Compilation of fundraising resources and insights for entrepreneurs

There is an abundance of great content available to entrepreneurs on the fundraising process. However, a lot of the utility of that content isn’t fully realized as time strapped entrepreneurs often do not have bandwidth to go searching for it. Additionally, it can be tough to tell whats out there and what sub-catagories to consider, and as a result a lot of great content goes overlooked. The intent of A&O series is to simplify the entrepreneur’s research process through aggregating great content and organizing it by category.

So.. Below, organized by category, is a curated list of links to great fundraising content. It is likely a fraction of whats out there, but it covers the major staples of the fundraising process. Of course nothing below should be taken as gospel, it is merely outline of the factors to consider.

Feel free to comment with any links that you think belong below. The post will be updated often to include new content and reader recommendations.

Why Fundraise from Venture Investors?
Understanding the costs and benefits of venture fundraising

http://blog.eladgil.com/2010/08/20-questions-to-ask-yourself-before.html

http://hunterwalk.com/2014/03/04/youre-either-venture-backed-or-a-lifestyle-business-the-big-lie/

http://avc.com/2015/04/lifestyle-businesses/

Economics of a VC firm
Understanding your current or potential appeal to their model

http://cdixon.org/2015/06/07/the-babe-ruth-effect-in-venture-capital/

https://blog.wealthfront.com/venture-capital-economics/

http://avc.com/2008/08/venture-fund-ec/

http://www.saastr.com/why-vcs-need-unicorns-just-to-survive/

Fundraising Strategy
Creating demand for your startup

http://paulgraham.com/fr.html (Must read — could fit into any category)

http://www.bothsidesofthetable.com/2012/01/16/how-to-develop-your-fund-raising-strategy/

Business Plan and Pitch Decks
Templates and Best Practices

http://www.sequoiacap.com/grove/posts/6bzx/writing-a-business-plan

http://www.slideshare.net/nextviewvc/startup-pitch-deck-template-2-next-view-ventures-slideshare

http://onstartups.com/tabid/3339/bid/98034/The-Pitch-Deck-We-Used-To-Raise-500-000-For-Our-Startup.aspx

Reaching out to and Interacting with VCs
Demystifying the process

http://www.bothsidesofthetable.com/2009/06/19/getting-access-to-the-old-boys-club-how-to-approach-a-vc/

http://robgo.org/2015/02/05/pitch-decks/

http://www.quora.com/What-are-the-best-ways-to-manage-relationships-with-VC-contacts-prior-to-fundraising

Seed Fundraising
Your first raise

http://nextviewventures.com/blog/how-to-raise-seed-capital/

http://cdixon.org/2011/06/09/notes-on-raising-seed-financing/

https://docsend.com/view/p8jxsqr

http://startupljackson.com/post/114347589480/open-letter-to-yc-founders-on-fundraising

http://tomtunguz.com/three-most-important-trends-in-seed-market/

Series A Fundraising
Capital to Scale

http://nextviewventures.com/blog/how-many-vcs-should-you-pitch/

http://firstround.com/review/what-the-seed-funding-boom-means-for-raising-a-series-a/

http://www.launch-capital.com/venture-capital/can-i-get-you-to-series-a

https://www.linkedin.com/pulse/20131015161834-1213-what-i-wish-i-knew-before-pitching-linkedin-to-vcs

Corporate + Strategic Investors
Nuances and Motivations

http://avc.com/2013/06/on-corporate-vcs/

http://micahjay1.com/2014/10/01/strategic-investors-youll-have-sold-your-company-you-just-wont-know-it/

https://www.cbinsights.com/blog/corporate-venture-capital-report-2014-q1/

Picking the right investor
Criteria to consider

http://blog.eladgil.com/2012/11/how-to-choose-right-vc-partner-for-you.html

http://cdixon.org/2009/11/03/how-to-select-your-angel-investors/

http://www.ventureblog.com/2013/01/pick-your-angel-investors-wisely.html

How Much to Raise
Obvious and Non-Obvious Considerations

http://cdixon.org/2009/12/28/whats-the-right-amount-of-seed-money-to-raise/

http://correlatedcausation.com/how-much-to-raise-using-crunchbase-data/

http://www.paulgraham.com/equity.html

http://venturebeat.com/2015/05/13/billion-dollar-startups-everywhere-but-no-billion-dollar-entrepreneurs-yet/

