First of all, if you’re a real startup CEO, these hard times aren’t so hard if you look at the right indicators. I’m interacting with startup money people all the time — angels, VCs, superangels, family offices, even some PE these days. There is still a lot of money out there, lots of deals happening. VC is still roaring, with the exception of about 2 months of fear over the NASDAQ and Crypto Crash.
The only thing that ‘s changed is valuations, and those aren’t much different than they were 2019-2021, which is pretty high.
Early stage angel investors like to find little gems before anyone else, they look for the $10 million valuation seed or pre-seed opportunities. That hasn’t change, money hasn’t “dried up”. I get angels asking me still every week for leads one early-early deals. If seed funding is good, follow on from these same investors later should be good also, unless the world falls apart over the next couple of years.
As they always have, investors do want a few things — a very strong level of belief in the founder(s), something new and not just a clone of existing businesses, and high energy from the startup.
I saw a very strong Silicon Valley angel say the other day that, for certain founders, he would give them $1 million without knowing the product or valuation, just betting on the founders he knows will win again and again. That’s the confidence and trust that prevails in the valley — today.
It’s also a testament to the power of the momentum of the current retooling of modern business. This recession can’t stop that.
So, the valuations are lower. Is that fair? Is that VC greed taking advantage of the stock market?? A little bit, but valuations, especially for mis and late stage were they too high and needed a reset. That couldn’t have gone on forever. And they’ll come back. Depending on where your company is, it shouldn’t matter anyway.
There are angels who look for early early deals, try to find $5M to 20M valuations. Those valuations aren’t going down.
But still, you should reassess, check your priorities, tighten things up.
1. What are people doing now because your product doesn’t exist, what is the pain you will solve?
2. What is it that you know about your specific niche that other companies do not?
3. How and when does this make revenue and profits? What is the growth graph?
I’ve found that -Openness- to options and possibilities that you haven’t thought of often lead you to a superior answer.
When I think of open, I think of standing somewhere way up in the mountains in Colorado or New Mexico or California. You can see so far and so wide out into the world, from above.
I try to remember those views, the feeling they gave, and use them when I’m not on top of a mountain.
[This article is based on some assumptions: you have a business worth funding; you have the motivation that inspires investment; that you have access to a “reasonable” pool of funding.]
About 4 years ago, a good friend of mine asked me to help her figure out if and how she could raise some funding for her business. She didn’t have a “tech startup” per say, rather she was a UX/UI designer, and a very good one.
She wanted to raise money because she was starting to hire people under her as contractors to help her with her workload, which was designing graphics and interfaces for startups in San Francisco. The company has nice revenue growth, some proprietary software tools (CSS, Javascript) and a bit of cash in the bank. This is not a vanity business.
I said “Sure, that could be fundable. How much are you raising?” She just gave me a puzzled look.
People wonder if it was pretentious to assume a design firm could be fundable. I tell them absolutely not – if gourmet coffee is fundable, then of course digital design was and can be a fundable, scalable, “productizable” business. The real question: Is it scalable? If is that what you want – a bigger company? Investors? why? are you ready???
Those questions caused her to go away for a few months; that happens a lot when I ask questions. She eventually came back with some great answers to my questions. My only feedback was to double the ask; ask for twice the amount she felt she needed. That kind of shocked her again. Good.
Why ask for more? So many reasons. Costs are hardly ever lower than you estimate. It’s never good to run out of money, as we all know. Also, real investors know when you’re not estimating your costs correctly and that turns them off. Believe in yourself.
Often fundable founders don’t agree with me on this point. They say…
I don’t want to give up more equity
I can do it with less
Investors will say “no” if I ask for too much.
And here are my responses:
Fight for a higher valuation, use outside experts
Over estimate all costs
Be bold
If you wait until you’re running out of money it will cost you more. Also, you can possibly sell a little bit of your own stock to investors, give yourself a six figure bonus.
By most measures, we are in crazy times right now in the tech startup world. We have thousands of new companies every week, hundreds of funding rounds over $100 million every month, and so many $1 billion exits or calculations that we’re getting used to them. A $1 billion valuation used to be a big deal for a web based company that wasn’t one of the top few.
Everyone thought Facebook was nuts when they walked away from such a deal. But now the funding seems to be flowing everywhere, at many levels, and that almost anyone who starts a startup will be successful, will be “big”. Unfortunately, this is very far from the actual truth; we just don’t hear about the 95% that fail and lose all of whatever money is invested.
The frenzy at these higher levels, and the continuous stories of first time entrepreneurs in their early 20s who magically start these amazing companies is creating a demand at the bottom of the funding market, like the pyramid schemes in Southern California in 980 (see below). Look out for this trend, put your wallet away.
Unsophisticated investors, which means family, friends, co-workers, etc. or also called triple-F – friends, family and fools, who have a few thousand dollars they would like to put into the startup “market” are the fuel at the bottom of the market that get things started. It can be anywhere from $5,000 up to $500,000. They help to make ideas into reality, hoping for the higher returns of the early investors. You’ll see many dentists, doctors, parents, Hollywood actors in the crowd. They have a lower probability of return, as expected, but now are losing their money at higher rates than ever before. We don’t hear about this much because they’re embarrassed; who wants to talk about it and admit that they made such a mistake?
This market is reminiscent of the rampant pyramid schemes in the 1970s. Here’s a description from Time Magazine June 16, 1980 issue:
For $1,000 each, 32 newcomers buy slots on the bottom row of a pyramid-shaped roster. Each new player pays half of his $1,000 to the person at the pinnacle, who ends up with $16,000. The new player also pays his remaining $500 to the person directly above him on the next tier, which contains 16 people. Since each person on that tier gets paid by two of the newcomers, he ends up with $1,000, thus recouping his original investment. As more people buy in, the players move up the chart. In time, theoretically, each person reaches the top—and $16,000.
