynamics on startup valuations (like, applying for a job without Glassdoor, investors could opt out of investing through VCs because they lack transparent local market valuations). For economists and government reporting, there’s a lot more impact here than meets the eye.

Arizona Founders Must Tell Their Story

Growing up around entrepreneurs can be a great inspiration to build a business or continue discovering ways to innovate, especially in tech. But when the entrepreneurs around you are primarily scientists, engineers, and academic innovators, like in Arizona, we need to step away from thanking our wonderful (truly amazing) universities for a moment. Though the University of Arizona (bear down) and Arizona State University are powerhouses for tech…unfortunately, a culture built around intellectual property can over-encourage privacy to the point of damaging a startup’s priority on marketing their needs. Privacy can quickly become secrecy (unhealthily so), and can damage a team’s ability to market, sell, and ultimately get startup funding. It can be incredibly isolating too, with no local success stories to share in.

How do you startups, founders, and serial entrepreneurs fix this? Can local business associations and news outlets do anything to help? Here are some ways for startups to take action (and if you have any others, please leave a comment or share your experience) and be more visible for raising capital...

• Register your company if you haven’t already on any crowdfunding sites or startup registries, especially if you’re seeking funding. Crunchbase is only one of many. You can also try Angellist, fundable, and others.
• Stay clear of mentors, advisors, consultants, and investors who encourage you to stay “under the radar” by limiting your spend on expert marketing. Stand up and let them know its important to dedicate consistent story-telling to the public, including any startup highlights like new hires, new discoveries, helpful stories (I.e., case studies), and especially — fundraising or “capital raise” announcements.
• Always reserve a portion of the story for the public. There is no level of security or ITAR-level defense gadget that cannot provide a level of content describing its mission or goal, while omitting any technical information.
• I can’t believe I’m writing this, but here it goes: Get online if you aren’t already. Free websites are better than no website. Having a site with no pictures is better than no website. If kids can build a site, so can you. When it comes to funding, every call with an investor or bank will immediately ask you “what’s your website address?” Try About.me, Wix, or even Google.
• Open a LinkedIn company page and a Google Business listing too.
• Compile a one-pager of information to send to every interested party, friend, family member, and colleague, which should include a snapshot of your executive summary and your “ask”. How much do you want to raise? Do you need a partner? What kind of customer do you need right now? You can hire a venture capital consultant on UpWork on an hourly basis.
• Be cautious not to join chambers or associations who want to “own” your story and reduce your marketing efforts to their internal member-networks only. Some could take your membership dues, but avoid helping small businesses (members) with marketing extension strategies unless it benefits their membership dollars. The Arizona Technology Council has been consistent in sharing exciting growth stats for years.
• Don’t forget, if you’re a good business writer, you can continually send that local association or any industry leader your updates and even offer to be a contributing author (read: industry influencer) to their blog and tell them about your story in a way that enhances their readership and website traffic.

So what do you say? Can you market your wins more? Let’s get louder about local successes. My selfish hope for Arizonans is that tech explodes here and we can only do so with an entrepreneurial spirit — the kind that comes with the infectiously positive startup mentality. I want more capital options for Arizona startups and not just for the founders, but the families they lovingly support.

And why not? Let me know if you need help and find me on LinkedIn or via our website at Shot Ventures. :)

— A special thank you from Shot Ventures to Sophia Kunthara for covering Phoenix, Arizona in her Crunchbase work too. We’re fans! :)

— Shot Ventures is an Arizona based venture capital and strategy firm headquartered in Tucson, Arizona, with additional offices in Phoenix and San Francisco.