How to Introduce Investors to Your Team the Right Way

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How to Introduce Investors to Your Team the Right Way

Eager to introduce investors to the rest of your "rockstar team"? That meeting could be to your detriment. Here's how to turn your dilemma into a win and close the deal.
Source: By Alex Gold

How Rapid 'Testing and Learning' During Product Development Saves Time and Money

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How Rapid 'Testing and Learning' During Product Development Saves Time and Money

Investing money and design work is all very well. But what do your (potential) customers think? That's what really counts.
Source: By Alex Gold

Perseverance: Why It Was Southwest Airlines' Herb Kelleher's Most Important Lesson for Entrepreneurs

Perseverance: Why It Was Southwest Airlines' Herb Kelleher's Most Important Lesson for Entrepreneurs

Sadly, Kelleher died last month. But his legacy lives on: Ever hear of how he and his airline became Texas's largest bourbon distributor?

I was actually on a Southwest Airlines flight when I found out that the company’s legendary co-founder and chairman, Herb Kelleher, had passed away. Kelleher died on Jan. 3, but over the five decades before that, his vision revolutionized air travel. His creation, Southwest — arguably the world’s first low-cost airline — democratized flying for millions.

The company’s differential was that by competing more with bus services than legacy airlines, it could disrupt the market. This strategy was so successful that in 1993, the U.S. Department of Transportation coined the term “The Southwest Effect” to denote an increase in origination air travel and a corresponding drop in prices, in any market the company entered.

This achievement alone is sufficient fodder for any successful entrepreneur’s legacy. But the fact that Kelleher achieved all of that in a company that was, and still is, ranked as the best place to work in America, with employees who would go without pay to work there, says even more.

And there’s yet another lesson stemming from Kelleher’s and Southwest’s story: perseverance. Kelleher’s life offers a unique guide as to how entrepreneurs can and should persevere through even some of the most daunting obstacles they encounter and still come out on top.

What, exactly, does “perseverance” mean?

The importance of perseverance in entrepreneurship cannot be overstated. Starting a new business may initially seem exciting but often, after a short time, the shock of reality sets in. Product, customer and regulatory problems hamper business growth, and many entrepreneurs end up playing an inevitable game of “whack-a-mole” just to solve their problems.

Perseverance is the ability of entrepreneurs to see through these obstacles and still win them, regardless of how daunting any specific challenge may be. Perseverance, in fact, is often the “secret sauce” that sets the most successful entrepreneurs apart from mere entrants in their field.

Stand for something more.

When Southwest Airlines was founded in 1967, the airline had no employees and no jets; it had to gain an operating certificate just to fly. Given the company’s innovative business model, incumbents like Braniff and Texas International (both of which no longer exist) attempted to block Southwest’s operating certificate through a series of historic court challenges.

Though his airline was effectively grounded for  four years, Kelleher hung in there; his persistence ensured Southwest would, and did, eventually fly.

To accomplish this feat, Kelleher first offered his time as a practicing lawyer for free. More importantly, when Southwest’s board of directors wanted to abandon the fight three years in, Kelleher shouldered all court costs himself to get the job done. It would take two Texas Supreme Court rulings and one U.S. Supreme Court ruling before the airline could actually fly.

Before he passed away, Kelleher remembered that during that tough time, he was fighting for something more: the right of free enterprise and the ability to open the skies to consumers who couldn’t afford to fly.

Of course there have been other entrepreneurs with the same kind of tenacity, founders who have carried out some mission of their own with the same motivational force Kelleher showed. Patrick Grove, the founder of iFlix, is an example: He persevered through multiple roadblocks to democratize access to media and information in Southeast Asia.

In the process, Grove created Netflix’s biggest competitor in the video-streaming market. Belief in something more powerful than just a new business or the profits it may bring — meaning a belief in the business’s mission itself — will motivate you, your employees, stakeholders and customers. By turning your business into a cause, you will be able to persevere through some of the darkest days as an entrepreneur.

Think differently.

Shortly after Southwest launched, Braniff thought that by launching a fare class at half of what Southwest was offering, it could undercut the airline and put it out of business. Other airline executives and the consumer press promptly wrote Southwest’s obituary.

But not Kelleher. He understood that to persevere through this crisis, the airline had to think differently. Examining revenue streams, he discovered that most passengers were business travelers on expense accounts who cared little for cost savings and more for time and convenience. So, he made a unique proposition: Pay the full fare and get a free bottle of Wild Turkey bourbon!

This promotion was so successful that over the course of just over six months, Southwest became the largest liquor distributor in Texas.

Stories abound of entrepreneurs thinking “around corners” and not giving up; This category includes people like the founders of Airbnb and GoodRX for example. The real lesson here is to look at the challenge and the situation before you and improviseuntil you win.

