Visible Blog

We are 2 for 2 in the Weekly Note! For the longest time we’ve treated lack of sleep as a badge of honor. “Hustle Porn” on Twitter & the web has made it even worse. Personally, I always felt like I was doing a disservice to Visible by prioritizing a good night’s sleep…”Should I be working instead of sleeping?” was a common question I’d ask myself. Luckily, we’re starting to see more data, studies and efforts by entrepreneurs to show how sleep is critical to just about everything we do. From productivity increases to reducing the risk of cancer and heart disease, sleep is fundamental to just about every aspect of your life. I’ve recently gotten to know Jeff Kahn from Rise Science (they have worked with NFL, MLB, and NBA teams to Basecamp to Fortune 500 companies…yeah, they are legit). I love Rise’s simple yet insightful approach to helping you understand your sleep and sleep debt. In particular, they don’t require any sensors, gadgets or putting your phone on your bed. One of my favorite features is their “peaks & dips” insights (your natural circadian rhythms). I find it to be incredibly accurate and I now structure my day around it. I’ll workout during my dips and prioritize critical thinking in my peaks. You can see my screenshot here from Rise. I asked Jeff why their model is so accurate. They use 3 different models to power this “peaks & dips” feature. One of those models comes from the Department of Defense. Turns out, the DOD has completed some extensive studies that enable us to more effectively utilize our troops in times of war. You are welcome to check out the research here. How much sleep do you get as an operator & entrepreneur? Do you prioritize it? Any stories you’d want to share that I can highlight? Let me know and I’ll share them next week (anonymously).

I’m going to start writing a weekly note (at least try!). Inspired from my great friend Max Yoder — make sure to check out his weekly note if you want to do better work. I’ll focus on something that caught my eye in the startup space, an interesting data set and/or anything that I think can give founders a better chance of success. If you unsubscribe, I totally understand but my goal is to make this as valuable as possible. Have you seen the latest buzz about founders wishing they had retained more ownership? Sam Altman from YC tweeted it here. The takeaway is founders feel like they dilute too much early on. Sam also thinks that founders dilute themselves 2x more for the same level of progress they used to 10 years ago. Suhail (Mixpanel founder) has a great response in his tweet. In short, he encourages founders to raise less money at a lower valuation early on. Easier said than done! I do love his mention of thinking through the preference stack. I think it’s incredibly important to model out how the preference stack impacts outcomes and decision for founders. Speaking of doing more with less. Can you guess which companies financials these are before going public. If you guessed Google, you are correct. How much did they raise to get to this point? Only $25M. A little different than today’s climate. Curious, have you felt like you’ve given up too much of your business?

We recently hosted a webinar with Tyler Tringas, General Partner at Earnest Capital, covering alternative financing options available to startups. During the webinar Mike, our CEO, and Tyler covered the current state of venture and SaaS markets, all things Earnest Capital, and SEALs. In case you missed it, check out the recording and our favorite takeaways below. Financial –> Production Capital One of the driving forces behind the Earnest Capital Investment Memo is the notion that software is entering the deployment age (read more about the deployment age in the investment memo here). In short, Tyler explains the deployment age as a time when products, software in this instance, can and should be distributed to every corner of the economy. This creates a new software category where niche and sustainable business can succeed as opposed to the winner take all software companies we’ve seen in the past. Generally speaking, venture capital has been the default funding option for software companies but as we enter the deployment age there will be a need for a new form of funding. As a result, the type of capital companies need is shifting from financial capital to production capital (Enter: Earnest Capital). The Peace Dividend of SaaS Wars Another key driver to Earnest Capital Investment Memo is the idea of “The Peace Dividend of SaaS Wars.” The idea is that when countries are at war they will throw money to escalate and create new technologies. An example Tyler gives is the development of synthetic rubber during WWII. After the war, synthetic rubber could be applied to consumer goods. So how does this relate to SaaS? Investors and early leaders are throwing money to create new technologies in the winner take all SaaS markets. As a result, it is less capital intensive than ever before to start a new business. Tyler mentions that software companies can be started on a free Heroku plan where in the past you’d need to buy your own servers and space. In turn, this helps companies attack markets with a smaller total addressable market and may not be a fit for venture capital. The New American Dream Entrepreneurship is in decline in the US. Tyler believes that one major component of the decline is because, “the major area for new entrepreneurship, software and software-enabled businesses, has no default form of aligned funding.” In the past (think 1970s or 80s), an entrepreneur may have had experience or been highly qualified in a field, went to the bank for funding, and likely built physical locations. But with no physical collateral for a software company, who is supplying the funding to grow these companies? Another sign of a need for a new form of financing. Tyler argues that, “building, owning (and possibly someday selling) a profitable remote software business is the new American Dream.” Entrepreneurs can employ 15-20 people, distribute their profits amongst employees, and still create huge economic impacts for themselves and those involved with the business. Shared Earnings Agreement Tyler discovered that the traditional financing options for