Mentor


As an advisor to startups, I’ve spent a lot of time developing my skills at teaching, guiding, and influencing people. But things aren’t always so rosy for startups – people who have done startups before know that there can be incredible highs but also incredible lows. The tough moments can be extremely challenging to the psyche. But who can guide them through these times?

Lately, I feel like I’ve been playing the role of helping entrepreneurs through tough times, not only with what they do, but what they feel also.

It’s hard being an entrepreneur. Sometimes, you have nobody to talk to. This is why we encourage entrepreneurs to have a co-founder, and to find good advisors. But I’ve found that while many give great advice and are awesome at the “doing” part, and are great problem solvers, they are awful at the “feeling” part.

Therapists have lots of skills – among them are:

1. The ability to listen.

2. The ability to be non-judgemental. What is, is. Don’t place value judgement on what is there in front of you.

3. Be able to practice “tough love.” Don’t be wimpy and only shower someone with good feelings; listen and then guide them to a better place. Don’t be afraid of confrontation – too many people, especially in California, avoid conflict. It’s stupid.

4. To be able to reflect what you heard from them and then guide.

If there is anything I’ve learned in my life, it’s that humans are AWFUL at the above. A good friend said it to me best:

Our society is awesome at creating doctors, lawyers, physicists, scientists. We put them through 12 years of grade school, then another 4 years of college, and then another few years of advanced training. They become AWESOME at what they do. YET we do not train someone to deal with another person positively and for a long time which arguably is just as or more important than your profession.

Those of you who know me know that I am mentor at 500startups, Lemnos Labs, and StartX. I was also mentor to Ycombinator startups when they had a short trial mentor program. And since 2006, I’ve been advisor to 20+ startups, and Venture Advisor at Betaworks. I’ve learned a lot about being a mentor and advisor over the years (see Advising with Influence and Resonance, Advisors for Early Stage Startups Presentation at Yale Entrepreneurship Institute, How Does One Advise So Many Companies at One Time?, The Three Faces of My Schizophrenia, What If I Advise But Don’t Invest?) but think one aspect that has come to the forefront lately is mentor-as-therapist.

So I listen. I hear what they are saying. I don’t be judgemental. I hear the problem or problems.

I can’t get my co-founder to agree!

Why haven’t I got 1 millions users yet? I think my product sucks!

I gotta bridge at a terrible valuation! Depression sets in!

My bank account is at zero! What do I do?

I can’t raise $100M at a billion dollar valuation! The world is so unfair!

Instagram got a billion, why not me?

I’m outta my comfort zone! Panic!

I may suggest solutions, but sometimes I suggest nothing – (in case you didn’t know, suggesting NOTHING is actually an effective way of helping!). Sometimes it can take several conversations. My intuition is fully on – can I actually push a solution now or should I wait? Maybe I can toe one in to see if it will work? I sense their receptiveness or lack thereof. I use a bit of humor. I rag on them to see the absurdity of it all (after all, what’s REALLY important in life – this stupid startup or something else?). If the time is right, I practice tough love. Some get defensive – that’s too bad – some take it in. It can be very taxing on me – isn’t it frustrating when the other party just won’t change or see the light fast enough? I just relax and be very patient because in my experience, the right answer always eventually comes. But ultimately, my hope is that I get them to a more positive place than they are today.

Yep, I’ve got a new job title – just call me “Venture Therapist”….

This year, I’ve got a number of startups all gunning for series A. A lot of us have been working on getting these startups to a point where they can present the best possible chance for getting their next round. Then, on the 500startups discussion board, the same topic came up and I posted an answer there. Rather than having it trapped there forever, I thought I’d repost it here (and edit it slightly) for all to take a look at some of things we’re thinking about as we’re prepping our startups for series A:

So what makes you most attractive to landing a series A? Sometimes it can be infuriating to see a competitor get funded and you not. Sometimes you can’t even tell why.

Here are things to work on for your series A, that can help you land one:

1. Relational – if the VC knows you, has a history with you, or even better has had an exit with you, then they will back you. Go out and smooze some VCs now!

2. Interpersonal – Very few VCs will invest in you if they can’t stand being around you. So work on your interpersonal skills.

3. Show entrepreneurial attributes – This is a given. Don’t let them think you aren’t going for the gold even in the slightest.