Like Kelleher, you should assess the real drivers of your business and the levers or incentives needed to change course in your direction — not to just react to the imminent threat. Often, creative solutions will materialize because by looking at a problem differently, you will come up with a divergent solution.

Perseverance matters.

Kelleher sits among a long line of great, and often colorful, entrepreneurs who disrupted and revolutionized their respective fields. The one thread nearly all of these leaders have and had in common, and which Keller possessed in spades, was the ability to persevere through the most challenging of circumstances.

Kelleher’s legacy not only shows us the power of “thinking around” the corners of a problem, it shows us the extraordinarily motivating power of believing in something — a mission — greater than oneself. That’s advice every entrepreneur should heed.

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Perseverance: Why It Was Southwest Airlines’ Herb Kelleher’s Most Important Lesson for Entrepreneurs

Sadly, Kelleher died last month. But his legacy lives on: Ever hear of how he and his airline became Texas’s largest bourbon distributor?
Source: By Alex Gold

2 Harsh Experiences Convinced Me Never to Invest in Friends' Companies

2 Harsh Experiences Convinced Me Never to Invest in Friends' Companies

How do you avoid the drama-filled minefield that can result when a friend pressures you for financial support? Try these 4 responses.

I’ve lost not one but two friendships this year because my response to an investment opportunity didn’t meet those friends’ expectations. The lesson I learned? Friends and funding definitely don’t mix. Here’s what happened:

Experience No. 1 occurred at 2 a.m., Sydney, Australia, time. I had just met my girlfriend’s mom, so it had been a full day. And, given the late hour, I just wanted to go to bed. That was when I received a text message from a close friend who had been pushing hard for me to invest in his business.

I had already told him in multiple conversations that thought he had a good “lifestyle business”; I had said I would support him but not invest. I would make useful introductions for him, I’d promised, to friends and family members I knew would invest.

Then came his text. “Sorry, just so you and I are absolutely clear,” he wrote, “we are not desperate for funding. We have $500K committed.  We’re good.” Shocked at his audacity, I responded with just one phrase: “Good you don’t need my help.”

We haven’t spoken since.

Experience No. 2 echoed No. 1 and happened earlier this year with someone I’d considered to be my best friend: an entrepreneur in Southeast Asia whose empowering presence, strategic presence and extraordinary determination had carried her through multiple business pivots. Through a series of calls and texts, she demanded that I invest in her bridge round or have my existing holdings and investment be “boxed out” of the new entity she’d create after she restructured her business.

Flabbergasted, I didn’t respond and decided to wait before re-engaging. Needless to say, there has been no re-engagement.

Proceed with caution.

As an entrepreneur, I am naturally attracted to people propelled to create and build something bigger. Because I have a similar drive and motivation, these relationships evolve into friendships.

Instinctively, I have invested both capital and time in friends’ businesses. Yet, every now and then, one of them presents a truly challenging business idea. When my response doesn’t meet that person’s expectations or I offer constructive criticism, the friendship often takes a turn for the worst.

Others say they’ve experienced the same thing. In The Startup Founder’s Guide to Fundraising, Justin DiPietro, co-founder and COO at SaleMove, expressed similar concerns about these kinds of investments, saying, “I would rather not take friends’ and family [members’]  money. It would add a massive amount of personal awkwardness and stress.”

Over the last few months, I have spoken with many entrepreneurs to determine the best methodologies for saying “no” to an investment in a friend’s company without jeopardizing the treasured relationship.  While the methodologies shared here are imperfect in many ways, I do believe they are better than just saying “no.” Here’s how to avoid this drama-filled minefield.

Highlight how other investments have “maxed” you out.

One of the most common ways many entrepreneurs decline to invest in their friends’ challenging companies is to highlight how other startup and public market investments have “maxed-out” their available capital for the year. Typically, no one will ask you how much money you have allotted for investments. You might only have a few thousand for investment or you might have six figures. Either way, all they need to know is that there’s nothing left.

This approach works because no one wants to question whether you are sure you don’t have any money remaining. Instead, this explanation shuts the conversation down without offending the friend asking.

Essentially, this strategy also buys you time so your founder-friend can’t ask again for the next month or so. Over the next year, there’s a good chance that he or she will find the funding elsewhere without the issue adversely impacting your friendship.

Offer to recommend the friend’s startup to someone else.

Another common method is to politely decline but then recommend other investors or stakeholders who might be interested and willing to invest in the friend’s company.

Share advice from the U.S. Small Business Administration with your friend. The government agency recommends that a company founder focus on potential investors that prove they have financial sense and a realistic view of your business plan.

In your network, you may know of some ideal investors for your friends who are more closely matched, with no personal ties. By your doing so, your friend will see that you have gone that extra mile to make a connection and find a funding source. Since so much about business is “whom you know,” the friend most likely will appreciate your effort to reach into your own network to help.

