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OK so if you’re pitching me and you’re not sure you want to take VC money, what exactly are you doing?! I’ve had a enough similar meetings with founders I think its time for a blog post on the subject.

Here’s how the conversation goes…”I made some money in my last gig/startup/whatever. I self-funded this project.” It’s going well but I’ve burned through my capital. One of my early investors is an investment banker. He says he knows other wealthy guys and we don’t have to go the VC route, give up board seats, deal with their firm’s baggage and listen to their myriad opinions.” OK that’s a bad start to a meeting with someone who is a gateway drug to more traditional venture funding. In many cases, it is also a bad way start to a tech company. Do your research and figure out what kind of money you want and need.

Funding from experienced early stage investors offers very valuable things beyond capital:

• There is an established, milestone-based template for your development that you can follow which enables you as founder to focus on building a (profitable… well, eventually profitable) product your customers love.
• There is a very organized — if sometimes opaque — marketplace for capital. With a little time and effort you can develop a long list of potential high-fit investors who cover your category, don’t have conflicts and have a good track record of success. And these investors are used to looking at deals, are comfortable with the lightweight due diligence possible at the seed stage and know the typical deal terms. Plus they can help you on future rounds of funding. I’ve directly introduced almost $100M in growth capital (other peoples’ money) into my portfolio companies over the years. Start on AngelList.
• Speaking of deal terms, VC type investors know the difference between a priced round, a SAFE agreement or a straight up convertible note. They’re not going to come up with exotic funding agreements that turn off future investors. Good ones will be sure you’re set up for success in the next funding round.
• Good seed stage investors have experience helping companies get to the next important milestone…which is product-market fit and the all important Series A. And let’s be honest, how many companies do you know that leave the seed stage so profitable with such great growth that they don’t need additional funding?!
• And a great seed stage investor can become an excellent board member when you do your Series A. I’ve been a board member in about 25% of my deals over the years. A seed stage investor as board member has a couple of valuable attributes: they’ve grown with the founder and are a known quantity; they have different motivations and drivers than a typical multi-partner VC firm; often times they have operating experience.

I’m a contrarian in many areas but not in funding. I think companies should innovate in product, not financing. I’ve seen some big problems when founders take money from inexperienced investors:

• “My early investor wrote a big check but has some pretty aggressive terms if I’m not successful.”
• “My early investor introduced me to his rich real estate friends and they all want to write checks but I can’t get anyone to agree to deal terms. I don’t think I can get this thing closed and now I’m hosed.”
• “My early investor wrote a big check but wanted a controlling interest in the company which seemed OK at the time.”
• “My early investor was a father/son combo. The father was experienced in business but got busy doing other things and the son has no interest in helping us grow. In fact, he wants the money back for other things that he thinks are cool(er) — like a Lamborghini.”  (No joke)
• “My early investor is pushing me for an immediate exit because he wants a return and wants to deploy the capital in other places.”

Who needs this freak show? Find good, experienced, balanced, helpful seed investors who know what they’re doing.

Investor updates – especially in the early days – are a must yet founders often neglect to do them. Why and when should founders do them?

Before the Series A, companies usually don’t have boards so there is no formal mechanism for reporting. Early investors are believers who understand the founder is super busy building her/his company. Many don’t demand regular progress updates. But it behooves the founder to build the discipline of regular reporting. I think a good discipline is to do a quick monthly update (a good, solid email is fine) for the first 12 months then move to more structured reporting quarterly. Why? It’s good practice and it’s an insurance policy.   I heard a phrase recently that I like — “Practice like you play” meaning if you’re practicing a sport or musical instrument or whatever, it’s likely you’ll play like you practice. So give practice your all. And I think building early reporting discipline will get you in good shape to do it once you raise your Series A and have specific reporting expectations. Plus – if you’re like many companies – you’ll be going back to the same early investors asking for a tweener investment before you get to your full blown Series A. And if the investor hasn’t heard from you since they wrote the first check — and the news isn’t totally rosy — they’re going to be less inclined to write another check.