http://www.foundersworkbench.com/capital-calculator/

Valuations
Understanding your sweet spot

http://codingvc.com/an-algorithm-for-seed-round-valuations

http://techcrunch.com/2015/04/13/big-valuations-come-with-dangerous-small-print/

http://avc.com/2015/05/what-can-it-be-worth/

https://www.linkedin.com/pulse/angel-investing-todays-market-rates-losing-proposition-david-shen

Convertible Note versus Equity
Pros and Cons

http://www.sethlevine.com/wp/2010/08/has-convertible-debt-won-and-if-it-has-is-that-a-good-thing

http://techcrunch.com/2012/04/07/convertible-note-seed-financings/

http://techcrunch.com/2012/04/21/convertible-note-seed-financings-econ-101/

http://techcrunch.com/2012/05/13/convertible-note-seed-financings-part-3/

http://siliconhillslawyer.com/2015/04/29/capped-convertible-notes-liquidation-overhang/

SAFE docs
Emerging Standards

http://techcrunch.com/2013/12/06/yc-safe/

http://www.ycombinator.com/documents/

Pro-Rata
Why is this right so important to investors

http://www.inc.com/mark-suster/the-authoritative-guide-to-prorata-rights.html

http://blog.semilshah.com/2014/08/01/another-angle-on-the-shifting-pro-rata-debate/

http://gothamgal.com/2012/06/pro-rata-rights/

http://avc.com/2014/07/the-pro-rata-opportunity/

http://www.aaronkharris.com/the-importance-of-honoring-pro-rata-agreements

Party Rounds
Don’t believe the hype

http://blog.samaltman.com/party-rounds

http://www.bothsidesofthetable.com/2011/09/01/the-problem-with-collecting-logos-at-startups/

http://www.aaronkharris.com/party-all-the-time

https://www.cbinsights.com/blog/party-rounds-seed-vc/

Participation of a Lifecycle VC
Implications for the future

https://www.cbinsights.com/blog/seed-venture-capital-funds/

http://cdixon.org/2009/08/14/the-problem-with-taking-seed-money-from-big-vcs/

http://www.ventureblog.com/2013/01/pick-your-angel-investors-wisely.html

What time of year to fundraise
Seasonality matters

http://blog.semilshah.com/2015/02/04/brief-field-notes-from-the-seed-world/

http://tomtunguz.com/what-time-of-year-to-raise/

Incubators + Accelerators
Understand the landscape

https://medium.com/@milanthakor/y-combinator-and-500-startups-a-founders-comparison-ae47bf218c0e

http://pando.com/2013/02/16/dear-awesome-startups-dont-join-an-accelerator-unless-y-combinator/

http://venturebeat.com/2015/01/16/accelerators-claim-they-are-in-it-for-the-long-hall-i-call-bullshit/

Angelist as a Fundraising Platform
Not to be overlooked

https://medium.com/@kevingibbon/how-we-built-shyp-on-angellist-and-raised-2-1m-1c723714f713

https://angel.co/2014

http://blog.semilshah.com/2013/09/24/the-big-angellist-deal-is-important/

Fundraising Stories from Entrepreneurs
Candid and Valuable Insights from the Trenches

http://reidhoffman.org/linkedin-pitch-to-greylock/ (longer post)

https://open.bufferapp.com/raising-3-5m-funding-valuation-term-sheet/

https://medium.com/@joshm/building-branch-fundraising-29c6081e7803

http://blog.foundersnetwork.com/2012/07/fundraising-post-mortem/

http://bostinno.streetwise.co/2011/07/05/6-pieces-of-generic-fundraising-advice-i-didnt-follow/

http://adespresso.com/academy/blog/want-1m-anatomy-of-an-angellist-fundraising/

http://venturebeat.com/2012/09/02/how-to-do-fundraising-right-on-a-seed-round/

Hi all,

We’ve moved our blog to our company website! Visit our new blog at Launch Capital.

