The Super-Simple Guide to What VCs are Looking For Today


This post is curated by Keith Teare. It was written by Jason Lemkin. The original is [linked here]

There is so many VC content out there, on Twitter, on Medium, on blog posts, and so much of it really is transparent and helpful. The industry is so much less opaque than it was just a few years ago.

But it’s also sort of confusing, how much of it there is.

And in particular what’s confusing is:  What Do VCs Really Want?

Here’s the simple answer:

  1. Seed and “Early” Series A investors are looking for you to have a shot at doing 100x their money.  True early stage investors will have a lot of misses, and only 1 out of 25 or even 50 starst-ups will be a hit.  So to make the math work, that 1 winner out of 25 or 50 has to do 100x on their money.  If 1 out of 500 does 100x, and you put say 2% of the fund into that winner … then that 100x deal makes you 2x the fund.  If all the rest collectively make 1x the fund, you’ve overall tripled the fund over 10-14 years — the goal here in VC.  Now, pre-seed and seed VCs can tolerate a high failure rate in the model.  But it also means if they invest at say an $8m valuation … they have to at least think you might be worth $800m, maybe.  Add in dilution, and that’s $1B.  The magical unicorn.
  2. Series B and Series C, and later-stage Series A … anything much higher than a $60m valuation or so … is looking to 10x their investment in you.  At this scale, 100x can happen (Zoom, Datadog, Snowflake) and that’s great when it does.  But 10x is more the model.  If they put 5% of the fund each into say 4 10x winners, that returns 2x the fund.  And if all the other companies in the portfolio do 1x, then you again ad dup to a 3x fund.  Here, you’ll see VCs don’t qutie expect 100x.  10x will do it.  But it has to happen more often.  If they need 4 deals at 10x out of say 30 investments, that means 1 out of 10 and sometimes even 1 out of every 5-6 investments needs to be a 10x hit now.
  3. Pre-IPO investors are looking for 3x.  Pre-IPO investing, i.e. unicorn stage, are looking in general for at least 2x-2.5x returns.  3x ideally, like seed and middle stage.  But at this stage, there is risk, yes, but more certainly.  They are hoping out of a portfolio of 10-30 late stage investments, that one does 10x, 3-6 do 3x, and 1-2 make money but less than 3x, and maybe 1 or 2 loses money.  Net net, if they invest at $1B valuation, they are looking for at least a $3B IPO.  A $2B valuation, a $6B IPO.  Etc. etc.

Some simple math that summarizes a lot of complexity, portoflio strategy, etc.

But it’s just about right.

Take VC money at each stage, and this is what they expect.  They hope for more.  They can afford it if you do your best, and come up a bit short.  But this is what they are expecting from that venture capital.

The post The Super-Simple Guide to What VCs are Looking For Today appeared first on SaaStr.

The Super-Simple Guide to What VCs are Looking For Today


This post is by Jason Lemkin from SaaStr

There is so many VC content out there, on Twitter, on Medium, on blog posts, and so much of it really is transparent and helpful. The industry is so much less opaque than it was just a few years ago.

But it’s also sort of confusing, how much of it there is.

And in particular what’s confusing is:  What Do VCs Really Want?

Here’s the simple answer:

  1. Seed and “Early” Series A investors are looking for you to have a shot at doing 100x their money.  True early stage investors will have a lot of misses, and only 1 out of 25 or even 50 starst-ups will be a hit.  So to make the math work, that 1 winner out of 25 or 50 has to do 100x on their money.  If 1 out of 500 does 100x, and you put say 2% of the fund into that winner … then that 100x deal makes you 2x the fund.  If all the rest collectively make 1x the fund, you’ve overall tripled the fund over 10-14 years — the goal here in VC.  Now, pre-seed and seed VCs can tolerate a high failure rate in the model.  But it also means if they invest at say an $8m valuation … they have to at least think you might be worth $800m, maybe.  Add in dilution, and that’s $1B.  The magical unicorn.
  2. Series B and Series C, and later-stage Series A … anything much higher than a $60m valuation or so … is looking to 10x their investment in you.  At this scale, 100x can happen (Zoom, Datadog, Snowflake) and that’s great when it does.  But 10x is more the model.  If they put 5% of the fund each into say 4 10x winners, that returns 2x the fund.  And if all the other companies in the portfolio do 1x, then you again ad dup to a 3x fund.  Here, you’ll see VCs don’t qutie expect 100x.  10x will do it.  But it has to happen more often.  If they need 4 deals at 10x out of say 30 investments, that means 1 out of 10 and sometimes even 1 out of every 5-6 investments needs to be a 10x hit now.
  3. Pre-IPO investors are looking for 3x.  Pre-IPO investing, i.e. unicorn stage, are looking in general for at least 2x-2.5x returns.  3x ideally, like seed and middle stage.  But at this stage, there is risk, yes, but more certainly.  They are hoping out of a portfolio of 10-30 late stage investments, that one does 10x, 3-6 do 3x, and 1-2 make money but less than 3x, and maybe 1 or 2 loses money.  Net net, if they invest at $1B valuation, they are looking for at least a $3B IPO.  A $2B valuation, a $6B IPO.  Etc. etc.

Some simple math that summarizes a lot of complexity, portoflio strategy, etc.

But it’s just about right.

Take VC money at each stage, and this is what they expect.  They hope for more.  They can afford it if you do your best, and come up a bit short.  But this is what they are expecting from that venture capital.

The post The Super-Simple Guide to What VCs are Looking For Today appeared first on SaaStr.

Why VCs Need Unicorns Just to Survive


This post is by Jason Lemkin from SaaStr

One of the most tiring things for founders can be always being compared to Unicorns and now Decacorns.  Certainly sometimes it’s inspirational.  I loved it when many of the founders come out of each SaaStrAnnual saying they needed to grow faster:

But the reality is as a founder there are different ways to make real money and build something meaningful.  Go back to our case study of Marketo vs. Eloqua vs. Pardot here.

For VCs that manage a fund any bigger than $150m or so though (which is relatively small for a VC) — there really is only one way.  Unicorns.

If you understand this, at least you’ll understand why VCs are the way they are.

Because the (maybe semi-sad) thing for VCs is, only Unicorns make the business model work:

  • Say you have a $200m VC fund (not that large, but basically our current fund, as an example).
  • Your own investors (the LPs) are looking for gross returns (before expenses) of about 4x, so let’s call it $800m.
  • You get to make about 30 or so investments from that fund.

So those 30 investments have to return $800m.

silicon-valley-season-2-ep-3-thumb

How can they do that, if they own on average say 15% of each company?

  • Well $800m (4x the fund before costs and profits/carry) / 15% ownership on average = $5.333 billion in market cap to achieve 4x gross in the fund
  • So a $200m VC fund needs $5.333 billion in exits (measured by the 30 companies’ collective value when the VC can finally sell their stock post-IPO or acquisition) to hit its own investors’ expectations.  In “just” a $200m VC fund.
  • Multiple unicorns, in fact.  Just one at a $1 billion or $2 billion market cap won’t be enough.  A decacorn will be enough though 🙂

And now you can also see why VCs care so much about how much they own.  If that 15% average ownership dips down to say 10%, it just gets that much harder.

Scale that up for billion$+ funds.

Unicorn and now Decacorn Hunters, so all VCs must be.  At least, any VC working at a fund of any material size.

(note: an updated SaaStr Classic post)

The post Why VCs Need Unicorns Just to Survive appeared first on SaaStr.

Why VCs Need Unicorns Just to Survive


This post is by Jason Lemkin from SaaStr

One of the most tiring things for founders can be always being compared to Unicorns and now Decacorns.  Certainly sometimes it’s inspirational.  I loved it when many of the founders come out of each SaaStrAnnual saying they needed to grow faster:

But the reality is as a founder there are different ways to make real money and build something meaningful.  Go back to our case study of Marketo vs. Eloqua vs. Pardot here.

For VCs that manage a fund any bigger than $150m or so though (which is relatively small for a VC) — there really is only one way.  Unicorns.

