The Other Kind of Traction You Need to Get Funded

One of the earliest lessons a new VC learns is about building consensus within a firm.  No matter what the voting structure is in your partnership, I think every VC can think of a deal that they got completely excited about, only to have the deal crash and burn when they showed it to the rest of their team.

It can be one of the most confusing and frustrating things from the entrepreneur side.  You think you've got yourself an investor who is signalling all the right things about coming in.  They're engaged, excited, and then all of the sudden, BOOM, dead.  

"Couldn't get my partners over the hump."  

As frustrating as it is for you, it can be pretty embarrassing for the investor as well.  No one likes to have their deals turned down--but that doesn't mean it still doesn't happen all the time.  Sometimes it takes years for an investor to figure out how to predictably get their partnership on board with the things they like--or to get them to trust their deal instinct.

On the other times, sometimes partners fall out of favor.  Maybe the last few deals tanked and they need to spend extra time that they didn't used to in order to get something over the finish line.

Here are a few things founders can do in order to make sure this doesn't happen:

1. Always do VC fund diligence with other companies they've invested in.  One, you should be doing this anyway, because life is too short to have the wrong people on your cap table.  Two, sometimes they can provide helpful insight into how they felt like the fund came to a decision about their investment, and who the key decision makers were.

2. Simply ask.  You're absolutely allowed to ask where a fund is in its process and what they key steps are to getting funded.  Do you need two partners to ok a deal?  Have you met any yet and you're still dealing with an analyst or principal?

3. Pay attention to who is setting the meetings.  Is every meeting you have with a partner being setup by the junior person?  Do you have a separate line to that decision maker or are all the questions from the team being relayed to you by someone junior?

4. Make sure you have multiple inroads into a firm.  That doesn't mean you go around the lead in any way, or open up separate channels, but it's good when multiple people are nudging various people around the table that they need to be paying attention to your deal.  

Rounds are getting harder to raise now.  They're under more and more scrutiny, and so you want to make sure that you know exactly how close you are to the finish line with eyes wide open, and that there isn't a key decision maker or two who will tackle you before you make it.  

Things I believe...

I believe in solvable problems, but that you can't make progress on them until everyone involved accepts responsibility for causing them.  

I believe that if you aim for compromise, you will be less successful than if you aim for creativity. 

I believe that if you treat people like you believe they can be better than they are, they will be.  

I believe that if you're not doing everything you can to get them there, they'll fail without you.  

I believe you should be eternally optimistic, while leaving nothing to chance.  

I believe that if you are honest with yourself about what you really want, you can have it.

I believe you have to work for everything you get.

I believe that complete and hard fought failure with the best people you can find is better than mediocrity with anyone else.  

I believe that most of the people who failed never really tried.  

I believe that actions speak louder than words, but that language has immeasurable impact.

I believe that one of the best things you can do for someone is make them feel like they belong right where they are and that it's ok to be who they are. 

This problem here?  

I believe we can fix this.

Health.  Education.  Crime.  Food.  Poverty.  War.  Environment.  Equality.  Transportation.  Relationships.  Family.  

We can fix them all.  

I believe in us.  

Serious.

_____

I posted this in my weekly newsletter about NYC tech.  If you liked it, please consider supporting my run up the Empire State Building next week for charity.

What is actually happening during a VC slowdown?

The public markets have been stumbling around lately, trying to figure out what China and oil prices mean for the rest of the world economy.  

That uncertainty creates fear--and in a US Presidential Election where fear is the debate topic de jour, we've got plenty of that to go around.  Fear, not surprisingly, weighs markets down.

But, that's a short term thing, right?

Aren't VCs investing in companies that won't exit for another 5-8 years?  Shouldn't they be long term minded?

What does the current economic cycle have to do with raising your Series A?  

The problem is that VCs raise funds theoretically every four years, but in a sense, they never stop fundraising.  It might take them 12-18 months to raise that fund, and because more funds create layers of fees on top of fees, if they can, they'll raise closer to every three years.  

