Startup Fundraising: The Good, The Bad, and The Ugly

One year ago today, Smart Office Energy Solutions closed a $1.3M angel round of funding. We've accomplished a great deal since then - expanded the team, finished gen-1 product development, obtained all the requisite certifications for our hardware, and built a large sales pipeline - but I find anniversaries to be a good time to pause and reflect.

This is a presentation on startup fundraising I gave a few days ago to entrepreneurship students at the University of Wyoming. In it, I review the pros and cons of several different startup fundraising strategies, using Smart OES and my previous startups as specific case studies.

Startup Fundraising Strategies: The Good, The Bad, and The Ugly from Bryan Hassin

Toward the end of the presentation, I take a deep dive into Smart OES's three rounds. The quantitative analysis provides some interesting insights:

• We had a 0% success rate trying to raise funds from people who were not part of our networks. 100% of our investment came from people we knew or people to whom we were introduced.
• Former colleagues invested the most (in total invested, mean investment size, and median investment size) in my venture. The trust developed by working with or for someone is a real asset in early-stage fundraising.
• A similar trust clearly is formed in the academic setting as well because a good deal of our investment came through my school networks. Interestingly, Rice contacts invested more (in total invested, mean investment size, and median investment size) than did IMD contacts.
• Second-degree contacts became much more likely to invest over time. It is helpful, therefore, for startup founders to engage "smart" money (in this case, investors with connections to other investors) early on.
• Similarly, the value of repeat investors increased over time, demonstrating the value of engaging investors with the capacity to follow on.
• Geographically, investors in Texas out-invested investors in Switzerland 2:1. However, using my LinkedIn network size (1,100 contacts in Texas; 250 contacts in Switzerland) as a denominator, the Swiss outperformed the Texans on a per capita basis. Most disappointingly, we didn't raise a penny from North Carolina (where I have 300 contacts!) - and not for lack of trying.
• Unsurprisingly phone calls and in-person meetings were more effective than emailing or messaging on social networks in leading to investment.

We've just opened up a new funding round (with more than 25% already committed by existing investors!) so we're putting these learnings into practice to be better/smarter/faster this time around.

Entrepreneurial Leadership

Last week I was invited to give a talk on a topic of my choice to the team of a high-growth startup in Durham. Because leadership challenges often cause friction during times of high growth, I chose to address the topic of entrepreneurial leadership. Check out my video below and let me know what you think!

When to Listen to Investors

One of the best - and worst - aspects of being a startup founder is being inundated with a nearly constant stream of advice. Advice comes from everyone - friends, business partners, professors, customers, competitors, journalists, employees - but especially from investors. This makes sense as investors have a lot riding on the outcome of your venture.

Part of the art of entrepreneurship is knowing when to take the advice and when not to. I saw an article on this subject today and it resonated with me. Many startup investors have not started up companies themselves. It is important to be cautious with their advice as startups are not simply small versions of large companies. The techniques and decisions used to launch and rapidly scale a disruptive startup are different than those that would make sense in larger companies or businesses in more mature markets.

Even investors with startup experience may be biased by a different time, a different industry, or false attribution of success in previous ventures. But all these investors are [hopefully] smart, experienced, high-integrity people who are earnestly trying to help the founder be successful and they should all be heard. It falls on he entrepreneur to process all of their advice and make the ultimate decision.

At Smart Office Energy Solutions we have managed to bring on some very savvy investors with a lot of valuable advice to offer. Although we don't always take 100% of the advice offered to us, these investors are a key asset and strategic advantage - and we'll take every advantage we can get!

Startups Should Never Pay to Pitch

Several times a week my startup is solicited to participate in pay-to-pitch events at which we are promised access to a smorgasbord of wealthy, capable investors who are just chomping at the bit to invest in companies like mine. Sounds too good to be true, right? Well, it is.

This has been covered by many other posts, such as from this startup lawyer and from this angel investor but here is my $0.02 to add as well.

These pay-to-pitch scams start off innocently enough. There is often no mention of a fee up front. Then, if you "apply" (a classic sales/manipulation trick: making YOU apply to THEM so that you want them to take your money in order for you not to feel rejected), you make it to the "next round," and then they casually drop the bomb that, oh by the way, there will be a fee of several thousand dollars to present.

If you object, it is often glossed over as, "We have to charge the fee to filter out the startups that aren't serious." I see, because the "application process" I've been going through doesn't help you filter any startups out? What exactly is the application process for then? Oh, right, see the above note about the sales technique!