4. Big market -If your market is not big, you’re in trouble. Better go find one.

5. Vision – It could mean that your vision is big and strong enough. If you have a small vision for your future, or an undefined one, that is much less attractive than if you had one.

6. Traction, showing large/exponential growth – This one is hard to attain at early stage. but then if you have tremendous traction, then why do you need funding? So make them pay up! For some startups, your revenue path is very unclear so you absolutely need to show tremendous traction before you get funded. If you are making lots of money, that’s obvious although then you have to show how much *more* money you can make – making $1M is awesome but if you can only make $5M max, that’s not so awesome to a series A VC.

7. Understanding of key metrics, even if not large in magnitude – This one is most important if you don’t have 5. For example, for ecommerce, you need to show that you can acquire a ton of customers cheaply, and sell them something that makes you a lot more money than what it cost to acquire them. Show that you can then keep selling them more stuff and you have a lifetime value that is super high. Then a VC can then just think if they spend $X million on customer acquisition, then I will make $X+Y million. If you can show great metrics but not necessarily tremendous traction, then you need to show metrics which will talk about your potential, once you get tremendous traction.

8. Why are you better than your competitors – If you have a lot of competitors, the probability of you getting funded drops. If you have less, the probability grows. In either case you need to show why you are better than the other guys in your space.

9. Exit potential – 10X or better – For series A, they will look to return 10X or better. They will NOT be playing to exit at 3-5X. If you can’t show that in your numbers and potential, you’ll never get your series A. Work on your plan and story to get that. Study M&A data to understand if it’s even possible.

10. Timing and market conditions – Here is one example: after instagram got bought for $1B, that ruined the market for all the other startups out there trying to get their series A; all the VCs started hunting for the next instagram! Talk about herd mentality. However, after 2008’s crash, VCs started looking for revenue generating startups and less those that only have traction. So the market changes regularly.

11. Defensible, sustainable competitive advantage – This attribute has been around since the dawn of venture time. If you have one, a REAL one, then you will be fundable.

Knowing the above, then comes to another part of this puzzle for those raising money now, which is how much money do you need to make a good showing in a large number of the above?

We tell people to raise for 18-24 months now. It could be even longer given the type of startup you have. 12 months or less is definitely not enough in today’s climate. So it could be $500K, it might be $2M – whatever is appropriate for what you are building. Also remember there are two levers to adjust: how much you raise and how much you burn. So it’s not as simple as doubling your raise to get to 24 months – it could mean you should burn half as much.

NOTE: 18-24 months is HIGHLY dependent on industry and market conditions at the time. It was 12 months back in 2006 timeframe; it could be worse in the near future. Or it could retreat back to 12 months. Like it or not, it’s 18-24 months right now.

Should you ask VCs what they look for in series A?

Asking VCs does work but it may also not work. Unless your business is in a category where there are known metrics, like ecommerce, or in an area where the VC has experience in a previous investment, it may be hard to get a good answer. You may get a generic answer like “show more traction”. Well that’s nice, but how much exactly? And is that enough? So find a VC who has experience and investments in a similar industry AND is friendly enough to take advice meetings in their busy schedule and you could get some good answers. But they could also be generic answers.

I think a better path is to find someone in a similar business who can tell you what metrics they track and see if they adapt to your business.

Proving and Showing the 10X Return Case

Another thing you can do is to do some math to show that you can generate a 10X or better return for an investor via comparison with historical data.

First, if you can, look up similar companies in your space. for some this is impossible. for others you may need to look at what a potential acquirer has paid for in the past. and still for others, it could be that you can find some public companies in similar spaces for comparison. google around the web for M&A data. some of that you’ll have to find in a M&A database like MandAsoft.com or CBInsights.com. Look also at press releases, Techcrunch, SAI, etc.

Second, if they have revenue, this is most straightforward. Look at typical multiples on revenue or EBITDA. There will be high/mid/low values for typical M&A-ed companies, or easier when a company is public.

If you don’t have revenue, this can be very hard. You may just need to find M&A data on companies that were acquired by a potential of acquirer of you. Gather metrics on those companies, like number of users, etc. to use as comparison.