In two past posts, I talked about doing due diligence on startups. The first one was The Lack of Due Diligence is Appalling and Foolish where I lamented that most investors I met out there did virtually no due diligence whatsoever. Then I talked about how simple and easy doing The Due Diligence Customer Call was, and some suggestions on what to ask. There are two more topics I would like to tackle in the due diligence area. One is research which I may let one of my other Launch Capital team members write since they are experts at this and way better than me at it. The other is what I will post about today which is about corporate due diligence.

In my Lack of Due Diligence is Appalling and Foolish post, I give a short list of documents I ask from the startup before investing. I have expanded that list slightly, adding debt obligations, business contracts, and then I modify it based on the situation and startup in question, but it has essentially been the same over the years. Most of the time I collect all this into a Dropbox folder and send it to my lawyer for review. It has always amazed me that it takes him only 1-2 hours to go through this- I guess when you look at a lot of this stuff, you get used to reading it and picking out specific stuff to look for. Every now and then, I get the opportunity to do corporate due diligence myself and yes I can definitely say it can take you only an hour to do this!

Generally, the corporate due diligence step I leave for the last step, after doing customer calls, reference calls, and research on the market. I don’t want to ask for corporate documents unless everything has checked out up to this point, since those documents are confidential to the company and I want to respect that.

Note that I am ONLY talking about early stage startups: companies that have been only in existence for less than a year and have not had many business operations. Corporate due diligence can grow exponentially when the company has been in operation for years and then there are tons of documents and contracts, which can take teams of lawyers weeks to review. So feel lucky that at early stage, you don’t have much company history to go through! But sadly, there could be a lot still to worry about….

So yes it can take only an hour! Just a few months back I did just this with a startup and zinged a bunch of questions back to them for inconsistencies and missing items. How does one do this? Some tips:

1. Do this often. Get used to reading legalese and understanding it quickly.

2. Learn to recognize standard legalese in corporate documents and when they diverge.

3. Learn to read and scan text quickly.

4. Take notes in a separate notepad or document while reviewing, so you can come back to important points or questions.

OK those are the preliminaries; now what to look for? Some common things I’ve learned to look for are:

1. Which items in the list are missing and why?

2. How many shares are authorized in the Articles? It is better to see 5M or 10M authorized. I would raise a flag if only 10K or similar shares were authorized. Lower numbers authorized also can indicate that someone incorporated by themselves at some online easy incorporation website – not the best option.

3. Scan through the board meeting minutes, assuming they exist. Identify any inconsistencies in personnel, consultants hired, stock granted to individuals and why, business dealings, operating directions, and information in the minutes and the other documents.

4. In the stock purchase plans, are people vesting or do they own stock?

5. If there have been previous financings, what do the terms of those financings look like? Do any have any effect on your money coming in at this time?

6. If there are any contracts, are there any problems with those contracts relating to future business?

7. If there is any debt, are there any liabiltiies to be aware of? Any liens on the assets of the company? Who gets paid back first and when?

8. Who is the lawyer? Be wary of lawyers who are not familiar with early stage startup work. Their lack of experience can cause all sorts of unwanted trouble – doesn’t mean they aren’t good lawyers, just means that lack of experience on what is acceptable and what is not can be a barrier to getting things done.

9. How much is owned by founders, employees, and, if any, previous investors? Is this acceptable to you?

10. Go to the site of the state in which they are incorporated and search for them in the incorporation database. Make sure they really exist there!

There are many more that come up, but those are ones that I’ve encountered in previous deals. I also asked my lawyer for a broader set of Top 10 things to look out for, from his perspective, listed here:

1. No Organizational Resolutions (after Articles, to set up the company, appoint officers, etc.), or they are incomplete.

2. No qualification filed in state of domicile (e.g., DE company located in CA, no filing made in CA).

3. Docs are provided, but they are unsigned.

4. Company is set up by an Incorporator, but there is no Action by Incorporator adopting the Bylaws and appointing the initial Board.

