I read an interesting blog post recently titled, Why Early-Stage VCs Should Be Careful About Intros from Bankers (update: he has since back peddled on the title). The author, Mark Suster, posits that entrepreneurs should carry the full weight of executing a successful capital raise and steer clear of “bankers.” Below are a few key issues that came out of the article.
“Bankers” are known to fight hard for their clients. Mark notes the typical, “We’re expecting 3 other offers, so move fast” and “You’ll have to top “x” price to win this deal” can be annoying to investors. It’s true that bankers have access to various capital sources – hedge funds, family offices, etc. – and will use this as a bargaining chip for entrepreneurs. This is a good thing.
One key issue that was not mentioned in the article, is the one sided valuation. When a “banker” type is not involved, the investor has full control over the valuation. An investor could tell an entrepreneur that their company is worth only a fraction of its true value and the entrepreneur has no way of knowing if it is or isn’t. This brings me to one of the most important reasons to have a “banker” type on your team. A “banker” will pull the data you need to back up a healthy valuation. Most early-stage entrepreneurs do not have time or money to research acquisitions and financing rounds to pull together valuation data.
Another point that Mark makes:
“And given how easy it is to meet VCs through introductions I also wonder what’s wrong with your startup teams that given the unprecedented amount of transparency and access now in our industry – why they chose to hire a banker.”
I agree, wholeheartedly, that it is easy for entrepreneurs to meet investors these days. If an entrepreneur is not willing to do any of the work needed to find investors, this is a huge read flag. Any entrepreneur who expects to hand off 100% of the process to a “banker” is not a true entrepreneur. A true entrepreneur is willing to do everything they can to get the deal done, yet smart enough to get assistance to carry the load.
How to Find Investors breaks down the process of finding investors. If an entrepreneur wants to raise money fast, they should be willing to network to ensure that they are casting the widest net possible. When an entrepreneur believes passionately in his or her vision and shares it with their network, they will attract the right investors.
The Rock Star you need to recruit is you.
There is nothing wrong with recruiting a “banker” type to help you research the market, build a financial model, defend your valuation, and assist you with your investor selection and investor pitch. But in the end, the investor is evaluating you as a person. Can you lead your team? Do you have conviction in your ideas while remaining open to new ideas? Do you enthusiastically accept criticism and view it as an opportunity to learn and grow? If you answered yes to all of these questions, you are the Rock Star that you need.
Are you raising capital and hitting a brick wall? Leave a comment below or send me a tweet for feedback on how you can fine tune your approach.
The number one reason brilliant companies with stellar products and services fail is that they run out of money. They have rousing press. They have fervent customer acceptance. They revel in month-over-month increases in traffic and revenue. And they have no idea what is influencing their bottom line.
The greatest challenge in building a company is determining where to focus our valuable resources – time, energy, and capital.
Let’s look at four basic metrics that will help us gain control of our bottom line and in turn help us make money: customer acquisition costs, value of customers, viral coefficient, and DAU.
Customer Acquisition Costs and Value of Customers
Macrohard Software just completed a new campaign, which set them back $30,000. But they are not worried because the campaign yielded 100 new customers, who have each signed up to pay $10 per month to use their software.
Was this the most effective use of their capital? The customer acquisition cost was $300 per user. The value of the customer is $120 per year. This means it will take over 2 years to recoup the $300 they spent.
Clearly, this campaign was not as effective as it could have been. When we understand the true cost of each customer and the real value they will yield, we will have greater visibility into our bottom line.
Viral Coefficient
OliOrange designs yoga wear for the most discerning yoginis. They’ve enjoyed robust sales online and are ready to take their experience into the physical world. Knowing that a retail build out is expensive, they set out to gather data to ascertain the most lucrative location. They emailed 100 promotional “refer a friend” codes to each of their two largest markets – Brooklyn, NY and Corte Madera, CA – and analyzed the results:
The 100 emails sent to Brooklyn, NY customers were zealously distributed, yielding 100 new customer purchases online (a viral coefficient of 1). The 100 codes sent to Corte Madera, CA barely saw the light of day, yielding 50 new customer purchases online (a viral coefficient of .5).
OliOrange set up shop in Brooklyn, NY knowing that their Brooklyn, NY customers were more passionate about their brand.
Spending money on less than enthusiastic customer segments deteriorates our bottom line. When we understand where our loyal customers are, we can invest our resources appropriately, enhancing our bottom line.
DAU
Live Forever is a popular site providing daily tips to help users live longer, happier lives. Unfortunately, as they move into their third year of operations, they are still not able to breakeven, as revenue fails to cover the expenses of running their site.
They monitor their traffic and are pleased with the general increase in the number of people who come to their site. However, despite their strong traffic they have never been able to build a cohesive community, which negatively affects their ad revenue. They investigated their daily active users (DAU) and monthly active users (MAU) and found the following:
Their daily active users were 1 million, yet their monthly active users were a staggering 10 million. Only 10% of their users visit the site on a daily basis, which is paltry considering Live Forever is a site that provides daily tips.
