Innovation Footprints

What if . . . ?

Pitching

User Manual: The Early Stage Startups I Want To Hear About Most in 2017 and 2018

by

Source Unknown

About KEC Ventures

We are a team of early-stage investors based in New York City. We invest in information technology startups that are pursuing business models with the potential to transform the way business is done in their market. In such startups, we invest in the first institutional Seed Round. Often, but not always, we act as the lead investor. On rare occasions, we might invest earlier than this when we meet a founder pursuing a vision that we believe in. Currently, we focus on investing in startups based in the United States or Canada. Very rarely, we may invest in a startup based in Israel, but that is in the process of establishing a presence in the United States.

On our team at KEC Ventures, I have been largely focused on finding and meeting the founders that we can become most excited about. I will continue to maintain that focus over the course of 2017 and 2018.

Here are some notes for the founders of the startups I am most eager to meet.

Why I Love What I Do

My mom and dad have been running small businesses since 1981 when my mom quit her job as a teacher in Kano, Nigeria. She started a school in 1986 which they have been growing since under conditions of high uncertainty. I am intimately familiar with the pressures entrepreneurs face. I wake up every day trying to be the kind of investor my mom would have loved to have at her side.

I am most content when I am thinking about and trying to solve ill-defined problems – the types of problems other people may describe as being too difficult and not worth the trouble. I am abnormally enthusiastic about the research process that leads me to develop answers to such problems. I think of myself first and foremost as a research analyst. I embrace uncertainty. I am not afraid to be different.

Connecting With Me

If you know someone who knows me, an introduction would help. If you do not, never hesitate to communicate with me directly. I am easy to reach on the major social networking platforms. Also, I hold regular and frequent office hours at various co-working spaces in New York City. Some allow non-members to sign-up and attend.

The best time to start communicating with me is at least 6–9 months before you believe you will raise a round in which KEC Ventures might invest because I believe it is important to build trust before entering into the kind of working relationship that exists between startup founders and their early stage investors.

That also gives me sufficient time to understand the problem you are solving, so that if we invest, we are doing so with conviction. Time enables me to become a more effective advocate on the startup’s behalf when my colleagues and I have discussions about making an investment.

Communicating With Me

If we are not meeting through an introduction, I will respond quickest to founders who get straight to the point, and explain why we should meet in 250–400 words in their first email to me. Founders do not need a warm intro in order to communicate with me in order to start a dialogue.

I try my best to respond. However, depending on what else I have going on, I may not respond if I feel the startup is outside KEC Ventures’ areas of interest and that the founder could have easily found that out before emailing me. Please follow up with me once or twice if you believe I have made a mistake.

If you are not connecting with me or anyone else at KEC ventures through a warm intro, you can email me at: brian@kecventures.com. For your subject line use; Pitch: {insert name of your startup}. This way I can easily filter my inbox for these emails when I review them each week.

Characteristics I Look For in Founders, and Teams

I look for teams in which the founders have known one another for a considerable amount of time prior to launching their startup. I look for teams in which the level of trust and respect between the co-founders is high. I look for teams that will not have difficulty attracting other great people to join the startup. I look for founders who inspire confidence and loyalty from others because they are good at what they do, the kind of people I could picture myself working for.

I look for founders for whom solving the problem that their startup is solving has become their life’s mission and they plan to solve that problem with or without help from outside investors. I look for founders who have an unconventional opinion about the market opportunity they are pursuing, and can explain why their position is correct with evidence which investors can analyze independently.

At the outset I look for teams that can focus on building a simple product that their initial customers love, and who can focus on a niche within which to launch their product. I look for teams that are judicious and frugal in how they deploy the startup’s resources.

I look for founders who value teamwork, and who can become great leaders if they desire to do so. I value transparency, honesty, and openness. I value self-awareness. I like people who are determined and tenacious, who do not give up just because the going gets uncomfortable and things seem bleak.

I look for founders who have a hard time doing something simply because it is what someone else expects them to do. I look for founders who are not afraid to be different.

I like founders who marry a strong technical background with a deep understanding of  the important role marketing and sales will play in determining the success of their startup. I like founders who demonstrate a singular focus on creating value for their customers/users.

Characteristics I Look For In Markets

I look for large markets that could ultimately be served by the startup’s product, even though the initial target might be a small portion of the whole. I look for customers capable of and willing to pay for the product, and who are looking for and eager to find a solution to their problem.

I look for markets in which the pain is acute because the problem suppresses customers’ profits significantly, or because the problem makes users less happy than they could be.

If currently the addressable market is between $1B and $10B, I want to see evidence that it is growing quickly enough to support the startup’s future goals, and the competition that I assume will quickly follow if the team is successful.

In certain markets where I believe there are invisible barriers to innovation, I look for industry expertise on the founding team.

If your team is based outside one of the first- or second-tier cities for startups, it helps a lot if I can drive, take a train, or take a direct flight from NYC or Newark to come and meet you.

Characteristics I look For In Business Models

I look for products and business models that:

  • will benefit from network effects as time progresses,
  • can scale efficiently and quickly, and
  • can eventually benefit from an economic moat.

If you have the time you can read my work on economic moats here in order to understand what I will be thinking about as I conduct my independent analysis of your startup.

My Philosophy

I believe my primary responsibility as a seed stage investor is to discover founders solving problems in a manner that has the potential to positively transform industries and markets before other investors have heard of them.

We help founders focus on finding product-market fit by creating an environment in which they can focus on 4 things;

  1. Keep existing customers/users as happy as possible so that they stay and use the product more often over time,
  2. Improve product features that create and deliver additional value to existing customers/users,
  3. Hire new teammates in order to enable the team improve the product in order to deliver increasing value to existing customers/users, and finally,
  4. Attract new customers and users in order to grow the startup into a company.

I think if our founders do those 4 things well, at an increasing cadence, and with increasing efficiency and productivity, we greatly raise the odds of success of the startups in our portfolio. We strive to be good thought-partners as our founders make this journey.

