startup textbook

1-Read-A-Day: what I learned running a newsletter, October edition

Every month, I share what I’ve learned running the 1-Read-A-Day newsletter. Here’s the first month.

How well is it doing?

Subscribers: 230 (only 10 new subs since September)
Open rate: 22.6%
Click rate: 2.5%
Most opened email: Lesson 5, Making Yourself a CEO by Ben Horowitz
Most clicked email: Lesson 39, How Mint beat Wesabe by Noah Kagan

What did I learn in October?

Readers were quiet this month. Several commented that they enjoyed the 10-question quiz after Lesson 50
I recorded three short audio summaries for Lessons 1, 2, and 3. Just experimentin’. They’re around a minute each. You can hear them by clicking the big blue button near the top
I published another 101, Startup Mistakes and Failures. 27 great links featuring Max Skibinsky, Siqi Chen, Derek Sivers, and more
I wish there was an easy, effective way to convert emails into blog posts. There are plugins that convert RSS feeds into emails, but I can’t find a good plugin to do the opposite. With email newsletters growing in popularity, I hope this problem is solved soon
I wish Mailchimp allowed me to better manage autoresponder emails in bulk. Right now, if I make a design change to one Lesson, I need to manually repeat that change more than 50 times!

What’s coming up

More 101s: Hiring, Product, and Stories
Once I hit 100 lessons, I’ll create a draft Startup Textbook (a well-designed PDF file featuring the 101s and the summaries). Hope we’ll be there by December
I haven’t marketed the newsletter (beyond blog posts and tweets), but subscribers are not growing (5% since September). I’ve been unwilling to make a big push, and I’m not sure why (perhaps I don’t think it’s good enough?)

Thanks to all subscribers for your feedback. It’s been a pleasure to do this. Here’s to showing up and getting to work. Cheers!

PS. If you run an email newsletter, I’d love to hear what you’re doing and what you’ve learned

1-Read-A-Day: what I learned running a newsletter, September edition

Every month, I share stats and learnings on the 1-Read-A-Day newsletter. Here’s the launch post.

How well is it doing?

Subscribers: 220 (last month: 161)
Open rate: 22.9% (22.8%)
Click rate: 2.6% (2.2%)

Thanks to Kale’s feature, I got 27 signups in a single day. By far the largest jump since the July launch. I highly recommend subscribing to his Hacker Newsletter and also enjoy his Wayback Letter, a nice way to re-surface classic content that has disappeared from the interwebs.

What did I learn in September?

1. Per Tommy’s advice, I customized the Gmail preview snippet.

Open rates have increased, but it’s correlation, not causation. The change makes me feel better, though.

To customize the snippet and not harm the email’s readability, I explored several options but went with this one: the text snippet is placed it at the top of each email, then the font size is set to 1 and font color to white, so it’s invisible to readers.

2. Readers complained they couldn’t distinguish direct quotes from my color commentary. So I added a quote symbol inside each yellow box. This has received positive feedback, but there is a downside: before, each email was image free and did not require you to click “Display images below” (if you’re using Gmail) to load the quote-symbol-image. Another lesson: product “improvements” are often double-edged swords

3. Quizzes are the most complimented feature, so I added more questions to each quiz. I will also have a big, 10-question quiz after Lesson 50. I’m even thinking of launching startup quizzes as a separate project. “test your startup IQ” sort of thing

4. There’s a tension between esoteric and popular content. Well-read startup folks appreciate the esoteric content, but it’s often esoteric for a reason (niche appeal, out-of-date, too technical). However, I do agree that I’ve relied heavily on popular content, so going forward, I will feature more esoteric/lesser-known articles and bloggers (such as this thoughtful essay from Max)

What’s coming up – niche email courses and audio lessons

My goal was 50 lessons before I began to widely market the newsletter and release topic/problem-specific email courses (eg, 20 email lessons on hiring engineers, or 35 email lessons on raising a VC round). I’m on lesson 50 (congrats if you’ve read all of them), so these are coming soon.

I’m also planning to record 60-second podcasts for each lesson, for those who enjoy audio learning and have time to kill on the daily commute or while at the gym.

Thanks to all my subscribers for your participation and feedback. Keep it coming, it’s been a pleasure to do this. Here’s to showing up and getting to work. Cheers!

PS. If you run an email newsletter, I’d love to hear what you’ve learned, what works, and what doesn’t.

Startup CEOs 101: The best articles, blog posts, and Quora threads

For this 101, I focused on what it takes to be a good startup CEO. Topics touched upon, but not covered in-depth, include cofounder relationships and day-to-day operations. Both will be addressed in future 101s.

“A CEO does only three things. Sets the overall vision and strategy of the company and communicates it to all stakeholders. Recruits, hires, and retains the very best talent for the company. Makes sure there is always enough cash in the bank.” – A VC

Here’s the previous 101 on seed fundraising (updated with new resources courtesy of you guys!!). Here are all of them.

I don't do this for the money, but donations certainly help. Use Venmo or Paypal. Thanks and enjoy!

PS. Please send me links. Please make them free and educational.

PPS. If you want a daily email recommending, and summarizing, a great startup article, subscribe to 1-Read-A-Day.

* * * * *

Startup CEOs 101: Common questions

Total links: 46

Question 1: What are the qualities of a good startup CEO?
Question 2: What are common startup CEO mistakes?
Question 3: How does a startup CEO manage his team?
Question 4: What should a startup CEO know about operations and day-to-day responsibilities?
Question 5: How does a startup CEO create and maintain the right strategy, vision, and mission?
Question 6: How does a startup CEO build the right culture and minimize politics?
Question 7: Stories and advice from the front lines

Question 1: What are the qualities of a good startup CEO?

12 Things Good Bosses Believe by Robert Sutton (HBS)

My job is to serve as a human shield, to protect my people from external intrusions, distractions, and idiocy of every stripe — and to avoid imposing my own idiocy on them as well.

14 Ways To Be A Great CEO by Jason Baptiste (Onswipe founder)

You will be inundated with a list of requests from potential partners, investors, employees, and more. They will all sound absolutely wonderful. As you grow, you will also have the resources to execute more of them. Don’t. It’s easy to say yes, but so very hard to say no. By having an uncanny ability to say no, you can keep your company on track with the large vision you maintain.

Everything is my fault by Derek Sivers (CD Baby Founder)

But to decide it’s your fault feels amazing! Now you weren’t wronged. They were just playing their part in the situation you created. They’re just delivering the punch-line to the joke you set up.

Founder as victim, Founder as God by Peter Thiel (Paypal CEO) and Blake Masters (Judicata cofounder)

Sean Parker might be the paradigmatic example of the extreme founder figure. There was a rise, fall, rise, fall, and then a rise again. His experience in founding multiple things has been a pastiche of extremes. He didn’t go to college. Maybe he didn’t even finish high school. He was involved in various underground hacking circles in ‘90s. He did Napster as teenager. That had a crazy up-down arc to it.

How Andreessen Horowitz Evaluates CEOs by Ben Horowitz (a16z)

The CEO doesn’t have to be the creator of the vision. Nor does she have to be the creator of the story. But she must be the keeper of the vision and the story. As such, the CEO ensures that the company story is clear and compelling.

How to Convince Investors by Paul Graham (YC)

So here’s the recipe for impressing investors when you’re not already good at seeming formidable:
1. Make something worth investing in.
2. Understand why it’s worth investing in.
3. Explain that clearly to investors.

What A CEO Does (continued) by Matt Blumberg (Return Path founder)

Run great meetings. Meetings are a company’s most expensive endeavors. 10 people around a table for an hour is a lot of salary expense! Make sure your meetings are as short as possible, as actionable as possible, and as interesting as possible.

Here’s a meaty review of Matt’s Startup CEO book.

What separates the top 10% of startup CEOs from the rest? by Robert Scoble and others on Quora

Listens and acts. Many CEOs want to tell you what they are doing, but the best ones listen to feedback, and, even, do something with that feedback. My favorites even give credit back. Mike McCue, CEO of Flipboard, tells audiences that I was responsible for a couple of key features.

