startups

Raising money from the best investors is more important than getting the highest valuation

In the summer of 2008, Posterous was a part of Y Combinator Demo Day in Boston and Mountain View. After one of our demos, an investor pulled me aside:

“I love what you are doing. How much do you want? $3M? $5M?”

This was the Silicon Valley dream. An investor was throwing money at us.

But he wasn’t one of the top VCs, and this was my first company. I wanted strong advisors. So I politely declined, and instead raised an angel round from some of the best investors in the valley.

Vinod Khosla said it well:

Khosla explained that the key role of early investors is not funding, but personal attention and guidance. But generating buzz too early can inflate a startup’s market cap and make them a less lucrative investment of time and money for the top-tier advisors they need. That leads to critical missteps like poor hiring decisions that can doom a startup.

via techcrunch.com

Raising from the VC would have put more money in our bank account, and our valuation would have been astronomical. But it would have been worse for the company.

My advice: go into fundraising with a clear idea of how much money you want to raise. What is the next major milestone for the company and how much money do you need to hit that? Don’t over raise.

Then, optimize for the best investors in the valley. Find investors with a track record of success, check references, pick the one that’s the most passionate about what you’re doing.

The past couple years, I’ve seen many companies raise huge rounds at huge valuations. They got the money, but couldn’t scale their team or product effectively. Ultimately it became hard or impossible for them to raise another round, or find an exit.

Raising money isn’t success in and of itself. You have to be able to use that money to build real value within the company. Great investors and advisors will help you get there.

Startup Impossible

On the Food Network television show “Restaurant Impossible”, celebrity chef Robert Irvine takes a failing business and turns it out around in two days on a $10,000 budget.

Unlike other Food Network shows, this one isn’t just a food competition. Restaurant Impossible touches on all the aspects of running a business, including hiring, management, service, revenue, and more.

The similarities between restaurants and a startup are incredible.

Starting a restaurant and starting a tech startup seem super glamorous. Everyone dreams of being the boss at their own restaurant, sitting back with a Manhattan while the place runs itself and customers pour in.

And if you read TechCrunch every day, you will get the impression that starting a company is easy. Everyone is raising tons of money and gaining traction.

But that’s wrong. It’s a lot of blood, sweat, and tears. It doesn’t matter how many employees you have. You have to give it 110%.

The most common scenario on “Restaurant Impossible” is when a restaurant that was once thriving has lost its way. The reasons are almost identical to why a startup might fail:

  1. The business stops innovating. You can’t let this happen. You have to keep changing and evolving. Your comptition will.
  2. Employee quality goes down. You might make a mediocre hire, then another, then another. All of a sudden the quality of your team is way down. You need to cut them loose.
  3. Your design gets stale. You must always be refreshing and giving customers something new and exciting.
  4. The business is not metrics driven. There is no way to scale a company if you aren’t looking at metrics. Even restaurants need to understand their “users”.
  5. Service quality goes down. It’s hard to scale this, but it’s important to keep overall sentiment and word of mouth positive.
  6. The business owner loses motivation. You can’t give up. It’s up to you to keep pushing forward and keep your team excited.
  7. Pricing doesn’t sustain the business. Often restaurants don’t raise their prices for years, even though costs have gone up. Similarly, startups sometimes never even find a business model.

A business owner or startup founder/CEO is trying to keep an existing business running, while still looking ahead to where the business needs to be in 3 or 5 years.

If you stop moving forward, you’ll slowly see that you’re actually moving backwards, as users leave and go elsewhere.

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Cutting features is hard

One of the interesting conversations coming out of my last post about Product Guys is the need to cut features.

It seems like everyone in Silicon Valley likes to blog about how “a good product should cut features” when they have zero track record of actually doing so.

It’s an easy thing to say. But it’s really hard in practice, much harder than adding new features.

To cut a feature, you need to understand your user base deeply. You need to have metrics to back up your decision. You need to understand the impact.

You will lose some users. Some of your earliest and most loyal users may love that feature you just cut. And they will complain, loudly. They will tell the world that your company has lost its way, jumped the shark. It will hurt.

But that’s why you have a good product guy. That person should understand the impact of cutting the feature. And they should have a clear reason why cutting this feature will be good for the product in the long run.

They should be able to tell the board that cutting that feature lost 1% of the user base, but tripled growth. They will have confidence in the decision.

The worst thing that can happen is to be surprised by the response of cutting that feature, and reverting the change. You will second guess yourself forever.

Adding features takes creativity. Cutting features takes balls.

You should follow me on Twitter here.