Most of my portfolio companies suck at reporting. Truly. Some, however, are awesome. In the early days of Twitter, Biz Stone wrote a wonderful Sunday night note to the company about everything that happened that week and he forwarded it to the early investors. It wasn’t an investor update per se and wasn’t so much about metrics and milestones but it was a beautiful and heartfelt insight into what goes into building a great mission-driven company. It featured stories about people in the company and how users were using Twitter in mind-bending ways. Biz should turn those early notes into a book. Jason Goldberg also did terrific updates in the early days of Fab. In fact, I’d say he was radically transparent.  Among all my portfolio companies, the best at early reporting has been SellBrite. Brian, the founder, writes a regular, detailed report about the business. No hyperbole. Just fact and insight. It’s a pleasure to read, not just because the charts are all up and to the right (which they are), but because it gives a very good overview of how things are going…hits and misses…kpis…milestones…what’s keeping the team up at night…everything you need to know to understand the health of the business. At the end of the post, I’ll share an outline of what the best updates include.

I can usually gauge the health of the company from founder communications. In all cases, if a founder is good at sharing wins and keeping investors up to date in some fashion and then goes silent it’s never because the company is crushing it. One of my companies was on a great trajectory for months and months then went silent. In the back of my mind I thought hmmm something’s up. I finally got around to writing the founder and sure enough they’d hit a big speed bump. I think in those situations, the instinct is to hunker down and focus on the problem. But I think that instinct is absolutely wrong. I think the right thing to do is be open and engage your investors. There is a high likelihood one of your investors has seen this movie before and might have valuable insight.  It was the same story for another one of my companies…everything was going well…updates were terrific then…crickets. After a few months of silence, I got a panicked note that the founder needed a bridge because cash was short. Ultimately I contributed to that bridge but it took a while for me to reconnect with the company and founder and frankly it left me feeling a little squeamish. You have a bond with your early investors. Keep that bond. You might need it.

So if you’re a founder and it’s early days you know what to do. WRITE THOSE UPDATES. Once you get to a Series A or B (and other peoples money) you can be more casual with early investors. Post Series A, if I haven’t heard from a founder, I’ll do periodic check ins. “Hey, how are things going…” And I’ll often re-engage around fundraising. I have a good network and have helped founders with introductions that have produced almost $100M in checks.

Now, a few words for investors. I’ve seen investors who are absolute jerks. They write a small check and feel like they own the company. They hit “reply all” to every update email and panic at every hiccup, offering advice on every little thing. OMG shut up!  If you want to opine, make sure the topic is material and your input is worthy. The worst is when you see a note that says something like “my niece used this app and shared it with her friends. They all said they don’t get it. You need to do XYZ.” Who knows if the niece is even the target market. The founder has much better sources of insight data. So now you see why founders shy away from updates. In cases like this, I’ll usually have a quiet and polite conversation with the investor about what’s reasonable. It usually starts with “Dude you need to chill out!”

What’s in a great update:

• KPIs (every category has it’s unique metrics, e.g., MRR for SAAS, GMV and liquidity for marketplaces)…Share the numbers and context.
• Hits/Misses i.e., Good/Bad…here’s where you can share whats working and what’s not…and ask for help if you need it.
  • How you’re progressing on the product roadmap
  • How you’re doing on customer acquisition, CAC trends, etc.
  • What you’re doing in BizDev.  What’s working and what’s not
  • How the team is coming together, key positions you’re hiring for
• Cash On Hand and Burn Rate
• Help Needed From Investors (fundraising, hiring, BizDev intros, etc.)

It’s time for my semi-annual blog post haha. I want to write more frequently, I really do. But I get caught up listening to pitches and whatever I’m helping a company with and it goes by the wayside. Excuses. Excuses. I know.

Valuation has been a big topic in recent years and two years after the mythical bubble was forecast to burst I have a few thoughts to share.

I’ve passed on a larger than normal number of companies recently over valuation. And that’s odd because we’re past the crazy frothy period of 2015. I don’t nit-pick over valuations typically and I’m not one to micro-optimize terms. I’m looking for fair deals that motivate the entrepreneur and come with a nice and clean cap table and vanilla terms so we have no objections when raising money in subsequent rounds. Pretty straight-forward stuff.

That’s why I’m disappointed when founders come forward with absurd, crazy, eye-popping seed-stage valuations. Why don’t I pay up and shut up? Well, beyond the very obvious fact that high early valuations affect future returns, they also set up a very high hurdle the company has to cross before raising a follow on round at a commensurately higher valuation. They create unnecessary execution risk and can lead to Hail Mary behaviors.