If you understand this, at least you’ll understand why VCs are the way they are.

Because the (maybe semi-sad) thing for VCs is, only Unicorns make the business model work:

  • Say you have a $200m VC fund (not that large, but basically our current fund, as an example).
  • Your own investors (the LPs) are looking for gross returns (before expenses) of about 4x, so let’s call it $800m.
  • You get to make about 30 or so investments from that fund.

So those 30 investments have to return $800m.

silicon-valley-season-2-ep-3-thumb

How can they do that, if they own on average say 15% of each company?

  • Well $800m (4x the fund before costs and profits/carry) / 15% ownership on average = $5.333 billion in market cap to achieve 4x gross in the fund
  • So a $200m VC fund needs $5.333 billion in exits (measured by the 30 companies’ collective value when the VC can finally sell their stock post-IPO or acquisition) to hit its own investors’ expectations.  In “just” a $200m VC fund.
  • Multiple unicorns, in fact.  Just one at a $1 billion or $2 billion market cap won’t be enough.  A decacorn will be enough though 🙂

And now you can also see why VCs care so much about how much they own.  If that 15% average ownership dips down to say 10%, it just gets that much harder.

Scale that up for billion$+ funds.

Unicorn and now Decacorn Hunters, so all VCs must be.  At least, any VC working at a fund of any material size.

(note: an updated SaaStr Classic post)

The post Why VCs Need Unicorns Just to Survive appeared first on SaaStr.

How Venture Capital Decision Making Has Changed During the Pandemic


This post is by Leah Fessler from Blog – NextView Ventures

The sudden arrival of the global pandemic has shifted the playbook for founders and venture capitalists. Despite the beginnings of a vaccine rollout, it’s likely that the conditions created by Covid-19 will continue to persist for some time.  Zoom calls have taken the place of in-person meetings. Investors previously prone to onsite visits and amassed airline miles, now grapple with how to form relationships and build confidence without having met teams in person. At NextView, we’ve experienced this changing environment first hand. As high-conviction, seed stage investors, we are inherently relationship-driven, and we value meeting exceptional founders face-to-face.

With the onset of COVID-19, we, along with the broader ecosystem of venture capitalists and entrepreneurs, have been pushed to rapidly adapt, forge connections, and do our jobs remotely. Noting our own experience, we questioned whether the fast proliferation of virtual interaction introduced by the COVID-19 crisis had changed investor decision-making more broadly across the venture capital industry. We interviewed various VCs about COVID-19 thinking and decision-making, and potential implications for the fundraising process.

Here’s what we’ve seen from our own activity, the activity of our coinvestors, and multiple interviews conducted with GPs at both seed, series A, and multi-stage funds.

How has this period impacted your pace of investment?

Following initial decision paralysis, many venture capitalists have returned to pace

There was a meaningful drop in venture capital investments in the early months of the pandemic, as the U.S economy shut down and investors grappled with new waves of uncertainty. In a survey conducted by Stanford’s Strebulaev and co-researchers, over 1,000 institutional and corporate venture capitals reported that investment pace was 71% of normal in the first quarter of the pandemic, with roughly ¼ adding that they had struggled to evaluate new deals. The majority had dedicated more time to guiding the portfolio companies through the pandemic. 

Kent Bennett from Bessemer Venture Partners spoke to this initial slow down: We couldn’t do anything until we understood the new normal. Many of the investments I was pursuing in this period were smaller checks, with the intent to invest more when the world came back to life.”

However, the sector has been fast to adapt, as entrepreneurship persists and leads to new forms of recovery. Gradually adjusting to sourcing deals online, venture capitalists invested $37.8 billion across 2,288 deals in Q3, with deal count exceeding Q2’s at nearly every stage. 

 

 

Early stage deal activity showed real resilience coming off of a slow Q2, with deal count at angel and seed stage in 2020 now about at par with the same period in 2019. Despite the sustained climate of uncertainty, valuations continued to climb and VC exit values reached their second highest total ever in Q3.

 

 

VC fundraising has also remained strong as firms look ahead, with VCs raising $42.7 billion in 148 funds for the first half of 2020. Over the last decade, only three years saw higher VC fundraising numbers than that seen in the first six months of 2020.

Graham Brown from Lerer Hippeau commented on this rapid recovery: “We saw a large slowdown in March, April, and May, before our speed really picked up in June. Much like investors, a lot of entrepreneurs that didn’t need fundraising stopped seeking investment until they had a better sense of what was happening in the world. This opened up a significant backlog, leading to the most active summer period we’ve ever seen.”

Lily Lyman from Underscore VC echoed this momentum: “Q2 and Q3 have been some of our busiest quarters from an investment perspective.”

By cutting out logistics, the top of the deal funnel has gotten wider and more efficient

There is less wasted time in ubers, repeated cross-country trips to board meetings and conferences. This leaves more space for more top of funnel activity: for back-to-back Zoom calls that create and expand relationships with new and known founders.

For some, this shift is a long time coming. Said one investor, “We may have overdone it on socialization at the expense of productivity.”

Of the eight venture capitalists we interviewed, six commented that they felt more efficient and were able to have more early conversations during this period than before. This included investors at Bain Capital Ventures, Upfront Ventures, and Bloomberg Beta.

One firm added that gained efficiencies have meaningfully expanded the top of their deal funnel: “ Our investment team has been able to have 2X the amount of top of funnel meetings than they’d have previously. By cutting out the commute, the process becomes much more efficient. You can realize fast if there’s not a fit, to avoid wasting both your and the entrepreneurs time. You can meet more teams and hear more ideas.”

Greg Bettinelli at Upfront Ventures added There is less parking time, less in between time, and more time in the day. I can have a wider reach and a higher volume of 30 minute meetings with founders.”

While it was easy to conceive that virtual modalities would widen top of the funnel conversations, our questions remained about how this period would impact the remainder of the diligence process. How quickly would deals move through the funnel, what new checks and balances were required to arrive at an outcome, and how could founders effectively build momentum to help investors develop confidence during the fundraising process?

How have you built confidence, without having met teams in person?

VCs have sourced from known founders and trusted networks to curb risk

In the early phases of COVID-19, some venture capitalists looked to de-risk investments by sourcing from founders known pre-pandemic, rather than building net new relationships. For Taylor Greene at Collaborative Fund, “50% of the entrepreneurs we invested in during this period were people already known before the pandemic.” This approach was echoed by investors at Underscore VC, Bloomberg Beta, Lerer Hippeau, and Upfront Ventures. 

While always core to diligence, social validation behind a business and management team became even more critical determinants of fit. Investors looked to known, credible networks, to closed communities, and sought warm introductions to source new deals. Familiar loops offered invaluable, pre-seeded confidence.

Lily at Underscore VC commented that “while sourcing from trusted people has always been important to early stage investing, it felt particularly critical during this period of time. We looked to who from our respected community could help us meet founders, partnered closely with co-investors we’d worked with before and with credible angels.”

Hearing this feedback, we questioned potential implications for first-time entrepreneurs. In a world where a focus on founder track record and network became increasingly pervasive, how could new founders effectively break in and obtain early financing?

On opportunities for new entrepreneurs, James Cham from Bloomberg Beta opined: Warm introductions and social context matter more than ever. Join online networks, reach out to investors over Twitter, and expand your community.”

Communication with management teams has become higher touchpoint, shorter form, and more transactional

The pandemic has perpetuated a range of more short-form communication styles between investors and entrepreneurs. 

Rebecca Kaden at Union Square Ventures commented on this trend: “We lost the chatter from onsite visits, but we wound up having much more frequent and targeted touch points throughout the lifecycle of a deal, often through text, Signal, and WhatsApp. Rather than wait for an in-person exchange, if you thought  of a question, you looked to answer it now.”

These same facilitating systems have also made the process feel more transactional to some. For Greg Bettinelli at Upfront Ventures: “as a relationship-driven investor, I feel like I’ve lost a degree of the interpersonal. There is less getting to know each other and more talking deals.”