early stage investors (SAFEs, convertible notes) are not aligned with “Earnest” founders so they create a new financial product: Shared Earnings Agreement. Tyler discusses why they created the SEAL in the webinar and dives into a few of the key components. If interested in learning more about SEALs, we suggest checking out this post. Send Updates to Potential Investors Tyler briefly touches on the importance of sending investor updates. Tyler mentioned that he has seen investor updates as the best tactic they have seen in use to help companies fundraise. If Earnest speaks with a company they are interested in but are not quite ready to invest, they’ll ask to be sent updates about the business. From here, Earnest can be in the loop and ready to make an investment as soon as possible. Check out the Founder Summit Earnest Capital is hosting a summit for founders and startup leaders in Mexico City in March. The summit is intended to allow founders to meet and network as oppose to another conference full of presentations. If you’re a founder and interested in learning more about the summit, check it out here. Q&A Mike and Tyler tried their best to answer all of the questions at the end of the webinar. For the questions they did not get to, you can check out Tyler’s answers inline below: Q: I assume that at least some incumbents/market leaders will try to meet growth expectations by appealing and selling to niche audiences. How much weight does this threat carry in your investment decisions? If it’s not a threat, why not? A: Competition from large incumbents is definitely not something we outright ignore, it’s just that we try to dramatically lessen the risk by backing founders tackling markets that just wouldn’t move the needle for a $10B or 100B+ firm even they came in and took 100% of the market. That said it certainly can still happen. I don’t think we have a special sauce for that scenario other than to encourage founders to lean in to their startup competitive advantages. One thing we do is encourage founders to not try to make themselves seem bigger than they are (don’t use the “Royal We” if it’s actually just You). It’s surprising how much some customers really want to support an independent small brand. The Basecamp folks are putting on a masterclass on how to counterpunch on BigCos like Google with this Q: How does Earnest protect itself from a business defaulting on quarterly shared earnings payments? A: Pretty much the only “investor right” we ask for in our investment docs are the right to inspect the books. Many founders just go ahead and give us access to their Quickbooks. Which is how we would address some kind of fraud or misrepresentation of Founder Earnings. At another level it’s quite hard to accidentally “default” in the sense of being unable to make a payment, since the Shared Earnings are always a % of Founder Earnings, the business should have generated the cash to make the payment (in contrast to debt where a payment is due whether you have the profits to pay for it or not). Lastly if a company has the Founder Earnings but just refuses to pay, we are somewhat protected by the fact that a) the company is obviously doing well and therefore is valuable and b) not making Shared Earnings payments keeps our implied % of a sale higher, so the founder is kinda shooting themselves in the foot if they ever intend to sell the business, we’ll likely get more money from the higher % of the sale than they would have paid out in Shared Earnings along the way. All about aligning incentives! Q: The required “hit rate” for a SEAL portfolio to work is really high (given the capped return + long time horizon): How do you think about this question? Do you have a target % of startups that must “survive” to get a return? A: It is higher than you would see in a traditional seed VC portfolio, but our theory is that the failure rate is not a law of startup physics but rather the whole venture strategy ratchets up both a) the chance of being a unicorn and b) the chance of failure. We don’t know what the typical failure rate is for a basket of highly filtered and selected, post-revenue bootstrapped businesses, but our basic bet is it’s much much higher than is typical in venture. I go into this in some detail here. Q: For your portfolio companies, to what extent do they also have other investors beyond the founding bootstrappers? What is your range of size of investment and also the range of time horizon to large-scale recurring revenue? A: We have done a mix of being the first/only investor in a company, leading a round where several angel investors co-invest with us, and a few deals where we co-invested with other investors (least likely for us, but does happen). We’re open to anything but have a slight preference to be the first/only just because it’s so much easier to close (can be as fast as 2 weeks). As of this moment, we invest $50k-$250k which may increase over time. As a fund, ideally we would love to see business mature and get to real profitability in 7-10 years but we are early-stage, long-term investors and understand that timeline is out of our control. Q: Tyler mentioned a mix of outside capital and sweat equity, however Earnest and other micro-VCs only seem to want to invest in products that are built and have traction. How do I get help building an MVP? I’m a technical founder so I can write code, but trying to do everything myself is taking forever. A: Yea, I have to concede that one of the main advantages the venture model has over ours (similar funding for bootstrappers ideas) is that pre-seed VCs have a model where they can invest at the “idea stage”… because we are not unicorn hunting, we also can’t take the very high risk of investing pre-product pre-launch. One of the main effects of the Peace Dividend that I talk about is that it’s now pretty reasonable to bootstrap, as a side project, a real product to real revenue from real customers. So as an investor, I (and many others) now really have to wait until that stage because so many entrepreneurs are getting there without funding. Some good resources would be some of my Micro-SaaS blog posts (microsaas.co), Indiehackers.com, and Makerpad (makerpad.co) for tips on building an MVP for business ideas without writing a ton of code.