The Themes I Am Focused On

Notes:

  1. My mental model of how our team functions is akin to how a soccer team functions, or how an athletic relay team functions. We take a team-first approach – it matters more that you communicate with one of us, and less on who specifically you communicate with. In turn, we will make sure that the right people on our team collaborate with a startup’s founders as we conduct our due diligence.
  2. These themes cut across different industries and sectors. That is a deliberate choice. Once you meet one of us, you’ll understand how we think about this.
  3. The technology sector evolves constantly. Accordingly, our team’s interests might ebb and flow in response. The themes I have described below should serve as a rough guide to how I think about the universe of startups in which we wish to invest.
  4. A startup raising its first institutional seed round should have raised less than $1.5M  or so prior to the round in which KEC Ventures would be investing. I personally prefer that the startup has raised $1.0M or less prior to the round in which we would invest.

I am currently interested in hearing about:

  • Marketplaces: Platforms that enable the participants in large, global markets to interact with one another in ways that reduce waste or create new, untapped opportunities.
  • Interconnectivity: Platforms that enable large numbers of different types of connected devices, machines, apps, and websites to communicate with one another seamlessly, and with the people managing or using them, within a secure environment.
  • Data & Analytics: Platforms or applications that help people or other machines to manage, analyze, interpret, make decisions, and take actions based on vast and growing troves of centralized or decentralized data.
  • Effectiveness & Happiness: Products that enable people to accomplish more at work, or to become happier outside work. Products that help large enterprises and other types of businesses and organizations to grow or function more effectively.
  • Distribution: Products that make it easier to create, manage, distribute, and consume existing and emerging forms of digital media and content.
  • Asset Management: Technologies for managing different forms of enterprise, business, or individual assets. Technologies for managing different forms of enterprise, business, or individual risk.
  • Other: New, and as-yet unknown technologies and innovations founders are building to solve problems that exist only because no one else has developed a solution.

Some, but not all, of the markets that fall within these themes include artificial intelligence – including all its existing and potential applications in different industries, software-as-a-service for enterprises – I am especially interested in products that help SMBs accomplish much more for a relatively small investment, virtual and augmented reality, distributed ledgers and other distributed computing systems, financial technology, insurance technology, educational technology and healthcare technology – where the founders discover a business model that addresses the concerns venture capitalists typically express about those markets.

Note: Starting in July 2017 I will function as the subject matter specialist on our team for investments in seed-stage startups building Internet Infrastructure, Supply Chain, and Transportation Services software.

Internet Infrastructure Software is; The software that connects computers, machines, devices, and people on the internet. Hardware is an important component of internet infrastructure, so I am willing to speak with founders who are developing a product that combines software and hardware.

Supply Chain and Transportation Software is; The software that enables networks of organizations, people, and information involved in moving products and services from one part of the world to another. This includes; Supply Chain Management, Supply Chain Logistics, and Supply Chain Finance. I have a particular interest in the application of artificial intelligence (e.g. computational stochastic optimization and learning), connected devices, and distributed ledger technologies, to the solution of problems in global supply chain networks.

Think of my focus as the union of Digital/Virtual Supply Chains and Physical Supply Chains. Virtual Supply Chains enable the movement of information within a network. Physical Supply Chains enable the movement of goods, services, and people within a network.

Things I am Not Interested In

  1. Exploding rounds: An exploding round comes with a caveat like “Seed round in ground-breaking tech startup closing in 1 week!” I do not like exploding rounds, not even exploding rounds that are being led by a name-brand VC. I need time to do my own homework.
  2. Meetings led by an advisor: I prefer my first few interactions with a startup to be with the team of co-founders, not with an advisor. It is okay for an introduction to come from an advisor, but I do not like to have advisors or mentors micro-manage my interactions with startup founders. That does not inspire confidence.
  3. Lack of control over core technologies: I try to avoid situations in which the startup has a product that has launched to the public, but the startup’s team has no primary responsibility for actually building the core product.
  4. Founders who will not share bad news: I only want to work with founders who will not hide bad news until it is too late for investors to do anything that might help the startup make a course-correction. I absolutely want to hear about difficulties, challenges, and problems. I expect the good news, but I think we have an obligation to try to fix the bad stuff before it becomes unfixable.
  5. Buzzwords: I do not believe in buzzword investing. I focus first on understanding the problem the startup has set out to solve. Only after I understand that do I concern myself with the specific technology or business model being employed to accomplish the founders’ goals.
  6. Obfuscation: “Trust me. Our algorithm is so complex and sophisticated that there’s no way you could possibly understand it.” Don’t say that. I’m willing to teach myself what I need to learn in order to understand what you do, and I need to understand the basics of how you will accomplish your vision before I can develop enough conviction to recommend an investment by our team.

My Commitment to Startup Founders

  1. I believe in Gil Dibner’s VC Code of Conduct, and will adhere to it in my interactions with founders.
  2. Given that we approach conversations with founders from the perspective of a potential lead investor, we always try to move as fast as we can to get to an answer without being sloppy about our due diligence. I wrote this guide so that founders can help us speed the due diligence process along.
  3. Other founders tell us they appreciate our team’s transparency about our due diligence process. We know founders’ time is invaluable, and we do not want to waste it if the probability that we’ll make an investment is nonexistent.

Update #1: Sunday, July 2, 2017 at 22:55 EST.

  • To reflect ongoing subject matter specialization on Internet Infrastructure and Supply Chain software.
  • To reflect institutional seed-stage focus.
  • To clarify approach to investments in Israeli startups.

Update #2: Thursday, August 17, 2017 at 08:47 EST.

  • To add Transportation.
  • To clarify that supply chain finance and supply chain management are part of our areas of interest.

Update #3: Thursday, October 26, 2017 at 09:30 EST.

  • Clarifications to themes I am focused on, and investment stage.
  • Add “Why I Love What I Do” section.