Rebecca added “I think these new mediums accentuate the value of good storytelling. As both a founder and an investor, you need to be able to capture and keep interest pretty quickly.”

VCs are conducting more diligence and employing more founder references

Investors are now having more one-on-one conversations with founders over Zoom than they would have in person, even finding opportunities for more casual formats–the new ‘virtual happy hour’–to cultivate personal connections. 5 out of the 8 investors we spoke to reported that diligence had deepened during this period, relative to before the pandemic.

Taylor Greene at collaborative commented: “I’ve found that vetting a founder takes more reference calls, more Zoom calls, more ‘getting to know you’ calls. It has always been, but is increasingly a multi-step process.”

By all accounts, there is a degree of nuance lost without in-person communication, but reference calls and credible external perspectives have helped fill in the gaps–rounding out and even adding additional color to a person, team, and market. 

One firm reinforced the growing importance of founder references during diligence: “We’ve invested more hours in diligence than alternatively. There is no doubt, particularly with early stage, energy, tenacity, and drive are important determinants of people. You lose that online. So, we have to rely more on other people to make up for that lost signal.”

Some venture capitalists have also looked inwards to collect perspective, involving more investors across their firms in deal evaluation.

Graham Brown at Lerer Hippeau commented on the move to include more investors in the decision making process: “Before COVID-19, 2 people had to meet the team before making a decision. Now, we’re trying to get more perspectives on an individual or a team by having 3 or 4 of us meet them. Ultimately, I think we’re moving to a culture that is more conviction based, but consensus driven–where everyone has a perspective on the team from having spent time with them.”

What impact do you think that this period will have on the quality of investment decisions?

While the real effect of COVID-19 on the quality of VC decision making remains to be seen, we heard varying perspectives on if impacts would be positive or negative. Here are the positives:

Virtual decision making may remove bias from the decision process, leading to better, more data-driven outcomes

When meeting a founder in person, aspects of charisma and likeability can yield an outsized impact. Some commented on the potentially harmful role of implicit bias: “I would argue that there may be some false positives that come when you get a great, charismatic person in the room, and that this can skew decision making.”

The idea that CEOs must have charisma can lead investors to overlook promising candidates, and to consider others unsuited for the role. Said Graham from Lerer Hippeau: Not every founder has to fit the archetype of overtly charismatic to be a good founder, and rather many of the best founders do not. We tend to overweight star power when evaluating in person.”

In fact, while a study presented in HICSS confirms that hubristic and charismatic entrepreneurs have historically been more successful in sourcing capital, research from Harvard Business Review suggests that excessive charisma over humility can ultimately destabilize organizations in dangerous ways. Recent history has paved a growing cautionary tale around rapidly capitalized, excessively charismatic founders. Elizabeth Holmes of Theranos saw a once $9 billion valuation dissolve into 12 felony fraud charges. WeWork, steered by a particularly emphatic Adam Neumann, fell from a nearly $50 billion valuation to just $2.9 billion in under a year.

Perhaps, the most positive outcome of moving online is that we become less captivated by showmanship, more discerning, and more reliant on impartial references and predictive data. Kent Bennett at Bessemer Venture Partners offered: “Subconsciously, the element of bias towards charisma has flowed away and become less important on Zoom. I wonder, should it have ever been important?”

James at Bloomberg Beta offered an alternative view, that as founders and VC adapt to virtual modalities, charisma increasingly translates over Zoom. He added: “As usual, people adapt and become more comfortable online.The question remains–will different people succeed and translate better over Zoom than others? Who will be the charismatic person in this environment?”

More diligence, checks, and infused perspectives may ultimately lead to improved results

As investors funnel even more time into deepening diligence and building external context around management teams, the decision evaluation becomes more grounded in data and input collection versus blunt intuition. Lily Lyman at Underscore VC commented, “my hunch is that decisions will be better, because we’re forced to be more discerning. It’s forcing VCs to do more proactive work versus intuition work.”

Historically, ‘intuition’ has been a significant driver of early stage venture capital investments. A 2019 Pitchbook Survey administered to 391 VC investors, found that while only 38% of VC investors currently used data to source and evaluate all investment opportunities, 85% of respondents believed that investment decisions would always involve intuition. While some degree of intuition may always play into decision making, there is a growing appetite for data: 86% of survey respondents agreed that data is increasingly important to accurately assessing opportunities. 

As Zoom-constrained venture capitalists push for more diversified inputs about a team and concept, more intentionality and fact-based evaluation may yield positive performance impact. One firm commented “Early sourcing and early diligence has been better and more data-driven than it’s ever been. I think we’re going to be able to end up as a more efficient and strategic group as a result of this.”

And here are the negatives:

Increased risk aversion may add more funding hurdles for underrepresented founders

The heightened atmosphere of caution surrounding the pandemic has introduced additional funding barriers for underrepresented and diversity founders. Lily Lyman from Underscore VC spoke to this directly: “When investing in known founders feels like the least risky path, how do we make sure that we expand diversity in our founders? This is an important question we’re doing the work to answer at Underscore.

Recent data adds weight to these concerns. An October 2020 Pitchbook study reveals that venture funding for female founders has now hit its lowest quarterly total in 3 years. Firms invested $434 Million in female founded companies in Q3, the lowest since Q2 2017. This third quarter total also amounts to a 48% drop in funding from Q2.

 

 

This is a serious step in the wrong direction, and it has never been more critical to be cognizant of and intentional in reducing bias and enabling opportunity. 

At NextView, we’ve taken proactive steps to dispel bias and increase our purview beyond our own known networks. David Beisel, co-founder and partner at NextView commented: “one of the motivations for our launching a virtual accelerator during the pandemic was to push ourselves to make sure we saw founders outside of our normal networks. We knew that the bias during this period would be to skew towards known founders and trusted referrals. But some of the best founders are off the beaten path, and we wanted to provide an avenue for that”

Gained efficiency may not necessarily correlate with better decision making

While most tout cutting out travel and gained efficiencies as positive outputs of this period, some cautioned that speed, and the increased ease of writing a check, may ultimately impair quality of decisions. 

Rebecca Kaden from Union Square Ventures commented: “Part of writing a check meant getting to where the company was, coordinating logistics, and following steps that served to slow down the process. There were built-in roadblocks to moving too quickly.”

On the direct impact on decision making, she added: “There is nothing structural to slow investors down now and it’s becoming easier and easier to write a check. If you look at history, speed of decision making and investing generally haven’t correlated well.”

We may miss out on predictive nuance and meaningful, long-term relationships

Despite an inundation of new Zoom features (cue branded ‘virtual backgrounds’), subtleties still get lost online. It is easier for investors to get distracted by the growing backlog of emails, succumbing to the urge to multi-task rather than dedicating full attention. This may ultimately mean missed signals in the early phases of diligence. 

Kent Bennett at Bessemer Venture Partners spoke to the importance of noticing subtleties: “You can sniff out when someone is being honest or dishonest in person, much better than you can on Zoom. Every signal from how they interact with other people in the office to how they conduct themselves in a boardroom may ultimately be core to the investment decision.”

Additionally, some venture capitalists have cautioned that this period may impede the formation of long-term relationships between VCs and their portfolio companies.

For Greg Bettinelli at Upfront Ventures: “Tactically, you can have a call, but it’s more challenging to build rapport over Zoom, to cultivate mutual trust as the foundation for a long-term connection. It’s not just about my getting to know the founder. If we’re going to partner together, I want them to vet and connect with me, and that’s harder to do in both directions right now.”

James at Bloomberg Beta offered a slightly different take: “Yes, l agree that we might have a deeper relationship with the person face to face, but I’m not sure I’d make a better decision or see a better outcome.”

What will be the long-term implications of the proliferation of virtual decision making?

Regardless of observed returns, the broader macro market may make it near impossible to discern the real correlation between remote decision making and outcomes. Rebecca Kaden commented: “If decisions are not as good during this COVID period, it may be hard to tell whether that’s due to changes to decision making from how the pandemic has changed our processes, or the general speed/heat of the current venture market.”

