Not Interested: How to know whether you've actually got an investor on the hook.

I don't think there's ever a time when I feel more like I'm raining on parades as when founders tell me how interested other VC firms are in investing.  I've seen it time and time again where founders, understandably apprehensive about fundraising, read too much into their engagement with investors--especially non-partners at firms.

The founders will say things like the following--and then comes my splash of cold water, which is honest, but also makes me feel like the bad guy, or not enthusiastic about the company.  In reality, I just don't want the founder spinning their wheels and wasting their valuable time.

"They're interested, but it's too early."

There are tons of examples of later stage venture firms not only placing seed bets, but also skipping right to Series A with huge "seed" rounds right out of the gate.  If Mark Zuckerberg was going to start a new company tomorrow, do you think he'd be too early for anyone?  No.  There are also lots of examples of companies who get funded by later stage firms that don't have the metrics that we've been told you need--$150k in MRR, a million users, whatever. 

"Too early" is a pass.  

You might take enough risk off the table for them in the future and they might come in at a later right, sure... but if they're not writing a check now, they're passing.  When you get a pass, move on, don't keep your hopes up, and go back to work.

"They're very interested if you can get a lead."

There are some firms that, as a policy, don't lead.  That's fine, but saying you're interested pending a lead is not saying you're committed.  Committing is saying "If you find a lead, we'd like to come in for $200k, assuming standard terms and the price isn't anything more than X."  Even better is when that firm reaches out to firms that do lead and says, "We've committed, but we need a lead."  Those people are basically in, and everyone else is just sitting on the sidelines with their thumbs in their butts wasting your time.  Many of those people are assuming you won't get a lead, and they're just being polite, and if you do get one, it's a good way to cover themselves in case they missed something.  This way, they try to guarantee that if someone else jumps in, they get a second look.  It's a free option, so why ever give a definitive no?

"[Non-partner] is really excited about it and is going to bring it to their partner meeting."

Listen analysts and associates...  I've been in your shoes.  I've been the junior person around the table trying to get partners excited about a deal.  The absolute worst thing you can do is fail to be transparent with a founder as to where your team is on a deal, and to lack the firm awareness to realize whether you have any internal traction.  It wastes founders' time and ruins your credibility.  So, when you know that founders are going to hinge on every little indication of interest, you should be straight with them about your process and who gets to make the decisions.

Unfortunately, even when you are transparent, the words "partner meeting" make founders think they are just a week away from a term sheet when, in reality, they're one of many line items likely to be passed over. 

What you really need is partner interest.  Even when you've got a principal, like I was at First Round, who can do deals, you still need partner interest to get the check approved.  So, realistically, unless you've got partners showing up to meetings with you, staying the whole time, and engaging with you after, taking multiple meetings, you really don't have anything.

Two things to watch out for:  The partner who gets dragged into a meeting.  Who set this meeting up?  Does the partner leave after ten minutes?  Do they engage with you after?  Do they show up in the next meeting?

Two is the partner cc'd on e-mail while the junior person does all of the talking.  This happens a lot with growth stage firms that do a lot of random cold calling.  I'll bet these firms have a special account or filter that allows them to ignore that CC, but it makes you feel like the partner is interested.  

"We want to see you get up to X milestone."

First off, like I said before, there are plenty of examples of firms that invest before conventional milestones if they really like something.

Second, this isn't a progress.  It's "come back to us when you get there".  If a firm really thought you had a 100% chance of getting there, why would they wait, potentially risk losing the deal, and pay up for it later?  The reality is that they're just setting a time for a check in.  It really doesn't mean interest at all--especially if they're not engaging.  Engagement means continued customer introductions, or potential talent introductions.  They start acting like an advisor--maybe even having regular calls with you.  

So how can you tell whether or not a firm is actually interested in investing?

a) They give you a term sheet or actually start discussing not only the terms of a deal, but how much they'd like to put to work.

b) You've met all of the people necessary to put a deal together, and those people take initiative to be engaged with you, multiple times.

c) You actually get invited to an official weekly partner meeting.  That's a thing.  

d) Senior people keep hounding you--like, daily.  

How else would you know?  You ask them.

