Thursday, June 22, 2006

Secrets to contact strangers and ask for funding

I spoke to 120 people in 40 days during my initial funding and thought I should share some secrets as I hear from smart people wondering how to get started asking strangers for money.

First, yes, YOU can do it, its better if you haven't done it before.

The first step of waking the entrepreneur in you is to be able to communicate your passion about your idea to others. Its like a first time newborns parents who can talk excitedly about their baby to strangers. It will come naturally if you don't stop to think about it.

Ok, you have stopped to think about it, so lets get a plan in place.

1. Start with people who you think you can trust and pitch your idea. Hear their comments, as best as possible without taking all criticism to heart.
This should help you through the process of validating whether you have a unique idea. Try this on as many people who are willing to hear it. This is also your practice session to get to explain the idea in simple words in less than a minute such that it explains the uniqueness of your idea and your passion.

2. First focus on validating whether the problem your idea solves really exists. In other words, market validate the solution for an existing problem in a vertical. Its easy to focus on how cool your technology will be, especially for tech ideas. Remember, you are out to build a business, and make money so focus on the problem you are solving for customers.

3. You may soon pitch your idea to get advisors, investors, hire the best talents and to companies to become your customers and partners. So, don't worry about investors yet. Everyone of them is a person. So practice your pitch on everyone who will listen. Its your lesson in gauging people's interest, their nuances in giving you feedback, your persuasiveness in getting them to see the vision you are painting.
The real success of an entrepreneur finally lies in being able to discern people - separating the good from the bad, separating good intensions from real capabilities, separating people who just want to talk from those who want to do.

4. Go to networking events; share your idea with several people. Meeting fellow entrepreneurs will help benchmark how far you are in the process, learn the good and bad you have to do and avoid. It will build friendships that will help with referrals and validations later.

5. I see a lot of entrepreneurs seeking investors and trying to smooze with them and trying to befriend them. This is painfully obvious in a panel, where the usual format is to see an entrepreneur flanked between two VCs. I don't know a single case of a VC funding an entrepreneur simply for sucking up to them.

Investors are real people. They are seasoned at spotting an entrepreneur who has a real money making proposition and shows the confidence to execute on it. Your confidence will show when you get there.

So, first focus on finding your first customer.

These people will also be at networking events. You can find referrals to companies at events from fellow entrepreneurs. Don't hesitate to call or email them. I spent bulk of my early days talking to potential customers to market validate my idea. They may surprise you and respond more favorably than you think. You'll never know till you try. This will also help you understand what is doable and what is futuristic.

6. Pitching to customers is a different game. Till now, you have been talking about your idea from your perspective. Now you need to pitch it from this particular customer view point of 'Whats in it for them".
In early Coola days, we pitched to several segments and always made a screen shot of what it would look like on their web site to use Coola. We setup demos specifically applying to their type of data and mobility problem.
This helped me understand the problem better and talk from their point of view.

7. I'd suggest never to stop talking to customers from this point on. Find the segment that easy to penetrate for YOU, the ones where you can get started.
I called pure strangers and found customer prospects before funding. But after funding one of my advisors told me an obvious truth, kept as a well-guarded secret by entrepreneurs.

“Your first paying customer is not going to be a stranger. It has to be someone who is ready to bet their job to trust you personally to go up to his/her boss to justify spending real money on a non-existent or brand new company that has no guarantees of survival next year".

In a software play, there are contractual ways to get around it by offering exit and merger clauses offer source code in case your company closed down.

Just remembering that you are dealing with real people, with real jobs will give you perspective in getting ready to network and sell your idea to your first customer.

One option is to go about the rounds getting validation that the need is real and they could be a potential customer before your funding cycle. Another option is to work hard to get a paid pilot deal with your first customer, which can serve as validation and get your seed money too.

8. Find advisors along the way who can guide you through the process. These can be strangers. Successful entrepreneurs who have sold their companies and are working in a large company are ideal people who are likely to understand your position and will help you.

I've written before about why you need advisors and compensation etc.

You just need that one person who you can trust. If you truly believe you have this great idea to change the world, be proud of asking people to be part of it.