They studied sites that enjoyed 50% DAU/MAU rates, such as Twitter and Facebook, and revamped their structure and content to provoke daily viewership. Since their revamp, they’ve been able to increase their monthly ad revenue by 40%, as their viewership has galvanized into a cohesive, active community. This increase in revenue has helped them to achieve profitability.
If we don’t know what is wrong, we can’t fix it. When we monitor our performance based on relevant metrics and compare our findings against our peers, we can enhance the user’s experience and in turn enhance profitability.
In summary, reviewing a few basic metrics can help us gain control of our bottom line and make money. When we understand the true value of our customers, we don’t overspend on acquiring low value customers. The ability to hone in on our most enthusiastic customers allows us to funnel our resources into the most lucrative customer segments. When we measure and benchmark our retention to industry leaders we learn from their success and reap the rewards.
I’d love to learn how you are making money by utilizing metrics. Leave a comment below.
Use code SPRING13 to take my Udemy online course, Finance for Startups, for $79 (originally $99).
A winner is a loser who was relentless in his or her pursuit of success.
Life is hard. 80% of companies started today will fail. As entrepreneurs, we must constantly arm ourselves with the tools needed to maintain our sanity and thrive. We must constantly remind ourselves that the darkest hour is just before the dawn. We must think like a winner when we feel like a loser.
When We Think Like a Winner We See The Opportunity, Not the Obstacle.
A winner prepares his or her mind and body for success:
Meditate – Thoughts create actions, actions create reality. Begin each morning focused on gratitude for what you currently have and visualize the world as you would like to see it. Winners are grateful, not resentful. Winners pour their energy into the good in their life and visualize all the possibilities the world could potentially offer.
Tip: Meditate for (at least) 5 minutes every morning or whenever you need a mental reset.
Connect – We become the people we spend the most time with, so select your circle carefully. Surround yourself with inspiring people. Kindly eliminate negative people from your life.
Tip: Build a circle of people who inspire you to be your best and provide a platform for you to honestly express your fears and concerns about life.
Exercise – Exercise helps to clear the mind and stimulate creativity. If you are stuck on a difficult problem, take a walk. New ideas will flow through your mind, your energy level will increase and you will be more productive when you get back to work.
Tip: Find time to exercise, whether it is walking or biking to work or visiting the gym during lunch or playing sports in the evening.
Laugh – Laughter is proven to decrease stress and increase your immune system. Try this right now: smile. A smile turns into a laugh. A laugh distresses your mind and energizes your body. In fact, a doctor in India, Dr. Madan Kataria, created laughter yoga to combine two powerful tools – laughter and stretching – and people around the world have incorporated his approach.
Tip: The next time you are feeling tied down to your computer, take a second to read Buzzfeed and stretch.
Eat – Food can give us energy or take it away. The opposite of a food coma is a well-fed, active mind. Develop an eating plan based on foods that stimulate your body and mind. Fruits, vegetables, nuts, legumes, whole grain, and water are a good start. Reduce or eliminate; sugar, alcohol, fried and processed food.
Tip: Utilize free tools, such as MyFitnessPal, to analysis your food intake.
Check Yourself Before You Wreck Yourself
Stress, depression, and anxiety are normal parts of life. When handled correctly, they are harmless. If left untreated, they can lead to self-destructive behavior including substance abuse and suicide.
According to a study completed by the Substance Abuse and Mental Health Service Administration in 2004, approximately 10% of Americans were dependent on alcohol and/or drugs. Nearly a decade later this problem persists as people turn to prescription drugs and alcohol to solve their problems, leading to an increase in drug overdoses and alcohol related deaths.
The Ugly Truth
The World Health Organization conducted a study in 2009, concluding that the current average world suicide rate was 10.07 per 100,000 people, while the US rate surpassed this rate with 11.10 per 100,000 people. To put this in perspective; Peru held the lowest rate at .85 and Belarus claimed the highest rate at 36.8. An elementary understanding of each culture makes the contrast crystal clear. Existing in a system with excessive stress and limited resources leads many to deep despair.
If you’re feeling stuck, please know that you are not alone. It is natural to feel overwhelmed while you are building a company. You are not the first person to feel this way.
• There are 20 failed suicide attempts for each successful attempt.
• Every 40 seconds somebody dies by suicide.
• Worldwide suicide rates increased by 60% in last 45 years.
There are several organizations that can guide you through a rough patch. I’ve listed the most well known below. Feel free to add any I have missed in the comments.
While advising entrepreneurs over the past six years, I observed distinct patterns amongst insanely successful entrepreneurs. I observed that those who experienced the most dramatic trials and tribulations in their formative years, were the best suited for managing chaos as CEOs. How can this be?
It is logical that a lifestyle of self-parenting, living with less and dealing with severe disappointment would yield an adult who is able to handle the, often difficult, role of building a company.
Below are the most common traits I observed:
Resourcefulness
If you were often required to prepare your own meals, organize your own activities or wash your own clothing, you were preparing yourself to become an entrepreneur.