However, even with this approach, you’ll have to tread carefully. This process is similar to what happens when you try romantic matchmaking. Although all you have done is introduce one person to the other, if things don’t work out, there’s always the risk that either or both people may blame you.   

Give advice, not capital.

Rather than offering capital, provide other assets. These assets could come in the form of your time, connections and expertise, to assist your friend’s business as an advisor. Often, when starting a company, a founder prefers advice and guidance over capital.

Think about what experiences or skills you have, or that those in your network offer, that you can share with your friend. Suggest potential solutions to barriers your friend is facing or make yourself available as someone to bounce ideas off of. If you know a talented developer or marketer, this particular recommendation could be valuable.

However, as already noted, even constructive criticism can impact a friendship. If the friend isn’t willing to accept this type of guidance, perhaps yours isn’t a solid friendship based on open, honest communication.

Keep it all “business.”

I’m upset that my two friendships were ruined by the mixing of our business and personal relationships. In learning lessons for the future, I would avoid any investment in a friend’s business or any startup connected to a friend. However, I would gladly connect my friends to anyone who might help develop their businesses, financially or otherwise.

In sum, there are many other investment opportunities out there where the focus is strictly on the transaction and return. But no deal is worth risking your friendships. Once the damage is done, it’s difficult to go back to what you had before.

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2 Harsh Experiences Convinced Me Never to Invest in Friends’ Companies

How do you avoid the drama-filled minefield that can result when a friend pressures you for financial support? Try these 4 responses.

Source: By Alex Gold

That 'Bad' Interviewee You Just Talked to May Be the Perfect Match for Your Job Opening

That 'Bad' Interviewee You Just Talked to May Be the Perfect Match for Your Job Opening

The ‘pattern matching’ that companies have long used to find the right candidate isn’t always the best strategy.

Think you’ve just conducted a bad interview? You may be mistaken.

Walking back to our office in San Francisco’s SOMA neighborhood one recent sunny Friday afternoon, I was excited about the job interviews I had scheduled for the afternoon. While some entrepreneurs hate this task, I’ve always relished it. To me, finding like-minded individuals with the requisite skills and a passionate desire to change the world — or something “like” that — is thrilling. Right?

At least it is for me: That afternoon, I would be conducting phone interviews for our open head of sales position, a notoriously difficult role to fill, not for a lack of candidates, but rather for the challenge of weeding out the perfect candidate truly skilled at closing sales and helping to build our health-intelligence platform.

That afternoon, however, reality set in, in the form of close to ten disappointing phone calls.

Picking up my phone once more, I made my final call — to the most unlikely candidate of the bunch. And, within two minutes, I was floored: This guy was quizzing me on my knowledge of our business space. Not only that, but he was also asking about my personal relationships with competitors. Huh?

Calling around to other founders after the interview, I quickly uncovered a strong consensus based on those founders’ individual experiences: This candidate’s comments weren’t weird or unwelcome, they said. In fact, they considered the best salespeople to be the ones who quizzed them.

For me, this was the first of many unexpected interview lessons that I learned “on the fly” as a startup founder. One of those lessons was that, in conducting job interviews and evaluating candidates, most hiring managers rely on “pattern matching” — the idea that you can identify patterns in candidates, in terms of their personal attributes and skills which align with your organization’s mission and values.

In the age of artificial intelligence and machine learning, this practice has intensified, as pattern matching has gone high-tech. Recruiters and organizations are turning to algorithms to more accurately identify talent “matches.”

However, even with this new data analysis capability, the concept of pattern matching can break down. Here are some further lessons I’ve learned that demonstrate the fallibility of “pattern matching” and why it may be challenging to rely on it during job interviews.

1. A “bad” interviewee could be the right colleague.

We often want to hire people we get along with. When a candidate can quickly and seamlessly integrate into the team, we can almost immediately leverage that collaboration for better business results. What’s more, the likelihood of conflict diminishes significantly, removing obstacles that often impede organizations when team members have contrasting values.

Finding thatseamless integration can be quickly determined through an interview, where we evaluate someone for his or her skills and ability to gel with team members. Yet, even a bad interview doesn’t mean the candidate won’t be a good match.

“Sometimes, a challenging interview does not equate to a poor hire,” Simon MacGibbon, my colleague and CEO of the health-monitoring company, Myia, told me. “You need to be able to look at the scope of the entirety of the candidate, including background interviews, reference checks and work product. Basing hiring on interviewing alone puts many companies at risk of passing over candidates with valuable skill sets and different, but complementary, personalities.”

2. Hire for attitude. Train for skills.

Herb Kelleher, the legendary co-founder of Southwest Airlines, said it best in the book Nuts!: Southwest Airlines’ Crazy Recipe for Business and Personal Success: “Hire for attitude and train for skills.” This, of course, is how Southwest grew from relatively humble beginnings into one of the largest airlines in the world.