One common question new entrepreneurs have is "how can I just ask someone to be my advisor? What does it mean? What am I offering?".

When you find the right person you can ask them to be your advisor. Find out the best mode of communication that works for them and stay in touch. Take their advice and move ahead on next steps and keep them posted on your learning and progress.

If your personalities do not work out, tell them politely and drop them. Its common to learn after your networking round that this advisor was not the best advisor for the long-term. So, don't make commitments of payments or add their names to your business plan too soon. Treat them as a new friend and keep them posted and take it from there.

9. Finally you get to the investors. Early on, find investors and ask for their advice and see what objections they raise. Do your homework on the investor that fits your type of business and stage of company and get a referral through their trusted network when you are ready. Before that as you network, setup meeting with investors to showcase your idea and get advice. They bring years of experience making comparables to business ideas being pitched to them.
At best, you'll learn a lot about potential blind spots, companies that sound like your competition just by the way you pitch your idea.

Later on, media will judge you the same way as investors by quickly trying to place you in the overall market. So, at best, your investor meetings should give you feedback on your pitch (wordings, tone, style and succinct meaning) and feedback on your business model and customer pain. You can gain valuable insight into execution details of scaling your business into your vertical.

But, remember, investors are real people. I heard from an honest VC from Fidelity Ventures who told me early on during my "meet me for advice" rounds, that he is doing a job. Will my company offer the level of comfort for him to go to his other partners and stage his career to bet that we will survive and guarantee the return on investment that the VC fund has promised its investors?
It sounds the same as the concern of the first customer right?
That’s why VCs prefer entrepreneurs who have successfully built and exited out of companies. They follow others in their network who are betting on some new technology. They like some fundamental technology which appears at worse as a potential candidate that can easily be sold to several companies, e.g., tool players.

10. The only caveat at a VC meeting is that they do not know if you are winning guy or girl as much as they do not know that you are likely to fail.

So, in the initial rounds, I'd suggest not meeting VCs in their offices. Meet them as real people at breakfast and ask for advice. Be open to hear the advice and take it in perspective and see what you need to fix to make your business plan reduce risk towards success.

I used to be available to meet investors at 30 minute notice locally and next day anywhere in America. I used to send a follow-up up email that night (however late). I made sure I got something out of my meeting with every person I met.

If you like the investor, follow-up after you have made fixes be it rounding off team or customer validation. Do not loop around just adding more features to your product. Think of your job as being to pitch to investors and get the money and hire the team who will build the product.

After this stage, nobody will look like a stranger, everyone will look like a potential person who can help your company grow :-)

Getting that first meeting in your networking rounds

I made this list as I wrote My secrets to Contact Strangers and Ask for Funding"

Heres what I did to make those initial contacts:

a) Attend networking events where you know your potential candidate is likely to be present.

b) Ask around, ask anyone. You'll be surprised when you put your mind to it, how many people you really know and how many know investors and advisors who can help.

c) Be persistent. Call or email people. Do not leave repeat voicemails for people. Try them till you get them. When you do, be courteous of whatever is keeping them busy and ask for a convenient time to call them back.

d)Follow-up diligently. Focus on the points they liked and what you are ready to change. Give them credit for ideas and they are likely to take ownership for it and support it. For example, if someone suggests that you try a new vertical, update them on progress of your calls to customers in that segment. They are likely to suggest more referrals and take you around.

I 've made it a habit to update people who helped me. I ry to send emails closer to when I believe they are likely to read it. So, if the person reads on a blackberry, send a meaningful short subject and 1 liner. If its a west coast person, write it in east coast morning so they get it as one of the first emails. Always remember them as busy people.

e) Do your homework. Today it’s easy to Google people and find their interest and background more than when I raised money in 99. You can read people's blog and know more of the real person. Then find the people you think who can help your business.

The first advisor I met was a famous, busy CEO. You'll be surprised how many CEOs read their own emails. I emailed him and he said he was too busy to meet me. I found he was speaking at a conference out of town and emailed again with the header "I'll drive you to the airport". I actually had thought through a working plan in case he agreed to it. Of course I met him at work next day. He is my inspiration to find time to help entrepreneurs today.

f) Understand the ecosystem of your business - who are the players - competitors, substitutes, who can easy move into your space, who are potential buyers, who are influential people in media, on boards of companies, current investors, famous people working in those companies etc.