All 8 of the interviewed investors agreed that, while there will always be space in in-person interactions, elements of virtual communication are here to stay. Even as the dust settles on this period of crisis, there will be less flights taken for repeated cross-country board trips, more flexibility with staff location, and a renewed appreciation of the business value in remote work, both within firms and across portfolio companies. Many founder introduction calls will still happen virtually, to maximize efficiency and widen the top of the deal funnel. 

However, showing up in person will remain core to the fundraising process, enabling investors to deepen relationships with founders and gain a competitive edge in the deal process. Rob Go from NextView offered his take: “Showing up in person will still matter significantly, especially if you are trying to win a deal and build rapport. In the end, the ability to meet in person may end up being how you stand out. If more VC’s go entirely remote, it could ultimately create more of an advantage for those who are willing to get on planes.”

As a large volume of VC firms concurrently raise new funds, firm differentiation is becoming even more critical. Through the third quarter alone, US VC firms have already raised $56.6 billion across 228 funds, with 2020 tracking to set a record high for total capital raised. Faced with growing deal competition from other firms, investors will need to proactively seek opportunity to gain advantage. In-person may be that edge. Rob prompted: “In the future, who will be willing to show up and go the extra mile?” 

For now, we’ve been taking steps where we can — adjusting to meeting teams through screens and even embracing social distanced walks with founders, when feasible. We have connected  with some truly inspiring teams throughout this period. Their stories resonate, both in person and virtually. We look forward to continuing to hear them. 

The post How Venture Capital Decision Making Has Changed During the Pandemic appeared first on NextView Ventures.

Imagine a World With Unlimited Capital, and See Where It Takes You


This post is by Jason Lemkin from SaaStr

yesThere’s an exercise BigCos do, that I was asked to do, that at first, I thought was a waste of time.  The exercise is:  “How would you  run your business if short-term revenues didn’t matter?”

I thought (and still think) in that context it was a bit of a trick question.  First, of course revenues matter, in the end, they (and profits) are all that matter, and in SaaS, you need short-term revenue to beget long-term revenue.  Second, I couldn’t imagine a world where it was a better idea to run a B2B business without regards to revenue, even in a F500 tech company, even if you could nominally “grow” faster.

But since then, I’ve turned this around into an exercise that I think is one of the best planning exercises you can do for a post-traction SaaS start-up company.

The question, and exercise is, “What would you do, if you had Unlimited Capital?”  Ask this not only of yourself, but even more importantly, of each member of your senior team.  Not every day, but as an integral part of the unscripted part of your planning processes.

In other words:

  • For Sales, who would you hire, and when, if you could hire as many people as you wanted?  And if you got those resources, how much more ARR could we close this year?
  • For Marketing, where would you spend if the ROI could be ‘any’ ROI?  What brand marketing would you do?  What new programs would you develop?
  • For Product, what new areas would you enter?  What new products would you build?
  • For Engineering, what would another 10, 20, 50, 100 engineers do for you?  What would you rebuild?  Improve?  How many more features could you push out?  What could you do that is simply, super cool for your customers?

In a BigCo, this question would be an exercise in fiefdom.

But in a start-up, I’ve found it’s a terrific way to plan for where you want your business to be in 12 and 24 months.  Because assuming you are post-initial traction (say $1-$2m in ARR), and are growing 100%+- at that point, in 12-18 months, you’ll have what Seems Like Unlimited Capital today.  And the best execs won’t actually ask for the moon, and 100+ hires.  They’ll actually just ask for what they need to hit the stretch plan, with a buffer.  And from that, you may even learn new avenues to growth.  Figure out when and if you should fundraise.  And mostly importantly — dream and thus go bigger.

You’ll be so much bigger 12 months from now … that you should have already started things on your Unlimited Capital list now.  At least some.  And in start-ups, there’s a self-limiting factor as well.  No one really wants to triple their team overnight.  No one wants to dilute the core.  Even if you had unlimited capital, you wouldn’t spend marketing dollars on say, search terms with zero ROI, or building new features no one would use.

So in fact, the answers will be great.  They will plan the near and mid-term for you.  And they’ll push you to make the growth decisions earlier, as a team, and as founders and as CEO.  The team will understand if they don’t all the resources on their Unlimited Capital plan now.  But you’ll know where to drive the bus to help them, and the company, be the best it can be.

Do this with your CEO Trainer, too.

Currency image from here.

(note: an updated SaaStr Classic post)

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The Pros and Cons of Letting Your Biggest Customer Invest In You


This post is by Jason Lemkin from SaaStr

Q: I run a bootstrapped software company and our biggest customer (60% of our revenue) has offered on several occasions to invest in the company. I worry allowing customers to become shareholders could complicate things. Should we consider this?

Taking an investment from your largest customer certainly will complicate things. So you should be worried. But there are positives as well.

Cons:

  • If the ownership stake is > 5%, could scare away VCs. Less than this though, no one will care too much.
  • If the ownership stake is > 10% or so, could scare away acquirers. They may be worried you are an affiliate of the BigCo and not a practical acquisition target. A > 10% shareholder can in many cases, one way or another, block an acquisition.
  • BigCo’s competitors may pick another vendor. But not always. Sometimes they’ll see it as a signal of the winner in the space.
  • Rarely keep investing after the initial investment. Most corporate investors are “one and one”, vs. VCs which often can invest multiple times.
  • Sometimes never end up helping at all. A small investment from a BigCo is really immaterial, at all.  Usually, the amount of help you get is smaller than most founders expect going into it.
  • Sometimes put onerous terms on the deal. E.g., rights to buy you, etc.  Established corporate VC programs have moved away from this, e.g. Salesforce, Shopify, etc.  But Big Customers may explicitly want these restrictions as a reason to invest.  Be very wary here, and default to No if you hear of any material restrictions.  Or at least, default to “Could Be Great, But Not Now”.
  • Your BigCo champion will probably leave at some point. Whoever drives the investment may well not even work at that BigCo in 12, 18, 24+ months. You’ll be stuck with an orphaned investment on the cap table.

Yes, that’s a lot of Cons. But there are also Pros.

Pros:

  • Sometimes, a BigCo will help far more than totally makes sense because they are an “investor”. It may not make economic sense, but some BigCo’s help the companies they invest in far more than those they don’t. Do your diligence here.
  • Can anoint you a winner in the space, before there is one. You can get a lot of bragging rights from a BigCo investing in you. Especially vis-a-vis a direct competition. “Salesforce picked us” or “Google picked us” can go a long way, at least before you have an established brand yourself.
  • Often are less price and ownership sensitive. At the end of the day, a BigCo investment in a start-up isn’t really about huge returns. But a VC investment is. So they are often OK buying a smaller stake than a VC would, and many times are less price sensitive.

Net net, if the ownership stake is <5%, there are no onerous terms or extra rights, and the investment can help you materially (i.e., you need the money or could really benefit from it) and it’s from a market leader … I generally say take it.

A bit more here: Corporate VC Investments: Limited, But Real, Pros. And Cons. | SaaStr

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Thinknum Co-Founder Gregory Ugwi on Growing Only as Fast as You Learn


This post is by Jenna Birch from 500 Insights

Lagos-native Gregory Ugwi started his career as a strategist (or “strat”) at Goldman Sachs in 2008. “As a strat, you write code and build data models while working with salespeople and traders,” he said. “You’re supporting them.” Ugwi liked everything about his job, but there was just one problem.  A portion of the data he […]

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Thinknum Co-Founder Gregory Ugwi on Growing Only as Fast as You Learn


This post is by Jenna Birch from 500 Insights

Lagos-native Gregory Ugwi started his career as a strategist (or “strat”) at Goldman Sachs in 2008. “As a strat, you write code and build data models while working with salespeople and traders,” he said. “You’re supporting them.” Ugwi liked everything about his job, but there was just one problem.  A portion of the data he […]

The post Thinknum Co-Founder Gregory Ugwi on Growing Only as Fast as You Learn appeared first on 500 Insights.