When building a company, we are often attempting to do much with very little. We may start with a co-founder and a few employees, but we are most definitely running with a deficit in our skill set. This requires us to be able to figure out things on our own and wear multiple hats.
I often see this trait in entrepreneurs who craft brilliant, inexpensive customer acquisition campaigns by cold calling, asking for favors and networking their way in front of their target audience. They don’t need $100,000 for a CMO. They have a million dollar attitude. Simply put, they get it done with minimal resources.
Intellectual Curiosity
If you were raised in sub par conditions, chances are that your education did not come via expensive boarding schools and private tutors. If you had to trek 5 miles to the public library to enrich your mind, you were preparing yourself to become an entrepreneur.
Entrepreneurs who are innovating new technology or products will not have all the information they need at their fingertips. They will need to be comfortable aggressively seeking information. If education is the key to prosperity, a healthy dose of intellectual curiosity is the fuel needed to prosper.
I often see this trait in entrepreneurs who are able to extract knowledge through self-constructed data. If the information they need does not exist, they create it.
Faith
If you were forced to overcome difficult situations in your formative years, and emerged stronger, you were preparing yourself to become an entrepreneur.
As entrepreneurs we need to be well equipped to handle the ups and down and uncertainty of building a company. We need to remain calm during difficult times and trust that we will find the answer.
I often see this trait in entrepreneurs who have been trumped by a competitor, yet fail to see it as the end of the road. In Only the Paranoid Survive, Andy Grove eloquently calls Intel’s failures an inflection point. Of course, it is easy to be optimistic when you have already won some heavy battles at an early age. By the age of 20, Andy Grove overcame a near fatal encounter with scarlet fever, escaped a concentration camp and fled a Communist regime.
The most common traits of an insanely successful entrepreneur can be summed up in two words: battle tested.
“Here’s to the crazy ones, the misfits, the rebels, the troublemakers, the round pegs in the square holes… the ones who see things differently — they’re not fond of rules. You can quote them, disagree with them, glorify or vilify them, but the only thing you can’t do is ignore them because they change things… they push the human race forward, and while some may see them as the crazy ones, we see genius, because the ones who are crazy enough to think that they can change the world, are the ones who do.” Steve Jobs
Did I miss a trait? Let me know what traits you’ve observed in insanely successful entrepreneurs.
Venture capital investing decreased by approximately 30% from 2011 to 2012.
This left many companies unable to secure funding. So, where do companies go when VCs say no?
We all know about crowd funding, but there are several sources of capital that are rarely discussed: revenue-based loans and asset-based loans. Both types of loans are similar to venture capital in that they work best with companies that have demonstrated potential for strong future growth.
Revenue-based Loans
Revenue-based loans have been around for decades, under the name royalty-based loans. Recently, this type of capital was reintroduced through Lighter Capital, a fund run by serial entrepreneur Andy Sack.
Revenue-based loans work well for companies that have solid revenue and healthy margins, as the loan is repaid as a percentage of future revenue. Unlike a bank loan, the revenue-based loan sets the monthly payment as a percentage of monthly revenue. This is ideal for companies who may not have smooth revenue streams. If they make zero revenue in any given month, their monthly payment is zero.
Arctaris Income Fund offers a hybrid version of the revenue-based loan in addition to the standard revenue-based loan. Companies are able to pay monthly payments of principal and interest, plus a small royalty on revenue.
Asset-based Loans
Asset-based loans have also been around for decades and have a wide variety of offerings. The one thing all asset-based loans have in common is the underlying need for collateral (read: assets).
The most commonly used asset-based loan is factoring, which is the exchange of invoices to allow for better cash flow. For example, if you manufacture clothing but need capital to produce the line, you may be a candidate for factoring.
Rosenthal and Rosenthal is a commonly used firm in the fashion industry. They purchase invoices from customers who need capital to manufacture merchandise that has already been ordered and invoiced. Once the companies deliver the merchandise and receive payment from their client, they repay their loan.
Of course, there are fees involved. A revenue-based loan ranges from 20% to 40% per annum and an asset-based loan ranges from 2% to 10% of the invoice amount. These fees may seem high, but keep in mind that you have not diluted your company’s equity as you would have by giving equity to a venture capital fund. Most companies use revenue-based and asset-based loans as a short term financing strategy. It allows them to grow their companies without diluting or giving away control of the company.
Have you used either source of capital? Let me know in the comments.
I recently created a workbook and spreadsheet tutorial titled, Master the Finance Game: A Guide to Building Financial Models, Valuing Companies, and Raising the Right Type of Capital, which focuses on selecting the right type of capital. You can read more about it at www.atelieradvisors.com/growth
I read an interesting blog post recently titled, Why Early-Stage VCs Should Be Careful About Intros from Bankers (update: he has since back peddled on the title). The author, Mark Suster, posits that entrepreneurs should carry the full weight of executing a successful capital raise and steer clear of “bankers.” Below are a few key issues that came out of the article.