Your business has the best chance of success if you are positioned well in that ecosystem. That’s one reason you see web companies offering APIs for others to build upon them and many small companies tout their large partners names.

Remember, everyone is a real person. Find them and reach them as real people. I have tracked where people spoke and followed up instead of random networking events. Many may not be as helpful or knowledgeable as you may assume, but you'll never know if you don't try.

g) I recently heard a VC mention at BarCamp Boston refering to entrepreneurs of web 1.0 companies as "scarred and having learnt capital efficiencies". He made a positive reference to such enterpreneuers. It made me realize this important point. When you meet investors, whatever you outcome, remember its a person, do not take an attitude of us vc them. It will help neither the investor nor you. I think serial enterpreneurs have experience, but its the attitude that always counts.

So, keep an open attitude , remember Colin Powel's quote " Don't carry your job too close to yourself to make it part of your identity". For enterpreneurs, its important not to get their companies so close to heart to become negative about the experience of meeting all sorts of people during the networking rounds.

h) Learn to project your contagious enthusiasim about your business details and everyone will want to talk to you.

Just remember, if you have a real solution to a real problem for a set of people who have money to pay for it, you have great potential. Every idea in the hands of different entrepreneurs makes different companies based on how they execute.

So, go about your networking with a clear plan, with respect and clear accountability for your time and you'll see yourself grow to a great entrepreneur.

Friday, June 16, 2006

Funding as way of life

For an entreprenuer funding is not a one time or 2-time process. Most first time entreprenuers think of funding as a one-time distruption in their dreams to their startups. It will help to think of a business as a separate entity with clear goals and funding as a resource you feed in to create more value. Then, we can see it as an ongoing process to scale the company even after you are cash-flow positive with paying customers.

I was introduced to VCs and funding first, during my corporate life at $2 billion Harcourt, the Education Publishing company where I was a Director who built out in early 99 just before I started my first startup.

I had built the initial by integrating 27 business units, and we were brainstorming about making a new online business targeting families of kids giving them education content from Harcourts divisions and planned to make our parent company a minority stakeholder and bring in local VCs for investment. It is common for corporate entreprenuers, especially in east coast to bring in VCs for investments to spinoff a business unit.

Later, at my startup Coola, I raised Series A as a first time entrepreneur and later Series B as an existing startup.

My friend Hemang Dave a true serial entrepreneur, started several companies for CMGI, the famous incubator of early 90s. He specialized in raising capital. So, he always started a technology company, then raised venture capital money to buy a related business and put them together to scale his company to a new business. He grew by aquisitions and sold his compainies to a large buyer. He is a VC now, his last company started out as training net that become THINQ, the learning platform company, which he sold to Saba systems

This is a good strategy to scale a startup during second round funding, only when it makes business sense for YOU!

Coola was compared with Syncplicity from the company Cognitive Roots, the file scraping software company, when we launched "Right-Click" to help create Coolets of information to sync to Palm apps using Coola. We were an early stage company with 6 or 10 people and Syncplicity was two guys out of NY.

Some investors suggested that we "acquire" Syncplicity and that would make a good story to show how we would use our funding money and can raise our Series B funding.

Well, I visited Syncplicity founder, a spirited, self-funded entreprenuer and decided we were complementary businesses and we could work well together as they agreed to integrate Coola API in their next release . We did not distract ourself with any merger. I had learnt from my infospace deal and VC fundng story from my Series A.

Nate, the Cognitive Roots founder's comments when we closed Coola, echos my belief that your integrity as a person matters most, and will come around to you in this same ecosystem of startup world.

Tuesday, June 13, 2006

Money is money right? No, bad money stings!

I have been talking to people recently, following Barcamp Boston, about my initial days of first round of funding. So its time to talk about my bad money experience :-)

When enterpreneurs start out the first time, they see all money as good money. Some stop to think whether they want to raise angel money vs VC money. In all these, there is good money and bad money.

My first round money was good money, infact great money, Second round was bad money.