Why So Many VCs are Moving to Austin and Miami


This post is curated by Keith Teare. It was written by Jason Lemkin. The original is [linked here]

Q:  Why are so many VCs moving to Miami and Austin? 

Three reasons:

  • It’s taxes first — but this isn’t new, and while taxes in CA are even higher than a few years ago, they’ve always been high … and
  • Quality-of-life second QOL has declined dramatically during Covid in San Francisco.  This is new.
  • And third — investing over Zoom is now routine.  This is the real new part. Before Covid, it was rare for all but angel checks to happen without a face-to-face meeting.  This is the true disruption that has pushed VCs over the edge to finally … move.  When before, taxes and even QOL alone weren’t quite enough to make the move.

CA’s state income taxes and more importantly, its state capital gains taxes (taxes on investments) are the highest in the nation at 13.3%. Even New York doesn’t come close, with 8.95% capital gains taxes.  This means every VC with a substantial portfolio is always at least thinking about taxes.

And Florida (Miami) and Texas (Austin) state capital gains taxes are 0%.

For years, it seemed to be important to be in the Bay Area to do VC. Some would quietly decamp to “Incline Village” in Lake Tahoe, Nevada — where state taxes are again 0% — and work in California < 50% of the time.

But with the onset of distributed investing over Zoom, that was the tipping point for many to seek out states with 0% capital gains, and to move to the ones with a decent set of entrepreneurs and co-investors. Suddenly, tax dodges like Incline Village were far less important than other areas like Austin and Miami with enough tech going on to keep things interesting, connected and lively.

It’s taxes.

And Covid pushed things over the edge. San Francisco is a grim place to live right now. And to pay the highest taxes in the country.

If you look at the states with 0% state capital gains, Texas/Austin and Florida/Miami are the most appealing for VC investing. Everything else just doesn’t have enough going on:

Yes, this excludes other taxes, like property taxes (lower in CA than TX — but then again, real estate is 2x the price in CA), City Tax in NYC and SF, etc.  But net net those don’t move the needle as much as simply moving to 0% state capital gains state.

The post Why So Many VCs are Moving to Austin and Miami appeared first on SaaStr.

Why So Many VCs are Moving to Austin and Miami


This post is by Jason Lemkin from SaaStr

Q:  Why are so many VCs moving to Miami and Austin? 

Three reasons:

  • It’s taxes first — but this isn’t new, and while taxes in CA are even higher than a few years ago, they’ve always been high … and
  • Quality-of-life second QOL has declined dramatically during Covid in San Francisco.  This is new.
  • And third — investing over Zoom is now routine.  This is the real new part. Before Covid, it was rare for all but angel checks to happen without a face-to-face meeting.  This is the true disruption that has pushed VCs over the edge to finally … move.  When before, taxes and even QOL alone weren’t quite enough to make the move.

CA’s state income taxes and more importantly, its state capital gains taxes (taxes on investments) are the highest in the nation at 13.3%. Even New York doesn’t come close, with 8.95% capital gains taxes.  This means every VC with a substantial portfolio is always at least thinking about taxes.

And Florida (Miami) and Texas (Austin) state capital gains taxes are 0%.

For years, it seemed to be important to be in the Bay Area to do VC. Some would quietly decamp to “Incline Village” in Lake Tahoe, Nevada — where state taxes are again 0% — and work in California < 50% of the time.

But with the onset of distributed investing over Zoom, that was the tipping point for many to seek out states with 0% capital gains, and to move to the ones with a decent set of entrepreneurs and co-investors. Suddenly, tax dodges like Incline Village were far less important than other areas like Austin and Miami with enough tech going on to keep things interesting, connected and lively.

It’s taxes.

And Covid pushed things over the edge. San Francisco is a grim place to live right now. And to pay the highest taxes in the country.

If you look at the states with 0% state capital gains, Texas/Austin and Florida/Miami are the most appealing for VC investing. Everything else just doesn’t have enough going on:

Yes, this excludes other taxes, like property taxes (lower in CA than TX — but then again, real estate is 2x the price in CA), City Tax in NYC and SF, etc.  But net net those don’t move the needle as much as simply moving to 0% state capital gains state.

The post Why So Many VCs are Moving to Austin and Miami appeared first on SaaStr.

The Many Types of Angel Investors in 2021


This post is curated by Keith Teare. It was written by Jason Lemkin. The original is [linked here]

Q: Are there different types of angel investors that should be sold differently when trying to raise money to start a business?

There are several key types. Let’s break them into several categories:
  • Professional vs. non-professional. Professional angels generally have very specific criteria in terms of valuations, team make-up, check size, etc. You do need to ask and listen to what their sweet-spot is. Non-professional angels often shoot from the hip or fish with a wider net.
  • Lead vs follow. This is critical. 90%+ of angels just want to “follow” someone that sets the terms, price — and does the due diligence and hard work. It’s so, so much easier to follow. But you at least need a strong lead to get the ball rolling.
  • Valuation sensitive vs. less sensitive. Many traditional angels are very sensitive to price. You can see this on Shark Tank. They want to invest a fixed amount of capital, into a specific number of companies, and own a certain amount of each. But other types of angels may care a bit less about price. This can range from family members, to very rich individuals (price is immaterial to them), to corporates investing for other reasons. Listen and ask.
  • Can — and can’t — afford to lose it. Ask — and find out. A professional investor typically won’t put more than 2% of their total investable capital in any one investment, at least not at first in the first check. And they will rarely invest more than 10%-20% of their total net worth in true angel deals. If someone is putting way too much of their life savings into an angel investment, maybe don’t take their money. Way too stressful for everyone. A true angel can lose 100% of any given investment and not care that much. They are hunting for that 1 out of 50 that gives them a 100x+ return. The others don’t need to.

A deeper dive here: What are the economics of angel investing? | SaaStr … and a list of flags and issues to spot here: 7 Signs an Angel Investor … May Really Be a “Devil” Investor | SaaStr

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The things you need to think about when setting yourVenture fund target


This post is by samir kaji from Stories by samir kaji on Medium

Follow me @samirkaji for my thoughts on the venture market, with a focus on the continued growth with the emerging manager landscape.

A common question I get when speaking with newer venture emerging managers is about how to go about fund sizing.

Most of the managers I speak with compute fund targets based on a few common factors:

1) How much they think they can reasonably raise using their available market intelligence and line of sight to prospective capital (this is hard, inexact, and often wrong).

2) A bottom-up approach toward how much they want to invest in companies, # of portfolio companies they’d like in the fund, and contemplated reserve model.

3) What they and their partners need to support themselves financially.

For many managers, this sets a path of a linear progression of fund sizing. I.e., a manager may raise a $15MM fund 1, jump to $30MM-$40MM for Fund 2, and perhaps $50MM-$100MM (or more) for Fund III.

Generally speaking, there are very rational explanations for fund size growth, including increased capital available for initial checks and reserves and the ability to accommodate institutional investors’ allocation requirements. This type of thinking often makes excellent sense and can work very well; however, it’s critical for managers not to limit themselves to any linear or pre-ordained mindset on fund sizing. An example of this type of thinking is “Fund 1 will be a proof of concept at $20MM, Fund II will be $35MM, and Fund III will be $50MM-$75MM”.

While that fund growth progression may end up being the optimal path for the fund manager, it still requires another dimension to the mental model. As Mike Maples has said repeatedly, “Your fund size is your business model.”

While this is a concept that is relatively easy to understand, it does require fund managers to ask themselves some crucial questions, including:

  • Do I have any definable edge for the business model that relates to my contemplated fund size?
  • How does my product value to founders and co-investors differ across fund sizes? At larger check sizes, % ownership, and % allocation of a round, the height of the product bar you need to clear changes dramatically. Going from small non-lead positions to lead positions requires an entirely different product profile, business model, and operational mindset.
  • Who are my competitors at different fund size bands, and within which cohort is my product and offering the most competitive and why?
  • Is the strenght of my brand aligned with fund size? Often, I see fund managers look to upsize significantly from fund to fund well in advance of establishing the type of brand equity that enables them to be consistently competitive with the new cohort of competitors.
  • Does the fund size optimize returns for my LPs (and for my partnership)? From experience, I’ve seen managers produce exceptional returns within a fund size band and then poorly perform when going too far above that band. VC is undoubtedly the consummate long game, and it’s vital to align fund size to where your highest competitive edge lies at that given point in time. The difference between a 5X on a $15MM fund vs. a 2X on a $35MM is 4.2X Net for LPs and $12MM in Carry for the GP vs. a 1.8X Net for LP’s and $7MM in carry for the GP. Optimize fund size for what best aligns with competitive edge.