However, interviewers may be biased toward skills over attitude. Naturally, it is easier to opt for a quantifiable metric than to dig into a candidate’s personality and disposition.

Consider Michael Lewis and his book Moneyball, which recounts how professional baseball started using Sabermetrics to determine a player’s skill level and performance potential. Other industries have likewise leveraged specific metrics and assessment tools to identify the right candidates for open positions.

However, stringent metrics aren’t everything and may not always deliver the right candidates for a constantly evolving business environment. Some of the nation’s top entrepreneurs are now hiring candidates who are demonstrably adaptable and who can forge their own paths.

“When hiring, we focus on grit and fit over pedigree and expertise,” Daniel Fine, founder of Neu Brands, told me. “All are relevant and important, but when you’re building a rapidly scaling company, culture and team alignment have to be the top priority. This isn’t something I’ve always been successful with, but having learned the hard way, it’s now a focal point.”

3. Interviewees who interview you know they can get a job anywhere.

Going back to the example of our search for our head of sales candidate: The best candidates for a position will often interview the interviewer to learn whether they can be successful in the role. These days, they know they can go anywhere; record low unemployment works in their favor.  Yet, remarkably, a lot of entrepreneurs and managers do not respond positively to this shift in power which gives talent the upper hand. Many positions go unfilled, as a result.

A 2018 research report confirmed this. Titled Talent Intelligence and Management Report, from and Harris Interactive, it compiled findings from 1,200 interviews with CEOs and found that 28 percent of positions went unfilled.  Also in the study, 87 percent of CEOs and CHROs stated that they were facing at least one talent-related challenge. Employers are even giving up college-degree requirements in an attempt to widen their candidate pool.

So, the next time a candidate interviews you, in his or her job interview, you may want to think again. This person is probably more sought after than you think.

It’s time to win the right talent.

It may not be a good feeling for a founder or executive to come to grips with this new reality. However, it’s also a valuable opportunity to change your interview approach and start evaluating candidates on more than experience and skills. By accepting this new shift in power, you can improve your position in the race to hire the best talent.

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That ‘Bad’ Interviewee You Just Talked to May Be the Perfect Match for Your Job Opening

The ‘pattern matching’ that companies have long used to find the right candidate isn’t always the best strategy.
Source: By Alex Gold

When Pitching Investors, Your Product Doesn't Matter (as Much as You Think)

When Pitching Investors, Your Product Doesn't Matter (as Much as You Think)

Ever considered upping your storytelling game? That’s actually something as important to investors as your product.

It was a perfect sunny day and my spirits were high. My co-founder and I had a meeting lined up at one of Silicon Valley’s most prestigious investment firms, which had funded such startups as Snapchat, Dropbox and Airbnb. Our thought: We’re next.

We began the meeting with the firm’s general partner by whipping out our standard presentation deck. It provided a strong product overview and proof of early traction. However, this is when things started to go sour. The general partner started fidgeting, working the phone as thugh he had an impending Tinder date and distractedly gazing out the window as if to ask, “I wonder what ski conditions are like in Tahoe right now?”

Hitting a point of exasperation, he finally interrupted. “Honestly, I am sure your product is great,” he said. “But, I don’t care about the product as much as you might think. Stop going on and on. I get it. What I care about is what you are building for me. The revenue. The opportunity for return. That’s different than what you are building for your customers.”

That was the moment that we got it. Well, I got it.

Like every other entrepreneur, we entered the meeting eager to go over what we’d built and what we thought added the most value: our product. Also, being nervous during the presentation, we tended to focus on what we know best, which was (again) our product.

However, that approach ignored a critical point. Entrepreneurs are actually building two products: one for customers and one for investors. While the product you’re constructing for customers is the one you are passionate about, the product you are developing for investors is just as important. That’s because it’s focused on revenue, team makeup and other intangible dynamics.

Both “products” are crucial for success.  Here’s how you can master storytelling for these two critical audiences.

The product you’re building for your customers

Geoffrey Moore’s book Crossing the Chasm outlines some key concepts on how to focus on the product you’re building for customers. The first concept he details is an entrepreneur’s need to create a unified approach for the marketing effort companywide.

To maximize resources and ensure strategic alignment, the entire management team needs to participate in the product development process. The task can’t be left solely to the marketing gurus in your company. Full participation ensures that the story stays consistent from the first draft to the final unveiling.

His second piece of advice is to pay attention to the technology-adoption life cycle. In building a product for customers, you’ll need to know when they’ll be willing to accept new products, especially if your product involves some type of disruptive technology. That requires research to discover customers’ comfort level for changing something they’ve been used to doing a certain way.