That means that while they're investing for the long term, their perception of their own portfolio is often short term minded.  So, when their latest unicorn raised last year, they were feeling pretty good about things.  Now that they have to go back into the market next year to pitch their own fund, they're going to have to answer some tough questions about valuations.  They might have to get another round in, and that round will most certainly be a down round.  Over the long term, the Series A they did in that company that was a billion dollar company last year and is a $600mm company this year will still look pretty good, it's going to take up a lot more of their time than normal.  

They might be doing board meetings more frequently, coaching first time founders through layoffs and debating with their partners which companies they should bridge until things thaw out.  

All that means less time for new deals.

It's not that they're concerned that the world will implode and that startups won't still be a good bet over the long term.  They're just... well... busy taking care of their wounded.

If you're a founder fundraising this year, that means spending more time getting VCs comfortable with the risks of your company.  That means getting out earlier, being more conservative and raising more capital, sometimes meaning more dilution, and taking a VCs fund into consideration.  Perhaps that VC who did nine new deals in the last two years isn't the person you want to be pitching versus that partner who just joined and who doesn't have a portfolio yet.

At the same time, this can be a very difficult environment for new partners to get deals done.  When VCs go to the mattresses, new partners who have yet to have a win under their belt may have a tougher time convincing the rest of the partnership to do a new deal, especially since that capital might be needed to preserve existing portfolio companies.

Thing of it as a VC hangover.  Your friendly VC isn't in a bad mood because you're doing anything wrong.  They're just feeling the effects of last year's excesses.  

That Time I Passed on Datadog Because I Didn't Understand the Market

Systems administrators get all sorts of data from all sorts of places and don't have a holistic view as to what's happening.  More parts throw off more data, which makes optimizing and troubleshooting that much harder over time.

That was the Datadog pitch in late 2010, my first full year of leading deals, that I got from two software engineers.  

Makes sense, no?  Doesn't sound crazy, does it?  

But instead of taking their word for it, I went overboard in due diligence.  I asked a bunch of CTOs what they thought, and they give me all sorts of conflicting takes on whether or not they needed a high level view of their systems.

Because I didn't get a screaming yes across the board, I sat on the deal, asking more people, trying to be peripherally helpful, but not jumping in and taking a risk.  I even punted on the fundraising by adding them to the Open Angel Forum in February, 2011, giving everyone else an opportunity to do the deal, without leading it myself.

Today, they just announced a $94mm round of funding. 

[smacks head]

Since then, I've found success investing in two jewelry companies (chloe + isabel and Ringly), a fashion media company (Refinery29), a kids apps studio (Tinybop), a kids class company (Tinkergarten), a kids art ecommerce place (Plum Print), and a whole bunch of other companies where I have no special knowledge of the industry at all.  

I'm much more open these days to checking my industry knowledge at the door and leaving it to the founders to explain the market to me.  It's my job to judge whether they're in a position to see it clearly, not for me to outresearch them.  

The fact of the matter is, Alexis and Olivier were impressively smart founders who wouldn't have ever built this thing if they didn't know there was a need for it, much the same way I think about Kurt at Clubhouse.  

Market research is probably one of the most overvalued pieces of information for seed stage companies--one that all too easily leads you away from working with great founders.  I should have focused much more on my assessment of these two founders and whether they were in a good enough position to see an opportunity versus challenging their view.  

I'd have to say that Datadog is probably my biggest turndown regret--because they succeeded doing exactly what they pitched, and I liked the founders from the start.  I was in the position of being super early to the deal and could have led it, but let too much half-assed market research get in the way.  If you're not an expert in a space, don't let a few e-mails to a few random people taint your judgement of perfectly good founders to back.  

Plus, if eight out of ten people say they wouldn't buy it, you'd still take 20% market share all the way to the bank, and that's not even allowing for feature development over time.  