5. Stock Options granted, but a Stock Option Plan was not adopted by the Company.

6. More stock issued than is authorized by the Company’s Articles/Certificate of incorporation.

7. No Board Consent or Minutes approving the current financing.

8. Notice of Stock Transaction (in CA, a 25102(f) Notice) not filed with the State for the sale of stock.

9. No Cap Table.

10. Founders acquired stock but did not sign a Stock Purchase Agreement.

My list and my lawyer’s list provide a great starting point. These lists are not, by any means, exhaustive. My best recommendation is always to collect the information and then send it to your lawyer for review and spend the money for it to be done by a professional. In lieu of that, it is always educational and interesting to go through these documents by yourself and try to spot potential problems. I always scan the documents, even when I send them to my lawyer, for practice, and also to double check his work because sometimes I may find something that he may miss, or I may care about something due to the nature of the company and situation but he won’t know it’s important since he isn’t as close to the deal as I am.

The next step is to then decide whether you’re OK with what you found or not. At early stage, it is common to find lots of corners have been cut to get to where they are now. Many early stage rounds are completed with big discrepancies in the corporate documents unfixed. If an institutional investor comes in, they will most likely demand clean up. I have often asked to clean up, even at low levels of investment. Rarely do I find that an entrepreneur won’t clean it up; most of the time he/she knows it has to be done anyways, so why not now?

Other red flags:

1. I have asked for corporate due diligence documents and the entrepreneur has refused to provide them.

2. The entrepreneur doesn’t want to clean up the documents, or constantly backpedals when you ask.

I have walked away from deals, after doing all sorts of other due diligence and then got to corporate due diligence and either one of those red flags pops up or I find something that I cannot live with. Do not skip this step!

Doing corporate due diligence is a necessary step no matter what the level of investment. It is best done by spending a little bit of money getting a professional eye to look them over. And it can be done on the cheap by doing it yourself.

Thanks to Mark Edwards of Edwards Law Group for contributing to this post.

Over this last year, I have been watching a whole group of startups attempt to land their series A. One aspect that has been shown to be incredibly important for sophisticated and series A investors is showing superior metrics and your knowledge surrounding them.

Why Metrics?

With internet startups, practically everything has been shown to be measurable.

Showing that you are tracking the right metrics means that you have experienced personnel in tracking the progress of your business.

Showing exponentially rising metrics means that you have found a way to grow and capture share that is grabbing customers in ever rising, large numbers, and that is hopefully growing faster than your competitors. Investors love startups that are growing exponentially in a short amount of time; for startups, time is your enemy and showing that you can get big quickly is critical.

Exhibiting metrics that are not only growing exponentially, but large in magnitude helps a great deal. But at series A level, the magnitude of the metrics may or may not be enough to land your next round.

Metrics on Demand

We have seen that investors demand that whomever is pitching should know every metric by heart and memorized. This shows that the team members are living and breathing metrics day in and day out.

If you cannot spew metrics on demand, you substantially reduce your ability to grab that series A. Investors are seeing too many pitches where the people pitching can recall detailed metrics from memory; it shows an obsession with tracking and deep knowledge of your business. If you don’t show an equivalent grasp of the metrics, then investors may get skittish and think you don’t know enough of about your business, thereby increasing the chance that something unknown might sink it.

You must also show proficiency with metrics, showing not only that you are tracking the right ones but that you are using them effectively to grow your business, and methodologies to improve and test them and also make them better over time.

Which Metrics?

As I sit down with startups, many need to track the same metrics. But different types of startups will have different metrics, and some will have different metrics they will focus on given the situation.

The topic of which metrics to track is too broad to cover in this post. Suffice to say there has been written on the topic of metrics, many of which can be found on the KISSmetrics blog. This book is about to be released: Lean Analytics by Alistair Croll and Ben Yoskovitz. You can buy the pre-release PDF at the O’Reilly site if you’re impatient to wait until March.

Some great articles and posts to read:

Single Startup Metric – this is also discussed in Lean Analytics. It is about focusing on one metric at early stage to drive the success of your business and not getting overwhelmed with too many metrics.