#NotesOnTactics: Relationship Management Hacks For First-Time Early Stage Tech Startup Founders

by

View Over The Manhattan Bridge
View Over The Manhattan Bridge

Note: I published a post titled “Relationship Management for Your Startup” on January 13, 2014 at Tekedia.com. This post is inspired by that one, and portions of this post are exactly identical to the original. It appears the post at Tekedia is no longer online. This post updates that one, with lessons I have learned since that time and advice I share with first-time founders with whom I have the privilege of meeting as they embark on trying to build their startups.

How should an entrepreneur manage the relationship with investors who say “no” to that entrepreneur’s pitch for capital? As I have noted above, I first tried to tackle this question in a post in 2014.

Before I suggest an answer to that question, I will propose some assumptions.

  1. The interaction between the entrepreneur and the prospective investors has been one of respect, and professional courtesy. In other words, you have not been treated badly or insulted by any of the investors you have met.
  2. The investors you have met are honest people, who would tell you if there is absolutely no instance under which they would invest in your startup. They do not have to tell you why, although it would be great if they did.
  3. Irrespective of how things play out now, there is every possibility that you will speak with investors at a subsequent stage of the current project you are working on, or, Insha’Allah, you will become a serial entrepreneur who seeks funding for a new startup in the future.

If my assumptions hold true, then it does not work to your advantage to “cut-off” an investor just because that investor did not fund your startup during your current round of financing. This is especially the case if that same investor might be able to invest in your next round of financing – for example, a venture fund which makes institutional seed-stage and series A investments, but which passed on your seed-stage round of financing.

Every venture capital fund’s primary responsibility is to make money for its limited partners. Venture capitalists do not invest because they like an entrepreneur or an idea, or because they feel obligated to provide capital. No. Venture capitalists invest in entrepreneurs and startups that they believe will make them money, lots of money . . . enabling them to fulfil the obligations they have made to the LPs in their fund.

It is your responsibility as the entrepreneur to connect the dots, and to help the investor understand how they will achieve that aim by investing in your startup. That is a very difficult task. Dealing with the inevitable rejection that comes with fund-raising for an early stage startup is jarring, for anyone . . . and it is especially so for first-time founders.

Are there any hacks that a first-time startup founder can use to make the journey less fraught with frustration? I think there are. Below, I share some suggestions.

Preparation is key; It is better to be over-prepared than it is to be under-prepared.

It is easy to assume that one will be able to tell one’s story in a way that makes sense to one’s audience. That’s a fatal mistake. If fundraising is important for the startup’s survival then founders should practice the pitch . . . Fundraising is about narrative and storytelling. Founders must practice telling the story until it becomes second nature.

This involves both qualitative and quantitative aspects of the startup’s story. It is important to note that this kind of storytelling differs from others in the sense that a startup founder seeks to persuade the listening audience to take a specific action that will work to the startup’s benefit. Write a check. Become a user. Become a customer. Spread the news about the startup’s product. I do not know if there’s a recommended amount of time that one should devote to preparing for something of this sort. When founders ask me privately for help preparing for a do-or-die pitch that is a few months away in the future, I recommend 80 – 100 hours of preparation; something like 1 or 2 hours of daily preparation devoted to making sure they know the story inside-and-out and that telling it is as normal as breathing. I also recommend that they practice delivering the pitch to different types of audiences to get input on the delivery from different points of view.

When founders ask me privately for help preparing for a do-or-die pitch that is a few months away in the future, I recommend 80 – 100 hours of preparation; something like 1 or 2 hours of daily preparation devoted to making sure they know the story inside-and-out and that telling it is as normal as breathing. I also recommend that they practice delivering the pitch to different types of audiences to get input on the delivery from different points of view. Toastmasters International is a useful resource for this, but founders will need more than Toastmasters offers.

Research is key; Know who you should be talking to.

It is easy for a first-time founder to get suckered into thinking it’s imperative to speak with “every investor known to mankind” . . . Meeting lots and lots of investors can really give a founder’s ego the kind of massage that market realities aren’t willing to dish out without herculean effort from the startup. Also, an investor’s willingness to “meet for coffee to discuss your feedback on our model and your perspective on the opportunity” can seem like positive confirmation that the founder did not make a huge mistake by pursuing this goal of creating something from nothing.

Here’s the thing; That is not always true. Often an investor might just want to find out what’s happening in a given market, and coffee with a founder who has initiated the meeting is a low-cost way of getting educated by someone who’s currently and actively solving problems in that area.

Obviously, the opportunity cost of such a meeting is far higher for the startup founder than it is for the investor.

What is a founder to do? Think carefully about which investors have the highest propensity to invest in the startup; at this stage, given its current levels of traction . . . within the timeframe in which the startup must raise capital. Create a short-list and focus primarily on those investors who fit the bill. This is easier said than done since investors do not often state their investment parameters publicly.

That said, for founders in the United States there are a few tools one can use. Shai Goldman, currently a managing director at Silicon Valley Bank, has created an open-source GoogleSheet’s document that is a good starting point. Samir Kaji, currently a managing director at First Republic Bank, has also created a body of research on micro-vc that is another great starting point.

These two pieces of work complement one another quite well, and should be every first-time founder’s BFF every weekend after the decision to build a startup has been made. There are other pieces of information that a first-time founder should use. These two are especially key . . . but also most likely to be unknown to most first-time founders. I maintain an email I send the founders I encounter who evidently could benefit from having these resources at their fingertips. I will post links to those resources at Hack Your Startup: Pitch.

I spent some time explaining why this matters in The Path To Disaster: A Startup Is Not A Small Version of A Big Company – The Office Hours Remix.

It’s nothing personal, it’s just business; Manage your investor relations with email.

After every meeting with a potential investor, or quite frankly, with anyone who could be helpful to your startup in any way, I think it makes sense to ask if they would be willing to be added to a “Friends of Awesome Early Stage Technology Startup” email distribution list. The most common response will be “Yes. Please add me to your distribution list for updates.” These updates will be very general in nature and should be a stripped-down version of the email updates that investors in the startup get. No confidential information should be included in this email – only information you do not mind being in the public eye.