Next, now you relate the performance of your company at a given exit value. But what is that exit value? Now go back to some scenarios on funding. For series A guys, what would a potential valuation be, for a given amount raised? Let’s say you want to end up at $20M post money. If a series A guy wants at least 10X, then you would have to exit at $200M assuming no more rounds of financing after them (highly unlikely that other rounds may not be required, but let’s start here).

If you have great revenue potential, then take the multiple on revenue and the multiple on EBIDTA and figure out what revenue you’d have to make in order to achieve that $200M, and/or also what your EBIDTA would have to be. Now you have these two numbers – if you can build a believable plan to get to these numbers in a reasonably short amount of time, say 5 years or less is optimal, 10 years is the absolute maximum which is the typical life of a fund, then you have a good chance of getting a series A.

If you’re off building to huge user traction, looking for the Instagram win, then you’ll have to show the traction buildup of similar companies sans revenue.

Remember that Pinterest took 1.5 years of hanging around until they started to hockey stick. Twitter took nearly 3 years – those guys could have hung around for 10 years if they wanted to. But once they took off, then the game was on.

There are many out there who are looking for high traction services, either to find the next Instagram or on the assumption that if you have that many users then you’ll be valuable to someone eventually, or you’ll figure out how to monetize them even if with ads.

So all traction based/sans revenue startups have to do is to get to their own hockey stick and survive long enough to do so, but you may have to wait until that hockey stick happens before you get your series A….

Now having said all that, put all those calculations and data into a slide in your deck and get ready to talk through it with a VC. Don’t count on a VC to do that math for you; they may not have enough experience in that industry or sector to do it on the fly.

If you can’t achieve those results no matter how you jigger your spreadsheets and models, then i think you have a pretty low chance of getting a series A. if that’s true, THEN DO SOMETHING ABOUT IT. change yourself. pivot what you’re doing and/or pivot your plan. otherwise you’re going to have to figure out how to survive on just your angel round, assuming that the angels you get also have lower expectations.

Am I Sunk If I Don’t Exhibit Typical Series A Attributes?

While not being able to show typical series A attributes, it doesn’t lower them to zero. There can be so many random factors that can land you a series A.

I would say that most VCs are pretty conservative relatively speaking and want proof points alongside the vision and things that are not yet shown or proved yet. but that doesn’t mean you couldn’t find someone to bet on you even with large sums of money.

The lesson here is: keep trying! Don’t give up! If you have absolute proof that you should change your pitch, then do it. But there also may be somebody out there who will fund you with your current plan. You’ll never know until you pitch as many people as possible. So DON’T GIVE UP.

At some point in their lifecycle, many VC’s try to open up the black box of decision making at their firms via a blog post.  When I read these posts, generally gloss over because they are explaining to you the things that I call table-stakes: the basics that will just get you in the door at a VC firm.  Examples include disruptive, large market, high barrier to entry, scalable, blah, blah, blah.

In fundraising, I believe that the most important thing that you can do to dramatically increase your chances of success is to better connect with the individual partner that you’re working with at a given firm.  By figuring out what makes this person tick, you can turn them from a passive decision maker into a champion of your company.  This seemingly small nuance will give you an infinitely higher chance of having his/her firm making an investment in your company.  While this sounds really logical, it is amazing to me how many entrepreneurs send over data, decks and emails, without any thought of what it will take to actually woo a partner (and I don’t mean faking it – this needs process needs to be completely genuine).  By turning a partner into a champion, many good things will begin to happen.  They’ll bring you up in partner meetings, make sure that the process runs smoothly with their analysts and associates, introduce you to people who can help you grow your business or solve a specific problem.  And, when the ultimate decision time comes, they will be in your corner fighting for you with their partners.

Unfortunately, figuring out how to romance a partner is next to impossible because we are all human (well, some are robots…) and the key to unlocking the vault is ever-changing

So, with that said, here are the things I think about and look when looking at a potential investment.  As I said, all of the market disruption, size, and competition stuff is table-stakes, so this is the peel-the-onion, next order of thinking.

Where did you come from?

Generally you get through the “door” when you come from someone whom I like and trust.  There are a number of sources that get preferential treatment and immediate consideration to take something that they recommend into deep diligence.  Get through their door and that is a big boost of confidence for me.  As with most other firms, the social filter is a great way to look at a lot of high quality pre-screened companies.