9 Metrics to Help You Make Wise Decisions about Your Start-Up – A great list of common metrics used to drive startups’ businesses.

Cohort Analysis – Measuring Engagement Over Time – Cohort analysis is very important. Showing increasing engagement across cohorts and over time is critical. Setting up the same graph with other metrics like LTV, which arguably is a measure of engagement, can be very valuable and worthwhile for an investor to see.

Ecommerce is a slog — what’s your angle ? – Fred Destin has an easy discussion on ecommerce metrics.

E-Commerce: What are the most important metrics for e-commerce companies? – A broader discussion on ecommerce metrics via Quora.

SaaS Metrics 2.0 – A Guide to Measuring and Improving what Matters – Written by David Skok of Matrix Partners. Great overview on metrics applied to SaaS businesses.

Many more great posts exist out there. Search on ” metrics” on Google and also in Quora.

By the way, toss Vanity Metrics. Save those for the press; don’t waste investors’ time with them. Definitely don’t use them for tracking the growth of your startup internally; they can lead you down the wrong path to death!

Are My Metrics Good Enough?

When you meet with seed investors, they may overlook the fact that you have metrics that are miniscule or non-existent. Seed investors often don’t have traction for proof and need to invest on the dream more than concrete proof.

When you get to series A, the bar gets raised significantly. Very few startups get series A on the dream today; we can always find the example startup or exception – but that’s the point – it’s the EXCEPTION not the rule. Much better to have shown that you have a good handle on metrics and the metrics themselves are great.

The elements of great metrics are easy. You need ideally all four of:

1. Show that you operationally have a great handle on metrics, tracking the right ones, showing that you are applying strategies driven by those metrics, and have on staff the right people doing the right things with the appropriate technology in place.

2. Exhibit metrics large in magnitude, ex. not 100s users, but millions of users (or maybe 10s of millions of users now).

3. Exhibit exponential growth in key metrics. Linear is not good enough for most metrics – an example where linear might be still great is linearly growing LTV over time. Mostly, show a real hockey stick up and to the right!

4. Show that your metrics are greater than industry benchmarks and/or competitors.

If you don’t have all 4, series A can be a real slog, potentially unachievable in today’s Series A Crunch laden market where there are too many early stage startups coming up for their next round. Why? It’s because too many startups have a handle on all 4 items above AND have higher magnitude and exponentially growing metrics than you. You’ve got your work cut out for you!

So the overall goal would be to achieve all 4. The first goal is item 1. Build the dream team for metrics and put in place technology to surface all sorts of metrics that you need. Use awesome tools like KISSmetrics and/or build your own. If you don’t have 1., then other 3 are going to be super tough and you’ll be reliant on luck to get there. Don’t rely on luck! Throw the odds in your favor of achieving the other 3 by being deliberate with respect to metrics, not haphazard.

Once you build the dream team and have the right technology in place, then you need to find the right metrics. Read those posts above. Get the right help – talk to others in your industry who have experience in metrics like yours and get their help in developing the right metrics for you to work with. Replace vanity metrics with better ones!

Let’s jump to item 4. This one is easy. Search Google, look at annual reports of public companies operating in your or similar spaces. Look on Quora for someone who may reveal metrics that you can’t find elsewhere. Search Slideshare for an elusive presentation that may reveal industry numbers. Check industry reports for more. Now you have a target – if you can show that your metrics are better than existing companies out there, that’s impressive!

Back to the hardest of the 4: items 2 and 3. How do you achieve these, and both in magnitude and exponentially growing numbers? Ack!

No magic I can impart on you from this post for sure. I will say that if you’ve got item 1, you’re well on your way to do the right things to get there. This is where the rubber meets the road and now YOU have to make your project shine.

What If I Don’t Have All 4 Items?

If you’ve got all 4 items, then why the heck are you reading this post? Go out and raise your series A!

However, if you’ve gotten this far, you may be one of the hordes of startups which do not exhibit all 4 qualities. What do you do now?

If you still have runway, go out and improve your metrics!