To be clear, this isn’t my call to keep fund sizes small (albeit I do think small fund sizes do allow much more nimbleness in investing behavior), but rather a call to managers to ask these critical questions while setting fund targets.

In truth, there are plenty of managers that have thrived despite growing fund sizes significantly — DCVC, Forerunner, and Felicis are firms that have grown fund sizes, but not at the expense of the risk/return profiles they offer LP’s. In contrast, others such as IA Ventures and Founder Collective have determined that staying within a specific fund size range is optimal for their ability to produce the highest returns.

Fund sizing doesn’t have to be overly complicated and isn’t an exact science but does require thinking across several macro and micro dimensions.

The things you need to think about when setting yourVenture fund target


This post is by samir kaji from Stories by samir kaji on Medium

Follow me @samirkaji for my thoughts on the venture market, with a focus on the continued growth with the emerging manager landscape.

A common question I get when speaking with newer venture emerging managers is about how to go about fund sizing.

Most of the managers I speak with compute fund targets based on a few common factors:

1) How much they think they can reasonably raise using their available market intelligence and line of sight to prospective capital (this is hard, inexact, and often wrong).

2) A bottom-up approach toward how much they want to invest in companies, # of portfolio companies they’d like in the fund, and contemplated reserve model.

3) What they and their partners need to support themselves financially.

For many managers, this sets a path of a linear progression of fund sizing. I.e., a manager may raise a $15MM fund 1, jump to $30MM-$40MM for Fund 2, and perhaps $50MM-$100MM (or more) for Fund III.

Generally speaking, there are very rational explanations for fund size growth, including increased capital available for initial checks and reserves and the ability to accommodate institutional investors’ allocation requirements. This type of thinking often makes excellent sense and can work very well; however, it’s critical for managers not to limit themselves to any linear or pre-ordained mindset on fund sizing. An example of this type of thinking is “Fund 1 will be a proof of concept at $20MM, Fund II will be $35MM, and Fund III will be $50MM-$75MM”.

While that fund growth progression may end up being the optimal path for the fund manager, it still requires another dimension to the mental model. As Mike Maples has said repeatedly, “Your fund size is your business model.”

While this is a concept that is relatively easy to understand, it does require fund managers to ask themselves some crucial questions, including:

  • Do I have any definable edge for the business model that relates to my contemplated fund size?
  • How does my product value to founders and co-investors differ across fund sizes? At larger check sizes, % ownership, and % allocation of a round, the height of the product bar you need to clear changes dramatically. Going from small non-lead positions to lead positions requires an entirely different product profile, business model, and operational mindset.
  • Who are my competitors at different fund size bands, and within which cohort is my product and offering the most competitive and why?
  • Is the strenght of my brand aligned with fund size? Often, I see fund managers look to upsize significantly from fund to fund well in advance of establishing the type of brand equity that enables them to be consistently competitive with the new cohort of competitors.
  • Does the fund size optimize returns for my LPs (and for my partnership)? From experience, I’ve seen managers produce exceptional returns within a fund size band and then poorly perform when going too far above that band. VC is undoubtedly the consummate long game, and it’s vital to align fund size to where your highest competitive edge lies at that given point in time. The difference between a 5X on a $15MM fund vs. a 2X on a $35MM is 4.2X Net for LPs and $12MM in Carry for the GP vs. a 1.8X Net for LP’s and $7MM in carry for the GP. Optimize fund size for what best aligns with competitive edge.

To be clear, this isn’t my call to keep fund sizes small (albeit I do think small fund sizes do allow much more nimbleness in investing behavior), but rather a call to managers to ask these critical questions while setting fund targets.

In truth, there are plenty of managers that have thrived despite growing fund sizes significantly — DCVC, Forerunner, and Felicis are firms that have grown fund sizes, but not at the expense of the risk/return profiles they offer LP’s. In contrast, others such as IA Ventures and Founder Collective have determined that staying within a specific fund size range is optimal for their ability to produce the highest returns.

Fund sizing doesn’t have to be overly complicated and isn’t an exact science but does require thinking across several macro and micro dimensions.

The things you need to think about when setting yourVenture fund target


This post is by samir kaji from Stories by samir kaji on Medium

Follow me @samirkaji for my thoughts on the venture market, with a focus on the continued growth with the emerging manager landscape.

A common question I get when speaking with newer venture emerging managers is about how to go about fund sizing.

Most of the managers I speak with compute fund targets based on a few common factors:

1) How much they think they can reasonably raise using their available market intelligence and line of sight to prospective capital (this is hard, inexact, and often wrong).

2) A bottom-up approach toward how much they want to invest in companies, # of portfolio companies they’d like in the fund, and contemplated reserve model.

3) What they and their partners need to support themselves financially.

For many managers, this sets a path of a linear progression of fund sizing. I.e., a manager may raise a $15MM fund 1, jump to $30MM-$40MM for Fund 2, and perhaps $50MM-$100MM (or more) for Fund III.

Generally speaking, there are very rational explanations for fund size growth, including increased capital available for initial checks and reserves and the ability to accommodate institutional investors’ allocation requirements. This type of thinking often makes excellent sense and can work very well; however, it’s critical for managers not to limit themselves to any linear or pre-ordained mindset on fund sizing. An example of this type of thinking is “Fund 1 will be a proof of concept at $20MM, Fund II will be $35MM, and Fund III will be $50MM-$75MM”.

While that fund growth progression may end up being the optimal path for the fund manager, it still requires another dimension to the mental model. As Mike Maples has said repeatedly, “Your fund size is your business model.”

While this is a concept that is relatively easy to understand, it does require fund managers to ask themselves some crucial questions, including:

  • Do I have any definable edge for the business model that relates to my contemplated fund size?
  • How does my product value to founders and co-investors differ across fund sizes? At larger check sizes, % ownership, and % allocation of a round, the height of the product bar you need to clear changes dramatically. Going from small non-lead positions to lead positions requires an entirely different product profile, business model, and operational mindset.
  • Who are my competitors at different fund size bands, and within which cohort is my product and offering the most competitive and why?
  • Is the strenght of my brand aligned with fund size? Often, I see fund managers look to upsize significantly from fund to fund well in advance of establishing the type of brand equity that enables them to be consistently competitive with the new cohort of competitors.
  • Does the fund size optimize returns for my LPs (and for my partnership)? From experience, I’ve seen managers produce exceptional returns within a fund size band and then poorly perform when going too far above that band. VC is undoubtedly the consummate long game, and it’s vital to align fund size to where your highest competitive edge lies at that given point in time. The difference between a 5X on a $15MM fund vs. a 2X on a $35MM is 4.2X Net for LPs and $12MM in Carry for the GP vs. a 1.8X Net for LP’s and $7MM in carry for the GP. Optimize fund size for what best aligns with competitive edge.

To be clear, this isn’t my call to keep fund sizes small (albeit I do think small fund sizes do allow much more nimbleness in investing behavior), but rather a call to managers to ask these critical questions while setting fund targets.

In truth, there are plenty of managers that have thrived despite growing fund sizes significantly — DCVC, Forerunner, and Felicis are firms that have grown fund sizes, but not at the expense of the risk/return profiles they offer LP’s. In contrast, others such as IA Ventures and Founder Collective have determined that staying within a specific fund size range is optimal for their ability to produce the highest returns.

Fund sizing doesn’t have to be overly complicated and isn’t an exact science but does require thinking across several macro and micro dimensions.