Imagine that: the hoards of rich investors want the cash-poor startups to pay substantial fees just for the right to talk to them - makes sense, right?? Seriously, no investor worth his/her salt needs a forum of curated startup presentations to get access to dealflow. Likewise, no entrepreneur worth his salt needs to pay to have access to a group of such C-list [non-]investors. Or put another way: if investors don't even see enough value in the event to fund it completely, how likely do you think they will be to invest in the presenting companies? The result is an event consisting of lackluster startups, lackluster investors, and very, very little actual investment activity.

Think about it: how many successful startups do you know whose story starts with, "Well we had this game changing idea and a great team but we were so unresourceful that we had to pay just to get access to some potential investors?" Google? Facebook? Paypal? Nest? Exactly.

The practice of charging entrepreneurs to present is, at best, naive on the parts of the angel groups and, at worst, straight up predatory. I have to admit that, when I first started Smart OES and was raising capital for the first time in my life, I fell prey to one of these events. Fortunately it was a relatively small fee and the damage was minimal.

Of the nearly $1M of angel capital my startup has raised, not a dime of it has come from events like that. It has come from hustling and networking, which are key entrepreneurial skillsets. My advice to entrepreneurs: forget the pay-to-pitch scams. If you're having a hard time raising money, get out and start networking or, though it may be challenging, take a look in the mirror and evaluate why the people you are pitching aren't buying in.

Entrepreneurship Advice: Growing a Consumer Web Business

A friend of mine who recently took the entrepreneurial plunge and launched a consumer web business recently asked me for some advice. Aiming to serve more people than just him with what is hopefully useful advice, I am posting my response here.

This was my friend's request:

"I believe the greatest challenge my company will face in the near future is how to manage anticipated rapid growth. We have a marketing strategy that will be capable of producing an extremely fast growth rate in users of our website, leveraging the power of social media and highly targeted and well-categorized content on a site that is designed to serve the everyday reading needs of all segments of the general public. I would like to be able to make management decisions based not on fears of scarce resources but on confidence that additional capital will become available to continue paying existing staff and to hire the new staff we will soon need after our website goes live. I believe it will be necessary to secure a large amount of capital investment soon after launch, from investors who are interested and capable of assisting the company in various ways to navigate the challenges of explosive growth -- both financially and in terms of business experience, advice, and connections -- or else we run the risk of growing ahead of our ability to run the business in practical terms."

My response:


"It is interesting to see you anticipate that your greatest challenge will be keeping up with growth. Historically this is not the challenge of most entrepreneurs. The challenge of most entrepreneurs is to provide a product that people really want. Then their challenge is to provide a product that people want enough to pay for - or that so many people want for free that advertisers will pay to reach them. With one of those two scenarios emphatically proven, then their challenge is to grow the business sustainably. Sometimes this involves raising capital, which is a very unique process/skillset.

It is getting harder and harder to "make it" with this second type of if-you-build-it-the-advertisers-will-come model and, if you seek additional investment, you will need to show traction with advertisers or at least user numbers (especially high-value users) that are so massive as to convince any investor that SURELY some advertisers would want to reach them. Recently some very public flops of advertising-driven consumer web companies (e.g., Facebook's IPO and Digg's acquisition) have made investors in this space particularly wary.

Generally the two metrics that an investor will focus on are your Cost of Customer Acquisition (How many marketing dollars do you have to spend for each new customer to join your site?) and Lifetime Customer Value (How much revenue will that customer make you either through paying you directly or through advertising dollars over the entire time that you expect that customer to continue using your site?). If LCV is significantly higher than CCA, it allows an investor to think, "If I invest X, it will generate a return of more-than-X" with high probability. Do you have convincing data to quantify your CCA and LCV - both today and how you believe these numbers will evolve in the future?

Almost every startup that becomes "successful" - that is, grows into a big company with sustainable profits - looks very different by the time it achieves "success" than it did at the time of founding. The key success attributes for entrepreneurs these days are not "great vision" or even "incredible execution to achieve that vision." Rather the most successful entrepreneurs exhibit outstanding ability to test products with their target markets, rapidly collect feedback, interpret it, and adapt or pivot the company's business model based on that learning and/or based on partnerships or other new means that the entrepreneurs are able to bring to their ventures. This has been the case for a long time but recently it has gained traction under the buzz categorization of "lean startup" principles. My favorite book that espouses these principles and provides a step-by-step guide to implementing them in your startup is The Startup Owner's Manual and I would highly recommend that you read it. It is unfortunately only available as a big, heavy hardback, but the process diagrams and writing inside are very valuable.

Another challenge you might face IF you seek additional investment will be your team. Investors tend to invest in teams before they invest in ideas. There is nothing wrong with you being a first-time entrepreneur but it would be ideal if you could strengthen your team with other experienced entrepreneurs (Previous startup experience - success or failure - of the founding team has the highest correlation with the success rate of entrepreneurial ventures and investors know that.), especially those who would complement your skillsets / fill your skill gaps.