Our Community Templates are a collection of Update Templates created by our customers, partners, and friends. If you’d interested in showcasing your Update Template send a message to marketing@visible.vc Community Spotlight Company Name — Malomo Description —Malomo is a seed-stage, SaaS company based in Indianapolis, IN providing shipment tracking software for ecommerce brands Stage — Seed Capital Raised — $600k Market/Business Model — SaaS, E-Commerce The Investor Update Template If you’re a seed stage, SaaS founder this is a great template to get you started. Yaw, the CEO and Founder, of Malomo shares the Update below on a weekly basis followed by a longer form Update on a monthly basis. For a seed or earlier stage company a weekly investor Update can be a valuable resource for your company. A weekly Update gives you an added opportunity to leverage your investors and use their experience, network, and knowledge to help with early company decisions. Talk to your investors and see if they’d be interested in a more frequent Update. You may not need to send a weekly investor update to your entire investor list. If you have investors that are not as hands on or close to the business it may be best to only share a monthly or quarterly Update with them. You can view and use the Template below: Thanks to Yaw for taking the time to share his template. If you’re a founder, investor, or company operator and would like to share your Update Templates send us a message to marketing@visible.vc

Upside is a podcast about startup investing outside of silicon valley. Our founder, Mike Preuss, was able to sit down with the hosts at Upside and discuss all things founder and investor relationships. If you’re interesting in learning more about Visible, investor communication, and portfolio management give the episode a listen. From the Upside blog, you can find the recap of the episode below: AD: Finding experienced employees for your new business with Integrity Power Search (5:23) Mike’s background and entrepreneurship experience (7:56) Orr Fellowship (11:17) Managing a remote culture, different time zones, and off-sites (12:44) Initial problem and genesis of Visible (18:38) Changing the product from investors to founders (21:53) Finding clients (26:07) Tracking metrics and data (or lack thereof (30:05) Visible using Visible (32:38) Money model (36:13) Investors’ and founders’ access to information (43:13) Visible’s potential in a downturn or recession (46:31)

A board meeting can be an intimidating endeavor for first time founders. However, when a founder is well prepared a board meeting can be an integral part of a company’s success. In case you missed it, we hosted a webinar with Russell Benaroya covering the ins and outs of running a board meeting on demand. Russell spent the last twenty years investing in private equity and as a healthcare entrepreneur, building and exiting two start-ups. Currently, Russell is a Partner at Stride Services where they help high growth organizations with back-office support. Between his time as a founder and helping companies at Stride, Russell has become an expert in preparing and executing a board meeting. During the webinar, Russell shared how founders can always be prepared for a board meeting. You can find our favorite takeaways from the “Board Meeting on Demand” webinar below: Lead with Facts It is normal to feel anxiety and excitement before a board meeting. However, it is important to manage your emotions and stick with the facts. If you lead with data and facts then you can take the time to talk about strategy and the future of your company. Russell warns founders not to approach board meetings with a narrative or a story to tell as it can be exhausting and can understates the facts. A Board Member Will Never Know Your Business as Well as You Do If you’re looking for a board member to give you tactical operational advice remember that their view will be slanted. No matter how involved a board member is with your business they will not have the same information and understanding of your business as you do. In reality, a board member should be able to determine if you’re properly capitalized to execute on your strategy, how you are executing to the strategy, and do you have the right people in the right roles. Turn the Executive Session on Your Board Rather than using the executive session as a chance to air your frustrations and “seek counseling,” use it as a time to allow your board to bring up their own discussion items. Ask your board to come prepared to discuss their topics, their observations, and their agenda items they want to cover. What to Send Before the Meeting Russell suggests sending your metrics vs. plan, financial and operating metrics, actions since last meeting, key customer learnings, your pipeline, and your functional roles chart. You can take it a step further by saying founders should not send a simple org chart but rather a functional role chart that will showcase what positions you need to fill to deliver on your strategy. Russell recommends sending your materials 3 days in advance so your board has a chance to review the facts and form an opinion in advance of the meeting. No Surprises A board meeting should not be full of surprises for you as a founder or any of your board members. You should go into a board meeting with a deep understanding of where every board member stands. Russell recommends scheduling 1 on 1 meetings with each board member to pick their brain on different issues. There tends to be a herd mentality when sharing to a group (your board) so it is important to discuss on an individual basis to understand where they truly stand. Come with Your Best Thinking As a founder “you should be coming to your board meeting to share your best thinking.” This can be boiled down to a simple process. You come to the meeting and share how you are thinking about an issue, how you analyzed it, your recommendations, then ask the board for their thoughts on your recommendations. This way you stick to the data and use your knowledge to make the best decision for your business. From here, you can have a spirited discussion with your board. All in all, remember that running a board meeting comes down to the preparation you put in beforehand. With the right preparation and mentality heading into a board meeting, it can truly be a valuable asset for your business.