Why you need a “product guy”

[There’s] a fundamental misunderstanding of what it means to do product. It is not code for a person who doesn’t really know how to do anything but thinks he can boss engineers around. It doesn’t refer to marketing guys who had an idea. Understanding what it means to drive a product means understanding the full scope of the vision of your company. It means understanding your engineering team, their capabilities, and their priorities. It means understanding what your next move is, and what your 6th move is from every angle.

I used to think product managers were worthless. Engineering run companies are the way to go! And why not? I was an engineer with an idea, and it turned into Posterous. When someone would approach me to be a “product guy”, I laughed. Especially if they had no engineering background or track record. What do you know about shipping a product?

Now I know better. A product manager’s job is not about coming up with all the ideas and telling engineers what to do. It’s about running a process to make sure the best ideas wins.

And a designer is not necessarily a product guy. They are different roles.

A good product guy knows your product and your market inside and out. They live and breathe metrics and industry trends. They look for market and revenue opporunities.

A good product guy takes ideas from the entire team. They talk to users and partners. They put it all together to come up with a great plan.

When starting a new company, you can build the most random thing ever and see if it sticks. You have no users, there is little risk.

But once you have users and investors, you need to take educated risks. That’s not a bad thing. But it’s not as easy as it sounds.

A good product guy will work his ass off to figure out the next 6 steps for the company, and beyond. And when you do take the big risks, he’ll have a better idea of what to expect.

A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.

Wayne Gretzsky

We blink two-thirds less often when we’re looking at a computer screen

If you work in an office, chances are you’ve experienced eye irritation, including eyestrain, dry eyes, burning, and light sensitivity. While there are many contributing factors to “tired eyes”, the most important cause is that we actually blink two-thirds less often when we’re looking at a computer screen. Since blinking is how our eyes keep themselves moist, that’s a significant problem.

Other contributing factors include the fact that most of us open our eyes wider to look at computer screens, thereby worsening the dry feeling in our eyes. Extremely bright lighting in your office and an improperly set-up computer monitor can also cause irritation and strain on your eyes.

Working at a startup takes a toll on your body. Weight gain, lack of sleep, stress, carpal tunnel, and more.

My latest affliction is tired and irritated eyes. I thought I was just sleepy but I’ve been sleeping a lot. Going to try visine and see if that helps.

Dave McClure on why seed-stage startup valuations have been increasing

price-insensitivity by 2 types of investors:

newly-minted / n00b angel investors, who have more money than experience, and/or are in it primary for fame more than fortune… in my first few years after leaving PayPal, I was in this category. while I did have tech expertise, I had limited knowledge of startup pricing, legal structure, or terms, and limited ability to change or negotiate much anyway. many current and ex- Facebook, Google, Twitter, LinkedIn, & Zynga folks fall in this category. they are eager to get in the game, and are probably not doing it as much for returns as for cool / fun factor. same applies to non-valley investors who want to get in on big-name valley deals. (or angels from less-active regions looking at more-active regions).

I completely agree.

I definitely qualify as a n00b investor. But I’m not doing it for fame. I’m doing it to help other startups and give back to the community. And to make money.

My rules for investing:

  1. I only invest in products I use myself. Heavily biased towards consumer and mobile.
  2. I only invest when the deal makes sense. I won’t over pay for an investment.
  3. I won’t ask for advisor shares. A company can offer them if they see value in my help.

I’ve passed on many companies that I love and I think have a good shot at being successful. The deals just didn’t make sense for me. Investing in early stage startups is very risky.

Early stage startups raising rounds at high valuations are losing investments from super helpful, super active angels/super angels like Dave McClure. That’s unfortunate.

Sometimes companies are giving angels advisor shares in order to offset the high price of the round. That’s one way to get around the price issue.

But another way is to stop raising rounds at crazy valuations. The price of your round matters much less than who is in it and what value they add outside of the money. Experience counts for a lot.

Steve Jobs on startups

The problem with the Internet startup craze isn’t that too many people are starting companies; it’s that too many people aren’t sticking with it. That’s somewhat understandable, because there are many moments that are filled with despair and agony, when you have to fire people and cancel things and deal with very difficult situations. That’s when you find out who you are and what your values are.

So when these people sell out, even though they get fabulously rich, they’re gypping themselves out of one of the potentially most rewarding experiences of their unfolding lives. Without it, they may never know their values or how to keep their newfound wealth in perspective.

Being in a startup is an incredibly rewarding experience. But it is a roller coaster. Sometimes quitting is the easiest option. But that’s what separates the men from the boys. The successful entrepreneurs stick with it to the end.

This has nothing to do with technology. When my parents started their restaurants, they had bad weeks and months. I’m sure there were times when business was slow and they thought they should give up. But they didn’t.

Entrepreneurship isn’t just starting something: it’s sticking with it, good times and bad, to make it successful.