Finally, from a cost perspective, I wanted to check with you on your technology infrastructure. I believe I saw you post on facebook before about costs for servers. Are you familiar with cloud computing options? Amazon Web Services, Rackspace, and many others offer virtual servers with ~infinite scalability to entrepreneurs. This helps you avoid some of the costs/risks/concerns of growing your venture on the technical side such that you can focus on the commercial side."

What do you think? Did I provide some valuable feedback?

Swiss Dairy

Last night was fantastic. The entrepreneurs behind my spring startup project, deskNet, took my group out for a celebration dinner. This was something we intended to do back in May when the project finished, but final exams, Kenya, and vacation interfered. It was nice to take a break, though, as this way they could update us on their progress. It seems that we really added some value as they are now running an operation much more focused on a specific strategy.

They picked us up at IMD and drove us about an hour up into the mountains. When it became clear that the only signs of life for miles around were evergreen trees and cattle, we came upon a dairy farm that doubled as an out-of-the-way restaurant, La Bréguette. Apparently others were in on the secret as the rows of tables inside the farm house were packed. We settled down to a delicious meal of escargots, cold meats, fondue, and incredible desserts. Cream, cheese, and chocolate were made there at the dairy so were prominently featured throughout the menu. Add a little (OK, a lot) Swiss white wine and great conversation and we found ourselves back at IMD after midnight. The crisp night air and bright stars up in the mountains were really refreshing; Switzerland is not a bad place to live. I wish the deskNET team all the best and I look forward to following their success.

Today has been a great day for USA volleyball. Misty May and Kerri Walsh won their second consecutive Olympic gold in beach volleyball (their 108th consecutive match win) while the indoor women's team advanced to the gold medal match. Tomorrow it's time for the men to show that they can keep up!

Carmen

Yesterday we made our final presentation for our startup project. After four months of working to add value to our client company, we are enthusiastic about its prospects so had no trouble presenting it positively to our jury of VCs and entrepreneurs. They asked tough questions which made for a challenging, valuable experience.

To celebrate, one of my startup group members, Mathias (French), and I attended a performance of Bizet's Carmen last night. Perhaps we should have been working on our papers or studying for exams, but relaxing with a wonderful performance and some wine (My first in three weeks!!!) was just what the doctor ordered.

We have this morning free too, as the final startup groups make their presentations. Martin (Czech), Martin's wife (Czech), and Tomas (Slovakian), and I are seizing the opportunity to play some beach volleyball. Again, maybe we should be working but the weather is beautiful and I can't pass up the opportunity to get in touch with my Eastern European side.

Beach Volleyball in the Rain

After an incredibly productive several days of work for deskNET, my group's startup client, I was chomping at the bit to get outside and enjoy the beautiful weather. Most of the class gathered in the auditorium to watch The Constant Gardener, one of 10 movies we must see in preparation for our Discovery Trip to Kenya. Having already seen it, I snuck off with Tomas, the Super Slovakian, to get some volleyball in while it was still light out.

At almost exactly the moment that we played our first point, it began to rain, just a sprinkle at first. Then it came down a little harder. And then harder. By the time we finished our second game, it was pouring. But hey, we were already there so we might as well play. Our opponents had the same attitude so, while the rest of the courts cleared, we managed to squeeze in four games before Tomas had to leave. Sure the conditions were suboptimal, but it was still a blast.

On an unrelated note, I've finally returned to my journey through American pop music and have now made it to 1993. It takes me back to my 8th grade graduation dance at Lake Braddock and the beginning of my freshman year at TJ--great memories!

Living the Startup Dream

A major component of our IMD entrepreneurship education is the Startup Project. 18 startup companies have come to IMD asking for "help." "Help" means anything from business strategy to market research to marketing to manufacturing and production optimization to HR to . . . any other aspect of business. Frequently they need help with several of these issues in order to secure loans, raise money, or even just get "unstuck". In January students selected from the 18 client opportunities and began work immediately. We are expected to deliver demonstrable value--not just a high-level, hand waving consultant report. We are expected to provide recommendations and then help implement them--essentially to work IN the startup.

My startup group (myself and four others: Turkish, Russian, South Korean, and French) is working on a company called DeskNet, which produces Sobees. They came to us without any investors, strategy, business model, clients, completed product, or many of the other things you would expect in a successful startup. Ah yes, living the startup dream! :-P But hey, they have a cool idea and we know we can help them commercialize it. We're really into the thick of it now, so I will keep you all posted about our progress over the next few weeks. I may even ask for some feedback on our ideas and options as we move forward.