Besides the traditional need to be referred from someone whom I trust, I also care a great deal about your background and what makes you tick.  A lot of the time, knowing what you value as a person is as important to me as the company that you are working on.  If your world-view aligns with mine then I have confidence that you will be making decisions that align with those that I believe will make you successful.

Why are you spending your time on this?

I always try to separate the “get rich quick” guys from those who are truly passionate about what they are working on.  I can’t stand the get rich quick schemers.  I like to think of myself as a pretty patient investor.  I like the guy who is thinking about what the company will look like when they’re 80 years old and their wife is telling them it’s time to retire, but they don’t want to hand their creation off to some hot shot, young Harvard MBA who knows nothing about electrophysiology.

How much have you risked on this venture?

You don’t need to mortgage your house, borrow against your sister’s 401(k) and trade in your ’99 Toyota to prove that you have risked a lot on your new venture.  There are small sacrifices that can have bigger impacts than just plowing money into a start-up.  For example, the founders of PaperG, who are first generation Americans, proved their commitment to me when they explained the personal sacrifice they faced when dropping out of Yale.  Those guys were facing parents who would, literally, never talk to them again if they didn’t complete their Yale educations.  Of course, I am not in this to break up families, so the entire investor group, along with the founders, figured out a creative way to help them finish up school while running PaperG.  They were on the 5+ year plan but who’s counting?

Do I look forward to diligence meetings with you?

No explanation here.  Am I thinking about your company before bed and excited to share ideas with you at meetings – or am I just going through the motions?

Do I open emails from you immediately (may not respond immediately)?

This is one of the biggest indicators for me as to how interested I am in your company.  I, generally receive 150+ emails per day.  If a company is hot on my radar screen, I like the founding team and love the product, I find myself itching to correspond.  As many of the CEOs who I interact with on a regular basis will tell you, when I find something that I believe in, I am naturally trying to spend more and more time working with them.

Am I excited to share this deal with my friends in the investment community?

Assuming that I am going to participate or lead a syndicate (90%+ of Launch’s deals are syndicated), then I am going to need to introduce you around.  As I am doing this, it is important to note, how quickly I send these referrals out.  Similarly, if I am not the one qualified within Launch to look at this company, how fast am I moving you through our organization?

Are you doing something that will help mankind?

In general, I like to think that I spend my time helping people build companies that will leave this world in better shape then when we started.  It doesn’t mean that I am interested in investing in the double bottom line.  There are great firms that focus on this as a strategy; we are not one of them. What it dos mean is that I would prefer to spend my time getting excited about a company that will transform an industry, positively change people’s lifestyles, contribute something substantial to science, the arts, humanities, etc. etc.  I am more interested in creating and disrupting markets rather then building on top of them.  Again, this doesn’t mean that LaunchCapital only invests in start-ups like this, but it is probably what I am spending my time on.

For reference, here are the companies within Launch that I am responsible for, or that I had significant input into the diligence process and the year of investment:

Apparel Media Group – 2011

Carsala (shutdown) – 2008

CustomMade (along with Bill McCullen) – 2011

Continuity Engine (along with K. Drakonakis) – 2009/2010

DoubleDutch – 2010/2011

Green Life Guides – 2009/2010

HoDo Soy – 2008

Kibits (along with Tom Egan) – 2011

Lefora (sold to CRWG) – 2008

Life360 – 2009/2010/2011

Liquor.com – 2010/2011

LP33 – 2010

Mobile Spinach – 2010/2011

Momelan (along with Bill McCullen) – 2010/2011

PaperG – 2008/2009/2011

ProFounder – 2010

ReportGrid (along with Tom Egan) – 2011

RentJuice – 2010

SecretBuilders (along with Bill McCullen) – 2009

SocialSci (along with Bill McCullen) – 2010

STR (along with K. Drakonakis) – 2010/2011

YouRenew (along with K. Drakonakis) – 2010/2011

zozi – 2010/2011/2012

 

(Written by David Shen, Director, West Coast Operations)

I was on a panel at Fundingpost’s, Silicon Valley VC and Angel Conference this last Thursday and once again the topic of how important the startup’s idea was, relative to other factors, in an investor’s decision process to invest.