Amazing, huh? The only problem was that the need for newcomers increases exponentially, thus the name pyramid. You needed 32 new people every night, and as the word spread new groups popped up everywhere in L.A. It fizzled out within a couple of weeks, but went on for years in other parts of the country.
Skip to 2013…
Two years ago in the California startup world there was a lot of buzz, or anti-buzz, about the impending pop of the current hyperactive tech market and unsophisticated spending of . The concerns took many forms, one of which was named “Series A Crunch”, another was the gratuitous use of the word “bubble”. Series A is the second round, the one after the seed or other small amount of ignition money. It’s the round that graduates of accelerators seek. It’s also “professional money”, not triple-f.
I remember being asked in a startup panel I was on by the moderator “What do you think of the Series A crunch?”. I replied, “Do you know what a Series A Crunch is?” She tried to explain but didn’t in fact know what it was. That was a sign to me of startup overhype, everybody mimicking each others phrase of the week.
Fast forward to today, 2015, when we’ve been in a possible “end of the boom” for over 3 years. We’ve been hearing the word bubble for that long, people trying to predict a crash, mostly out of envy for not being able to harvest any cash from this current crazy market. Seed funding is at an all time high rate and it has that scary phenomenon of feeding on itself.
There are a number of articles floating around again about the lack of Series A money in the market, which is usually required to take a company to ROI.
At the same time people are bragging about how easy it is to raise seed funding of up to $1 million. Almost anyone with a web based working “app” or mobile app can get funding. No business plan, no ROI. Sometimes you’ll need to show traffic/traction/conversion, but not usually. There are plenty of triple-F investors anxious to empty their 401K or add another mortgage, take a “risk”, for the chance at those 8 to 9 figure exits they keep hearing about.
This is also reminiscent of the late 90s when unsophisticated investors lost billions diving into the dot com boom just before it crashed fairly rapidly. The difference is now it’s not crashing so visibly. There are admittedly many more successful growth startups on the Internet than ever, the second renaissance of the web, but the statistics for success are much worse than ever.
If you look at CrunchBase, almost every day you’ll see a new funding of over $100 million. Almost every day. That’s enticing to a potential angel. You’ll also see several others from $10 to 50 million. This has become the holy grail for that 401K earning slow interest.
But here’s the problem. Most of these investments will return $0. Not 80% or 50%, zero. In this flurry of amazing new Internet startups, a higher percentage are failing after the seed round than ever before, probably close to 99% vs about 85% 20 years ago. That means almost every unsophisticated angel investor is losing their savings and adding new debt to their life.
Why will so many people lose their money and why is no one talking about it? Here are the reasons:
It’s very easy now “look real”, i.e to create and deploy an Internet and/or mobile app live on the web or a phone. I get pitched one every day.
We’re still in a terrible job market, no matter what the official statistics say. I’ve met more broke unemployed professionals in Beverly Hills and Santa Monica in the past 3 years than ever in my life. They have nothing to lose. Why not start company.
The Triple F effect. Friends, Families and Fools. Those are the people who will give you funding based on no actual research or due diligence.
Erosion of true self analysis. One very critical part of succeeding in a business is being able to critique yourself as a business. As part of the new startup world people are avoiding this process. It’s become a casualty of “fail fast” and pivot and other buzzwords.
The bottom line is that people with no experience or particular expertise in almost anything will most likely fail. So get some expertise involved before you go get that wire transfer of $100,00 for the son or friend or co-worker you want to help.
This post has been one of my most popular on Quora. I originally wrote it in late 2012 when asked the question – What does it feel like to be a start-up mentor? (link to original post). In it I discuss the 3 full time jobs a real startup CEO has. If you read carefully I didn’t even actually answer the question properly, but I did touch on a few truths.
One of the points of this is to realize that maybe yu shouldn’t try to be a startup ceo; most fail at it and are miserable. They Zalsohave a lot of fear that they can’t discuss with anybody – not their team not their investors, not their spouse, not the Board of Directors. All of those people have to be held at a bit of a distance. That’s often where I come in…
Enjoy…
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As a Startup Mentor to over 20 companies over 20 years, plus a few currently, I think the first question is what is the CEO going through? (See below) As thementor you need to empathize, coach, help, counsel and help the CEO develop the business.
What is the startup CEO going through?
Being the CEO of a startup is crazy, fun, very hard work, inclusive, humbling and of course can be quite rewarding. Weekends are meaningless. There is a continuous decision stream where each decision informs the next. Your mind is thinking 24 hours a day, even when you sleep.
When you’re the CEO of a startup, a real startup with product and some cash in the bank and/or revenue, there are 3 FULL TIME JOBS.
1. Raising Money – you are constantly doing this, preparing for this and thinking about this, whether it’s pre-seed, seed funding, debt, revenue, partnerships, IPO or other.
2. Managing and Properly Growing The Business – this includes several things, depending on the size of the enterprise: managing employees, administration, hiring, firing, leases, expenses, unhappy employees, fixing other problems, etc.
This piece is what often kills an otherwise great business, which justifys the case for less is more when it comes to employees and infrastructure.
3. Selling – The CEO of a startup must ABS, always be selling. You start every day working this, just like #1 above, they’re closely related. Using the CEO to close sales no matter what size the business is, is vital to success.
This piece emphasizes the importance of having an awesome, mature VP of Sales, if you can afford it; it takes a lot of pressure off and frees up the time of the CEO.
So the job of the mentor is to make sure everything progresses forward and your protege is staying out of the ditches. It requires strong mutual trust but if you have that, it can be a rewarding win-win experience.
