Tag: fundraising

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If you’re not 10X better you don’t matter

My last startup failed. You may read that we were acquired, that it worked out well for our investors and team, and that we’re excited about new opportunities. That’s all true, but at the end of the day we still failed. More specifically, I failed. I didn’t move the needle for my investors, my employees didn’t make life-changing amounts of money, and our product didn’t make a significant impact on the world. We had all the right ingredients — funding, talent, relevant experience — but we came up short for one simple reason: we weren’t 10X better than our competition.

At HeartThis, our vision was to create the definitive online shopping site by putting all your favorite stores in one place. When we started, the market for shopping apps was already crowded, but our team had a secret weapon: we were experts at growing consumer services to massive scale without spending money on user acquisition (massive = tens or hundreds of millions of users). Viral growth was our 10X edge over the competition, but we failed to commit ourselves to growth at all costs. Every single action item should have been prioritized in terms of ROI on growth. Instead, we wasted time on product features and improvements that created an incrementally better user experience but didn’t directly drive user acquisition. We built monitors to make sure prices and inventory stock-info were accurate. We didn’t force users to follow friends on install because user tests showed that was a turnoff in some instances. We spent significant engineering resources ensuring that users always saw new content when they returned to the app. All nice features, but all 100% worthless without a 10X differentiator between us and our competitors. That lack of focus killed our company.

When raising a Series A or later round, investors aren’t willing to take a chance on a product that has a slightly better user experience and a slightly better growth rate than the competition, which is exactly what HeartThis offered. We would have been better served by putting more effort on growth and being able to point to an order of magnitude higher growth rate than all competitors even if that meant we had a merely adequate user experience. When it comes to post-seed investing, investors need a reason to believe that your company is a true outlier because they’re looking for the handful of superstar investments that return the fund[1].

It is extremely difficult to be an order of magnitude better than your competition at one thing, but it’s fairly easy to be incrementally better at many things. This creates a dangerous cycle. You feel a sense of accomplishment for each incremental win over your competition. As a result, rather than tackling the difficult task of turning a small advantage into a 10X differentiator, it becomes tempting to search for another easy win and the pleasant sensation of steadily increasing your value proposition relative to your competition. This will ultimately create a product that is slightly better than your competition in many ways…and then you will run out of money and your company will die.

Don’t fall into the trap of incrementally better. Figure out what makes your product 10X better than your competition and ruthlessly push towards that goal. Investors, employees, friends, family, and other well-meaning people will point out all of the other things you should be working on. Record all of their suggestions, then ignore them until after you hit your 10X goal. Users don’t abandon products they’re familiar with for incrementally better. Investors don’t throw money at companies that are incrementally better. Massive success isn’t born from incrementally better. If you’re not 10X better than you don’t matter. Once you are 10X better, then you can flesh out the rest. I learned that lesson the hard way, and I sincerely hope that you’re able to learn from my mistake.

Notes
[1] For more on how investors think, see Fred Wilson’s What is a good venture return?

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Finding Funding: It doesn’t count until the check clears

A lot of people have asked me about my experience fundraising for HeartThis over the last few months. We successfully raised funding from a fantastic group of investors (including Freestyle Capital, Google Ventures, 500 Startups and more), but if I had it to do all over again there are many things I would do differently.

One thing I learned is that no investment is a sure thing until the money is in the bank. You’ve probably heard this before, but it’s 100% true and important to keep in mind when pitching. I’ll cover three examples of how this can play out. Two come from personal experience, and one is a gut-wrenching example from a friend.

Insufficient funds
An individual angel investor expressed interest in backing HeartThis. We went over the details of the business, the team, and all the risks involved, and they remained solidly on board. However, when the round was closing and the time came to provide final details in order to receive financing documents I opened my E-mail to discover a message saying they had to pass for financial reasons. This is something you have to be aware of when dealing with individual angels. Often times they don’t have tens (or hundreds) of millions of dollars set aside specifically for investing, so their ability to invest is much more tenuous.

Failure to close
The HeartThis team has personal connections to a number of professional investors. We began speaking with one such individual early on. Between our personal ties and their warm reception, we were confident that they would participate in our seed round. Despite being positive towards our team and business, they ultimately declined to participate in our seed round. Losing their investment was primarily my fault. Our personal connection to this investor wasn’t through me, so I was less aggressive about following up and building momentum with them than with other investors. Instead, I let our team member with the closer connection manage the relationship. This was a mistake. Investors want to see the CEO take charge so they can have confidence in their ability to lead a new venture in the face of overwhelming odds. By playing a passive role in courting their investment I failed to instill that confidence, and I believe that ultimately led to them passing on our round.

Losing your lead
This story comes from a friend and fellow founder. Their startup was in the midst of wrapping up their Series A funding with a prominent VC leading the round. At the last minute, the firm decided that not only were they not going to lead the round, but they were not even going to participate. This put the company into a full-on crisis. The CEO went from feeling confident about raising a major round of funding to facing the prospect of not being able to make payroll the following month. They were forced to literally beg other participants in the round to not drop out and to instead consider increasing their investment. Anyone who has gone through fundraising before will recognize how terrifying a situation this would be. Most investors are followers, and they want to get in on hot deals that alongside name-brand firms. If you have a top firm back out of leading your round, the majority of other investors won’t even consider putting in money. The emotional toll on the CEO was immense, and the company came very close to disaster.