What We Look for in Founders by Paul Graham (YC)

Though the most successful founders are usually good people, they tend to have a piratical gleam in their eye. They’re not Goody Two-Shoes type good. Morally, they care about getting the big questions right, but not about observing proprieties. That’s why I’d use the word naughty rather than evil. They delight in breaking rules, but not rules that matter.

Why We Prefer Founding CEOs by Ben Horowitz (a16z)

Professional CEOs are effective at maximizing, but not finding, product cycles. Conversely, founding CEOs are excellent at finding, but not maximizing, product cycles. Our experience shows—and the data supports—that teaching a founding CEO how to maximize the product cycle is easier than teaching the professional CEO how to find the new product cycle.

Jump back to the ToC

Question 2: What are common startup CEO mistakes?

The 18 Mistakes That Kill Startups by Paul Graham (YC)

Starting a startup is too hard for one person. Even if you could do all the work yourself, you need colleagues to brainstorm with, to talk you out of stupid decisions, and to cheer you up when things go wrong.

I wrote a brief summary of these 18 mistakes.

Avoid Decision by Indecision by Mark Suster (Upfront Ventures)

To me the sin is having the decision implicitly made for you. The weakness is not having conviction. And as I stated previously in this post, decisiveness is one of the most important characteristics of an entrepreneur. You won’t always be right. But if you’re right 70% of the time and correct when you make mistakes you’ll always be better off making the early calls.

Shared Command by Ben Horowitz (a16z)

Shared command always seems really attractive to the people at the top of the organization like the CEO and the board: “we have two world-class people, this gives us the best of both worlds! We shouldn’t get caught up in the conventions of years past. We’re all adults. We can get along.” It looks much less attractive to those who do all the work in the organization. To them it looks more like frustration, chaos, and delay.

Treating the Dysfunctional CEO by Scott Weiss (a16z)

Some of the most dysfunctional organizations I’ve observed have evolved from dealing with a leader’s idiosyncrasies: He’s stereotypically passive aggressive, erratic, a bully, or plays favorites. Whatever the weird behavior, it drives massive turmoil as the company adapts a workaround to the “Emperor’s New Clothes” syndrome.

Why Founders Fail: The Product CEO Paradox by Ben Horowitz (a16z)

And then he ran smack into the Product CEO Paradox: The only thing that will wreck a company faster than the product CEO being highly engaged in the product is the product CEO disengaging from the product.

Jump back to the ToC

Question 3: How should a startup CEO manage his team?

Delegating or micromanaging, threading the needle by Steven Sinofsky (a16z)

Share experiences, don’t instruct. As the work progresses there’s a chance that the manager will see a pattern or similar situation arise. There’s a good chance the way that experience is communicated can come across as either “sage sharing of experiences” or “more micromanaging”. If there are experiences to share then share the story and allow the learning to take place by allegory and not turn the learning into “just do these steps”.

Enforcing Your Top Priorities by Ian Small (Tokbox CEO)

To develop the list I think about the company’s calendar, milestones and key activities over the next three to four months, and send a draft list of the top seven priorities to the management team. If they agree with the list and order, we just drop the bottom two items. If they don’t, we hash it through until we agree.

Fight Like You’re Right, Listen Like You’re Wrong and Other Keys to Great Management by Robert Sutton (Stanford Engineering Professor)

He points to IDEO founder David Kelley as a prime example of a light-touch manager. “David is a master of what I call ‘management by walking out of the room.’” He might convene a meeting, but if things are going well and the conversation is productive, he’ll eventually walk out. “He knows the fact that he is an authority figure can mess things up. The discussion can be more creative without him there.”

Here’s the email summary from 1-Read-A-Day.

Part 9: How to hire a professional CEO by Marc Andreessen (a16z)

Don’t.

If you don’t have anyone on your founding team who is capable of being CEO, then sell your company — now.

If, Why, and How Founders Should Hire a “Professional” CEO by Reid Hoffman (Greylock)

Many of the greatest success stories of the internet era involve founder/professional CEO partnerships. During the dot com era, Yahoo!’s Tim Koogle helped build Jerry Yang and Dave Filo’s startup into the world’s most valuable internet company. Meanwhile, Meg Whitman helped Pierre Omidyar’s eBay become the second most powerful ecommerce company in the world (trailing only Amazon). The Web 2.0 era provides successful examples like Joe Kennedy and Tim Westergren at Pandora, and the current social era provides even more, including Dick Costolo at Twitter and Tony Zingale and Dave Hersh at Jive.

Here’s the email summary from 1-Read-A-Day!

Line management by numbers by Cennydd Bowles (Twitter design lead)

Score your employee out of ten for:
-Current motivation
-Experience in the role
-Skills

Then look at the lowest number of the three.
0-3: adopt a tight, management-heavy approach until performance picks up.
4-7: take a supervisory, mentoring approach.
8-10: occasional coaching is all you’ll need. These are the good times.

Losing The Team by Fred Wilson (Union Square Ventures)

If I think about the times I have had to remove a CEO, by far the most common reason was the loss of confidence of the team in the CEO. You get the call from one of the senior team members. They tell you that they are going to leave and so is everyone else on the senior team unless you do something about the leader.

Making Yourself a CEO by Ben Horowitz (a16z)

A popular and sometimes effective technique for feedback beginners is something that experienced managers call The Shit Sandwich. The technique is marvelously described in the classic management text, The One Minute Manager. The basic idea is that people open up to feedback far more if you start by complimenting them (slice of bread #1), then you give them the difficult message (the shit), then wrap up by reminding them how much you value their strengths (slice of bread #2).

Here’s the email summary from 1-Read-A-Day.

Jump back to the ToC

Question 4: What should a startup CEO know about operations and day-to-day responsibilities?

13 Things You Must Do Every Week As A Startup CEO by Jason Goldberg (Fab founder)

Exercise. I can’t stress enough the importance of this. Make yourself go to the gym at least 4 days per week, preferably 5 or 6. Working out gives you the energy and stamina to solve complex problems. Being CEO is incredibly mentally challenging. Use the gym as a way to stay fresh and to clear your head.

As a startup CEO, what is your favorite productivity hack? by Dustin Moskovitz (Facebook, Asana) and others on Quora

One of my favorite hacks is No Meeting Wednesdays, which we borrowed from Facebook. With very few exceptions, everyone’s calendar is completely clear at least one day out of the week. Whether you are Maker or a Manager (http://www.paulgraham.com/makers…), this is an invaluable tool for ensuring you have some contiguous space to do project work.

How much should a start-up CEO make? by Seth Levine (Foundry Group)

I think market (and this seems to be true whether you’re in San Francisco, New York, Boulder or somewhere else) is that companies that have raised $1M or less tend to pay their CEO between $75k and $125k (skewed very much to the low end of that scale – companies that have raised less than $500k tend to top out at $75k for CEO comp). Companies that have raised between $1M and about $2.5M tend to pay their CEOs around $125k.

How to Be Startup CEO by Ryan Allis (entrepreneur)

Be as creative as you can, offering ownership in your company in exchange for early employees’ work or for critical services like legal and accounting, or requesting deferred payment so that you can pay when you are able to. Keep your costs down, as low as possible, until your monthly revenues grow and enable you to increase your expenses. And do contract consulting work on the side if needed to have money to live on.

The CEO’s Weekly Checklist by Scott Weiss (a16z)

Shortly after our first round of funding, my co-founder, Scott Banister, turned to me and said, “I’ve heard you tell 100 different people a slightly different version of the same story. I had no idea you spend so much time selling!” He was right, I was constantly selling: soliciting investors and advisors, signing recruiters and PR firms, hiring employees, securing first customers, conducting company meetings, convincing reporters and sparring with industry analysts.

Here’s my email summary from 1-Read-A-Day.

The Entrepreneur’s Guide to Conflicting Advice by Joe Heitzeberg (entrepreneur)

This blog post isn’t about how advice is useless, or that you should go it alone. Au contraire – surround yourself with SuperMentors, advisors and investors who are aligned with your goals and who believe in you and can bring out the best in you — by applying relevant experience to your particular challenges — now and in the future.