While the periodic updates are interesting on their own, to my mind they are not the point of this exercise. The primary purpose of this exercise is to split the universe of so-called “Friends of Awesome Early Stage Technology Startup” into three categories.

First; the people who unsubscribe from the updates. I do not know a more explicit signal that they have no interest in what the startup is doing but simply did not have the courage to tell the founder so directly. There’s no point devoting much more energy pursuing these people.

Second; the people who have not unsubscribed but have never engaged directly based on a prompt in any of the periodic updates. It is probably worth sending people in this group an email saying you are going out to raise a financing round for which they might have interest based on developments since the previous round . . . If they do not respond after two or three attempts . . . Move on.

Third; the people who have engaged with the founders after an update was sent. Perhaps the startup needed to hire an engineer and they responded with a recommendation or offered to share the job description with their network . . . They have demonstrated some interest in what you are doing. Even if they do not invest themselves, they are likely to be a positive reference to someone else for whom there’s a better fit. Focus on these folks.

These 3 suggestions are the big ones. I make other suggestions to founders I meet in person. Those are minor in comparison. For example, don’t let a friendly investor who passed on investing in a prior round for a specific reason find out about a new round in which they might still be able to invest with only a week left before your anticipated close. It’s unlikely they can conclude their due diligence that quickly.

It’s not personal Sonny. It’s strictly business.                                          – Michael Corleone, The Godfather

Financing a startup’s operations is a crucial part of every founder’s responsibilities . . . In fact, it might be the most important. If financing from external investors is part of the plan, then founders need to find ways to make it less of a hit-or-miss affair. I hope these suggestions provide some food for thought about how to do that effectively without spending an inordinate amount of time.

Source Unknown
Source Unknown

Further Reading

  1. When The VC Says “No” – a great discussion by Marc Andreessen. You must read this.
  2. Dear Dumb VC – a post by Andy Dunn, the founder of Bonobos and Red Swan Ventures.
  3. As Populist As it May Seem, 98% of VCs Aren’t Dumb – a rebuttal by Mark Suster of Upfront Ventures.
  4. How LinkedIn First Raised Money (and Endured Rejection) – a post by Lee Hower.

User Manual: The Early Stage Startups I Want To Hear About Most in 2016 and 2017

by

Vasco da Gama Bridge - Lisbon, Portugal. Image Credit: Tasha S. K. Aoaeh (2010)
Vasco da Gama Bridge – Lisbon, Portugal. Image Credit: Tasha S. K. Aoaeh (2010)

At KEC Ventures, I have been largely focused on finding and meeting the founders that we can become most excited about and partner with. I will continue to maintain that focus over the course of 2016 and 2017.

Here are some notes for the founders of the startups I am most eager to meet.

About KEC Ventures

We are a team of early stage investors based in New York City. We invest in information technology startups that are pursuing business models with the potential to transform the way business is done in their market. In such startups, we generally invest in the first institutional Seed Round or, less frequently, we will invest in the Series A round of financing. Often, but not always, we act as the lead investor. On rare occasions, we might invest earlier than this when we meet a founder pursuing a vision that we believe in. Currently, we focus on investing in startups based in the United States or Canada.

Connecting With Me

If you know someone who knows me, an introduction would help. If you do not, never hesitate to communicate with me directly. I am easy to reach on the major social networking platforms. Also, I hold regular and frequent office hours at various co-working spaces in New York City. Some allow non-members to sign-up and attend.

The best time to start communicating with me is at least 6 – 9 months before you believe you will raise a round in which KEC Ventures might invest because I believe it is important to build trust before entering into the kind of working relationship that exists between startup founders and their early stage investors.

That also gives me sufficient time to understand the problem you are solving, so that if we invest, we are doing so with conviction. Time enables me to become a more effective advocate on the startup’s behalf when my colleagues and I have discussions about making an investment.

Communicating With Me 

If we are not meeting through an introduction, I will respond quickest to founders who get straight to the point, and explain why we should meet in 250 – 400 words in their first email to me. I try my best to respond. However, depending on what else I have going on, I may not respond if I feel the startup is outside KEC Ventures’ areas of interest and that the founder could have easily found that out before emailing me. Please follow up with me once or twice if you believe I have made a mistake.

If you are not connecting with me or anyone else at KEC ventures through a warm intro, you can email me at: pitch@kecventures.com. I’ll go through submissions to that email address every Friday.

Characteristics I Look For in Founders, and Teams 

I look for teams in which the founders have known one another for a considerable amount of time prior to launching their startup. I look for teams in which the level of trust and respect between the co-founders is high. I look for teams that will not have difficulty attracting other great people to join the startup. I look for founders who inspire confidence and loyalty from others because they are good at what they do, the kind of people I could picture myself working for.

I look for founders for whom solving the problem that their startup is solving has become their life’s mission and they plan to solve that problem with or without help from outside investors. I look for founders who have an unconventional opinion about the market opportunity they are pursuing, and can explain why their position is correct with evidence which investors can analyze independently.

At the outset I look for teams that can focus on building a simple product that their initial customers love, and who can focus on a niche within which to launch their product. I look for teams that are judicious and frugal in how they deploy the startup’s resources.

I look for founders who value teamwork, and who can become great leaders if they desire to do so. I value transparency, honesty, and openness. I value self-awareness. I like people who are determined and tenacious, who do not give up just because the going gets get uncomfortable and things seem bleak.

I look for founders who have a hard time doing something simply because it is what someone else expects them to do. I look for founders who are not afraid to be different.

Characteristics I Look For In Markets 

I look for large markets that could ultimately be served by the startup’s product, even though the initial target might be a small portion of the whole. I look for customers capable of and willing to pay for the product, and who are looking for and eager to find a solution to their problem.

