Emotional Resonance In Raising Capital & Why Some Startups Fail
Satya Patel manages the seed stage investment fund Homebrew alongside Hunter Walk. He recently sat down with Harry Stebbings on the 20 Minute VC to discuss starting the fund, the importance of transparency in follow-on investing, the difficulty of raising Series A and B rounds in today’s market, and many other topics. The following are a few key takeaways from the interview that are particularly useful for startup founders.
Homebrew’s mission is predicated on helping entrepreneurs who are building the bottom up economy —
The team at Homebrew is laser focused on the assisting portfolio companies. Homebrew’s first fund invested in about 18 companies, and the team is only planning on doing about 8 new investments per year. This intentionally focused investment strategy allows them to maintain enough bandwidth to spend real time with each company establishing product market fit, figuring out organizational design (hiring, cultural values, etc.), and creating a go to market strategy (pricing, distribution, partnerships, etc.).
Patel On The Importance of Establishing Emotional Resonance
I use this term called ‘emotional resonance.’ And I think the key to successful fundraising at the seed stage is establishing that emotional resonance with the investor. And there are only two real means of accomplishing that. One is the personal story of the founders — why it is that they are focused on the problem they are solving, what makes them uniquely suited to attack it, what’s the belief they have about the solution to the problem that is unique to them and maybe different from what the rest of the world sees, hopefully some common ground with the investor that helps them relate to the problem. Secondly, the mission itself — is it a problem the investor can relate to, or is it a problem of such potential scale that the investor has to be involved in it, is it something that the founders have a very narrow, near-term focus but a broad long-term vision around what the world should look like? And I think those two things are the only things that can help establish the emotional resonance early on.
On Finding Product-Market Fit
We focus a lot on the why. It’s the founder-market fit. And more than that, it’s what led them to choose the market they are attacking. Every product and every company is different when it comes to the question of product market fit.
Ultimately what it comes down to is sustainable active usage of the product. To get there, founders have to be narrowly focused, hypothesis driven, and experimental about validating or invalidating that hypothesis.
We spend time helping people thinking about what question they should ask, what they think the answer might be, and how you know that’s the right answer.
On The Most Common Reasons Startups Fail
It boils down to one of three primary problems. One, and this is more common than people might expect, is that the founders disagree and realize that they don’t want to be cofounders anymore. Two, the product that has been developed doesn’t resonate with the market. That tends to be because the product isn’t narrowly focused enough on the use case it addresses or it isn’t narrowly focused enough in terms of the audience it addresses. And the third thing is that founders run out of time or run out of money.
We like to see a narrow near term focus but a path to a long term vision. Start with something small, something meaningful, then think about how you broaden that relationship. In terms of growth versus revenue, we probably have a nuanced view of this relationship. In some cases, growth at great cost is the right strategy. In other cases, revenue out of the gate is the right strategy. But more often than not, there needs to be a balance. We tend not to invest in businesses where the units economics are not clear out of the gate. We tend to invest in companies that generate revenue from day one. We don’t invest in pure consumer social companies. If we did, we’d take a very different approach because those are hard to predict and they consumer lots of capital over the course of time, so we’d probably have to have a different sized fund. For us, we balance growth and revenue, and we don’t focus on extremes on either side.
Slightly abridged by Charles LaCalle at Dreamit Ventures in partnership with Harry Stebbings at The 20 Minute VC. Be sure to check out Satya Patel’s blog Venture Generated Content for more great insights.