Here’s the email summary from 1-Read-A-Day.

What Harvard Business School is Teaching This Tech Entrepreneur by Ryan Allis (entrepreneur)

One of the key “HBS takeaways” from the last few weeks for me has been that to continue to grow beyond initial success, an entrepreneurial founder CEO must change their very nature and slow down to:
1. Create effective processes for disciplined information sharing.
2. Give up as many operational roles in the company as possible.
3. Bring the senior team in early on during strategy formation.

Jump back to the ToC

Question 5: How does a startup CEO create and maintain the right strategy?

2004 Founders’ IPO Letter by Larry Page and Sergey Brin (Google founders)

Our employees, who have named themselves Googlers, are everything. Google is organized around the ability to attract and leverage the talent of exceptional technologists and business people. We have been lucky to recruit many creative, principled and hard working stars. We hope to recruit many more in the future. We will reward and treat them well.

Here’s the email summary from 1-Read-A-Day.

From Vision to Values: The Importance of Defining Your Core by Jeff Weiner (LinkedIn CEO)

Mission – Overarching objective of the organization; should be measurable, achievable, and ideally inspirational. Should not be used synonymously with a vision statement. A great mission statement is brief, easy to remember, minimizes the use of the word “and” (to prevent a laundry list), shouldn’t require follow-up clarifying questions when first presented, and ideally proves to be uniquely identifiable to the company

Here’s the email summary from 1-Read-A-Day.

How to Analyze Your Startup Like A VC in 15 Minutes Or Less by Tom Tunguz (Redpoint)

The BMC describes the key operations of a business: the Value Proposition, the Key (Operating) Activities, Partners, Assets/Resources, Customer Relationships, Go-To-Market Channels, Customer Segments, Cost Structure and Revenue Streams.

How to build companies that matter by Eric Ries (Lean Startup author)

The Lean Startup takes agile practices and evolves them for use in a startup. The net result is a focus on experimentation and extremely rapid deployment. At IMVU, my most recent startup, we built the systems that allowed us to deploy code to customers fifty times every day. When releases are measured in minutes, not months, you can build a company culture designed to avoid the biggest waste of all: building product nobody wants.

How to Make Wealth by Paul Graham (YC)

There is a conservation law at work here: if you want to make a million dollars, you have to endure a million dollars’ worth of pain. For example, one way to make a million dollars would be to work for the Post Office your whole life, and save every penny of your salary. Imagine the stress of working for the Post Office for fifty years. In a startup you compress all this stress into three or four years.

Startup = Growth by Paul Graham (YC)

A good growth rate during YC is 5-7% a week. If you can hit 10% a week you’re doing exceptionally well. If you can only manage 1%, it’s a sign you haven’t yet figured out what you’re doing.

Here’s my email summary from 1-Read-A-Day.

Jump back to the ToC

Question 6: How does a startup CEO build the right culture and minimize politics?

Cult Creation by Steve Newcomb (Powerset founder)

The best way to prove to yourself, potential investors and to any potential future employees that you have a killer idea, is to get a number of A-level engineers to join full-time with equity-only deals.

Here’s the email summary from 1-Read-A-Day.

How to Minimize Politics in Your Company by Ben Horowitz (a16z)

The difference between managing executives and managing more junior employees can be thought of as the difference between being in a fight with someone with no training and being in a ring with a professional boxer. If you are in a fight with a regular person, then you can do natural things and they won’t get you into much trouble. For example, if you want to take a step backwards, you can pick your front foot up first. If you do this against a professional boxer, you will get your block knocked off. Professional boxers train for years to take advantage of small errors in technique. Lifting your front foot first to take a step backwards will take you slightly off balance for a split second and that’s all your opponent will need.

Here’s the email summary from 1-Read-A-Day.

What strong beliefs on culture for entrepreneurialism did Peter / Max / David have at PayPal? by Keith Rabois (Paypal, Square) and others via Quora

Extreme Focus (driven by Peter): Peter required that everyone be tasked with exactly one priority. He would refuse to discuss virtually anything else with you except what was currently assigned as your #1 initiative. Even our annual review forms in 2001 required each employee to identify their single most valuable contribution to the company.

Jump back to the ToC

Question 7: Stories and advice from the front lines

90 Things I’ve Learned From Founding 4 Technology Companies by Jason Goldberg (Fab founder)

It’s all about the product. Always has been. Always will be. The only thing that matters is how good your product is. All the rest is noise. At Fab, our virtual product is our website & apps, our physical products are the merchandise we sell, and our experience product is our operations and service. Getting all 3 parts of our product right is everything.

Here’s the short summary from 1-Read-A-Day.

All CEOs Should Be An Outside Director For One Company by Brad Feld (Foundry Capital)

Now, imagine you are a CEO of a fast growing startup. Wouldn’t it be awesome to be able to spend a small amount of your time in that same emotional and functional detachment for someone else’s company? Not only would it stretch some new muscles for you, it’d give you a much broader perspective on how “the job of a CEO” works. You might have new empathy for a CEO, which could include self-empathy (since you are also a CEO)

Among Max Levchin’s lessons learned as a young entrepreneur, which are the greatest? by Max Levchin (Paypal, Slide) on Quora

If there is any doubt about hiring a candidate for your first 5-6 positions, there is no doubt — do not.

Here’s the email summary from 1-Read-A-Day.

Entrepreneurs Who Create Value vs. Entrepreneurs Who Lock Up Value by Andy Kessler (entrepreneurship author)

Carlos Slim Helu comes to mind who briefly passed Bill Gates in 2007 and 2010 to become the richest man in the word. He controls 90% of the phone lines in Mexico and 80% of cellular customers. He didn’t invent anything. He doesn’t drive down prices. There is little innovation. And why should there be? He is milking this franchise for all it’s worth.

Entrepreneurshit. The Blog Post on What It’s Really Like. by Mark Suster (Upfront Ventures)

You have secret doubts about your co-founder. She seems depressed. And she isn’t pulling weekends anymore like you are. I know, right? Total bullshit. She’s just not as committed as she once was. I don’t think she really believes any more. If I told my VCs would they then lose interest in our next round? Would they blame me? Would they back me or think I had gone off the rails?

Here’s a related Suster post on CEO health and fitness.

Startup Advice by Sam Altman (Loopt, YC)

Hire friends and friends of friends. Go after these people like crazy to get them to join. Some other candidate sources are ok, but I always got bad results from technical recruiters.

Here’s the short summary from 1-Read-A-Day.

Swapping Drivers on this Long Road Trip Together by Rand Fishkin (Moz founder)

Sarah likes to describe the last 6 years at Moz as a road trip. I’ve been driving and she’s been in the passenger seat, navigating. But while I really loved having the wheel for most of the journey, we’re getting into terrain I don’tlove as much, and it might be time for Sarah and I to switch positions. She’ll be a different kind of driver and I’ll be a different kind of navigator, but we, the vehicle, and the passengers, will all be fine.

The Hardest Lessons for Startups to Learn by Paul Graham (YC)

Startup founders are naturally optimistic. They wouldn’t do it otherwise. But you should treat your optimism the way you’d treat the core of a nuclear reactor: as a source of power that’s also very dangerous. You have to build a shield around it, or it will fry you.

The Struggle by Ben Horowitz (a16z)

This is not checkers; this is mutherfuckin’ chess – Technology businesses tend to be extremely complex. The underlying technology moves, the competition moves, the market moves, the people move. As a result, like playing three-dimensional chess on Star Trek, there is always a move. You think you have no moves? How about taking your company public with $2M in trailing revenue and 340 employees, with a plan to do $75M in revenue the next year? I made that move. I made it in 2001, widely regarded as the worst time ever for a technology company to go public. I made it with six weeks of cash left. There is always a move.