Generally, we discuss what it takes to raise venture capital on the Founders Forward blog. However, there are a number of other types of investors and capital. All of which serve different purposes and can help different businesses in different ways. Angel investors are an integral part of the “startup ecosystem” and can be a valuable source of capital to take your business to the next level. So how do you find an angel investor for your startup? What is an angel investor? Both angel investors and venture capitalists offer a form of equity financing but there are a few key differences that will help you determine if you should approach angel investors. The main difference is where their capital comes from. An angel investor is generally a wealthy individual who is looking to invest spare cash in an alternative investment. On the flip side, a venture capital firm is backed by limited partners who are expecting substantial returns in a certain period of time. This means that an angel investor may have alternative motives (personal interest in the problem, product, founders, etc.) whereas a venture capital firm is focusing on maximizing their returns. With the different expectations in returns also comes a difference in check size and resources. An angel investor will typically write a check for anywhere from $1,000 to $100,000 (maybe more in some cases). As for venture capitalists, they will likely write a check from $100,000 to $5M+. If you’re not growing at hypergrowth speeds or do not need a huge check to grow your business, angel investors are likely a great option for your business. However, smaller checks are not necessarily a bad thing. As Kera DeMars of Hustle Fund puts it, “it’s often easier to convince a bunch of people to write small checks rather than a few people to write huge checks.” Recommended Reading: The Understandable Guide to Startup Funding Stages Angel Investors vs. Venture Capitalists VC funds are often organized under the limited partnership (LP) model. They raise large sums of money from institutions – such as pension funds, endowments, and family offices, then invest that money in exchange for a share of the return & management fees (see this excellent article by Elizabeth Yin for a deeper explanation on how VC’s make money). This gives them incredible leverage and financing power, but often leaves them under the watchful eye of LP’s who want a return on schedule. Angel investors usually operate under a different model. Most tend to be high net worth individuals, and in many cases have built and exited a company themselves. They need to be accredited investors who can stomach the inherent risks involved with early stage startups. Because angel investors tend to have smaller sums to invest than VC funds, you’ll often find them in Pre Seed and Seed rounds. VC’s tend to participate across all rounds, but typically only they can afford to play the game in Series B and beyond, as the shear amount of money required tends to be out of the range of most angels. Recommended Reading: Venture Capitalist vs. Angel Investor Step-by-step guide for finding and securing angel investors Considering the wide range of people who can be angel investors and their check sizes and interest there are many ways to find and approach angels. Here are a few of our favorite approach to finding angel investors: 1. Ask friends and family first As Elizabeth Yin writes, “There are lots of rich people worldwide — they don’t even have to be super rich. There are lots of angels who can write you a $1k-$10k check. Angels may not know they are angels. It’s your job to plant the seed in their heads that you are open to an investment from them!” When searching for angel investors it is generally best to start with the people already in your network. 2. Tap into your personal and professional network Don’t be afraid to ask someone in your network for an introduction. Past co-workers or investors likely have their own professional network and can open doors to new potential investors. Part of raising angel capital is stepping out of your comfort zone, and as Elizabeth Yin puts it, “embracing the awkward.” If someone in your network passes, quickly move on to the next opportunity instead of wasting time continuing to pitch someone who passed. Related Resource: Top 6 Angel Investors in Miami 3. Signup for an account with Angelist Angel investors tend to network and create their own communities. One quick way to find angels outside of your immediate network is to turn to the internet to hunt down angel groups A slightly different approach is to find a syndicate. As AngelList defines it, “a syndicate is a VC fund created to make a single investment. They are led by experienced technology investors, and financed by institutional investors and sophisticated angels.” AngelList is a great source for finding syndicates and angel groups. Related Reading: How To Find Private Investors For Startups 4. Join the Angel Capital Association