Last year an interesting company came to me (pre-product, pre-revenue, interesting team but they weren’t 3x entrepreneurs with decacorn exits – just good, solid entrepreneurs). I liked the concept. I liked the space. I liked the team. All good. But the valuation was breathtaking…and we’re not talking AI or another flavor-of-the-month here. Wow. I told the founders the valuation was extraordinarily high but I’d love to hear what they thought justified it. I was prepared for some hustle and a good back-and-forth about their genius business model or the secret sauce in their brilliant algorithm or the insurmountable moat their technology ensured or how they crushed it in user tests. Instead the answer was “We’re a San Francisco company so we feel we deserve this valuation.” Pick me up off the floor. That was such a deflating answer.   No hustle. No insight. No passion or conviction. Just entitlement. Needless to say I didn’t write a check. Yikes.

I found another great company recently that ended in a #fail for a different reason. I loved the founder. Super high hustle. Smart. Scrappy. Great UX chops. All the things I like. The product is brilliant. It is. But there was no customer feedback as of yet so it’s a big bet. But I was willing to take the gamble until the conversation about valuation.   The number was big. I gulped and asked nicely why he felt it was justified. The answer I got? “Well we raised our friends and family round at a very high valuation of X and only gave away a small amount of equity. So we need the valuation to be Y because we don’t want to disappoint our early investors. Plus we have a lot of interest.” ARGH. Friends and family are not usually valuation sensitive. Many probably don’t know what’s reasonable. They’re investing because they believe in you. But don’t take advantage of that and command an absurd valuation to minimize your dilution. One of two things will happen: you’ll have to go back to them and explain you’re doing a “down round” or you’ll face the risk of not being able to raise money because you’re trying to get the valuation up.   If you are able to defy the odds and raise a nice up-round then you’ve set yourself a BIG hurdle for the next fund raise. You’re going to have to have a super duper home run to get there. And that could lead you to do ill-conceived Hail Marys. I’ve seen that movie and have never liked the ending. See above. Read Good to Great. Be sensible. Take it step-by-step. Yes, reach for the stars, but climb a ladder to get to them.

I had a third #Fail around a cap table. The founder launched his app and it took off like a rocket. Totally broke, out of desperation, he took a very small check that felt huge at the time but gave up an enormous slug of the company to get it. That’s just a terrible burden to carry forward. In a situation like that, I could get actively involved, meet with the initial investor and try to work out something that’s a #WIN for all while not polluting the cap table but that’s a big expenditure of time.

So founders, please think sensibly about initial valuations. I know this sounds self-serving but I think it serves your interests best. Oh and if you are going to go big, then have a fantastic story (product, IP, traction – SOMETHING!) to back it up.

It’s been a busy Q4 in sunny SoFla!  I invested in two new Miami-based startups and tripled-down on an existing investment.  I think of myself of a contrarian in that I make picks others don’t.  With these two picks I contradicted my own investment philosophies (no MarTech,  no Media).  Go figure!

Gramercy.io solves a big problem I see in my portfolio companies.  And that’s growth through referrals.  Fab.com — which did this brilliantly — saw huge growth from friends referring friends.  I was fiendish about racking up referral wins on Fab.com.  I wish Jason had productized his toolset.  Why are referrals a problem?  Developing a great refer-a-friend program with clear attribution, easy but detailed metrics and flexible campaign-building tools is a lot of work developers simply don’t want to do or don’t have time to do.  Too many growth hackers hit this wall and opt to do Facebook or Google ads instead because its easier.   Alex Nucci, the founder, learned all about this in his growth hacking job ClutchPrep and set out to build tools that make it easy to develop and manage word-of-mouth marketing programs.  During the pitch, Alex told me his story and showed me what he’s built so far. I was impressed.  But I couldn’t get there.  SAAS is tough.  MarTech SAAS is even tougher and I’ve been avoiding MarTech for awhile.  Plus Ambassador is a well-funded competitor.  So how did Alex get me to write a check?  He showed me how scrappy and hungry he is by doing a very detailed referral program assessment of one of my portfolio companies.  He went through every touchpoint that could be used to increase referrals and described how the company could do better at each point.  It was a fantastic piece of work and it showed me how Alex gets his hands dirty tearing apart the UX to really understand where the impact points are.  It also showed me he has that magic and rare trait called initiative.  His assessment could be the basis for a very effective consultative selling approach.  He got me “there” and I wrote a check.  I’m in!  A big thanks to Shawn Convery for the intro.