What does it feel like to be the CEO of a start-up? by Paul DeJoe (Ecquire founder) and others on Quora

You feel guilty when you’re doing something you like doing outside of the company. Only through years of wrestling with this internal fight do you recognize how the word “balance” is an art that is just as important as any other skill set you could ever hope to have. You begin to see how valuable creativity is and that you must think differently not only to win, but to see the biggest opportunity. You recognize you get your best ideas when you’re not staring at a screen. You see immediate returns on healthy distractions.

You’re not the CEO – you’re the Fucking Janitor by Zach Bruhnke (entrepreneur)

My employees never looked at me as a boss but always as a colleague. They knew that if they didn’t pick up that broom to sweep the floor then I certainly would and that led to a much more productive work environment.

Jump back to the ToC

Seed Fundraising 101: The best articles, blog posts, and Quora threads

When I launched The Startup Textbook a month ago, I had grand visions for a beautiful textbook of the web’s best startup content.

I enjoy curating, reading, and summarizing startup content. But unfortunately, I didn’t enjoy the process of creating a textbook from scratch.

That’s why the newsletter has been going well (and is FUN to work on), but the textbook effort has languished.

So, instead of a complete textbook, I’m publishing a series of “101” posts with the best links that I’ve collected. Starting with seed fundraising, then tackling topics like culture, CEOs/leadership, legal issues, product, hiring and more.

Don’t let perfect be the enemy of the good, as Voltaire says.

So here’s the first 101, Seed Fundraising. I’ll publish a new one every few weeks, and will continually update each page since there’s always more great stuff.

Be warned: this is a LONG post so I’ve provided links to jump back-and-forth.

Bitcoin please? Donations always help. Use Venmo or Paypal. Thanks and enjoy!

Kevin

P.S. Please send me links. My asks: #1, they’re free, and #2, they’re educational (for example, a news article about a startup raising $2mm from top seed investors is relevant if it includes fundraising advice from the founders).

P.P.S. If you want a daily email recommending, and summarizing, a great startup article, subscribe to 1-Read-A-Day.

P.P.S. The second 101 is Startup CEOs. All of them are here.

* * * * *

Seed Fundraising 101: Common questions

Total links: 97!!

Question 1: Do I need to raise a seed round?
Question 2: How much should I raise?
Question 3: Will I be able to raise?
Question 4: How do I put together a great pitch deck?
Question 5: What are the different types of investors?
Question 6: What am I looking for in seed investors?
Question 7: How do I hire an entrepreneur-friendly lawyer?
Question 8: How do I meet investors (angels and VCs)?
Question 9: Should I raise from angels or VCs?
Question 10: Should I use AngelList, and what are best practices?
Question 11: Should I apply to incubators like Y Combinator or 500 Startups?
Question 12: Once I start fundraising, what is the process like?
Question 13: What advice do you have on scheduling, running, and following-up on investor meetings?
Question 14: What questions will investors ask?
Question 15: What financing terms should I know? How do I read a termsheet?
Question 16: How do I follow-up with investors?
Question 17: How do multiple fundraising rounds work?
Question 18: How do I negotiate terms like valuation cap and discount?
Question 19: Should I do reference checks?
Question 20: They said yes! How do I get money in the bank?
Question 21: Should I create a board of directors? Board of advisors?
Question 22: How do I work well with my investors?
Question 23: Should I announce that I raised a round? How do I get PR from Techcrunch, Pandodaily, and other news outlets?
Question 24: When should I raise another round?

Question 1: Do I need to raise a seed round?

Shoehorning startups into the VC model by Chris Dixon

A startup should raise venture capital (or “venture-style” angel/seed funding) only if: 1) the goal is to build a billion-dollar (valuation) company, and 2) raising millions of dollars is absolutely necessary or will significantly accelerate growth.

Here’s the email summary from 1-Read-A-Day.

Notes on raising seed financing by Chris Dixon

Best thing is to either never need to raise money or to raise money after you have a product, users, or customers. Also helps a lot if you’ve started a successful business before or came from a senior position at a successful company.

20 Questions To Ask Yourself Before Raising Money by Elad Gil

1. Why are you raising money? It is for vanity purposes or does your business really need it?
3. What are your goals as founders? How will raising money impact these goals?

Is Your Startup A Cash or Equity Business? by Elad Gil

There are, broadly speaking, 2 types of ways to build value in a business.
(a) An “equity” based business in which the stock value will grow significantly with time
(b) A “cash” based business, in which the company will generate a lot of cash on an annual basis, but the value of the stock will remain a low multiple of earnings.

The Value of Fundraising by David Hornik

The fundraising process forces you to better define and defend your business strategy…A defensible strategy is not something you can fake…No matter what the outcome, the conversation is a valuable one.

Here’s the email summary from 1-Read-A-Day.

Jump back to the ToC

Question 2: How much should I raise?

How to do seed fundraising right by Kate Endress

Put together a detailed monthly model in Excel and project your cash burn as best you can. Raise enough money to hit meaningful milestones. For my company, the seed round milestones were to take the technology risk off the table by moving from a virtual fitting prototype to a web-based product and to sell 1,000 pairs of glasses.

What’s the right amount of seed money to raise? by Chris Dixon

Short answer: enough to get your startup to an accretive milestone plus some fudge factor. “Accretive milestone” is a fancy way of saying getting your company to a point at which you can raise money at a higher valuation.

Jump back to the ToC

Question 3: Will I be able to raise?

How to Raise Venture Capital by Neil Patel

So why didn’t Crazy Egg get funded? Crazy Egg wasn’t an idea that had the potential to be sold for anywhere near 100 million dollars.

Why You Shouldn’t Raise VC by Mark Peter Davis

For medium-sized VCs, a large opportunity equates to a $1 billion addressable market; big VC funds need to believe your market is in the billions of dollars, typically $5 billion to $10 billion (or more).

High Resolution Fundraising by Paul Graham

Fundraising is an extremely momentum-based process. Hardest part is getting “anchor” investors. These are people or institutions who commit significant capital (>$100K) and are respected in the tech community or in the specific industry you are going after (e.g. successful fashion people investing in a fashion-related startup).

[…]

By far the biggest influence on investors’ opinions of a startup is the opinion of other investors. There are very, very few who simply decide for themselves. Any startup founder can tell you the most common question they hear from investors is not about the founders or the product, but “who else is investing?”

Jump back to the ToC

Question 4: How do I put together a pitch deck?

The 10/20/30 Rule of PowerPoint by Guy Kawasaki

I am evangelizing the 10/20/30 Rule of PowerPoint. It’s quite simple: a PowerPoint presentation should have ten slides, last no more than twenty minutes, and contain no font smaller than thirty points. While I’m in the venture capital business, this rule is applicable for any presentation to reach agreement: for example, raising capital, making a sale, forming a partnership, etc.

Size markets using narratives, not numbers by Chris Dixon

For early-stage companies, you should never rely on quantitative analysis to estimate market size. Venture-style startups are bets on broad, secular trends. Good VCs understand this…The only way to understand and predict large new markets is through narratives. Some popular current narratives include: people are spending more and more time online and somehow brand advertisers will find a way to effectively influence them; social link sharing is becoming an increasingly significant source of website traffic and somehow will be monetized; mobile devices are becoming powerful enough to replace laptops for most tasks and will unleash a flood of new applications and business models.

6 Tips To Get Your Startup Off The Ground And Score A Seed Round by Anthemos Georgiades

We spent 50 percent of our time in VC meetings discussing one of our 14 slides. This particular slide – in simple graphics – portrayed the uptick we’d created for clients using our alpha site. That one slide dominated every conversation and helped us pitch the end-game of where we could be in five years.

How To NOT Write A Business Plan by David Cowan

Your presentation should not exceed 10 slides. The appendix can include as many slides as you want. Nothing beats responding to some VC’s question with a slide from the appendix. Sales productivity? Here are the historical numbers. The competitor’s software? Here’s a screenshot. Most operating details will remain safely ensconced in the appendix, eliminating unnecessary friction in the presentation.