As written on their website, “CA is a professional society of accredited angel investors who make up the world’s most prolific early-stage investment class. The association is the largest professional development organization for angel investors in the world deploying more than $650 million in early-stage capital each year. ACA provides an insider perspective that can help you make smart investment decisions.” Learn more about Angel Capital Association and the perks for founders here. 5. Leverage social media Many investors spend time on social media — especially Twitter and LinkedIn. You can leverage social channels to get in front of angel investors. Investors typically need multiple data points to make an investment. By interacting on social media, you’ll be able to build up those “data points” so when the time comes to raise they will already be familiar with you and your business. Who can become an angel investor? Just about anyone can be an angel investor. Typically speaking an angel investor has to be an accredited investor. As Investopedia puts it, “to be an accredited investor, a person must have an annual income exceeding $200,000, or $300,000 for joint income, for the last two years with the expectation of earning the same or higher income in the current year.” One of the interesting aspects of raising angel capital is that everyone around you has the chance to be an investor. With the introduction of equity crowdfunding (more on this later) the scope of angel investors has been opened even further. What do angel investors look for? Angel investors can be interesting because they may not be motivated purely by returns. Sometimes angel investors are attracted to a market, a personal interest, or even just want to back a friend or family member. With that being said, it is still vital to be able to portray that you are building a sustainable business that can generate returns and compete with their other investments. At the end of the day, an individual investor has countless options for where they should invest their money. You need to be able to paint a picture of why they should allocate their money in your business as opposed to public markets, real estate, and other traditional investment opportunities. ROI Like most investors, angels are looking for a return on their investment. Motives might differ than a traditional venture capitalists, but at the end of the day they’ll want to see how they can make a return on their investment. A reliable leadership team Angel investors want to know that they are investing in a reliable leadership team. This means they will properly communicate, lead, and build their startup. Early growth and traction If an angel wants ROI, they’ll want to see that you have the data and business plan to generate returns. Like VCs, angels will use data and traction to make their investment decision. A scalable and effective business plan Also going hand-in-hand with generating a return, is a scalable business plan. Angels will want to understand how your business scales and what it looks like at different points in the future. How much do angel investors typically invest? The typical investment amount from an angel investor varies quite a bit. Angel investors will invest anywhere from $1,000 to $1,000,000+. However, the average check size hovers around $25,000 to $100,000. There are a few ways to approach the wide range in check sizes. On one hand you can talk to as many angels as possible and pick up smaller checks to build your round. This obviously can be more time consuming and requires you to keep more stakeholders in the loop. However, it is generally an easier decision for someone writing a $5,000 check as opposed to a $100,000 check. On the flip side, you can target a couple of larger angel investors and spend your time targeting a few large checks to close your round. What are the benefits of angel investors? Angel investors can often play a role in providing crucial company-building guidance in the early days. Because they tend to arrive on the scene early, they stand to make a massive return if your company succeeds. VCs can be equally helpful, and they’ll sometimes place a member of their fund on your board who can assist in guiding the direction of your company. Check out some of the benefits of raising from angel investors below: Build momentum during a raise — angel investors can be a great first check and help build momentum during a fundraise Introductions to other investors — angel investors tend to know other individuals that might be willing to invest in your company or help in key areas Silent investor — some angel investors tend to be more hands-off than VCs (which can be a pro or con depending on your business. How to pitch angel investors If you can find an angel investor that fits in with your company ethos they can be incredibly valuable for you as an advisor and source of capital. Check out how Jonathan Gandolf, CEO of The Juice, found warm intros to potential investors below: Find Their Motivation As we mentioned earlier, often times angel investors have an alternative motive outside of profit. A lot of the time they may be investing because of the founders, a personal interest in the problem, or an interest in the market/business model. With that being said, it is important to tailor your pitch to what motivates your angel investors. A pitch to a venture capitalist often times will focus on the economics and ability to create returns but a pitch to an angel investor may differ quite a bit. Iterate Your Pitch You’ll want to be sure to iterate on your pitch for each angel investor. After your first meeting if you find they have an affinity for