I look for markets in which the pain is acute because the problem suppresses customers’ profits significantly, or because the problem makes users less happy than they could be.

If currently the addressable market is between $1B and $10B, I want to see evidence that it is growing quickly enough to support the startup’s future goals, and the competition that I assume will quickly follow if the team is successful.

Characteristics I look For In Business Models 

I look for products and business models that:

  • will benefit from network effects as time progresses,
  • can scale efficiently and quickly, and
  • can eventually benefit from an economic moat.

The Themes I Am Focused On

Notes:

  1. These themes cut across different industries and sectors. That is a deliberate choice.
  2. The technology sector evolves constantly. Accordingly, our team’s interests might ebb and flow in response. The themes I have described below should serve as a rough guide to how I think about the universe of startups in which we wish to invest.
  3. Ideally, a startup raising its first institutional seed round should have raised less than $1.5M – 2.0M or so prior to the round in which KEC Ventures would be investing.

I am currently interested in hearing about:

  • Marketplaces: Platforms that enable the participants in large, global markets to interact with one another in ways that reduce waste or create new, untapped opportunities.
  • Interconnectivity: Platforms that enable large numbers of different types of connected devices, machines, apps, and websites to communicate with one another and with the people managing or using them within a secure environment.
  • Data & Analytics: Platforms or applications that help people or other machines to manage, analyze, interpret, make decisions, and take actions based on vast and growing troves of centralized or decentralized data.
  • Effectiveness & Happiness: Products that enable people to accomplish more at work, or to become happier outside work. Products that help large enterprises and other types of businesses and organizations to grow or function more effectively.
  • Distribution: Products that make it easier to create, manage, distribute, and consume existing and emerging forms of digital media and content.
  • Asset Management: Technologies for managing different forms of enterprise, business, or individual assets. Technologies for managing different forms of enterprise, business, or individual risk.
  • Other: New, and as-yet unknown technologies and innovations founders are building to solve problems that exist only because no one else has developed a solution.

Things I am Not Interested In

  1. Exploding rounds: An exploding round comes with a caveat like “Seed round in ground-breaking tech startup closing in 1 week!” I do not like exploding rounds, not even exploding rounds that are being led by a name-brand VC. I need time to do my own homework.
  2. Meetings led by an advisor: I prefer my first few interactions with a startup to be with the team of co-founders, not with an advisor. It is okay for an introduction to come from an advisor, but I do not like to have advisors or mentors micro-manage my interactions with startup founders. That does not inspire confidence.
  3. Lack of control over core technologies: I try to avoid situations in which the startup has a product that has launched to the public, but the startup’s team has no primary responsibility for actually building the core product.
  4. Founders who will not share bad news: I only want to work with founders who will not hide bad news until it is too late for investors to do anything that might help the startup make a course-correction. I absolutely want to hear about difficulties, challenges, and problems. I expect the good news, but I think we have an obligation to try to fix the bad stuff before it becomes unfixable.

My Commitment to Startup Founders

Based on Gil Dibner’s VC Code of Conduct;

  1. I will be transparent.
  2. I will respect your time.
  3. I will not ask you for material I do not need.
  4. I will not string you along.
  5. I will let you know about any competitors in our portfolio.
  6. I will be transparent about conflicts of interest.
  7. I will not share any of your material without your permission.
  8. I will not speak with your customers without your permission.
  9. I will educate before I negotiate.
  10. I will be honest about what standard terms are.
  11. I will not issue a term sheet unless my firm has made a firm decision to invest.
  12. I will reflect the term sheet in the final legal documents.
  13. I will not seek an unreasonable equity stake.
  14. I will avoid surprises.
  15. I will always act in the best interests of the company.

What Is Your Business Model?

by

Invariably, when I am meeting the founder of a startup for the first time to discuss the possibility that KEC Ventures might invest in their startup I ask this question; “What is your business Model?” 1This post is an updated version of 4 separate posts authored by me, and first published at Tekedia between Sept. 18th, 2011 and Oct. 30th, 2011. Any similarities between this article and those posts is deliberate.

Typically, the response I get is unsatisfactory. In this post I will discuss what I expect startup founders to include in their answer.

To ensure we are on the same page about what a startup is, I will begin with a definition; A startup is a temporary organization built to search for the solution to a problem, and in the process to find a repeatable, scalable and profitable business model that is designed for incredibly fast growth. The defining characteristic of a startup is that of experimentation – in order to have a chance of survival every startup has to be good at performing the experiments that are necessary for the discovery of a successful business model. 2I am paraphrasing Steve Blank and Bob Dorf, and the definition they provide in their book The Startup Owner’s Manual: The Step-by-Step Guide for Building a Great Company. I have modified their definition with an element from a discussion in which Paul Graham, founder of Y Combinator discusses the startups that Y Combinator supports. As an investor, I hope that each early stage startup in which I have made an investment matures into a company.

That leads to another question; What is a business model According to Michael Rappa; “In the most basic sense, a business model is the method of doing business by which a company can sustain itself – that is, generate revenue. The business model spells-out how a company makes money by specifying where it is positioned in the value chain.” Alex Osterwalder and Yves Pigneur say that; “A business model describes the rationale of how an organization creates, delivers and captures value.”

Other definitions exist, but taken together, these two statements provide us with enough basis for understanding what we should expect to learn from an adequately developed business model.

The business model should tell us how the entrepreneur expects to create value. To do this, the entrepreneur must decide what activities are core to the business the entrepreneur wishes to start. The question of how the entrepreneur creates value is also important because the answer to that question will often contribute to an understanding of the customer base that the business can expect to rely on.  This might seem trivial at its face. It is not. Understanding the customer base for which the business expects to create value is central to many other decisions that the business will have to make as it matures and approaches the launch of its product or service on the market.

Our definition of a business model raises a second question; how does the startup deliver value? I expect the startup founders I meet with to have started thinking about the process by which the value that the startup creates will be delivered to its target customers.