Overwhelmingly, the panelists’ response that super smart and entrepreneurial people were much more important at early stage. This was because of the fact that almost always their initial idea was going to be wrong, or needed to be adjusted, and that someone needed to be smart and adaptable enough to pivot their activities into a viable entrepreneurial direction. So like war, the initial plan seldom survives contact with the enemy, or the marketplace.

However, I think I was one of two folks who said that we bet on superior people that were ALSO working on a great idea.

There are numerous documented cases of investors who bet almost solely on rockstar entrepreneurs and will invest in a team that has genius credentials, even if the idea is underdeveloped. Why they would execute such a strategy:

1. Their past experience has shown that smart entrepreneurs has been more predictive of a successful outcome, but relatively independent of the idea they are working on or where they started.

2. They have enough capital to spread their bets among many smart teams and be less sensitive to exactly how good their initial idea is.

3. Given enough capital, a strong team/entrepreneur has enough runway to take a less developed idea and iterate until it is a strong idea. So those who qualify for item 2 above will readily support strong teams/entrepreneurs because the initial capital outlay is large for the startup, but still miniscule relative to their entire fund.

3. In today’s world, there is a huge movement to create and nurture entrepreneurs. Joining up with this effort aligns with their own thinking that more entrepreneurism is good for the world, as well as generates positive public relations with the outside world on these efforts. Thus, to support rockstar entrepreneurs at early stage is a positive thing for them and the world.

Many big names are executing this kind of strategy right now. If they are doing well, then shouldn’t I also worry less about the idea and just bet on super strong teams, even if their idea is relatively weak?

Why I look for strong entrepreneurs AND great ideas:

1. I have met strong teams but with underdeveloped ideas and walked away from investing. This is a personal choice, where I like to support them in their direction and especially if I have experience or an affinity for the direction they took. If the direction they take is very fuzzy, then I feel less of a connection with their project.

2. Personal experience plays out here, but I have seen many super smart people fail at their ideas. So for me, it’s not enough to just bet on rockstars and be more lax about the idea. I want to maximize my odds of success by finding strong entrepreneurs who are at least starting with some breakthrough idea. If they do not start with a breakthrough idea, then it is just as possible that they will pivot their way to one as it is to pivot to nowhere.

3. Now that I am at Launch Capital, I have more capital to deploy but still it is not at the level of other funds who have much deeper pockets. So there is a practical strategic consideration I need to make in the face of what Launch Capital can bring to the table. It is not possible for us to make the number of bets into smart people as others are making, and therefore I must be more discerning in my decision process.

4. Today, we are seeing an explosion of entrepreneurism. People are graduating from top universities and taking their genius-ness out to Silicon Valley to create a startup. However, this has generated what I call the MIT Problem for Startups where *every* team I meet is super-strong and smart. Even those in the valley who execute the invest in strong teams strategy can’t invest in everyone. So what differentiates you from the next team? Not everyone from MIT has what it really takes to become an entrepreneur, even if you have genius intelligence. One of those differentiating factors is your idea, especially if it is a superior one.

In times past when entrepreneurism wasn’t so popular, a superior team would definitely have an edge over an average team since there weren’t that many of them. But I think in today’s world, there are too many people with superior credentials to pick from and it’s not possible for all of them to succeed. So there needs to be some other aspect which differentiates them from others – hence the presence of a superior idea.

5. Given that we are seeing not only an explosion of innovation, but an explosion of me-too ideas, many strong teams are working on the same or similar ideas. Even strong teams are not enough to dominate a marketplace if every team (who are also strong) is going for the same customer with a similar product. The chance is very great that you will all divide up the market and end up with smaller pieces of the whole no matter how much of a genius you are.

I don’t want to invest in a strong team working on a me-too product, or an incremental product, or building a product in a super-crowded marketplace of other similar or “blurry” products. I want a strong team working in an area that is game changing, exponentially different/better, or simply has not yet been worked on yet.

6. At early stage, you don’t have much time to operate. Your clock is ticking as your bank account runs down and you better have some sort of traction for your product/service before it does. Thus, if you start with a weak idea, you may need a lot of time to iterate to find a viable idea to turn into a business. But you’re early stage – you don’t have time! If you happen to start with a superior idea, then you’re at least pointing in a direction that has a lot of positive factors for success; undeveloped ideas are much less certain and I’ve seen a lot of people end up with nothing as their bank accounts ran out, no matter how smart they were.