365 Days, $10 Million, 3 Rounds, 2 Companies, All With 5 Magic Slides by Tim Young

Normally, in a pitch meeting, you and the investor sit on opposite sides of the conference table. But by sharing a screen and sitting in close proximity to each other, the environment naturally becomes more comfortable and relaxed.

Here’s the email summary from 1-Read-A-Day.

How To Raise A $1M Seed Round by Sunil Rajaram

No matter how you size the market, be ready to get ripped to shreds. It goes without saying that VCs want to see a multi-billion dollar market, but how a VC reacts to your numbers could depend on what they ate for breakfast that morning.

How to do seed fundraising right by Kate Endress

Get a LOT of feedback on your investor deck from friends, advisors, and investors. Make sure it’s perfectly formatted and that you know backup details for every single number in your presentation.

How to Analyze Your Startup Like A VC in 15 Minutes Or Less by Tom Tunguz

The BMC describes the key operations of a business: the Value Proposition, the Key (Operating) Activities, Partners, Assets/Resources, Customer Relationships, Go-To-Market Channels, Customer Segments, Cost Structure and Revenue Streams.

Here’s the email summary from 1-Read-A-Day.

Jump back to the ToC

Question 5: What are the different types of investors?

A SuperAngel’s Investment Guide by Fabrice Grinda (angel investor and entrepreneur)

Jose and I have successfully been doing international idea arbitrage for 12 years in the businesses we run. We apply the same principles to many of the companies we invest in. A large portion of our investments, and our seemingly most successful investments, are localized versions of successful US concepts for Brazil and Russia.

Here’s the email summary from 1-Read-A-Day.

Notes on raising seed financing by Chris Dixon (a16z)

Types of capital: strategic angels (industry experts), non-strategic angels (not industry experts, not tech investors), tech angels, seed funds, VCs. VCs can be less valuation sensitive and have deep pockets but are sometimes buying options so come with some risks (more). Industry experts can be really nice complements to tech investors (especially in b2b companies). Non-strategic angels (rich people with no relevant expertise) might not help as much but might be more patient and ok with “lifestyle businesses. Tech angels and seed funds tend to be most valuation sensitive but can sometimes make up for it by helping in later financing rounds.

How Funding Rounds Differ: Seed, Series A, Series B, and C… by Elad Gil

Series Seed: Figuring out the product and getting to user/product fit
Series A: Scaling the product and getting to a business model. (AKA getting to true product/market fit)…you typically have figured out your product/userbase, and need capital to…

The 7 types of angel investors – what is right for your startup? by Elad Gil

1. Connectors
2. Product people
3. Tacticians & builders
4. Smart business people
5. Domain expert
6. The brand
7. The filler (aka dumb money)

How to select your angel investors by Chris Dixon

The most common mistake entrepreneurs make is to base their choice solely on the investors’ “celebrity” value (by “celebrity” I generally mean in the TechCrunch sense, not the People magazine sense). Picking celebrity angels might help you get a little more buzz when you announce the financing and a few SUL tweets, but that’s about it. A startup is a long trip — what you should care about is whether, through the ups and downs and after the buzz dies down, the investors will actually roll up their sleeves and help you.

Angel Funding Advice by Mark Suster

Quick caveats: having fewer investors (3-5) is better than many investors (10-15) and PLEASE make sure you hire a great lawyer who has experience in doing start-ups to avoid pitfalls that will make VC harder down the line.

Jump back to the ToC

Question 6: What am I looking for in seed investors?

Angel Investing Skill 2 – Domain Knowledge by Mark Suster

So many deals seem like obvious money makers. But then I talk with my partner Brian McLoughlin who has worked in the field for 20 years and he’ll run through the 10 reasons why similar companies haven’t succeeded. Not in a cynical way – he just has the domain knowledge to know what has been tried before. It’s sort of like having an Encyclopedic history book before just launching your product and seeing whether anybody uses it.

Angel Investing: Skill 3 – Relationships with VCs by Mark Suster

First Round Capital & True Ventures seem to spend as much time cultivated relationships with “second round capital” as they do entrepreneurs. Keith Rabois (mentioned in my previous posts on angel investors) is on record on GigaOm as saying how important VC backed deals are to him. Why? Because he doesn’t look to invest in quick flips. He believes that returns are derived by industry-changing companies and as an investor in LinkedIn, Yelp & YouTube (to name a few) I guess he’s got the credibility to say that.

Angel Investing 4 – Why You Need Deep Pockets to Win Big by Mark Suster

The second scenario is the one we’ve already discussed – the ability to “lean” on deals that are doing well. In the worst case you want to protect your prorata investment as much as possible (e.g. avoid being diluted). But the best investors are those that spot their best hands after the flop and find a way to increase their ownership before the turn or river.

Angel Investing – The Most Underrated Skill: Access to Buyers by Mark Suster

Imagine that you funded Larry & Sergey, Chad Hurley & Steve Chen, Mark Zuckerberg, Mark Pincus or Evan Williams. Or eBay / PayPal, Salesforce.com, Skype, etc. Imagine the kind of relationship you’d have with these folks and your ability to discuss their needs as well as your portfolio successes at which they should be looking. Or imagine that you were colleagues with any of these individuals before becoming an investor.

Raising Angel Money by Mark Suster

As an entrepreneur you should raise money from the most experienced people possible – period. If you have the opportunity to raise a small amount of money from a group of experienced investors who have a track record of helping companies get from that tricky idea stage to being a well-formed company with a good product and solid market-entry strategy I would take the money – even if it were priced.

Pick Your Angel Investors Wisely by David Hornik

It is true that money is fungible. But investors are not. The choices you make when raising seed capital can have a meaningful impact on the long-term success of your startup…Find investors with the time and inclination to help you. Find investors who will increase your chances of raising additional capital, not diminish those chances.

Jump back to the ToC

Question 7: How do I hire an entrepreneur-friendly lawyer?

Ideal first round funding terms by Chris Dixon

There is no reason you should pay more than $10K for the financing (including both sides). I personally use Gunderson and think they are great. Whoever you choose, I strongly recommend you go with a “standard” startup lawfirm (Gunderson, Wilson Sonsini, Fenwick etc). I tried going with a non-standard one once and the results were disastrous.

You Should Read Every Word of Every Legal Doc (Especially Funding Docs) by Elad Gil

Reid Hoffman was one of my company’s (Mixer Labs, acquired by Twitter) investors. One piece of advice he gave me was to read every word of every contract I signed on behalf of Mixer Labs (including the crazy ALL CAPS parts and legalese). This is one of the better pieces of advice I received.

Jump back to the ToC

Question 8: How do I meet investors (both angels and VCs)?

Notes on raising seed financing by Chris Dixon

Make sure you have good Google results (this is your first impression in tech). Have a good bio page (on your blog, linkedin and about.me) and blog/tweet to get Google juice. Get involved in your local tech community. Join meetups. Help organize events. Meet every entrepreneur and investor you can. Entrepreneurs tend to be more accessible & sympathetic and can often make warm intros to investors.

Getting Access to the Old Boys’ Club (how to approach a VC) by Mark Suster

I remember asking for advice from a law firm in 1999 (before my first fund raising exercise) the best way to approach VCs. He told me that “most VC’s will figure that if you are truly an entrepreneur you’ll find somebody that knows them, develop a relationship with that person and find a way to get them to introduce you to the VC. If you can’t do that then you’re probably not really an entrepreneur.

How to Optimize Your Startup’s Web Presence for Investors by Andy Sparks (Mattermark cofounder)

LinkedIn is also a great source for investors to track how fast your company is growing in terms of employment, so once you create a page for your company make sure you (the founders) and your employees list your startup as their current place of employment…

How To Reply to Angel Investor Intro Emails by Elad Gil

1. Move the introducer to BCC. They don’t want to be on the 15 emails it takes to schedule the meeting.
2. Put social proof up front. All these great investors are part of the round! Angela angel will want to be part of the club and invest too. It also means you are more legit than the other random companies trying to talk with the same investor.
3. If you have good traction or a key stat, explain it in 1-2 lines. This is additional proof that they need to rush to talk to you.