Some customers will eagerly embrace a continuous innovation cycle for products, such as an upgraded version of their smartphones. Other products — for example, an electric vehicle — may take much longer to gain acceptance. Knowing customer interest, behavior and adoption rate is integral to building the right product at the right time.

Finally, Moore’s third concept has to do with maintaining momentum. No matter what the product may be, customers over time experience a continuous technological progression that affects their expectations and addresses their needs slightly differently. If you don’t address or incorporate ongoing emerging technology, your competition will steal your customers.

The product you’re building for investors

By way of contrast, investors tend to care about a different type of product. They want the intangible story “behind the company.” This usually includes four topics:

  • Product
  • Revenue
  • Team
  • Systems

To tie it all together for investors effectively, you’ll need a solid storytelling ability. According to Nathaniel Krasnoff, the principal at Wildcat Venture Partners, “The vast majority of the time, when you pitch, you’ll only get a 30-minute opportunity. It’s your one shot to get your foot in the door.

“With funds looking at anywhere between 1,000 to 5,000 companies per year, you need to be able to sell your company clearly and concisely, with a great story,” Krasnoff told me.

Storytelling, then, goes beyond a good pitch. “Storytelling is a foundational skill because if you can’t sell us, then you probably can’t sell your customers, and you will also probably have difficulty selling potential recruits,” Krasnoff said.

The product fallacy

Product is probably the least important of the four topics I mentioned earlier. It matters primarily in the earliest stages, as you are driving toward a minimum viable product (MVP). Yet, at a certain point, if you haven’t figured out your product, you won’t be able to raise funding anyway.

If an investor believes that what you’re building is legitimate and viable, he or she will do due diligence to learn more. The primary reason startups fail is that founders aren’t thoughtful about their MVP. They ultimately raise money for a sales team that is selling the wrong product.

Revenue and systems efficiency

When you’re thoughtful about what you’re building, the answer to, “Will this product make my users heroes at their organizations?” will be a resounding yes. From there, you will need to quantify what that means, in order to determine your pricing model and the systems you need to build. Next, you’ll follow up with a demonstrable and solid understanding of how you acquire customers and the costs.

Then you can go out and raise capital to add fuel to the fire.

Team above all

Building a company is the hardest thing you will ever do. That’s why no one wants to do it alone. The team you form will determine your success at every critical stage. This factor often becomes the difference between winning and losing.

If you surround yourself with the best people, then the journey becomes smoother. In interviewing many successful founders, I’ve discovered that they often had one key hire who altered the culture or built the right systems to change the company’s direction.

For customers and for investors

It’s helpful to measure your success along a chronology developed by Wildcat Venture Partners called the Traction Gap. As you move along the Traction Gap, the focal point of these four topics changes, while the key inflection point remains the same — the importance of building a product that customers will willingly buy.

Simultaneously, you must develop systems that reduce the friction involved in acquiring those customers. This helps raise the capital to scale those systems accordingly. And that in turn helps you create a product that matters to investors and customers alike.

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When Pitching Investors, Your Product Doesn’t Matter (as Much as You Think)

Ever considered upping your storytelling game? That’s actually something as important to investors as your product.
Source: By Alex Gold

This Is the Only Reliable Way to Get Valuable Investor Intros

This Is the Only Reliable Way to Get Valuable Investor Intros

Expanding your network is the only way you’ll meet the investors you need to grow your business.

If you want investment dollars for your business, you need to meet people. But that’s easier said than done, right? If you had throngs of investors filling up your inbox every day, you wouldn’t be looking for ways to round up funding.

But I have some good news. You probably already have resources in place that can help get you there. Warm introductions are the key to generating investment dollars as in many cases, investors cannot take unsolicited pitches or introductions. If you can get mutual friends to connect you with the investors on your list, you stand a better chance of getting the funding you’re seeking.

The best new tool in your funding toolbox is lead mining, which helps you get those crucial introductions. Lead mining is an organized way to help you mine your contacts to find mutual connections that can make those introductions. Using lead mining, you can close your funding round in weeks when it otherwise would have taken months.

This strategic guide will help you get started on your lead mining efforts.

Create a map

To start, you’ll need to get a grasp of your entire network. LinkedIn will likely be the best tool for this, since this is where you can easily see not only your connections, but their connections, as well. At one time, you could generate this information through LinkedIn’s InMaps, but that feature is ancient history.

One of the best third-party tools for this is Socilab, which outputs a map of your network and gives you the opportunity to see your macro groups. You can also see “nodes,” which connect your various macro groups, and “outliers,” which don’t connect to your existing networks. Don’t dismiss the outliers. Those people can be just the bridge you need to that investor that most of your network has never met.

Meet with ‘super connectors’

Look over your network and try to identify the “super connectors.” Once you’ve identified those within your network who can introduce you to the right people, it’s time to get to work. Reach out and ask for a meeting, whether it’s an offer to buy lunch or a request for a brief cup of coffee to catch up one morning.