It’s all about increasing my chances for creating a good outcome for my investment and time. Strong entrepreneurs are a prerequisite for success, but in the crowded startup world of today, it’s not enough to lessen the impact of weaker idea they are working on. If there are so many ideas being worked on, then I can wait for the right smart/superior team to come along who is also working on a superior idea. Then my probability for getting a great outcome for my investment is much higher than without a superior idea.

Footnote: In thinking further, it is obvious that even those who invest in super strong entrepreneurs are still looking at their ideas. Even though they are writing about the fact that it’s all about super smart entrepreneurs, they are still banking on the idea in their decision process because otherwise more people would get funded. Very rarely do entrepreneurs get funding to work on really weak, undeveloped ideas; usually these people are repeat entrepreneurs with a stellar track record and with a prior relationship with the funding source.

Perhaps the most important relationship within a start-up business is the adviser relationship.  Some entrepreneurs know how to leverage this relationship very well, while others believe that it is a waste of time and energy.  I believe that, if properly aligned and matched,  the mentor/adviser relationship can elevate a start-up to the next level.  From a definition standpoint, I am considering a mentor someone who is not compensated for their time/effort and an adviser as someone who is (either via equity or with payment).

Over the summer, I have had the unique opportunity to mentor a New Haven, CT based entrepreneur on her new start-up.  While I have been unofficially advising companies over the past 3 years on a one off basis, the relationship that I struck with this New Haven start-up was more formal in nature.  Weekly calls, regular in person meetings, help developing financial models, employee contracts, etc. (It is important to note that I have no financial incentive in the company and have not been paid a *consulting* fee or equity by the founder).

And, over an Indian food lunch yesterday with the start-ups founder, I began to realize that as a VC, the role of a mentor is far more complicated then strictly giving advice.  When going into the formal relationship with my NH based start-up, the most important thing that myself and the founder did was to decouple my relationship with LaunchCapital and my relationship as a founder.  The reason that we did this was to make sure that I was fully aligned with helping her grow her business and receive the best terms possible for her angel round of financing.  Obviously, if I am trying to maximize the terms for the entrepreneur, I am misaligned with LaunchCapital’s financial incentive.  Therefore, decoupling was necessary.  And, by allocating another resource to advise LaunchCapital as to whether or not to make the investment – independent of my opinions of the start-up – we were able to seamlessly due diligence.  While not the perfect solution, it certainly helped.

So, for those entrepreneurs who would like to bring a mentor or adviser into their business, I have a list of 5 necessary things to make the relationship worthwhile:

1) Align all incentives.  Make sure that the mentor/adviser is not working with a competing start-up, does not have board membership on another company that could cause a misalignment.  If the adviser is from the venture community, I would ask around to see what companies they have been actively engaging, what companies they recently funded.

2) Require regular meetings.  A lot of entrepreneurs that I talk with have great advisers and mentors to lean on, but talk with them so infrequently that they are not successful at leveraging their expertise and connections.  To maximize the time and relationships that you have, I would schedule bi-weekly calls and monthly in-person meetings with all of you mentors and advisers.  And, if a mentor/adviser is not willing to meet that often, then it should be seen as an indicator of how helpful they will be in driving your business forward.

3) Don’t offer equity or payment until the adviser says something.  The start-up ecosystem is such that people are willing to do a lot of work and mentoring without compensation.  Before you are willing to give up that valuable equity award, make sure that you work towards a non-payment agreement first.

4) Identify your needs from this person before you develop the relationship.  Most mentor/adviser relationships fail because the entrepreneur hasn’t identified what the needs are from the person with whom they are talking to (it is also pretty frustrating to be on the other side when this happens).  Advisers and mentors can be valuable in more ways then just making introductions.  Many times, these people have built teams, businesses, made sales pitches, etc.  Use them for everything that you have not done before.

5) Have an end goal.  For any informal relationship to work, I believe that their needs to be an end goal that everyone is working towards.  It could be anything from raising the angel round to successfully selling your product to a strategic customer.  Regardless of what the end goal is for you, make sure that you have decided on final outcome that you want to see from the mentor/adviser relationship.  And, once this final outcome is achieved, celebrate and move on.  There is often a feeling that these relationships should last for ever.  In my opinion, that is not necessary.