Investors don’t want to meet you. They wanted to be introduced to you. by Jason Freedman (42 Floors CEO)

One day, I met a prominent VC at a conference. I started my elevator pitch. But in a rare moment of candidness, he told me that he doesn’t go to conferences to meet new startups. He told me, “By the time they get here, they’re already picked over.”

Seed Startups & Fundraising by Jared Tame

The smart founders are going to identify these investors quickly by how excited they get and how decisive they are. Being more decisive will be a key indicator of how valuable an investor will be at the seed stage—even if it’s a quick pass.

Startup Advice: How Entrepeneurs Gain Credibility by David Hornik

The best way to earn credibility with investors is to have good answers to the questions you are asked. […] That doesn’t mean that you need to have all the answers. You don’t. You just need to be thoughtful when you don’t and explain 1) how you intend to get the answer, 2) what you predict the answer to be, based upon what you do know, and 3) how you expect to gain the answer over time.

Getting Peter Thiel’s Attention–and His Money by Christine Lagorio

Bannon: How about a game of blitz?
Thiel: What?
Bannon: How about a game of blitz?
Thiel: Now?
Bannon: Yeah, I have a table set up over there.
Thiel: Give me five minutes.

How to get meetings with people too busy to see you by Steve Blank

The meeting requests that now jump to the top of my list are the few, very smart entrepreneurs who say, “I’d like to have coffee to bounce an idea off of you and in exchange I’ll tell you all about what we learned about xx.”

Jump back to the ToC

Question 9: Should I raise from angels or VCs?

The problem with taking seed money from big VCs by Chris Dixon

when you take any money at all from a big VC in a seed round, you are effectively giving them an option on the next round, even though that option isn’t contractual. And, somewhat counterintuitively, the more well respected the VC is, the stronger the negative signal will be when they don’t follow on. […] Basically big VCs are spending 5% of their budget generating captive leads for their real business: investing $10M into a companies at the post-seed stage.

VC Signaling Coming Home To Roost by Elad Gil

A large number of seed rounds in the last 12-18 months have included traditional venture funds as investors. Sometimes having a VC in your seed can be super helpful. However, a number of the the companies who raised from VCs are now regretting it, as having a VC in your seed round can backfire. There are a number of ways to mitigate this signaling risk.

Financing approaches most likely to kill your company (if it is already on the edge) by Elad Gil

Your Funding Structure Today Impacts Whether You Are Middle of The Pack or Dead Tomorrow […] The line between “Middle of the pack” and “Dead” will be a fine one. One of the characteristics that may tip companies from Middle of the pack into Dead is the existing cap table/financing structure of the company.

Understanding a VC’s Seed Funding Policy is Critical by Mark Suster

4. The signaling affect is overrated. Everything you do is a signal. Investors will look at which angels you chose, whether old bosses invested, whether you were an EIR somewhere and did they invest, etc. Future investors will also look at whether your angels “re-upped” if you hit a bump in the road. VCs are just one of many signals future investors at which future investors will look. If you don’t understand the concept of “signaling” please read the blog post I wrote on Understanding VC signaling.
[…]
6. So the biggest issue for entrepreneurs IMO is not “to VC or not to VC” but rather “what chemistry do I have with my funding sources, how aligned to I feel we are on how to build a company, how much do they understand my specific opportunity and importantly what can I find out about them from referencing previous people with whom they’ve worked and do they have a well defined seed program strategy.

Jump back to the ToC

Question 10: Should I use AngelList, and what are best practices?

A PRIMER FOR FUNDRAISING ON ANGELLIST by Aaron Hall

I quickly decided that becoming a “trending” startup, or getting featured on AL, was the quickest path to increase our reach. This was the first step in the fundraising process for us. […] Next, I wanted to figure out how to get “reach”. Each Sunday, AL sends out an email to all investors promoting the top four trending companies. I knew from talking to investors that they keep an eye on the trending list to find new companies. I wanted to make sure Boatbound was one of them.

AngelList’s Big Four Benefits for Investors by Ty Danco (Vermont-based angel investor)

Either way, I often find following either senior or beginning VCs creates too low a signal to noise ratio, so I concentrate mostly on active angels I respect. There are exceptions: some micro-VCs associated with incubators (e.g., Dave McClure) work AngelList hard to promote their companies…but you need to recognize that that is part of the brand strategy for their companies and their incubators.

How we built Shyp on AngelList and raised $2.1M by Kevin Gibbon (Shyp founder)

AngelList is not only about fundraising — it is a recruiting beast! Jack Smith reached out to us after we were featured to see if he could help out in any way. Joshua and I later convinced him to join as a late co-founder. Our first employee Andrew Wyatt, who is a fucking rockstar, also reached out via AngelList.

The AngelList by Fred Wilson

I am on AngelList. I see all the deals come together. I don’t personally invest in angel deals in the web/tech space because of potential conflict with USV down the road. But even so, I find it immensely useful to see what companies are getting traction in the angel market. It’s part of my radar/early warning system.

Why I Deleted My AngelList Account by Bryce Roberts

I tend towards a more concentrated approach to seed investing where we make fewer, larger, investments and take an active role in working with the companies we fund. Frankly, I just don’t buy the notion that making an investment is akin to throwing a dart in the dark. Worse, I think its a dangerous idea to promote. The best angel and venture investors are consistently good. Think Mike Moritz, John Doerr, Jim Breyer, Fred Wilson, Peter Fenton, Danny Rimer, Reid Hoffman and the like are just exceptionally good at throwing darts in the dark? I don’t.

What’s The Real Deal With AngelList? by Mark Suster

I cannot stress enough, though, that I believe getting access to the right investors in critical and spending time getting to know who these investors are is equally critical. Far from being a waste of time, the fund-raising process introduces you to a lot of experienced entrepreneurs and VCs who will offer opinions on your business and approach. It should be a continual process. Just don’t use AngelList as a short-cut for the hard work. But to be clear, used properly there is NO downside to AngelList for entrepreneurs.

Jump back to the ToC

Question 11: Should I apply to incubators like Y Combinator or 500 Startups?

The most important question to ask before taking seed money by Chris Dixon

The best programs don’t have sponsors who are even capable of further funding the company. Y Combinator simply doesn’t do follow ons, so there is no way they can positively or negatively signal by their follow on actions…The most dangerous programs are the ones run by large VCs. I would love for someone to prove me wrong, but from my (admittedly anecdotal) knowledge, no companies that have been in large VC seed programs where the VC then stopped supporting the company went on to raise more money from other sources.

The Start-up Guru by Max Chafkin

I recall that a number of founders have warned me that Graham has the habit of throwing out business ideas at a rapid clip, without really thinking through what he’s saying. Still, says Kan, “you always come away feeling energized. You could be working on the most boring piece of software, and you talk to Paul and you think, Man, I’m excited to go back to work.”

Everything you need to know to succeed after (YC) Demo Day by Ash Rust

On our demo day we had just eight investors express interest in us using YC’s online voting system. Some of our batch mates had upwards of 50. We were a simple app, in an unsexy space but we still desperately needed investment to keep going. We had no choice but to work the floor for the whole of demo day collecting business cards. We followed up with most investors that day and had our first meeting scheduled for 9 a.m. the next day. The strategy proved effective.

Jump back to the ToC

Question 12: Once I start fundraising, what is the process like?

If you aren’t getting rejected on a daily basis, your goals aren’t ambitious enough by Chris Dixon

To investors, the sexiest word in the English language is “oversubscribed.” Sometimes it makes tactical sense to start out raising a smaller round than you actually want end up with.

How to do seed fundraising right by Kate Endress

If you are raising venture money, your first meeting will likely be with one representative. If that goes well, you can expect to get called back to meet with 2-3 partners. If that goes well, you will be called back in to do a partner-wide meeting, where they will make the final investment decision. It can be a few weeks between meetings, which is why fundraising requires patience.