If you need to raise, then here are some suggestions to increase your chances, knowing that there could be hordes of startups with unfortunately much better metrics than you:

1. You probably can’t hire since you are running low on cash and need to raise, unless you can get somebody to sign up on equity. But you should go to investors with someone who at least is tracking and implementing a metrics driven approach in your startup. That person could also be you! Bring that person to the pitch so that they can show uber-expertise in metrics at your company.

2. The most common problem I’ve encountered are items 2 and 3. You either have low magnitude numbers or slow, linear growth, or both. If you have either 2 or 3, you still have a chance to raise on the vision and team. The better one to exhibit is exponential growth, even with low magnitude numbers. If you don’t have growth but big numbers, investors might think that your growth has stalled, or you’re doing something wrong, or both.

Metrics are an important part of the startup process. Investors today demand not only great metrics, but people on the team who understand the critical metrics in the business and can use them to grow the company. Implementing technology and process for metrics in your startup will greatly increase your chances of landing that next round. Don’t wait – do it now!

Very recently, one of our portfolio company CEOs experienced a horrible tragedy; one in which there is no reaction or response that can substantiate what has happened.  This tragedy has hit very close to home personally – and has rocked our organization all the way up to our LPs – Karen Pritzker and Michael Vlock – as we try to see if there is anything as a collective that we can do to support them during this time.

To this person and his family, please know that the entire LaunchCapital team – and entrepreneurial ecosystem is here to support them when they are ready.

To everyone else out there (entrepreneurs, VCs, angels, mom’s, dad’s, brothers, sisters, etc), go home tonight, turn all of your devices off, have dinner with your family and spend a few minutes reconnecting with them.  Talk about something silly.  Laugh about something stupid.  Don’t take yourself too seriously.  These are the moments in life that matter most.

The physical and digital worlds are colliding. The most exciting recent mobile innovation has been the product of the growing inclusion of the physical world.  Accelerometers, GPS and NFC tags have enabled mobile devices to expand beyond being merely one-way portals to the digital world. From activity trackers to location-based deals, mobile devices have demonstrated the numerous opportunities that arise from the interplay of the physical and digital world. While once the domain of only large corporations, technology has enabled businesses of any scale to participate in the awesome opportunity that is building connected hardware.

Design/Prototyping

Previously CAD software required prohibitively expensive specialty computers and an engineering degree to operate. Now through Google Sketchup and Autodesk, the process of designing a product is significantly easier and accessible. The current open sourced environment of CAD designs, also allows for the leveraging of existing designs. The process of turning digital designs into physical prototype is now seamless as well, through 3D printers and other personal fabrication tools.

Another major hurdle that previously encumbered small hardware producers was the inability to produce and acquire critical hardware tech.

Now that a lot of hardware technology has been commoditized, individuals can acquire prefabricated kits and chipsets cheaply, not to mention custom chips can now be manufactured inexpensively as well.

Production

The go to market strategy has radically changed for hardware startups.  Kickstarter and Etsy have democratized the means of reaching consumers, and Kickstarter in particular has been an excellent channel for market validation and early customer acquisition.

Added to the ease for startups, Foreign manufacturing is becoming increasingly accessible to smaller firms. Small Firms can also pursue domestic contract manufacturing, an opportunity previously not available. 3D printing and other fabricating tools are also laying the foundation for truly scale free manufacturing.

Community

The DIY hardware community, called the Maker subculture, is a major driver of the larger hardware movement.  The increased availability of common platforms, easy-to-use tools, Web-based collaboration, and low cost technology has facilitated participation in the maker movement. Many contend that the current state of maker movement is reminiscent of the early personal computing movement that consisted mainly of hobbyists and tech enthusiasts. Whether one agrees with that comparison or not, the potential hardware innovation that can occur in garages all across the world is an incredibly exciting prospect.

Paul Graham, in his blog post on the Hardware Renaissance, perfectly explains the appeal of hardware from a consumer standpoint: “physical things are great”. Tangible tech is just plain cool. Hardware companies on Kickstarter have surged in popularity, to the point where Kickstarter had to change its policy to require physical prototypes in order to curtail some of the irrational exuberance of consumers.