Founders should be asking filtering questions--the kinds of questions designed to kick investors out of their pipeline.  I know it feels good to have a lot of names in a Google sheet, but a lot of those leads are cold or dead.  Find reasons to knock them out by asking questions like "By when can I get a firm yes or no?"  "Who needs to sign off on this?"  "What are your remaining issues?"  "Who in the firm has said they'd like the firm to invest?"  "Who is against the deal that I need to work on?"

Better to be positively surprised that someone came up with an offer than to feel like you're going to get something done and then have your pipeline fall apart.  

On No Sides...

On no sides is genocide an ok thing to promote with your free speech or to organize a group around.

On no sides is the Confederacy, the sole purpose of which was to defend the institution of slavery, a thing to be admired.

On no sides is the eradication of Nazis and the KKK a slippery slope to the end of free speech in our country.  It is perfectly right and acceptable for a society to draw lines--to point to levels of despicable behavior and say "No--in no uncertain terms.  No way.  Not here."  We certainly do this around the abuse of children.  These things do not belong in any kind of healthy, functioning society.  They have no more right to be here than anyone would suggest that cancer cells are a living part of your body that deserve a home.  I'm perfectly ok if a corporation decides that they don't want to be in the business of working with the Daily Stormer--and no, telling a Jewish software developer that they don't have to work for a company protecting Nazi websites is in no way anywhere near the same as saying it's ok for a florist not to do the flowers at a gay wedding.  If you think that a hate site promoting genocide is on the same level as two people who come together because they love each other, I'm at a loss for words for you.

Millions of patriots have already lost their lives in our history fighting these kinds of cancers--cancers that grew or persisted far too long because we didn't draw the kinds of lines that a healthy society should draw.  They didn't die on the beaches at Normandy to allow Nazis to march on our streets here.  They didn't die at Gettysburg to see Confederate soldiers memorialized in our parks.  To argue that removing these groups and movements is desecrating history would be to desecrate the memories of all those who made the ultimate sacrifice protecting us from them.  

Let's talk for a moment about false equivalency and the agenda of the right.  There is a narrative that stretches as far back as slavery itself that blacks are angry, savage, and need to be checked.  Even when the law said we were all equal, our society went down a path of "Yeah, but let's keep them over here."  The country needed a savage narrative to justify that--and it persists today.  Countless media studies have proven that the images we see of people of color in the media are disproportionately skewed.  "Whites represented 43% of homicide victims in the local news, but only 13% of homicide victims in crime reports. And while only 10% of victims in crime reports were whites who had been victimized by blacks, these crimes made up 42% of televised cases."  

When someone tells you that Black Lives Matter is a hate group and uses police shootings in Dallas as their proof, get smart about their agenda and the facts: 

1) First, the Dallas police shooter was not associated with Black Lives Matter.  He interacted with other extremist groups on social media, but not BLM.  

2) Second, the BLM movement has been quick to denounce racially charged violence, unlike the hate groups protesting in Charlottesville where *leaders* of these groups have, on multiple occasions, supported or praised the death of Heather Heyer.  

3) Third, just look at the reasons why these groups exist.  Black Lives Matter started after the acquittal of a man charged with killing an innocent black teen. It was *in response* to violence against black people.  There's no equivalent origin story around white supremacy--of whites being oppressed or being unfairly treated that any rational person would give equivalence to.

4) It has been shown that stories of mass violence on behalf of BLM protestors are either inaccurate anecdotes or cherry picked stories of what winds up being self-defense.  People think they've seen lots of images of angry BLM protestors when the reality is that hundreds of peaceful protests go on in its name with no incidents whatsoever.  The same cannot be said for white nationalism gatherings.  

It's all too easy, though, for working class whites to accept the narrative of angry masses of African Americans pitched against them in opposition.  It's the culmination of the media narratives they've grown up consuming--narratives driven by the agenda to keep working class people divided against each other.  Without division and fear, why would the masses of working class people ever cede the kind of power held by wealthy white people?  You'd never vote to allow corporations to run unchecked or for the gap between the rich and the poor to grow so large unless it was bundled with a set of fear driven policies meant to keep "law and order" by unfairly targeting and keeping down people of color, immigrants and other minorities. 

So while we tear ourselves apart, the rich are picking our pockets.

Slavery is like having a flood in your house.  You don't just pump the water out and call it a day.  You have to throw out every single thing that got wet, otherwise you can get mold.  Slavery was just the water, and by ending it, all we did was get rid of the water.  It's still damp, and we didn't really throw anything out.  