How to Stand Tall While Being Human

Starting a company is a stressful, draining, and extremely emotional undertaking.  

The burden of responsibility to your investors, your customers and your employees--not to mention to yourself--is the heaviest of weights.  Sometimes, it takes every last drop of strength you have just to endure it one... more... day. 

Yet, at the same time, everyone looks to your confidence.  Lost faith can go viral quickly.  Your temperament around the office and in board meetings gets noticed, even if unconsciously.  Maybe you don't realize that you used to end stand ups with a little clap or a smile and you don't anymore.  Then there's that little sigh at the end of an intense board meeting.  

The cracks start to show at the top before anywhere else.

Well, what does anyone expect?  After all, you're human.  

Much has been made about the mental and emotional health of founders--about how the idea that everyone's company is always killing it 100% of the time is complete bullshit and how sometimes, even in the best companies, things really suck.

So how do you balance?  How do you allow yourself understandable, but difficult, emotions while trying to lead a company and its morale by example?

I certainly don't have all the answers, but here are a few things that might be helpful.

First off, it's ok to be down.

The only thing worse than feeling bad is feeling bad about feeling bad.  There's no reason to give yourself extra grief because things are just getting to you.  You're allowed.  

Be specific.

Identifying exactly what's wrong directs and focuses your negativity, minimizing the collateral damage of everything else.  For example, if you have a difficult conversation with your board about fundraising options while they're trying to be helpful, saying "This sucks!" makes everyone else feel like they're wasting their time and not being helpful.  You already feel bad, and now they're going to feel bad, too.  

Saying that fundraising can be frustrating is better and actually more honest, because it more accurately reflects what you're feeling--lest they get the impression that you think being CEO sucks and you're ready to throw in the towel.  More specific and honest still is to identify what about it sucks--that you're frustrated by the fact that investors aren't seeing your value proposition or the real traction you believe you've made.  That's something actionable that someone else can actually help with, and maybe help you feel better about--supporting your view that lots of progress has been made and working on ways to convey that better.  

Spend time with other founders.

Absolutely no one can make you feel more supported than other people who are going through the same thing.  They're going through it at the same time, and despite the fact that you have no time for anything, you have to find a way to connect with peers--especially if you're a solo founder.  

Never use stress as an excuse to treat others poorly.

You need an outlet, but that doesn't mean treating the next person who comes through the door as a verbal punching bag.  Taking someone else down, especially someone who could potentially be helpful, isn't going to make you feel better anyway.  It's going to make them feel worse about interacting you and it will alienate you from others, creating a negative feedback loop.  You'll be more upset that no one wants to help, and you'll feel more alone when you have no one to tell that to.  

Strengthen relationships by making sure they're a two way street.

You need a lot of help, but you can't just be a taker all the time.  It's really important to have the kind of relationships where you can be open and honest about what you're feeling, but those relationships get built.  For example, you may have a board member you want to count on for support, but you owe them some things, too--like the willingness to listen, to take feedback from, and the determination to be better founder.  It's the same with employees.  You need to be there for them before it's ok for them to be there for you.

Plan.

When you think about what you're going to accomplish ahead of time--and do the work to lay out that path, spelling out risks and alternatives--hardship is easier to bear.  When you know what could possibly happen and what you're going to do to mitigate it, you're less likely to feel the full weight of a situation, because you'll already be on to your previously planned next step in Plan B.  

Know when to fold 'em.

Sometimes things just don't work.  You have to know your limits--and knowing those limits also gives you some certainty when you haven't hit them.  If you're going to spend X dollars of a marketing budget to figure something out, you won't get too down when you're halfway there, because you already planned to spend twice this much.  It's easier to say it's over when you've decided what that point was going to be ahead of time, as opposed to in the moment.  

The toughest thing you can ever do is throw in the towel, but it's easier when you knew it was possible all along and how far you had been away from it.