First time founders don’t buy this BS…
One of our fast growing startups is raising a $1MM+ round and recently came to me with more silly misinformation from a junior VC associate.
The associate told the founders “If it’s such a great deal why doesn’t your current investor (us) just take the whole thing?” The founders replied that we’d already invested in two sizable pre-seed rounds and were looking to add other capable investors.
It’s called “syndication”.
The concept is that multiple venture capital firms or angel investors make investments in a startup simultaneously. It’s very common and upwards of 70% of deals are syndicated.
There are three non-mutually exclusive reasons why syndicates exist…
The first is the constrained capital hypothesis. It assumes that VC firms supply important human and financial capital and that both are constrained within a VC firm. Therefore syndication increases the availability of money and talent available to help a new business.
The second reason that syndicates exist is known as the certification hypothesis. It’s basically the concept of “safety in numbers” where presumably a crowd of investors can exhibit better judgement than a lone investor.
The third reason that syndicates exist is known as reciprocity. Put another way, the wedding guest that gives the nicest gifts gets invited to the nicest weddings. Or VC’s that share good deals get access to other good deals. It’s a core strategy behind venture investing — which is to optimize returns through improved dealflow and a portfolio of investments.
Now there are PLENTY of great reasons for investors not to invest in a particular startup including this one.
But if you’re a first time founder don’t accept this sort of garbage about “If it’s such a good deal why doesn’t your current investor just take the whole thing”. That’s junk.
Most importantly it does a huge disservice to you as an entrepreneur and doesn’t help you LEARN what, if anything, you need to improve or fix about your business or investment proposal.
There’s a lot of room for improvement in toys for kids. I went to buy my 7 year old son a gift for the last night of Chanukah. First I thought I’d get him an Xbox. Then I thought maybe he’s too young to get addicted to idiotic video games. Maybe I can delay that. So I thought I’d get him a fly fishing rod for our move to Colorado. But that would be a lousy Chanukah present. So I went to the toy store and there were quite a few interesting board games, a lot of craft kits for girls, a lot of play toys for kids younger than 5, but not much for boys or curious kids older than 5. I looked at a few snap together electronic kits but the kinds of circuits you can create didn’t seem all that exciting considering he can jump online and play exciting flash games — or program a virtual circuit that will do amazing things. Ended up getting a race car track, wind up speed car thing. What’s been your experience? Any luck finding challenging, educational toys for kids? Or have these taken a backseat to computers altogether?
Things people tell others to try to persuade them not to try new things…
An affordable clip-on light up meter greatly reduces household water consumption and lowers household water costs. Launched yesterday by a startup in our accelerator…
”Not everything that counts can be counted, and not everything that can be counted counts.”
~ Albert Einstein
The other day I was in a roomful of supposedly experienced business executives when one complained that she was on the board of directors of an early stage business and that, “The CEO doesn’t even understand the cost basis of his products.”
Cost basis of his products?
"That makes no sense," I thought. But I figured the executive knew something I didn’t so I googled it. Sure enough it’s nonsense. Those words don’t belong together.
That’s not the first time I’ve heard capable businesspeople torturing accounting and finance terminology. I hear it almost every day.
Cost of sales, gross margins, discounts, net profits, breakeven, and so on. There are plenty of terms to confuse. Finance and accounting concepts are already needlessly complicated. Mixing ‘em up just ain’t cool.
As with all professions, terminology has evolved to serve two purposes: to describe important ideas AND to confuse people into thinking certain ideas are more complicated and important than they really are.
When it comes to finance and accounting there are four basic types of terminology:
1. Terms describing concepts that are easy to understand and you ought to regularly apply to your business
2. Terms describing concepts that are a little more complicated but you should still understand and apply to your business
3. Terms describing concepts that are quite complicated, rarely important, and you ought to have a specialist apply to your business
4. Terms describing concepts that are just BS, unimportant and don’t add value to your business
On top of these four types it’s important to know that lots of finance and accounting terms overlap and mean exactly the same thing. For example there are at least 6 different terms that mean profit. Seriously. SIX!
Whether you’re starting or running a business, understanding how money flows — how you make it, spend it and talk about it — is super important.
But there are plenty of well-intentioned bloggers, bankers, accountants, lawyers, employees, friends and board members that will give you bad advice.