You want to know what this kind of mold does to a society?  Read The New Jim Crow and watch 13TH.  Our society is sick from the mold of racial prejudice.  It's in walls.  Read and watch.  I dare you to and not have your mind opened up just a little bit.

No matter how crappy you think your life is as a working class white person or how much more you deserve, people of color, on average, start out with less than you, have a more difficult time getting a job despite the same qualifications, get pulled over more than you, and get arrested and charged more often for lesser things.  It's a stacked deck.  

For example, there's no difference among drug use rates across races, but blacks get imprisoned for drugs six times more than whites.  

These aren't made up facts like you or I may have heard on some cable news program.  They're from real studies you can learn from reading a whole actual book--in fact, several of them.  

People may spit on CNN, but perhaps not getting 100% of your information from social media and cable news would be more productive.

It's hard to attempt this conversation without going down lots of rabbit wholes and never quite feeling like you made the whole point you were trying to make.  These issues are so intertwined.  They touch the core of people's identity and their skewed perceptions of the way things are.

If nothing else, I feel like I'm at a place where I've examined my views and been open to changing them in the face of new information.  That's what strikes me about these arguments.  You see lots of examples of people with privilege opening their eyes to what they have, how they got it, and the unfairness of social systems.  

You don't really see that too often on the other side--because generally the more you know, the more you realized that there aren't sides to this.  

Only right and wrong.

Turns Out I Wasn't Crazy: Tinkergarten Raises $5.4 million

I send out a monthly mailer of deals that I'm investing in that I'm looking for co-investors for.  Because I'm investing so early, a lot of times these companies are not only pre-revenue, but they might also be pre-product.  I also invest in a really wide range of opportunities, so many of them don't look like you're typical venture deals.

Tinkergarten is one such company.  At the end of 2015, I backed a husband and wife team expecting their third kid to build a network of outdoor kids classes--not an Uber for kids classes, Classpass for kids classes or Airbnb for kids classes.  Actual kids classes: finding teachers, vetting them, training them, creating content--all of the unscalable things you'd never want your tech startup doing.  They barely had any tech and I think they had maybe three teachers at the time I backed them.  I couldn't even get the round closed and had to send a second, slightly desperate note to my co-investor list:

We did eventually get the round closed and today, I'm excited to announce that they've raised a $5.4 million Series A led by Owl Ventures.  This year, they'll reach 1000 leaders and they're currently in 48 US states.  They have an amazing tech platform managing the whole process, from recruitment to class management to parent communications.

There are a lot of models out there that investors would think is unscalable that I'd say if you actually figured out a way to do economically, just means you've built a better moat.  When you actually offer a service or product you built and own your customers directly, loyalty goes up, brand value goes up, and you can be your own platform to launch a lot of different opportunities--if you can do it well.

These days, while you'd maybe rather be Classpass than you're average, run of the mill cycling studio or a faceless big box gym, I'd argue that you'd rather be Soul Cycle than Classpass.  Same goes for Shake Shack, Seamless and your average deli.  If you're not a special brand, you'd rather be software, and if you're software, you're always fighting to hang on to your network advantage as tech likes to disrupt networks and middlemen.   

Excited to see Tinkergarten get recognized as a special brand.  

Some Rules for Fundraising

Fundraising sucks. 

No one likes it.  Founders don't start companies so they can spend half their time asking people for money and VCs don't love the dance either.  

However, it's a necessary animal, so the least everyone can do is act professionally, and most of all value each other's time.  That's what I'm most frustrated by--the lack of respect for other people's time.  Too often, both sides walk away from fundraising processes feeling like a lot of it wasn't time efficiently spend--even when it does lead to a round.

So here are a few things both sides should do to make the whole thing go a lot smoother.