WhereBy.Us  builds experiential media for the world’s curious locals. Huh?!  WhereBy.Us puts an email (yes email!) in your inbox, daily, with great local news — what to do, what to don’t, where to eat.  They encourage readers to “live like you live here.”  If you live in Miami and you’re reading this, you’re probably a millennial, one of their 30K subs here and you know the company as TheNewTropic. You’ve come to rely on it for great stories like Nine Tips For Surviving The Art Basel Traffic Nightmare.  They just raised a round to fund their expansion.  Their newest market is Seattle where they launched TheEverGrey with a coloring book.  The team is building local brands you just love and because you love them, advertisers love them.  When I think of WhereBy.Us I think of Refinery29 (I’m an investor) and Thrillist (I wish I was an investor) — both properties that have a unique voice demonstrating a very tangible “feel” for their readers’ needs/desires.  While I’m a big fan now it took me a while to get there.  Media is hard.  And Local is really hard so I had to hear the pitch three times before I got there.  Chris, thanks for your patience! And a big thanks to AGP for the initial introduction !

Shortly after I arrived in Miami, Wifredo Fernandez — one of the founders of TheLab Miami (the coworking space I work out of) — introduced me to Jordan Melnick.  Jordan’s a native Miamian, a blogger and journalist, a regular around Wynwood and now a purveyor of inspiration.  He and his team created an app called SKTCHY.  I think of it as instagram for artists but it’s actually much more/different than that. You can post photos of yourself on Sktchy to inspire artists to draw you, paint you, maybe even sculpt you. And of course you’re welcome to choose someone else’s photo to draw yourself. There are no drawing tools in the app. The Sktchy team decided to leave the creating up to the experts — the artists — and instead focus on becoming an ever-growing source of inspiration and a place for them to share their creativity with the world. The community enjoys the artwork with wows. Relationships form.  It’s the give-to-get principle in action. Inspire me and I’ll do a portrait.  The concept and indeed the UX is simple, arresting, engaging.  I saw it and loved it.  Why? I believe there is an underserved market here. More on this in a bit. Jordan and team did a great job with the UX, they’ve got some early traction and there is very good engagement among users.  It’s an early bet because I’m the first investor but I feel great about Jordan and the team and love the app.

In doing my due diligence, I was looking for a sizable market and good, early engagement and I found both.

Way back in the days when MySpace was still something and FB was opening up the platform, I came to believe social networks would go vertical and niche.  In fact, I wrote two ClickZ articles on the topic in 2006 and 2007. [I am afraid to re-read them but you can here and here.  No ridicule please — I wrote those almost 8 years ago!]  Fast forward several years, and under that thesis I invested in a gay social network called Fabulis.com (which later pivoted to become Fab.com).  Today there is an endless array of niche and or vertical social networks. In looking at SKTCHY I recalled Richard Florida’s controversial thesis about the rise of the creative class.  In 2002 Florida said that there were 40 million workers in the US engaged in the creative class.  The figure stuck with me.  You don’t have to walk around the Mission in SF, Wynwood in Miami, or Williamsburg in Brooklyn to see members of the creative class at work.  They’re in every town.  In the US alone, you have more than 1.5 million professional artists, architects and designers (very narrowly and traditionally defined) and many more who create beautiful things. Using the 1:10 to 1:20 ratio of content creation to content consumption, you can extrapolate yourself to an audience in the US that is easily in the tens of millions.  If you extend that worldwide, you can see a potential audience in the hundreds of millions. Oh, and remember DrawSomething?  It was downloaded 50 million times before Zynga finally bought it.  OK, that’s not a great analogy…but you have to admit it was a phenomenon!

The early engagement on SKTCHY is very good.  The app has been downloaded nearly 90K times.  There are 30,000 original artworks in the archive from artists in 60+ countries and 1,000 or more are being posted every week.  In the last week, there have been 25K “wows.”  A popular work can get 300+ likes.  People are creating and interacting with the content.  

And user feedback is superb:

“Not including my “free draws” or works in progress, this is my 100th Sktchy-inspired portrait!  Thanks again to Jordan and the entire Sktchy staff and community for not only an amazing app, but a seriously life-changing experience… I am so grateful for all of you.  This has been hands down the most productive year I’ve had art-wise in my entire life… And it’s not even over yet!  Thank you!!”  Artist: Krystal Figueroa

 

“I didn’t even know I could draw until I downloaded this app”  I didn’t draw AT ALL!  But I felt bad people drawing me and me not returning the favour and now I have almost 100 people tagging me to draw them and a couple of people on Facebook want to commission me!  Me?!  My silly little doodles!!! X”  Artist:  Doodle Swan

What’s next?  A better on-boarding experience.  Easier sharing.  Faster load times.  Richer analytics.  And a few things the team is keeping under wraps.

Download SKTCHY, post an inspirational photo and enjoy some art.  You’ll get hooked like I did.