Once you’re face to face with the person, don’t jump right in to ask for a favor. Instead, make an offer to help the other person with something. Ask questions to determine what that connection may be working on at the moment and offer to use your own resources to help.

Ask for the intro

After you’ve scratched your connection’s back, it’s time for a little return scratching. You’ll want to be subtle about this. Nobody likes to feel as though they’ve been scammed into helping. Simply mention offhandedly that you’re thinking about pitching an investor you’ve noticed they know and see what they say.

You’ll immediately be able to gauge your connection’s comfort level with your ask in that moment. That will give you the confidence to proceed. You may find that the connection initially claims he or she doesn’t know the investor all that well, only to later get a phone call that they’ve mentioned your business or handed over your contact information to the person.

Repeat the process

Once you’ve achieved this first introduction, whether it lands investment dollars or not, it’s time to move up the scale. Shoot higher with each introduction, looking for investors who stand to help move your business to the next level. If you’ve identified a dream investor, always go to that map to identify someone who can help you meet the person.

Don’t forget to continue to expand your network. This will help you grow your focus from networking groups where you can meet potential investors and business partners to simply reaching out to meet others in your community. Everyone you add on LinkedIn, whether you meet them briefly at a national conference or they’re someone you worked with years ago, has the potential to help you reach your funding goals.

Lead mining seems like a game because it is. The problem is, many people know how to play that game and, yes, they’re looking for funding, too. Don’t be afraid to be aggressive as you expand your network, since that will help you get the money you need to grow your business’s bank account.

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This Is the Only Reliable Way to Get Valuable Investor Intros

Expanding your network is the only way you’ll meet the investors you need to grow your business.
Source: By Alex Gold

How to Keep Your Company Afloat When Investors Pull Out Just Before Closing

How to Keep Your Company Afloat When Investors Pull Out Just Before Closing

If not handled correctly, this situation can be the end for your company.

It was raining harder than usual as I grabbed a tea at one of my favorite cafes in Toronto. With the pounding rain making the monochromatic design of the cafe even more imposing, I started to reflect on the past month of my career. Just about to close my company’s Series A round, I was getting all investor signatures returned and starting to see the money hit the bank. By the end of the day, I could formally close the round and move on to doing what I really wanted to do: build my business.

There was only one issue. Our co-lead investor had not returned any signatures, emails, calls or even text messages. With one week of runway left, my entire team was starting to get nervous.

Finally, after many calls and texts, the investor responded and said he could not produce the money he had committed to and signed the term sheet for. This wasn’t at all a “reflection on our business and its potential,” he said. “I just can’t raise enough capital.”

For my co-founders and me, the next month was a whirlwind of calls, investor meetings, team huddles and some begging to keep the company alive. We made it, but it was a harrowing ordeal. If you’re an entrepreneur long enough, you most likely will experience this yourself. Here’s what you should do if you ever run headlong into this situation.

Engage in scenario planning.

First things first. Huddle with your team, and engage in a series of scenario-planning sessions. Map out and plan the results of a “worst possible” outcome and a series of other eventualities so you at least have an idea of what may happen — including having to shut down completely.

At the very least, devise a strategy that takes into account what the office needs will consist of as it contends with a decreasing amount of money in the near term. You’re going to be searching for more funding as well as making cutbacks (more on that in a minute). In the meantime, you must have a plan in place for your strategic ops moving forward.

The starting point for your scenario planning is timing. How much time do you have before the cash is gone? If you have a small team and only three weeks before you think you can ship a completed product and get paid, you may be able to pull it all off with minimal funds — and fuss.

Ensure all other investors are still on board.

Once you know what scenarios you can realistically count on, start calling all other investors immediately. The goal here is to ensure that every other investor is still on board with you. Do they believe in your business? Do they trust that you can raise more capital to cover the unexpected shortfall? Do they know another individual or company that would like to invest in your company?

This is perhaps the most critical step, as one investor pulling out — even for reasons that have nothing to do with the promise of the business — can cause a cascading effect that leads to others pulling out.

Calling and having this conversation with investors isn’t an easy step to take. You’ve most likely convinced these folks of the virtue and efficacy of your business model or product. You’ve sold them on where you hope to take the company in the coming years. As tough as it may be to keep some of the investors on board, it’s only the first part. Now it’s time to double down, and get them to invest even more.

Get other investors to make up the shortfall and hit the road.

Since you’ve probably told other investors about the shortfall, give them the opportunity to make up the difference. It is likely that many will — and possibly even be happy for a bigger piece of the pie.

Use every tool in your arsenal to do this convincing since time is critical at this point. Your arsenal could include discounts, super pro-rata rights, rights of liquidation, changing stock classes, and even board observer or board seats. With many suggestions and strategic interventions in mind, go out and immediately hit the road to get other investors in the round. Offer the same preferential terms to each of them. Go after these individuals as if this is the very first time you have done this for this particular round.