When it comes to fundraising, do not relax until the money’s in the bank. A positive feeling doesn’t matter. A verbal commit doesn’t matter. Even receiving term sheets doesn’t matter. None of them are legally binding, and there are countless examples of investors choosing not to invest (for both good and bad reasons) at the eleventh hour. Close investors as quickly as possible before they have time to cool off (consider closing in tranches!), and don’t stop actively pitching just because you think the round is filled. Good luck!

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Finding Funding: Fundraising will kill your productivity

Over the past month, I’ve had to cope with the fact that fundraising for HeartThis has wreaked havoc on the team’s overall productivity. Instead of cranking out code and hiring new recruits, my time has been spent tweaking decks and pitching investors. When initial meetings go well, my co-founders also have to take time out of their duties to join the next round of meetings. Fundraising is an important (and necessary) process for many startups because capital is the lifeblood of a new business. However, I strongly recommend that you prepare yourself for the massive productivity disruption it can cause.

If you’re the point-person for fundraising (most likely the CEO), then assume that while fundraising you’re not going to have time for anything else. Make sure your team knows this and has the resources they need to keep moving forward with minimal input from you. Prior to starting fundraising in earnest, the HeartThis team had an intense hacking week where I was able to crank out a lot of code and see our product move forward in a tangible way. Over the last 3-4 weeks I’ve barely done any coding, and I have found myself frustrated with the lack of progress. I have to constantly remind myself that by raising funds I’ll have the resources necessary to bring on more developers and we’ll more than make up for any “lost” time. It can be particularly disheartening when meetings end in rejection because it feels like the epitome of wasted time. In reality, even meetings that don’t lead to checks can be extremely fruitful. Whenever an investor decides to pass, I push them to be specific about their reasoning. Sometimes it’s not anything actionable (ex. you don’t fit into their portfolio’s investment thesis), but occasionally I’ve gained insight into an underlying weakness in product or vision (or more often a weakness in how I convey the product or vision). In addition, the multitude of investor meetings has yielded valuable contacts for later funding rounds or even later companies.

There are some steps you can take to try to minimize the reduction in your own personal productivity while fundraising. Because of the multitude of meetings, it’s hard to find large contiguous chunks of time to tackle tasks. Instead, I have to be ready to get things done whenever I have a few spare minutes. This is far from my ideal work style. I strongly prefer getting in the zone and working nonstop with minimal distractions. In order to still be effective in the short blocks of time between investor meetings, I try to keep 3-5 small, high-priority tasks in my work queue at all times. As soon as I find myself with a few spare minutes I immediately start working on something of importance without wasting time wondering what to do. Even with this process in place I’m still not getting a huge amount of work done outside of fundraising, but it’s better than nothing.

There’s really no way around it: fundraising will kill your productivity. Just remember that it’s vital to the growth of your company, commit yourself to it fully, and when the cash is in the bank you can get back to building an awesome product. Good luck!

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Finding Funding: A/B test your pitch

As the founder of a startup, a large portion of your time is spent pitching — to investors, to potential employees, to your friends and family when they start wondering if you’re really just unemployed — you’re constantly tasked with explaining and validating your business idea to others. There are numerous articles written on best practices for pitching (I strongly suggest all entrepreneurs read everything by Naval and Nivi over on Venturehacks), but in this post I will focus on one specific process for perfecting your pitch: A/B Testing.

A/B testing has become a favorite tool for iterating on consumer web products, but I’ve found it incredibly useful for improving how I convey my business idea. When HeartThis was still at the ideation stage, I was often reluctant to discuss the idea. Not because I didn’t believe in its potential, but because I knew that I wasn’t able to convey the full concept in a concise and engaging way. If you find yourself in a similar situation, don’t fall into the trap of trying to independently come up with “the perfect pitch.” Do the exact opposite. Discuss your ideas openly and as frequently as possible while having a process for systematically improving your pitch. Here’s how to do it:

1. Write down an exhaustive description of your business. Feel free to go into as much detail as you like.

2. Based on your description, identify the key 2 or 3 components that make your business unique.

3. Come up with 3 elevator pitches for describing your business that touch upon the points identified in step 2. These should be no longer than 2 to 3 sentences and should be as different from each other as possible. For example, one could draw a parallel between a company in another industry, one could focus on your team, and one could position you against direct competitors.

4. Start using your new elevator pitches. Talk to as many people as possible and rotate through your different versions making note of how people respond.

Typically, you will quickly find that one version of your story clicks with people much more so than the others and starts to be your go-to pitch. Based on that learning, repeat steps 3 and 4 until you end up with an impactful pitch that immediately captures your audience’s interest. You may also find that different versions of your pitch resonate with different groups (ex. investors vs potential customers), so you can begin developing a specific pitch for each audience. This strategy is also helpful because in order to get enough data points you’ll be forced to do a lot of pitching, and like most things in life, when it comes to pitching practice makes perfect.