For VCs:

  1. Be upfront about the possibility of you investing now versus whether this is a "get to know you" kind of thing.  It's fine if you want to learn about blockchain or you never do pre-product and maybe the founder will oblige your curiosity at some point, but right now, they need cash, so don't waste their time if chances are 0%.  
  2. Don't take multiple meetings and then pass for a reason that you should have passed on at either the e-mail state or after the first meeting.  "We just can't get there on a consumer deal" is not a reason for passing after five meetings.  
  3. Be transparent about process and timeline.  If you need 8 partners and a Magic 8 Ball all to agree, let them know when you've decided to start serious due diligence.
  4. Never ever take a meeting with a founder when you're in the middle of fundraising your own and can't write a check within reasonable timelines for this round (usually about 30-60 days for a seed.)--unless you let them know beforehand.
  5. Make it clear where your money comes from and what control you have over it.  Are you a fund?  Is it personal money?  How did you come into it?  Does anyone else need to approve this deal?
  6. Make references to founders you've backed available upon request.

 

For Founders:

  1. Be transparent around where you are in the fundraising process.  Does the VC need to call a special partner meeting because you already have three term sheets or is this the beginning?  I know you want to move fast, but don't make a VC prioritize your timing when I'm literally the first meeting.  I have other founders who literally need to know tomorrow or the round will close.
  2. If you're going to take a meeting with an investor and you don't think it's a good fit, just say it.  Don't make them do any due diligence or make an offer only to not take it.
  3. If you wind up getting more interest than you anticipated in a seed round, give the investors a fair opportunity to work together.  When you send terms around, get a hard number from everyone within a reasonable deadline.  I favor the simple math approach.  Take the amount you want to take, and divid it by the amounts offered based on everyone's average or requested size.  If you're 2x oversubbed, as long as you like everyone, give them a shot to do half their allocation, and distribute evenly what isn't taken.  People might gripe or bail, but the absolute worst is when you do a bunch of work, take meetings when you say you're still fundraising, and then get completely shut out of a deal.  
  4. Don't accept introductions to other co-investors investors unless you're willing to take money from the person making the introductions.  If someone shows me a deal, and then you cut that person out, that's professionally embarrassing for them and puts me and them in a weird spot.  There's just no reason for that if you manage the process right. If you really don't want to work with them, just be upfront about it.
  5. Take a moment to think about who might expect you to pitch them--former bosses that have been successful, people who funded the last place you worked at.  If your experience is due in part to the effort and resources of others, it feels like good practice and courtesy that you at least give them a look--or let them know why you might be going in a different direction.  

 

For both sides:

  1. Take professional meetings in professional or public settings during business hours--busy hotel lobbies are ok, but ideally, you avoid happy hour time because that's a less professional vibe.
  2. Alcohol should not be consumed in a professional discussion between two people where money and uneven power dynamics exist.

There's Always Other Money

In reading the NYT piece about the negative experiences of female founders raising, one quote stuck out to me:

"They put up with the comments, Ms. Renock said, because they “couldn’t imagine a world in which that $500,000 wasn’t on the table anymore.”

If you've ever had to fundraise, you can understand this.  It's an extremely vulnerable time where you're getting a lot of rejection.  When you finally get someone willing to fund what by now seems like a crazy idea, especially after all the criticism you've gotten during the process, you get in a mode of pushing for a close.  You're willing to overlook just about anything because you really need this money.  Rent is due.  Credit cards are maxed.  You don't want to lose this fish while it's on the hook.  

That's why so many of these founders went down rabbit holes that, in hindsight, maybe they shouldn't have--and where they have gotten some pushback.  That's why the agreed to meet at such and such time or place, or ignored the first set of comments.  

They felt like this was the *only* opportunity for their company to survive.  

The reality, and what it's important to remind founders of, is that there is *always* other money.  If one investor seriously wants to put money in, there's nearly zero chance that they're the only high net worth individual or VC on the face of the earth that will get there.  You convinced one person, and that means you can convince another.

It's never ever worth having your values take a back seat or not receiving the utmost respect from those who invest in you.  Know that you can move on, and there will undoubtedly be a much better partner for you in someone else.  

In fact, this is where you can use the ecosystem to your advantage.  If you tell community leaders that you got an offer for investment from someone you don't trust or someone that you don't think respects you or your boundaries, so you want to find replacement investors, I guarantee people will be willing to help.  

It's one thing to take time to just help someone raising--it's another to help someone who has had a crappy fundraising experience that no one should have to go through.  Founders and investors alike will point you in the direction of well-respected and professional investors.

Plus, many of the high net worth angels who mistreat founders aren't serious investors anyway--and there would have always been a strong chance that they would have bailed on you before the finish line.