Don’t Worry About Losing All Your Investors’ Money


This post is by Jason Lemkin from SaaStr

Screen Shot 2015-01-31 at 8.56.19 AMIn both my start-ups, I was constantly worried about losing all my investors’ money.  The first time, my first start-up which we haven’t talked much about, NanoGram Devices, I mainly worried about it because I realized we’d almost never have enough capital to achieve our long-term goals.  So, FBOW, we sold for $50,000,000 after 12.5 months.

At Adobe Sign / EchoSign, it was a bit different.  My investors included my old bosses, and, as time went on, myself to a material extent.  When things were rough in our first 12 months, one of the main reasons I didn’t quit was because I couldn’t bear to lose their money.  So that was good, in the end, that fear of losing your investors’ money.  At the time, at least. It got us to our “Series B” (what would be called an early Series A today 🙂 and ultimately a pretty good exit by the standards of a few years ago at least.

But with hindsight it’s a real negative — worrying about losing your investors’ money.  Especially in SaaS.  Now as an investor myself, I get it much better.

Let me explain:

  • First, true seed investors know what they are getting themselves into.  True seed investors know many of their investments fail, and they make (hopefully) calculated bets.  Maybe, don’t take money from your mom and dad if they can’t afford to lose it.  But true seed investors, the ones that make 30+ seed investments for a profit and not a hobby, and all VCs, know exactly what they are doing and what risks they are taking.  Look at me now as a VC — I have about $60,000,000 from our current fund (my share) to personally invest.  If I lose $250,000 on a seed investment that I truly believe in, but it didn’t played out as we all hoped … that’s a bummer.  But that’s about all it is from an investor perspective.  It’s a rounding error.  Now, if I lose like $10,000,000 … oy.  I’m in trouble then.  I’m out of a job.  But not on that one $250k seed investment.
  • Second, in the early days, your interests are almost perfectly aligned with your seed and early investors.  It’s binary here.  Most every early-stage investment either makes a solid profit for the investors, or nothing at all (odd acqui-hires aside).  It’s rare to make a 5.75% return on an early-stage start-up investment.  So worrying about losing your investors’ money doesn’t help.  We’re all in it together.  Just worry about getting to Initial Traction.  That’s enough.
  • Third, post-Initial Traction, caring too much about losing your investors’ money will make you too risk-averse.  Once you’re at $1-$1.5m in ARR or so, you can still fail.  But you’ve done The Impossible.  It’s time to get to The Inevitable, $10m ARR.  Your biggest risk really here is not getting there fast enough.  Stop living hand-to-mouth.  Stop taking out the garbage yourself, if you don’t have to.  Stop paying below-market salaries, and only hiring the managers you can get, not best-of-breed.  Stop paying sales reps too little.  Stop hiring directors instead of VPs to save money.  Get it done.  Make it so.  Grow faster.  And if that increases the risk you lose all your investors’ money, so be it.
  • And later, it’s just a valuation game.  I firmly believe in Mark Suster’s top end of normal.  You don’t want angry investors who feel ripped off in a deal.  Those scars last a long time, and disalign interests.  But I mean, if investors want to invest at some soon-to-be-unicorn valuation when your start-up is doing $10m in ARR growing 200% YoY, dude just take it.  Don’t overanalyze it.

Mostly importantly, all you really have to worry about in the early days on the finance/capital/money side is your Zero Cash Date.  When you run out of money.  More on that here.

 

If you worry beyond that if you worry too much about the moral obligations in losing all your investors’ money … you’re just adding unnecessary stress to an already impossible task.  I’m not saying spend it all in 12 months, or increase your burn to worrisome levels.  Do what’s right for the business, even in these heady days for SaaS.

And seriously, make the money last.  The best founders I’ve worked with have all almost failed.  Even Slack had to downsize to just a few employees.  But the best founders never let the company truly run out of money:

What I am saying is I know empathetic, high EQ founders that worry a lot about their investors’ capital every day.  Don’t.  It can hold you back.  Instead, just worry about getting the world to buy millions of dollars worth of Yet Another SaaS App They’ve Never Heard Of and Managed Until Today to Survive Just Fine Without.  And just try not to run out of money getting there.

 

Knowing — and Sharing — Your Zero Cash Date

At $50k in MRR, Running Out of Money Is No Longer an Excuse

(note: an updated SaaStr Classic post)

The post Don’t Worry About Losing All Your Investors’ Money appeared first on SaaStr.

A Journalist’s Perspective on How to Earn Press for Your Company


This post is by Leah Fessler from Blog – NextView Ventures

Most founders know the value of publicity, but earning press can be a massive headache. The media world is notoriously difficult to navigate from the outside, and working with PR agencies can be even more of a black box. When I joined NextView Ventures as an investor after building my career as a journalist, I knew that helping founders more effectively engage with reporters would be among my top priorities.

Prior to NextView, I worked as a journalist at Quartz, where I regularly covered early-stage founders and companies with a focus on the intersections of gender, race, culture, and technology. I frequently fielded pitches from founders and tech-oriented PR agencies, and to be honest, I auto-deleted most of them. Not because the companies or agencies were inherently bad or boring, but because the narratives weren’t well-framed, and the fit wasn’t interrogated.

While there’s no silver bullet to sparking a journalist’s interest, simple mindset and behavioral adjustments can significantly boost your chances. Before sharing tips, I want to clarify a potentially harsh reality: Journalists don’t owe you anything. They’re usually overstretched and underpaid, and if they don’t respond to you, that’s their prerogative. I don’t say this to intimidate founders or sound mean. I say this to remind you that reporters are humans too — and even if you’re building the most interesting product on the market, it may not be the right story, or the right moment for whoever you’re pitching. And that’s okay!

Now, on to the help. Below is my top advice for behaviors to avoid — and how to fix them — when pitching journalists on your company. These tips set a baseline to help ensure your emails are strategically oriented toward respecting journalists’ work, and positioning your company in a positive and intriguing light.

Don’t tell the reporter what the story is

Yes, you know your businesses, market, and growth opportunities better than any reporter ever will. But that does not mean telling them what to write will be convincing. Usually, it’s the opposite. Instead, think of your pitch email as setting the table, then letting the reader know what’s on the menu — not immediately serving the dinner. Journalists are interested in larger market trends, and it’s fascinating to hear why and how the problem you’re solving arose, rather than simply cutting to your solution. We care about context.

Don’t intentionally ignore competition

Even the best ideas have been thought of before. Founders who think they’re the only one doing or thinking about their problem come across as arrogant and ignorant. Instead of pretending like your competitors or failed companies in your space don’t exist, lean into the larger market narrative, and your differentiation within it. It’s okay to admire competitors, too; you can be confident that any reporter who covers your company is going to aptly research market competition, and mention it. It’s in your best interest to own your company’s narrative and market positioning so to sound simultaneously confident and self-aware.

Do your research on the reporter or publication!

Not all reporters are the same. Not all tech publications will care about your story. I cannot tell you how many pitches I’ve received that were intended for someone else, or lacked a name entirely (“Dear XX, Have you heard about the latest product in Femtech?” = immediate sigh).

It’s also common to receive pitches that have nothing to do with a journalist’s beat, or areas of interest. To me, that’s a clear indicator that you put me, along with many of my peers, on blast. Not a great look. Instead, take the time to read the work of whoever you’re pitching, find the best fit, and reference your research in the pitch. Link to relevant past articles — not just the most recent piece a reporter wrote. When a founder links to a recent piece I wrote with context on how it relates to their vision, I am far more likely to keep reading and respond.

Don’t count yourself out of the narrative

PR pitches can hurt to read because more often than not, they’re impersonal. Reporters want to know the who and the why behind the what. We want to hear about the bright sides and the dark moments. A robotic success story translated through a PR person who isn’t in the weeds on your business is just boring. Instead, share your story (briefly!), noting why you were motivated to build your business. This approach is especially powerful if you have an authentic narrative about founder-market-fit. Journalists are always thinking about how to frame their stories, and a powerful story is one of the best tools in our kit. Personally, whenever I consider a story, I’m thinking about that first line — how would I open this narrative? You can help me out by speaking from the heart.