Given a reasonably well defined customer value proposition, our entrepreneur must now decide how that value is going to “be put in the hands” of the people that will become customers of the startup. The process of delivering the product or service that the entrepreneur has developed involves several distinct phases; Learn, Buy, Get, Use, Pay and Support. Employees of AT&T are believed to have developed the acronym LBGUPS (pronounced ELBEEGUPS) as a means of remembering the phases of this process as it relates to AT&T’s products. It is most effective to think of LBGUPS as a continuous, circular, and repetitive process.

  • Learn – when new customers first become aware of the product or service and acquire information and knowledge about how they may benefit from its use. Typically the startup accomplishes this through some sort of marketing, sales and public relations activity.
  • Buy – when customers decide to make a purchase after having learned about the new offering and communicate the desire to act on their decision to someone in a position to initiate the next phase of the process.
  • Get – when customers actually take delivery of the new product. This might happen in a physical or virtual store. It might involve shipping the product to the customer. If the customer is buying a service then this typically happens in person, or the service could be delivered remotely.
  • Use – when customers actually use or consume the product, or benefit from the service.
  • Pay – when customers pay for the product. This might happen simultaneously with buy. Sometimes there’s a time-lag between buy and pay – for example, in a fine dining restaurant a guest dines before before paying for the meal.
  • Support – when customers are provided with additional information that is aimed at resolving any problems they may have encountered during any of the preceding phases. Support should serve as an opportunity to encourage customers to remain, or to come back the next time they need to purchase a similar product or service. This is the role of technical support, customer service and customer relations. Done well, support should lead right back to learn.
How will your startup deliver value?
How will your startup deliver value?

Every startup must ask, and find answers to a number of questions while going through the process of delivering value to customers. What is the most effective channel for marketing, advertising, public relations, and sales? Where should we place our product or service in order to enable evaluation by potential customers as they make the buy decision? How do we put the product or service in a customer’s hands once that customer has made a purchase? What do we need to do to ensure that the customer uses our product after they have bought it and we have delivered it? How do we ensure that our customers are paying us, in full and on time? What is the mechanism by which we get paid by our customers? What problems might our customers encounter, and how should we help them resolve those problems in order to ensure that they come back to learn more about our other offerings and buy more from us in the future?

Often, each question that the startup seeks to answer will give rise to other questions that must be answered as well. This process requires trade-offs. It might be too costly to attempt to exploit every possible marketing channel and so the entrepreneur must choose only a few out of many. An over elaborate support structure might prove too expensive to maintain over the long term. Also, that might create bad-habits that the startup’s revenue structure has not been designed to carry without tipping the company into a position where it is experiencing difficulties, this touches on the issue of pricing.

Next, let’s examine the third question that our definition of a business model raises; How does the business capture value? A startup founder should be able to describe how the startup will create value, deliver that value to its customers and in-turn capture some value for itself and its investors.

Michael Rappa’s statement about business models emphasizes the importance of revenue streams. Revenues comprise the cash that a startup’s customers exchange for the product or service that the startup provides. In the process of this exchange, a transfer of ownership or usage rights takes place – in an outright sale, the customer assumes ownership. In a lease, licensing or rental agreement ownership remains with the seller, but the buyer is granted usage rights for a contractually agreed period. Revenue streams can be one-off or recurring.

I have no argument against the suggestion that startups should focus keenly on developing and growing revenue streams. However, my experience has taught me that startups must focus equal attention on profit, and on the related issue of costs.

Why?

In order to reach self-sustaining growth, a maturing start-up must quickly put itself in a position to invest in areas that are critical to its ability to create and deliver value to its customers – it has to invest in those assets that make its revenue streams possible. Costs represent the price the company pays to obtain the resources it must bring together in order to create and deliver value to its customers. A business earns a profit when its total revenues exceed its total costs. A successful business model should lead to an outcome in which customers perceive the entrepreneur as adding value. They demonstrate this by paying more for the product than it cost the entrepreneur to produce it – leading to a profit for the entrepreneur.

Earning a profit makes it possible for the startup to invest in the assets that are most critical to its ability to create and deliver value. Controlling and managing costs effectively while growing revenues will ensure that the startup maximizes its profit.

How will your startup capture value? You should be able to describe how your startup will grow revenues, manage costs, invest for growth, and maximize profits. This is not a static process. It should be dynamic and ongoing. Your startup will not be operating in a stagnant market. Therefore, your product and pricing strategies will need to adapt from time to time in response to competition as well as other market forces.

Also, depending on the stage at which KEC Ventures is considering an investment, it might not yet be clear which revenue model will work best for the startup. A seed stage startup might not yet have settled on a revenue model. A startup to which we are speaking about a series A financing should have some well formulated ideas about its revenue model, and in fact should be running some experiments to validate its hypotheses. An existing startup in our portfolio in which we are contemplating making a follow-on series B investment should most certainly have settled on a revenue model, and be in the process of scaling the business model in a repeatable, and profitable way.

I will end this discussion with some related observations;

First; It is often tempting to assume that one startup can simply copy or imitate the business model of one of its competitors. That may work in the short-term. In my opinion that is not an approach that confers a lasting competitive edge, certainly not in fledgling markets and industries, and often not in mature industries either. An important aspect of business model development is the deliberate and conscious selection among a number of alternative choices regarding product design, customer development, revenue models and cost structure; the wholesale copying of a business model simply because it has worked for another startup suggests the entrepreneur has abdicated responsibility for understanding the dynamics at play in each of those critical areas. That is a recipe for a failed startup adventure in which I am not eager participate.

While I oppose the wholesale copying of a business model that someone else has developed, I am a strong proponent of learning from the experience of other startups – the successes and the failures. There is real value in knowing what has ensured that some startups thrive. There is even more value in knowing what has proved fatal to others.