So as an entrepreneur your challenge is to slog through all this input and try to make the best decisions you can.
The key is tuning out most of the noise and just focusing daily on the basics. Things like revenue, fixed and variable costs, profit, receivables, payables, cashflow, cost of goods sold, and customer acquisition costs.
It’s easy to get overwhelmed with financial models, projections, and other forms of guesswork — especially when you have investors or others telling you that hypothetical scenarios are important. Try to stay focused on the basics and earning income asap so any hypothetical exercises will be rooted in some reality.
Above all else, listen to your inner voice and if you find yourself knee deep in complex financial concepts or exercises, take a deep breath, back up, and don’t be afraid to call BS and ask exactly how these things are supposed to help you grow your business.
I bet you more often than not, when you call BS you’ll be right.
One of the most valuable public speaking lessons I ever learned came during an afternoon of media training in San Francisco in the late ‘90’s.
The lesson is really simple but something I have to constantly remind myself to do when I’m speaking to a group: Lock my eyes on one person while I’m speaking and completely finish one thought BEFORE LOCKING MY GAZE ON ANOTHER PERSON!
Before training began I was videotaped (yes we were still using tape in the ‘90’s) presenting investor slides. Afterwards I was asked to review my performance. What I saw was interesting.
If you’d asked me to grade my performance on the presentation before watching the video I would have given myself a B grade. After watching the video it was closer to a C- or D. The problem is that I looked awfully nervous, unsure and like I was hiding something.
"No problem," said the trainer, "We see this all the time. What you need to do is force yourself to stare at someone and complete a thought before fixing your eyes on someone else."
Then she videotaped me again and my performance was, well, instantly 100% better.
It didn’t feel natural at all to fix my eyes on one person per thought but it worked like super magic.
BOTTOM LINE: If your eyes are flitting around the audience, glancing at the floor, glancing at the walls and ceiling, then skimming by some audience members mid-sentence, you will look untrustworthy and shifty.
Try it and let me know if it works for you!
Over the years I’ve had the chance to work with hundreds of businesses of all shapes and sizes and among startups one phrase stands out as a frequent response to the question, “How’s business going?”
"Business is going GREAT!"
"Couldn’t be better."
"We’re killing it."
I’m talking about very early stage startups here. Startups just getting started. Startups that typically have zero revenue and zero revenue model. Startups still finding their way.
What’s frustrating about this response — aside from being dishonest — is that it usually ends the chance to have a meaningful discussion about the status of the business and how I might be helpful.
I understand that founders are always selling themselves and the business and they need to stay positive, but over-inflating progress, especially around people that can be helpful, is a lost opportunity.
This is especially true when it comes to sales and partnerships.
Very often I hear from overconfident founders about this or that “huge deal” or “opportunity” that’s about to close. 95% of the time that “huge deal” doesn’t close and that “opportunity” turns out to be a non-value-producing relationship that never translates into revenue.
Why am I bitching about this?
Because all this overconfident rhetoric clouds reality. And in the early stages of a business, honesty and accuracy are super important. Keeping interested mentors, advisors, and other stakeholders informed about the real challenges and opportunities gives them a chance to help and to get emotionally involved in your success.
My advice is to keep deals quiet until they’re highly qualified and advanced. And if you want advice earlier on, try to undersell the upside potential and likelihood of the deal closing. Keep it simple and straightforward and be real.
I recently heard Mark Pincus, ex-Zynga CEO talking about how he really just wanted his company to make a positive difference in the world. It’s a trend I keep hearing. Idealistic tech founders whose products and businesses have no relation to making a positive difference, saying it’s not about the money — they just want to make a positive impact.
Just how do you make a positive impact with mobile gambling and Facebook games?
Of course it depends on how you define “positive impact” but it stretches credulity to imagine a social game company based in San Francisco making a positive impact on the world.
Really want to make a positive impact? You have two options…
1. Do something that’s actually positive (develop technology that helps kids learn to read or cures diseases or slows global warming, etc.)
2. Or, do something that’s not inherently positive in a place that will benefit by proximity (ex. headquarter your new hedge fund or social media company or oil company in a struggling area and hire locals)
Or just forget about the company and try feeding hungry kids…