Be open to accepting a series of new business milestones from an investor offering a cash-infusion. Work with them candidly to identify those specific milestones as well as the money you receive upon reaching them. Once that’s been solidified, take a hard look at what needs to be done to get those milestones accomplished and then make visible the steps you will execute to make this happen.

Make immediate changes where appropriate.

Here’s the stretching part that may hurt the most. Don’t wait to make cuts in costs wherever you can. Cut founder salaries. Cut all expenses to as close to zero as possible. Put a hold on all accounts payable. Ensure that very little cash leaves the company — especially if you have very little runway left.

There’s an important point to make here about product. Your most vital adjustment may be to whatever you’re shipping. I strongly recommend limiting — at least for the time being — the set of features you’re offering with your service. Now is the time to scale back to the minimum viable product (MVP) and push forward from there. It is possible for the bells and whistles to wait until you’ve proven there’s enough demand.

Be open, honest and constructive with your employees.

While all entrepreneurs want to portray an image of ambitious success to their colleagues, in these situations honesty goes a long way. Be open and honest with employees about the situation, and be careful to explain to them the very real risk facing the company. You will absolutely be amazed at what your employees will do for you if you have treated them well and been honest with them. Many companies have been saved by their employees.

Even more importantly, you should give employees something constructive to contribute. Do not doubt their very real ability to save the day here —  whether they find you an investor connection or furlough pay for extra equity or other instruments. Often, you’ll find extraordinary loyalty in times like these.

Part of what’s going to generate this level of loyalty is how well you’ve been able to make your team feel invested in the company. Have you hired people who really understand the mission of your business and believe in it themselves? If you have, you’ve given yourself an insurance policy of sorts that can get you through the toughest of times.

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How to Keep Your Company Afloat When Investors Pull Out Just Before Closing

If not handled correctly, this situation can be the end for your company.
Source: By Alex Gold

To Attract Investors, Let Them All Be the 'Last One In'

To Attract Investors, Let Them All Be the 'Last One In'

Raise smaller mini-rounds in close succession rather than one large equity round.

Driving down the Bay Area’s idyllic I-280 — for the third time — from San Francisco to Palo Alto made for a very, very long day. But it gave my cofounder and me time to marvel at the speed with which we were able to supercharge our business with new capital.

In just a few days, we had gone from struggling to close to having enough capital to make the hires and purchases we needed. More importantly, we were able to do this in smaller increments and at successively higher caps, or valuations.

As founders, this is an even bigger win because higher valuations for investors means less dilution for founders. Unknowingly, we had stumbled upon a novel strategy to raise money and lower founders’ dilution risk.

If you’re raising money for your startup, you’re likely spending way more time than you thought you would working and reworking your valuation. You may get offers from investors, but not often enough to fill out your round. Yet, through a simple technique, you can push your fundraising to the next level, resulting in a higher valuation that attracts the funding you need.

Adjusting valuation caps attracts money.

This is called a “step close,” and it requires you to raise smaller “mini rounds” in close succession, at ever-higher valuation caps, rather than one large equity round at a fixed valuation.

This gives founders more control over the timing and strategy of the close. All that needs to be executed is a simple document at signing.

The first key to this technique is employing the valuation cap of convertible notes to your advantage. Often, the value of notes are offset by a valuation cap, which places a maximum amount on converting your notes into equity. This protects investors if, for instance, your company becomes the next Facebook or Amazon out of the gate.

But founders can also use this instrument to their advantage. Companies can issue a variety of convertible notes at different valuation caps, meaning you can raise with a valuation cap of $5 million one week and then, owing to demand, raise the valuation cap to $6 million a week later. For the extremely daring, you can compress this time scale into a matter of days.

Close the door behind you.

The second key to this technique is the “last person in” principle. Very few investors, even the most daring, want to be the first “money in” at a company. The smartest investors prefer to wait until other stakeholders have validated the business before committing.

This is great if you have three-quarters of a $2 million round completed, but it’s quite daunting if you’ve only closed a tenth of that. Smart founders turn this problem on its head, turning a $2 million round into a $400,000 mini-round that’s already received more than half its commitment. Making the round smaller, you give investors the ability to be the last money in for that mini-round — the way they prefer.

Let’s see how these two techniques play out in practice. Say your goal is to close $1 million in seed funding. Because all investors want to be the last one in, close the first mini-round at $500,000 at the first valuation cap. Usually, this valuation cap is lower and offers preferential terms to the first investors. Luckily, you can close this small amount from close family and friends, making it much easier to gain traction.