What’s Next

We have already seen the rise of hardware startups through companies that we have screened, seen on Kickstarter or watched graduate from the most recent Y-Combinator class.  Most of these companies are still in their infancy, so questions of sustainability still remain, but their initial success is a positive indicator.

The underlying question for hardware startups is scalability. Could the next Kickstarter project eventually compete with a major hardware producer? Some on Wall Street seem to think so, as 3D printing startup Form Labs was flooded with calls from Wall Street Analysts asking about the future of the company, during their Kickstarter campaign. Some even contended that drops in 3D Systems (DDD) stock price were attributable to Form Labs Kickstarter campaign. 3D Systems seemed to take notice as well, they recently filed a lawsuit against the fledging startup. As 3D Systems demonstrated, large corporations will staunchly defend their market share, which could be dangerous for future hardware startups.

Another issue facing hardware startups is the ubiquity of the mobile device. The perverseness of the mobile device is leading a lot of new hardware to become focused on its interaction with the mobile device rather than it own platform. While mobile accessories are an exciting field, focusing on mobile as a platform rather than a channel is limiting for future hardware innovation.

Its not all bad news though, startups have the benefit of building hardware for niche markets, or other markets that larger companies would deem too small or too risky.  Apple demonstrated  both with the personal computer and the iPhone, that products can define the scalability of the market rather scalability determining the viability of the product.

Lawsuits aside, it is an exciting time to be a hardware startup.

Are you dreaming about a white picket fence and two-car garage? Want the newest Rolex or gas guzzling Range Rover? While the 1990s and 2000s saw the rise of McMansions, MTV Cribs, and “Bling, Bling”, more recently we’ve seen a shift in consumer patterns from owning things to “experiencing” things. The movement, which we are calling “The Experience Economy”, is being driven by young people who have come of age during one of the worst periods of recession in our history. Frugality and value have begun to supplant overspending and excess in the U.S. Even while student loan debt has exploded, individuals have continued to deleverage themselves. The savings rate, which plummeted from its 12%+ peak in the 70’s to slightly north of 1% just before the recession, now hovers around 4.6%. The demonization of the 1% during the Presidential Election further illustrates this changing social construct. 

Evidence of this trend is widespread. Dramatic population shifts are occurring back to urban centers, as people want to be closer to the action. Young people are more likely to spend their money on travel instead of purchasing durable goods. Individuals are shifting their focus from consuming mass produced products to a more customized experience. It would make sense that Apple, the fastest growing company over the last few years, is obsessed with user experience and the design of their products. Social media has become a major catalyst for the Experience Economy. Not only do we share our experiences with the people around us, but also with our closest 1000 friends!

Rise of the Humblebrag

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Bragging is an innate behavior. According to Harvard psychological studies, researchers estimate that we spend 30-40% of what we say in life to telling others about our own experiences. In what shouldn’t come as a surprise, they found self-disclosure “activates parts of the brain that form the mesolimbic dopamine system, widely associated with our desire and reward mechanisms”. The amplification of social media has given people the megaphone to shout these experiences to a much larger audience. In fact, 91% of people that use photo-sharing sites have posted photos of their vacations.

So how is all of this connected? Where buying luxury brands once conveyed a message of wealth and allowed you to show off to the people that you came in contact with, social media has allowed you to show off your experiences to a much larger audience, in real-time. But shouldn’t that just mean that people would continue to show off their luxury goods to others via social media? Experiences offer a much higher utility for consumers, meaning those experiences are much more memorable and offer more satisfaction than goods purchases.

Luxury Experiences Trump Goods

Speaking of luxury goods, according to the Boston Consulting Group, the Global Luxury Market is a $1.4T industry. The experiential luxury category made up grew to 55% of the total market last year. This segment is not only made up of traditional luxury experiences like exotic African safaris, but also includes experiences like deluxe hospital rooms with specialty chefs or high-rise luxury apartment buildings offering virtual golf-facilities.  Experiential luxury is actually growing 50% faster than the luxury goods segment.  According to a study by Unity Marketing, consumers were three times more satisfied with purchasing luxury experiences than goods. The report chalks this up to a number of factors including an aging, affluent population that have reached an age where experiences are much more valuable than goods, a younger generation who define themselves by what they’ve done and not what they have, backlash from the recession, and consumers seeking a greater sense of purpose and satisfaction.