High Resolution Fundraising by Paul Graham

By far the biggest influence on investors’ opinions of a startup is the opinion of other investors. There are very, very few who simply decide for themselves. Any startup founder can tell you the most common question they hear from investors is not about the founders or the product, but “who else is investing?”

How To Raise A $1M Seed Round by Sunil Rajaram

Looking back at my inbox, it looks like we received a total of around 120 intros to individual angels and institutions – a little over 10 folks invested in our round.

A Guide to Using Authority & Social Proof in Fund Raising by Mark Suster

So what you really need to get an angel round together are your “anchor tenants.” These are the people who make the early commitment to you to fund your round before having any social proof. You should seek to get people who are respected by others in your field and who will therefore make it easier to raise the rest of your angel round.

Party Rounds: How To Get a High Valuation For Your Seed Startup by Elad Gil

In the not-so-distant past, there were a handful of major angels or funds who would lead rounds. An entrepreneur would have to negotiate terms such as valuation with this small set of potential leads…Today, it is increasingly typical that the entrepreneur raises a round without a lead investor. Furthermore, the entrepreneur can get much better terms (e.g. a much higher valuation) in a Party Round…

WTF is Traction? A 6-Step Relationship Guide to VC by Mark Suster

If you wait until you’re “ready” to fund you’re too late. Funding is about developing a relationship over time. Most of us wouldn’t get married on the first weekend we met someone in Vegas. And most VC’s wouldn’t fund the first time we meet you. Given that many VC’s base their decision on the team, the longer they have to get to know you the better. […] The people who get funded are the people who actually get things done. They tell you that they’re working on biz dev deals with distribution partners and they get the deals signed. They tell you they’re going to ship product and they do. They get their widgets embedded or their products piloted…

Fundraising Will Take You ~3 Months by Elad Gil

4. Putting together the syndicate.
Once you have a set of interested investors, you need to:
a. Gauge valuation. What valuation will get the best people on board without you giving away too much of the company?
b. Determine allocations. How much should each person invest in the round? E.g. do you want any one investor to control the voting privileges of an equity round?
c. Close the first dollars in. The first few committed investors are always the hardest. Once the round starts to come together, everyone will fall in quickly.

Jump back to the ToC

Question 13: What are best practices for scheduling meetings, running meetings, and following-up with investors?

How To Raise A $1M Seed Round by Sunil Rajaram

It goes without saying that the best VCs will not take your meetings unless you get a referral from a strong source. We learned early on that entrepreneurs who have successfully raised or exited companies are the best way to get in the door. We were fortunate enough to put together a really strong advisory board before we went out for our raise, and it helped quite a bit.

How to Present to Investors by Aaref Hilaly (Sequoia partner)

We think of it as being similar to a James Bond movie. Everyone who watches Bond loves the opening sequence, before the titles come on. There’s suspense, action, and unbelievable stunts – in essence, those first 5 minutes bring home why you love Bond, and that keeps you going through the next 2 hours of nonsensical plot twists.

How to Present at Big Meetings without Going Down a Rat Hole by Mark Suster

Make sure you discuss this expectation with your sponsor before the meeting. Understand how knowledgeable the room will be around your industry and your product and importantly – agree a plan with your sponsor on how to play the meeting. Getting his / her buy-in to your approach is important as they can help you steward the meeting in the right direction.

Pitch yourself, not your idea by Chris Dixon

What you should really be focused on when pitching your early stage startup is pitching yourself and your team. When you do this, remember that a startup is primarily about building something. Hence the most important aspect of your backgrounds is not the names of the schools you attended or companies you worked at – it’s what you’ve built. This could mean coding a video game, creating a non-profit organization, designing a website, writing a book, bootstrapping a company – whatever.

VC’s care about the upside case, not the mean by Chris Dixon

Investor sentiment, the old saying goes, is a horse race between fear and greed. The fear and greed in venture capital is all about investing in or missing out on the next Google. No VC stays up at night worrying about missing the next startup that’s flipped to Google. The way you get VCs interested is to convince them there’s a small but non-negligible chance you’ll create a billion dollar (valuation) business.

Jump back to the ToC

Question 14: What questions will investors ask?

Questions VCs Will Ask You by Elad Gil

Who is your team?Why is your team uniquely qualified to solve this problem? What unique insight do you have?
What is your business model? How will you make money? How big of a market is your specific market really (i.e. the market or customers from which you will extract direct value, not “Local is huge, and we are in local, so of course we will be huge”)?
Who is the competition? Why will you beat them?
Why do users care?
How has distribution worked so far? What has worked/not worked?
What milestone will the capital get you to?
Why can this be a billion dollar business?

Jump back to the ToC

Question 15: How do I read a termsheet?

Converts versus equity deals by Chris Dixon

There are two kind of rights that investors get when they put money in company. The first are economic rights: basically that they make money when the investment is successful. The second are control rights: board seats, the ability to block financings and acquisitions, the ability to change management, etc. Converts give investors economics rights with basically zero control rights (legally it is just a loan with some special conversion provisions).

Everything You Ever Wanted To Know About Convertible Note Seed Financings (But Were Afraid To Ask) – Part 1 by Scott Edward Walker

What are Some of the Other Advantages of Issuing Convertible Notes?
Speed, simplicity and cost. Indeed, a startup could close a convertible note round in a day or two by merely issuing a 2-3 page promissory note, which could cost as little as $1,500-$2,000 in legal fees (or a little more if a note purchase agreement is also executed, which is customary)

Is There a YCombinator Valuation Bubble or Not? by Jason Calacanis

(b) Valuation caps: A convertible note “”converts”” in two different ways (typically). First, the loan can come due and the investors can get their money money back, typically with interest, or convert to an agreed upon valuation (guess who has the power in that situation!). That doesn’t happen often; the company will typically shut down by that point. Second, another investor (typically a VC) can price the next round at a specific value. The investors who made the loan in the convertible note are forced to accept that new valuation up to, you guessed it, the valuation cap. There is typically a 20% discount given to note-holders for taking the risk. For example, a capped note at $10M would yield a $10M valuation for the angels if the valuation of the next round was > $12.5M. Search blogs like www.venturehacks.com, www.avc.com or www.bothsidesofthetable.com for more details on these issues. ]

Founder vesting by Chris Dixon

1) All startup employees – including founders! – should vest over 4 years from their start date (with a one year “cliff”).
2) Founders should always have acceleration on change of control! In particular, you should have full acceleration on “double trigger” (company is acquired and you are fired). In addition you should have partial acceleration on “single trigger” (company is acquired and you remain at company).

Convertible Debt in Plain English by Barrett Sheridan

Another common element of a convertible note is a discount. This is kind of like a floating-rate cap. It basically means that, whatever the value of your company when you take your first equity investment, I get to invest as if it’s happening at a lower valuation. So if a $100,000 note has a 25% discount, and you raise money at a $1 million valuation, your note holder gets $100,000 / ($1 million * 0.75 = $750,000) = 13.3% of your company (rather than 10%).

First Round Funding Terms and Founder Vesting by Mark Suster

If you have founder vesting and protection on change of control + protection against losing your shares of you’re fired then we’re completely aligned. I’m protected against your walking (as are your co-founders protecting each other). You’re protected against my asking you to go or a company buying you and taking away your value.

Seed Stage Valuation Guide by Jordan Cooper

Things change quickly, and it’s been 2+ years since Jordan’s post, but his thought process is a good starting point.

Startups: Give Your Family Stock In Your Company by Elad Gil

When you set up your company, the stock is really cheap (e.g. 0.0001 cents per share or the like). This is your opportunity to give your family, spouse, or other loved ones the equivalent of a tax free gift that could have a major financial impact long term (i.e. the taxes they will need to pay on the gift at this point could be either zero or very low in dollar terms).

Jump back to the ToC

Question 16: How do I follow-up with investors?

Signs A VC Is Just Not That Into You by Elad Gil

Does not suggest next steps at the end of your meeting.
Makes endless data requests, without any in-person follow up set up.
Only has you deal with a junior associate.
Is not responsive to your emails
Does not try to sell you on her firm.