Once the first mini-round is completed, raise another $500,000 at a slightly higher valuation cap, owing to increased investor demand, company traction and progress. With more traction, you’ll be able to close angels and seed funds. With a higher valuation cap, you get to preserve more equity as a founder as well. Continue this process until you reach your $1 million goal.

You can repeat this process over a period of weeks and months, depending on how many mini-rounds you need to reach your ultimate fundraising goal. In doing this, you’ll gradually drive your valuation up and have fewer dilutions. Best of all, several investors will get to achieve their goal of being the last one in.

Of course, if and when you exit, the opposite often proves to be true. Investors will all want to be the “first money out.”

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To Attract Investors, Let Them All Be the ‘Last One In’

Raise smaller mini-rounds in close succession rather than one large equity round.
Source: By Alex Gold

How to Use Psychology to Get Investors to Close When You Want Them to

How to Use Psychology to Get Investors to Close When You Want Them to

Deadlines can trigger FOMO and FOMO can trigger signing the papers.

The night before Demo Day, my co-founder and I were sitting in a drab hotel room next to the Computer History Museum in Mountain View, Calif. Deciding that the extra precious minutes to practice our three-minute pitch for the next day justified springing for the cost of the hotel, my co-founder and I carved out five hours to fine-tune a pitch that had gone through at least 20 revisions and was about to go through at least 40 more.

The only catch was that we kept getting phone calls from investors throughout the night and into the next morning.

“I know we met two weeks ago, and I was dragging my feet, but I want to commit now,” said one.

“Look, you may not have any more room, but I want to get in at this valuation right now,” said another.

This continued as my co-founder and I closed several hundred thousand dollars’ worth of capital within several hours. All the while, we kept asking, “Why?” Why, after we had met with these angels and firms for the past six weeks, were so many committing the night before Demo Day?

We had struggled for weeks with cash flow, attempting to get investors to commit when it was good for the business. We had failed repeatedly; now, they were suddenly interested — so eager to commit at 1:00 a.m.?

It turned out we were bumping up against a major third party-verified deadline.

Something neither investors nor entrepreneurs can control

The third party-verified deadline is one of the easiest ways to get investors to close on your schedule. Essentially, it’s an event-, holiday- or calendar-based function that the entrepreneurs themselves cannot control but must adhere to for business reasons.

This deadline is a literal “line in the sand” that can help you force a close at a specific valuation because investors will know you cannot give them more time or make extensions.

After our Demo Day presentation, the company’s valuation was going up by more than 40 percent. Many investors waited until the last possible minute to get in because they knew we couldn’t extend the deadline set by our accelerator program.

Conversely, it’s been my experience that if we had just told investors our closing deadline was at the end of the week or month — arbitrarily set by us — they would continue to drag their feet because we’d set the deadline.

How to create your own third party-verified deadline

Closing investors on your timeline is a critical skill for any entrepreneur. After all, as founder, you know what’s best for your business and have dedicated plans for hiring, expansion and cash flow that require capital commitments at specific junctures.

Unfortunately, many investors don’t think that way. Their currency is time. The more time they have to assess the business and ask the opinions of potential customers, partners and other investors, the more power they have in terms of doing their due diligence and driving a better deal.

And while not everyone has an accelerator program-sponsored Demo Day to turn the tide, there are some key ways you can create your own third party-verified deadline to turn the tables and close investors when it matters most to your business.

Step 1: Create FOMO by stacking meetings.

The first step is to create investor FOMO –fear of missing out — by planning to engage as many investors as possible in a short period of time. Rather than meet with a handful of investors in the weeks and months before you wish to close, set a hard timeline to meet with as many as possible in the two weeks before you wish to close.

Investors gossip more than Regina George in “Mean Girls.” By stacking meetings, you’re more likely to be at the top of investors’ minds as they circle like sharks.

Step 2: Pick a third party-verified date.

Once you have your meetings planned, pick a date set by a third party. No Demo Day? No problem!

A tax filing deadline works just fine because it’s often the case that a company may not be able to accept capital after that date has passed. National holidays also work extremely well.

Additionally, the last day of the year is also a good option. Once you have your date, tell this to investors — and stick to it.

Step 3: Gamify with an incentive.

To get investors to close on your timeline, they need to be provided an incentive that’s at immediate risk of loss.

Operating on the concept of loss prevention, investors will often accelerate their exposure and their review of your business to come to a decision much faster than normal. Good examples of this include a lower or more attractive valuation that’s at immediate risk of increase or the hiring of critical staff.

Remember, the third party-verified deadline only works if the date and time are set by a third party — not you. There are natural and often convenient real-world cutoff points that you can leverage simply by integrating them into your planning. Don’t waste your time by creating your own deadlines that investors have no good reason to follow.

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How to Use Psychology to Get Investors to Close When You Want Them to

Deadlines can trigger FOMO and FOMO can trigger signing the papers.
Source: By Alex Gold