Flight to Cities

Another phenomenon is the flight to cities and urban areas back from the suburbs. In the nine months between July 1st, 2011 and April 1st, 2012, 27 of the nation’s 51 largest metropolitan areas exceeded their suburbs in population growth, according to census data. This is the first time this has happened since the 1920s! Many factors have contributed to this shift, which is largely perpetuated by young adults. Sustained high unemployment the continued search for jobs has certainly attributed to the flock to cities and an affinity for renting apartments over buying homes, but there are a number of other factors including the downtown revitalization efforts, reduced crime rates, reliable public transportation, and the growth of cultural amenities. Young adults are also delaying marriage and having children later, another impetus for a flight to the suburbs. Work locations also shifting back to more urban areas away from corporate campuses, drawing adults back to cities.

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The revitalization on former industrial areas has also attributed to this shift. The Wall Street Journal notes:

“… A decades-long migration of factories to the suburbs and rural America has rid cities of the heavy industry that used to make them smoky, loud, and smelly. Take New York: In the 1940s, freight traffic ran on an elevated rail line on the city’s west side. Today, that line is now the High Line, an elevated public park.”

Participating in the Story: Mass Customization and Crowdfunding

Two major consumption shifts are fueled by the experience economy: Mass Customization and Crowdfunding. Mass customization gives people more tailored options. Consumers are demanding products that fit their own needs and are willing to pay more for a customized experience. Starbucks is probably the best example of this, turning the standard $1 coffee into $4-5 personalized coffee drinks. Other companies like Nike and Coca-Cola are investing millions in mass customization. Nike ID allows customers to customize their shoe choices (and is now a ~$100m portion of their business) and Coca-Cola has invested over $100m in their new Freestyle vending machines that offer literally thousands of potential soda combinations of their beverage portfolio. Startups like Cafepress and Zazzle have jumped on the opportunity to offer customized products for their customers.

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Crowdfunding is also a phenomenon related to the experience economy. People are willing to fund projects with no guarantee that it will ever get manufactured! It’s the ability to participate in the story of the product and the experience of bringing a cool consumer product to life. According to Kickstarter, over $336m has been pledged to over 33k projects in 2012.

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The Asset-Light Generation

In her most recent Internet trends presentation, Mary Meeker identifies the Asset-Light generation as digitalization and technology’s affect on all the “stuff” that people own. Think about how much space all the VHS tapes, video games, CDs, DVDs, filing cabinets, and books took up in your house. All of these things have been digitalized, allowing people to live in smaller apartments/houses in urban areas. Why own an “asset-heavy” vehicle that sits 90% of the time in a garage when car-sharing sites like Zipcar allow “on-demand” options? Why own expensive textbooks when book rental sites like Chegg offer cheaper options to rent? New startups and enabling technology has allowed people to downsize their assets to save space, money, and inefficiency.

Conclusion

Many different trends have affected consumer patterns. From the impact of social media shifting our focus to “brag” about experiences to technology enabling the downsizing of our lives, consumers are much more focused experience than physical goods. The Experience Economy will affect how companies target and market consumers, manufacturing goods, and raise money for new projects. No longer does one size fits all. Consumers are their own individual market. Consumers are demanding unique and personalized items that may challenge traditional supply chains. Both major companies and startups will have to tailor their experience individual users. Because good or bad, you know they will be Tweeting about it!

Launch Capital portfolio companies benefitting from the “Experience Economy”:

  • Zozi – Literally a marketplace for experiences!
  • Fashion Playtes – Lets young girls customize their clothing.
  • Custom MadeMarketplace for local furniture artisans for those who are sick of IKEA
  • Daily Grommet – New product discovery, “experience” eCommerce.
  • QuincyTailored fit for women’s business attire with an online shopping experience.