your founding team, you may want to build your pitch around the team. If you find they have a personal interest in the problem you are solving, build your pitch around your solution. Note: is vital to let angel investors know the risks associated with backing a “startup.” This is especially true if it is their first time investing in a private company. Provide Status Updates Angel investors are ultimately risking their own money for your business and it is your duty to keep them involved throughout the process. It does not have to be an in-depth dive into your business start by sending them status updates during and after your fundraise. We suggest including things like wins/losses, high level metrics, priorities, etc. Remember if your investor has a certain motivation behind their investment feed into that when updating them. If they have experience in the market or field you may want to make specific asks where they are qualified. Keep your investors up to date with Visible Once an investor writes a check it is your responsibility to keep them engaged with your company. At the end of they day they should be the ultimate evangelist for your company so it is vital you communicate and have a transparent relationship. Depending on their check size and involvement with the business will dictate how much you should share with them. However, if it is someone that wrote a smaller check size it may make sense to send a less involved Update. This allows you to keep them in the loop but avoid the additional questions and confusion that may come with sharing too much information. In a “lighter” version of an Update we’d suggest sharing a couple key things: Major milestones — share your big wins from the past quarter. This can be a new customer, round of funding, or just anything you are proud of. Where you need help — let angels know where they can be of help to your startup. Don’t be afraid to ask for introductions to customers, potential hires, and other investors. Key Metrics — share 1 or 2 of the key metrics behind your business. They should already be familiar with these metrics and should not come as a shock when they see a chart. Not all investments are created equally. Do you want an investor that will write you a check and leave you alone? Are you interested in ‘smart money’ that will help you build your company? Do you want mentorship in exchange for a board or advisory seat? No one can answer these questions for you, but it’s important to keep it them mind when evaluating the pros & cons of angel investors vs venture capitalists. Fundraising is one of the hardest jobs in the world – you should try to make it worth it.

A great board of directors can be a “secret weapon” for a company. At the same time, a bad board can kill a company. Matt Blumberg, CEO of Bolster, joined us to break down how early-stage founders can build a great board — we covered everything from recruiting board members to running a successful board meeting. What we covered: How a great board can be a secret weapon The purpose of a board of directors Determining the makeup of your board Scaling your board as you grow How to best run a board meeting

You may have noticed a new addition to the Visible application if you have signed in lately. We recently launched the Home section. The Home section provides an activity feed to show you exactly who is engaged with your Updates, Dashboards and other content. In this first version we’ll provide: Views of Updates (from an email or link) Clicks on Updates Reactions to Updates Views of Dashboards Your feed will also smartly group items together based on time and the activity type. Home also provides quick actions to see your recently sent Updates, edit existing Update drafts, and the ability to start a new Update from scratch or a template. We’re excited to provide even more activity types as we launch new ways to engage with your investors and stakeholders. Engaged Investors Engaged Investors = Startup Success. When startups produce regular investor Updates and prioritize investor reporting they create an unfair advantage of being top of mind. The Home section helps understand which of your investors are engaged, value-add and in the loop. When companies are top of mind they get the benefit of customer introductions, partnership introductions, follow-on capital, help with hiring and more. This is just the start with the new Home & Activity Feed. We’re excited to provide more insights on how to engage your stakeholders for success. Up & to the right, -Mike & The Visible Team

This post was written by Justin McLoughlin. Justin is the founder & President of airCFO, a finance & accounting services startup built for startups. He spent the early years of his career in both large and small companies, in a variety of roles, learning how a solid financial team plays a vital part in a company’s overall growth and ability to scale. Related Resource: How to Model Total Addressable Market (Template Included) Launching a startup of your own is one of the most exciting and challenging business ventures you can pursue, but often every thrill and joy comes with a corresponding setback, or worse, a tedious bureaucratic or procedural hurdle. You’d like every moment of your day to be filled with closed deals and big sales, but there’s more to it than that. A lot of running a business, unfortunately, involves the somewhat less exciting work involved in creating budgets, managing spreadsheets, performing data entry, etcetera, and analyzing financial statements probably doesn’t rank highly on your list of anticipated startup activities. For a lot of founders and entrepreneurs, financial statements are and remain a