Second; It might take several attempts before a startup discovers the business model that works best – reflecting an industry in its earliest stage of development. Even then, the business model must evolve with the passage of time. Technology changes. Labor markets shift. National economies expand and contract. Opportunities not present in the past will present themselves in the future. Competitive threats that did not exist at the time the startup was formed appear as soon as other individuals notice a new chance to earn economic profits. Regulations emerge as a result of changes in political mood. A business model that does not adapt and evolve reflects a startup founder who does not grasp the nature, extent and complexity of the numerous challenges that lie ahead. Such founders, and the startups they are building, are bound to fail.

Third; The business model is not the business plan. Your business plan should certainly discuss your business model, yet the two are distinct and different. The business model is a framework within which the startup’s activities occur. The business plan is a document whose main purpose is to serve as a record of the startup’s goals, the reasons why those goals make sense and can be achieved, the manner in which the goals will be accomplished and the timeline within which the startup expects to implement its plan – presumably the plan is to become profitable as soon as possible within the tenets of the business model.

I am a fan of The Business Model Canvas. In fact, I use it each time I sit down to study a startup in which I believe KEC Ventures should invest. Using it ensures that I understand the business model, that I understand the risks that might lie ahead, and that I am comfortable that the startup indeed has found an opportunity to create, deliver, and capture value.

References   [ + ]

1. ↩ This post is an updated version of 4 separate posts authored by me, and first published at Tekedia between Sept. 18th, 2011 and Oct. 30th, 2011. Any similarities between this article and those posts is deliberate.
2. ↩ I am paraphrasing Steve Blank and Bob Dorf, and the definition they provide in their book The Startup Owner’s Manual: The Step-by-Step Guide for Building a Great Company. I have modified their definition with an element from a discussion in which Paul Graham, founder of Y Combinator discusses the startups that Y Combinator supports.

Question Everything; My Remarks At FOCUS100 2014

by

Startup Stock PhotosBackground: I gave these remarks at Digital Undivided’s FOCUS100 2014 Conference which was held between October 3rd and October 4th in New York City. A number of investors were invited to explain to the audience how they ought to pitch venture capitalists in order to win funding. Digital Undivided is a social enterprise that develops programs that increase the active participation of urban communities in technology. It has a particular focus on women. 1I have edited it by adding comments based on questions people at the conference asked me after I had spoken, mainly adding a little more context.

I am not very good at listening to what other people tell me to do, so rather than outline what I think you should do in order to get funded by a venture capitalist, I thought I should instead share with you some of my beliefs about founders, and startups, and how I think about my responsibilities as an early stage investor. I hope in doing so you will question some of the assumptions you hold about how you should go about raising capital.

  1. The kind of founder that really excites me does not need a venture capitalist. She simply needs some capital to enable her build her vision and transform the world. My job is to give that founder sufficient reason to decide that she wants to undertake that journey with KEC Ventures as a companion.
  2. To get past the first meeting, a founder has to inspire confidence. She has to make me want to follow her over the edge of a cliff, or into a burning building. She has to make me feel I could trust her with my life because come hell or high water, she’s going to figure things out. She’s smart, hard working, can process an enormous amount of unfamiliar information and take action based on what she’s learned, she knows or can learn how to build and lead a team that’s going to do something ambitious. She might be an introvert, or an extrovert. She gets me to buy into her vision of how things should be, and how she will use technology to accomplish that. She wants to win, and she knows how to win. I do not believe in “pattern matching” in the way some well known investors have described it. I don’t pattern match people. That’s an intellectually lazy approach to picking investments. Instead I pay attention to ideas, problems, and the characteristics of successful businesses. Meeting and investing in startups led by founders with a vision to make the world a better place is what makes me eager to wake up each morning and endure the cognitive dissonance that is a daily and ever present aspect of my job as an early stage investor.
  3. I do not believe in founders who lack the intellectual and emotional fortitude to debate and argue honestly about what is best for the startup with their investors and with others who might have opinions about what they should do. I believe that the best decisions are made when one can debate issues with one’s self, and when founders and investors can engage in healthy, critical and honest debates with one another and subsequently reflect and contemplate on everything they have learned through that process. I get frightened by founders who cheerily agree with everything investors say. If the founder is indeed creating something new, or solving a widely-overlooked problem, there’s no way the average investor has considerable experience and expertise in that area – by definition the founder is “the expert”. I expect the entrepreneur to know far more than the average investor about what will work, what will not work, and why. Cheery agreement with everything an “ignorant” investor suggests acts as a red flag to me that perhaps this founder does not understand the problem she is solving, or her market, as well as is required to do what she says she wants to accomplish.
  4. My primary responsibility to investors in KEC Ventures is to be skeptical; Skeptical about myself, and what I think I know, and skeptical about the founders I meet and the claims they make. This is the only way I can minimize the chance that I pass on an idea that seems inconsequential at the outset, but goes on to form the basis for a transformative business. I hope another consequence of my skepticism is that I also minimize the probability that I am too eager to invest in startups that fail because they are built on ideas that are obvious. (Note: I also need to be optimistic.)
  5. Most startups fail. Let me rephrase that, the overwhelming majority of startups fail. My only task is to find those that will succeed before they become well known by other people. Further, we should not invest in a startup unless we believe that our investment in that startup can return our entire fund. One founder at the conference suggested he could “guarantee” a 10x return if KEC Ventures would invest $250,000 in his seed round. That would be great, if we were investing from a $2,500,000 fund.
  6. The type of startup I want to invest in is a very specific thing; it is a temporary organization that has been created to search for a profitable, repeatable, and scalable business model while it solves a problem that has been overlooked in a certain market. It is designed for fast growth once that solution is developed and the business model has been found, and if it succeeds it completely transforms and overwhelmingly dominates the market in which it operates before it moves into adjacent markets. 2This definition is a composite that combines elements from definitions other investors have used. It is primarily derived from a definition that Steve Blank and Bob Dorf use in The Startup Owner’s Manual.
  7. Accepting the definition of a startup that I use as my guide, there are certain things that I listen for when I am speaking with a founder. Collectively, they are described as “Economic Moats” . . . Intellectual Property, Network Effects, Efficient Scale, Switching Costs and Branding. Even if these do not exist at the very outset, it has to be clear that they can be designed into the startup’s business model as it matures and that the founder has already been thinking about them. Also, I am not interested in situations where only 1 of those sources of an economic moat is present. I prefer 3 at a minimum, all 5 ideally. The durability of a moat is a something I worry about. Also, how wide or narrow that moat can be made is something I think about constantly. Essentially, I want to avoid the detrimental effects of competition.
  8. A venture capitalist does not provide capital to people who need it. A venture capitalist has a fiduciary responsibility to make the best effort possible to generate a positive return for investors in the fund.