I emailed a VC and never heard back by Mark Suster

If you’re pitching me specifically and I haven’t emailed you back send me a polite reminder a week or two later. If you’re on a tight timeline try also sending me an @msuster message on Twitter, trying leaving a polite voice message with my assistant and/or trying sending me a message on Facebook. As long as your polite about it, say words like, “I’m really sorry to hassle you with multiple emails / voicemails but I’m going to be in town for just 2 days and would love to know whether you’re interested to meet,” then I can’t see how any VC would be put off. And if they are you’re pitching the wrong VC.

Saying No In Less Than 60 Seconds by Brad Feld

I can figure this out from the first interaction at least 50% of the time and my first email response is (hopefully a polite) version of “no” that usually consumes a total of less than 30 seconds from beginning to end. Another 25% of the time I need a little more information and request it via mail. This has the side effect of eliminating another chunk of interactions since the person on the receiving end never bothers to respond. For those that do respond, I can usually figure out from the response whether or not I want to spend more time or not; if not, I’m still probably under 60 seconds for saying “no”.

Jump back to the ToC

Question 17: How do multiple rounds work?

How Do I Do Multiple Closings for an Angel Round? by Brad Feld

A: For a convertible debt round, you can keep it as simple as issuing a promissory note for each investor…You can do as many closings as you want by simply issuing a separate promissory note for each investor. The best way to do multiple closings on an angel equity round is to raise the early money using the convertible debt approach above with an automatic conversion into a pre-negotiated equity financing once a certain amount of money is raised.

Jump back to the ToC

Question 18: How do I negotiate terms?

6 Tips To Get Your Startup Off The Ground And Score A Seed Round by Anthemos Georgiades

First, don’t be afraid to ask investors to match the best offer you have. We improved our valuation cap by 50 percent in 48 hours by rallying our investors behind the most favorable term sheet on the table. It’s tough to go up against big VCs, but if they like you, they like you. The negotiation on valuation means less to VCs in the early stages than it will to you and your team. Play up to that imbalance. It favors you, not them.

First Round Funding Terms and Founder Vesting by Mark Suster

If you have founder vesting and protection on change of control + protection against losing your shares of you’re fired then we’re completely aligned. I’m protected against your walking (as are your co-founders protecting each other). You’re protected against my asking you to go or a company buying you and taking away your value.

How to Negotiate Valuation With a VC by David Pakman

1) The first is to understand the VC firm’s philosophy on price and term sheets. Some VCs are flexible on price but will introduce other terms to essentially manipulate the effective price (such as participating preferred, the size of the option pool, anti-dilution provisions, etc.) Other VCs, such as Venrock, prefer to deliver vanilla term sheets but have a clear agreement on price.

The Equity Equation by Paul Graham

One of the things the equity equation shows us is that, financially at least, taking money from a top VC firm can be a really good deal. Greg Mcadoo from Sequoia recently said at a YC dinner that when Sequoia invests alone they like to take about 30% of a company. 1/.7 = 1.43, meaning that deal is worth taking if they can improve your outcome by more than 43%. For the average startup, that would be an extraordinary bargain. It would improve the average startup’s prospects by more than 43% just to be able to say they were funded by Sequoia, even if they never actually got the money.

Jump back to the ToC

Question 19: Should I do reference checks?

YES.

How Do You Reference Check a VC? by Mark Suster

Make sure to call the companies in that VCs portfolio that didn’t succeed. Feel free to ask the VC after they give you the official list for a list of 3 CEO’s where the company stumbled. Do a web search to find companies that they didn’t give you. Ask the CEO’s about the VC when the chips were down. Do research and find some CEO’s who were fired by the VC. That would be instructive. I’ve met some that actually say positive things about the VCs. I’ve heard others that say the opposite.

Jump back to the ToC

Question 20: They said yes! How do I get money in the bank?

6 Tips To Get Your Startup Off The Ground And Score A Seed Round by Anthemos Georgiades

“yes” does not mean “yes.” Put the Champagne back on ice. It took us four times as long to close our seed round as it did to get verbal commitments. The whole process took five months. That’s quite skewed as we had a series of VCs in our round – a different proposition to having a couple of angels – but in general it’s a fair warning. The legal back and forth takes time. Investors can be less responsive about the ‘boring’ stuff. Move quickly and get it done.

You Should Read Every Word of Every Legal Doc (Especially Funding Docs) by Elad Gil

One of the most important set of contracts you will ever sign in the life of your startup are your financing documents. I am surprised by the number of entrepreneurs who depend on their lawyers to read through and decide on key business points of their funding rounds. I will often ask an entrepreneur who is running into an issue about a key issue impacted by their prior funding rounds or employment agreements and their answer will be “I don’t know”.

Jump back to the ToC

Question 21: Should I create a Board of Directors? A Board of Advisors?

How To Choose A Board Member by Elad Gil

The members of your board are the most important people you will ever “”hire”” for the company. For an early stage company, your board will often:
1. Select the CEO of the company. This means the board may be able to fire you from the company you started. Part of the board’s job is to hold the CEO accountable for deadlines, plans, and deliverables.
2. Block or push for major events in the company’s life (future fundraises, acquisitions, selling the company etc.)
3. Provide great strategic advice or become pain in the butt, medling overhead.
4. Help with recruiting senior executives or key hires.
5. Teach you about nuts and bolts of the business, or processes as you scale.

Ideal first round funding terms by Chris Dixon

A board consisting of 1 investor, 1 management and 1 mutually agreed upon independent director. (Or 2 VCs, 2 mgmt and 1 indy). As an entrepreneur, the way I think of this is if both my investors and an independent director who I approved want to fire me, I must be doing a pretty crappy job and deserve it.

Jump back to the ToC

Question 22: How do I work well with my investors?

Angel Investing – The Most Underrated Skill: Access to Buyers by Mark Suster

Send monthly updates to your investors. Hang out at their events and get to know them. And don’t be scared to ask for help. I’m sure Zumper’s investors would agree that I’ve been pretty aggressive about asking them for support. Investors will respect you more as a founder if you admit there are various problems you need their help to solve.

Put Your Investors To Work For You by Elad Gil

Ask your angels what they are good at, and what they can help with. When the time comes to close your first employee, negotiate that business deal, or figure out the best channels by which to buy traffic, contact the right angel or investor and ask them for help.

Jump back to the ToC

Question 23: Should I announce that I raised a round? How do I get PR from Techcrunch, Pandodaily, and other news outlets?

How To Get PR For Your Startup: Fire Your PR Company by Jason Calacanis

When I started Silicon Alley Reporter in New York City, I had stacks of the magazine with me at ALL TIMES. If you saw me at a party I had 25 copies in my backpack, or 200 on a broken-down luggage cart, and you had one shoved in your face within a minute of meeting me. […] Additionally, if you met me in the last 90s, chances are I was wearing a tight black Silicon Alley Reporter shirt. Stacks of them littered my loft on 26th street, and I would toss them only if they started to fade on the edges.

HOW I PITCHED @TECHCRUNCH AND 13 WAYS TO GET PRESS WHEN YOU LAUNCH YOUR STARTUP by Jason Baptiste

So when we pitched TechCrunch, we didn’t pitch it as a WordPress plugin company. That’s just not big news and though it’s a very cool, it doesn’t provide excitement. We gave a taste of the future of being available to All CMS’s, a hosted platform, and helping pave the way for the future of media via tablet publishing.

Jump back to the ToC

Question 24: When should I raise another round?

The Expanding Birthrate Of Web Startups by Fred Wilson

So, if you are an entrepreneur you should be very focused on either getting to profitability or getting a VC firm or two with deep pockets into your company (or both).

Raising Angel Money by Mark Suster

Your chances of raising money from a VC are significantly greater if you have raised money from prominent people. In most cases we probably don’t care whether the deal was priced or convertible debt. We would, however, look to make sure that you didn’t take too much dilution, which would be a negative. If you have many angels (say a group of 10-15 people) and if these people are not sophisticated serial angel investors it could cause problems.

Jump back to the ToC