Don’t freak out about timing

Founders who are stressed about when they should reach out to press ought to keep in mind that journalists are looking for stories all the time, we don’t churn out pieces overnight,  and the world doesn’t read nearly as much as you think they do. Unless there was recently a major scandal or sale in your industry, you’ll probably overthink it if you try to time your press reach outs based on industry events. If a publication covered an adjacent company last week, that doesn’t mean they’ll ignore you this week.

Instead, focus on giving reporters sufficient leeway. If you’re working with an exclusive, give at least a week’s notice. (It is annoying, not incentivizing, to receive an email on Sunday night saying “this exclusive embargo will expire on Monday morning.” Please remember that we have editors, and that the pitch process is rarely instantaneous.) If you’re reaching out around a holiday, once again, remember that journalists are humans with families and lives too. Time is your friend not your enemy — give us more of it. It takes longer to craft a story than you may imagine.

Don’t underestimate the power of relationships

It’s often said that you should build relationships with the press before you want them to write about you. I get that this is somewhat frustrating advice. If this is done inauthentically, this “relationship building” is just weird. Instead, build relationships with reporters by being genuinely useful. Offer to be a source in your area of expertise — whether that’s startup leadership writ large, the future of work, how consumer businesses are fending off Apple and Amazon, etc. Let us know that you’re always available to speak to on background, or on the record about your industry or relevant trends. Drop your cell number, and make yourself available. Also, read and amplify journalists’ work — whether on Twitter, Linkedin, Instagram, Clubhouse, or TikTok, a little flattery can go a long way.

These tips are pulled from a recent AMA I did with NextView Ventures portfolio founders. If you have follow up questions, please feel free to reach out: @LeahFessler

The post A Journalist’s Perspective on How to Earn Press for Your Company appeared first on NextView Ventures.

What VCs Do With Their Time. Hint: Most of It Isn’t New Investments


This post is by Jason Lemkin from SaaStr

Q:  What are the main responsibilities of an average venture capitalist?

Let’s break it down a bit.

General Partners at VC firms have to:

  • Raise capital. Yes, VCs themselves have to raise the money they invest. If you are top tier firm, with a long track record, this often can be done easily. If you aren’t though, it can take years. And so this can consume anywhere from 5%-50% of your time.
  • Manage their LPs. This doesn’t take a massive amount of time, but it does take time. VCs have to manage their own investors, the “LPs” or Limited Partners. This includes an Annual Meeting (which can take a lot of prep), quarterly reporting, audits, and more. This is probably 5% of your time.
  • Manage existing investments. This can take a lot of time, especially if you are on a lot of boards. Many VCs end up spending 40%-50% on 15+ boards, and sort of become professional board members. In addition, in some cases VCs spend a material amount of time interviewing executives and others for portfolio companies. And startups that fail often take a fair amount of time and drama to wind down. And then there are founder issues.  All together, this can take 50% of your time or more.
  • Internal management and related internal management overhead. All of Monday is often taken up with partner meetings and pitches. Add other internal work, and internal work can take up 15%-20% of your time.

You can see already this can add up to 100% of your time — and that’s without finding, sourcing and winning even 1 new deal.

So best case, most established general partners with a full plate of existing investments spend < 50% of their time on their own new deals.

Often < 30%.

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What Does It Take To Be “Venture-Fundable”?


This post is by Jason Lemkin from SaaStr

What is the minimum projected annual revenue in the exit year and projected exit valuation for a startup to be investable from a VC?

For most “traditional” U.S. VCs doing early-stage investment, the goal is simple:

  • At least 1 investment out of every 20 or so per fund needs to be worth $1 Billion or more within 10–15 years.

If that happens, the math generally works out. If there is more than 1 “Unicorn” per fund (i.e., per every 15–30 investments), even better. If there is a “Decacorn” (i.e., worth $10 Billion+), then the fund makes a lot of money.

So VCs are thinking that when they meet you. Is there a 5-10% chance this investment might be worth $1B+? Or more subjectively, is there a real chance, given the team, the market, and the very early traction?

If so, it’s a good bet.

In terms of what that means for revenue … translate that to say $100m ARR. So if 1 core investment out of 20 gets to $100m+ in revenue in 5-8 years, the fund will do OK.  And you’ll also see what matters less than how much revenue you have today … is how quickly you are growing.  This is why is today’s world of Cloud decacorns, you’ll see seemingly crazy valuations for folks with, well, crazy growth.

More of this math here: Why VCs Need Unicorns Just to Survive | SaaStr

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Sizing the Ask


This post is by Rob Go from Blog – NextView Ventures

One important tactical decision when fundraising is determining the size of “the ask”. Sizing the ask incorrectly is one of the things I see founders get wrong most often, and it ends up having a meaningful impact to the fundraising process overall. Telling an investor how much money you are looking to raise seems like a simple and benign question, but it’s actually pretty complicated. A couple thoughts.

First, fundraising is a means not an end. Every fundraise process should start internally with the financing needs and goals that the business is looking to hit. Don’t let the tail wag the dog here. You are better off raising the right amount of capital (and at the right time) and screwing up everything I write below than doing the reverse. That said…

Every ask implicitly suggests a valuation range. Most series A funds are looking to own 15-20% of a company after their investment. Your “ask” then will imply the check size you think the lead is going to write and some sort of pricing expectations. If you are asking for $10M, that typically suggests something like a $25-40M pre. The new investor invests something like $8M (with $2M available for existing investors) , the new investor gets 20%, so $7/20% = $40M post. Conversely, a series A with a $6M ask suggests a lower valuation.

Because every ask suggests a valuation, make sure it is market appropriate. This means not making an ask that is way too big relative to where you are as a business, or way too small relative to the stage of investor that you are approaching. VC’s are typically looking for easily ways to filter out their top of the funnel, and one of the quickest ways to get to “no” is to have an as that is way outside the range of what seems reasonable. That’s why I think it’s important for founders to have allies that will tell them the truth about the reasonableness of their ask based on actual market data. Don’t focus on the outlier examples, usually outliers happened not by starting out with an outlier ask (more on that later). By the way, I notice that founders systematically over-estimate how positively the market will receive their company.

The ask also needs to be investor appropriate. Every VC has a zone they are trying to hit in terms of fund size and ownership. And not every round will fit their zone. A large fund looking to write $10+ checks might not take a company seriously if they have a $4M ask. Conversely, a smaller fund that writes $5M checks will have a hard time figuring out how they are going to lead a $25M round. Most funds can stretch in both direction if they have conviction. But the key is to keep things as close as possible to their likely zone so that they have the opportunity to build conviction. Using a range can be helpful here. I also think that founders that are on the border between pitching really big series A funds and medium sized funds might want to have two scenarios in mind that they can pitch equally well. My rule of thumb is that if the last fund was $500M or more, you can make an “ask” of $15M. But if a fund is under $500M, then keep your ask below that, probably more like $8-10M. Again, there are lots of counter-examples, but that’s my general rule of thumb.

This is very hard to do and counter-intuitive, but my number one advice to most founders is to start out with a lower ask. If you think that you have a good chance of raising a $15M round, make your ask $12M. There are a few reasons for this. First, most founders are overly optimistic about how the markets will receive their startup. It’s a combination of the necessary optimism required to be an entrepreneur plus the way investors whisper sweet nothings in the ear of a founder to maximize their own optionality.

But the second reason is more important. A lower ask is a better approach to get investors interested. Once you have multiple investors that are interested, you can leverage that competitive dynamic to improve the terms and increase the round size. It is true that a lower ask suggests a lower valuation. But I’ve found time and time again that the benefit of creating investor demand more than makes up for this in the end. When investors are in a competitive situation, they can often use check size and valuation to make their offer more attractive. So an investor willing to invest $7M for 20% might improve their offer to $10 or $12M for only slightly higher ownership in order to win the deal. It’s a lot easier to walk the valuation and round size up during a competitive process than is to it walk the valuation down when investors aren’t biting.

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