References   [ + ]

1. ↩ I have edited it by adding comments based on questions people at the conference asked me after I had spoken, mainly adding a little more context.
2. ↩ This definition is a composite that combines elements from definitions other investors have used. It is primarily derived from a definition that Steve Blank and Bob Dorf use in The Startup Owner’s Manual.

The Most Important Thing A VC Needs To Know About Your Startup

by

Over the past 6 months I have been spending more time meeting many first time founders in New York City and elsewhere. One question has arisen over and over again. What are the most important things a venture capitalist wants to know about my start up in order to invest? I will attempt to answer that question in this post. 1Any errors in appropriately citing my sources are entirely mine. Let me know what you object to, and how I might fix the problem. Any data in this post is only as reliable as the sources from which I obtained them.

To set the context, I am assuming that the potential investor and the entrepreneur are meeting one another for the first time, and that the startup is an early stage startup raising a seed or series A round of capital. There are still numerous questions to be answered, but the entrepreneur has made some progress and is well beyond just having an idea. There’s a product that is in a really early iteration and has had some user testing, but is still far from “perfect”. The startup has already raised some capital from friends and family, and subsequently from angel investors.

Some of my comments are directed towards startups building products for enterprises, but the same logic applies to startups building products for individual consumers.

First, as the potential investor, I want to understand the market in which you think your startup will exist. 2In this blog post from July 2007 Marc Andreessen argues that the market is the only thing that matters: http://pmarchive.com/guide_to_startups_part4.html I want to know as much about that market as possible. How many potential customers are there? How much did those customers pay in the past year for solutions to the problem you are solving? If this is a small but growing market, at what rate is that  growth occurring? How do we know that? If you are trying to convince me that you will somehow “grow the market”, how will that happen? How big is the market today? I would much rather bet on an entrepreneur building a product for a big market. The bigger the market the better. What is the current market structure? Who are the biggest incumbents in the market? How might they respond? What barriers to entry do you have to overcome? How difficult is it going to be for you to reach potential customers? 3In this blog post from December 2013 Rob Go describes why the choice of market is important: http://blogs.hbr.org/2013/12/great-entrepreneurs-pick-great-markets/

I want to understand the market because it is the most important factor in determining the success or failure of your startup. A great market is one in which customers will find you if your product works. They might complain that the product could be better and they might ask for more features, but if it works they will find you and they will buy your product. In a bad market your product is irrelevant. If you are selling to an industry with very thin profit margins, there may simply not be enough money available for additional expenditures on a new product. Also, it is very hard to displace a product that your prospective customers have learned to use and around which they have built their business processes.

Closely related to my questions about the market, I want to understand the problem that you are solving for that market. Too often I meet founders who are unable to succinctly and clearly describe the problem they are solving. In a typical week I speak with many founders about their startups. The startups I most easily remember are those that make it easy for me to understand the problem they are solving. It is important that I have a firm grasp of the problem the entrepreneur is solving. Why? My understanding of the problem will direct how I perform my independent research. It will also ensure that I study the information and data that I find on my own from a perspective that is congruent with the point of view of the entrepreneur.

Second, I want to know if the founder or founding team has an ability to learn. I am certain that the founder will encounter many unfamiliar questions in the future if the entrepreneur is building something truly unique and solving a problem that has not yet been solved by someone else. It is important that the founder is someone who can gather unfamiliar information, process it, interpret it and then make decisions about strategic and tactical choices. A founder who lacks the ability to process large amounts of unfamiliar information quickly but thoroughly is at an extreme disadvantage. Market structure changes. Regulations change. Consumer tastes and preferences evolve in ways that might escape notice till it is too late and business has deteriorated. Technology changes constantly. The economy shifts between upswings and downturns. Rivals and competitors enter the scene without warning. All this generates volumes of information and data. I much prefer to back founders and entrepreneurs who I believe possess an inherent ability to learn. It is equally important, that they can build teams around them of people who have this same quality. It is the only way that their startup will move from the early stages of its lifecycle and into the growth phase. 4In this blog post from January 2014 Brad Feld reflects on his strong preference for CEOs who are learning machines: http://www.feld.com/wp/archives/2014/01/invest-ceos-learning-machines.html

You will often hear venture capitalists say that they consider things in this order; market, product, team, and deal. Their analysis of the market and the product belong in the same category as the first factor in my preceding discussion – market. The question is this; is this a great market, and will someone pay to use this product in that market? Their analysis of the team falls under the second factor – is this a team that can learn what it needs to learn in order to succeed?

Every other question is simply an attempt to fill in the details.

 

References   [ + ]

1. ↩ Any errors in appropriately citing my sources are entirely mine. Let me know what you object to, and how I might fix the problem. Any data in this post is only as reliable as the sources from which I obtained them.
2. ↩ In this blog post from July 2007 Marc Andreessen argues that the market is the only thing that matters: http://pmarchive.com/guide_to_startups_part4.html
3. ↩ In this blog post from December 2013 Rob Go describes why the choice of market is important: http://blogs.hbr.org/2013/12/great-entrepreneurs-pick-great-markets/
4. ↩ In this blog post from January 2014 Brad Feld reflects on his strong preference for CEOs who are learning machines: http://www.feld.com/wp/archives/2014/01/invest-ceos-learning-machines.html