Good Money is:
- Money from investors with a strategic fit to your business. This means money from people who can help grow your business, people who have experience and contacts in certain verticals that can help your business.
I got some money from a Director from Amazon, GM of Intuit, Director from Exodus, who were all good people who were excited about my company and willing to help me.

-Money from people who will guide you as advisors to grow your company.
All my select angel investors were true angels who guided me. Again, its not about their brandname, but your mutual respect to work together.

-Money from geographical areas that help your business.
My lead VC was from west coast while we were based out of east coast. So that helped reach companies for partnerships and lead to VCs at next round.

- You do not want small change from several wealthy angels who do not understand your business.
I had some money from a financial planner. When things went south he was the first to be worried. In all fairness, I had to spend time to keep him updated on my decisions. Think of "being your own boss"! I have a friend who raised $2 million from an angel group of 30 wealthy doctors etc and spent a day every month updating them.
In fact there are several consultants who would get you your first $250K within a week, but its all $10K etc from people unrelated to your business. I have seen this work for another friend who got his first $250K, then went on to raise VC money.

-As best as possible you should raise money from a group of investors who can work well together, be it two VCs or set of angels and VCs.
After I closed on my first $1million, I met Howard Anderson and he said he wanted to invest $1millin more and asked to increase my round and I declined because there was no fit with my led investors. Howard's money would have been good as the lead money.

- Finally comes the terms of the money. What is the catch?
I had a local Boston area VC who looked me in the eye during my second round funding and asked if I would step down as CEO beause he would bring his own guy as CEO. The relationship was not at any stage of respect, I declined to him, was hurt at th anti-feminist sentiments, but I honestly fretted about what I should do purely in the interest of the company. Of course, it was a bait and not real followup so it didn't get me money.

There are some inherent market valuations and percentages that VCs get for different stages of a business. In 2000, companies got 30 and 50 million valuations easily. So, I made the mistake of building product, launching it, building user base (palm users in our case) and initial paying customers, and thought I'd raise next round money to scale the sales team to grow the business. So I went to VCs asking for $15million and got the same polite reasons of grow some more, this or that is missing. Then, I came across a honest VC who said, asking for $15 million implies a valuation of $30 million as a Series B would give VCs 50% of the company. This was early 2001 and since the bust was beginning, VCs were getting cautious of high valuations.

Finally we got our Series B from West coast for $5 pre at 20mill valuation. It was the worst terms possible.

Our terms were such that our VCs get everything if we sell the company within 2 years. Specifically in our business, mobile and wireless were crashing ahead of rest of IT as soon as Palm split as two companies. So it was not sensible to believe we could survive towards an IPO without even finding a buyer for 2 years.

The terms could get more money to the second round of investors while leaving the first round of investors in the same terms as founders. Most VCs act in trusted cirlces and won't let this happen but during the bust times, this was common in the terms.

Again the basics of dealing with real people towards a common vision at the closing of the round is important just to keep it fun through the process and bearable when things get tough.

Thursday, June 08, 2006

BarCamp Boston - a conference with enterpreneurial energy

Loved BarCamp Boston, learnt a lot from several sessions, but best of all was the enterpreneurial energy!

Monster Lab, the sponsors, were great, and true to the unconference, they did not market their wares but helped a lot with food, organization and friendly smiles.

I'll write about the various enterpreneuers and what I liked in the coming days.

I loved Ray Deck's talk about bootstrapping and want to write about it here.

Ray is a modest serial enterprenuer since 97 on his 4th startup

Bootstrapping means putting ones one money to get a startup funded for most people. I remember my early days after college when I was involved in Bootstrapping OS, particularly, in Sequoia systems with fault tolerant proprietary OS.

Many enterpreneurs I speak to on a daily basis have one thing in common - for them bootstapping is to get started, but they have nowhere to pass the funding of their startups to. So they loop for a long time spending their own monies building their business looking for funding to scale it to next level.

I like two things about Ray's presentation:
1. Very logical layout of a business in terms of its components with practical advice for the new enterpreneuer
2. Very positive presentation focusing on answers
3. Clearly brought out the opportunity cost of the founders time which most enterpreneurs forget.

More on these later.