mystery, since most of them didn’t launch their own business to pore over financial data, but even if you don’t have a finance background and aren’t familiar with startup accounting, it’s worth your time to learn some of the basics of the statements you’re likely to encounter. Below are the four types of financial statements that are relevant to your startup or small business and explanations of how they can be used to understand the financial health of your business and how they might be used to achieve your goals: Related Resource: How to Create a Startup Funding Proposal: 8 Samples and Templates to Guide You Income Statement This is a straightforward statement, but an essential one, and very valuable to your startup. It shows your business’ performance over a period of time — monthly, by quarter, yearly, or over a longer period. Income statements usually include a detailed section on revenues (sales of goods and services) from which expenses (operational costs like salaries, utilities, transportation, etc.) are subtracted, to achieve a net income figure at the bottom of the statement. An income statement is a great way to get a handle on the overall health of your startup, and a good starting point for any examination of you business’s financial health. It’s a good place to get into the nitty-gritty of your business by breaking down expenses to get a handle on your profitability or fine-tune your margins. It’s also important to keep in mind that this is one of the first things a potential investor or lender wants to see, so having an accurate, detailed income statement is a critical part of any raising or investment round. Balance Sheet A balance sheet, sometimes called a statement of financial position, unlike an income statement or statement of cash flows, isn’t meant to show performance over time, but is a snapshot of your startup or small business at a specific moment. It shows your company’s assets, liabilities, and equity. This is another document that stakeholders like investors, lenders, and shareholders will want to see, so it’s important to keep an accurate one on hand. The balance sheet is named such because the two sides of the sheet are always equal to each other. Simply put, your assets are equal to your liabilities plus your equity — sometimes these values are broken down further into current (short-term) and noncurrent (long-term) values. This is a good way to get a handle on the value of your company at any given moment. Statement of Cash Flows This is a relatively simple financial statement, but a critical part of your financial planning. A statement of cash flows shows your expected input and output of funds over a projected period of time (most commonly over the course of a financial quarter, or for the month). This is not the same as an income statement, it’s meant to show the course of the cash that enters and exits your business. Generally, this statement has three sections: cash flow from operations, cash flow from investing, and cash flow from financing. As you probably know, cash flow is a major problem for a lot of startups, including slick, well-funded ones, and no one wants to get caught in a cash crunch at a critical time. Keeping a statement of cash flows updated and on hand is a critical part of predicting cash flow issues and allowing your startup to plan for the future. Statement of Changes in Equity This is a somewhat more specific financial statement, and is usually not relevant until your company has shareholders, but it’s worth understanding ahead of time, and if you have investors, it’s something your business will want to be prepared to produce. The statement of changes in equity shows shareholder contribution, movement in equity, and equity balance at the end of the accounting period in question. This might record financial events like shares issued or dividends paid out. Note that since these changes will be reflected on your income statement and balance sheet, so that if they’re correctly prepared, the statement of changes in equity will be correct as well. Accounting for startups can get a lot more complicated, but if you have a handle on these basic financial statements, you’ll be on strong footing to get started and answer any critical questions about the financial health of your company. If you need further help or have questions, you can contact us here to find out more. Related Reading: How to Secure Financing With a Bulletproof Startup Fundraising Strategy Related Resource: A User-Friendly Guide to Startup Accounting

Startups are in constant competition for two resources: capital and talent. Without capital, a business fails to exist. Without talent, a business fails to flourish. This guide is intended to help you understand the venture markets and improve your likelihood of raising venture capital. We will cover the history of venture capital, the investor thought process, finding and pitching investors, sharing data and documents, closing your new investors, and building strong relationships to help with future fundraises. Note: You can find the resources (blogs, podcasts, videos, books, etc.) used to fuel this guide in the resources tab located in the top right. If you’ve raised venture capital before, you already have some combination of a great product, a highly functioning team, and a growing market. Before we jump into these aspects, we need to take a step back and study the history of venture capital. As recent as the 1990s, the venture capital space was dominated by a few large firms that did incredibly well. Capital was enough of a scarcity that it was a differentiator for these large firms. As the internet skyrocketed in the 90s and early 2000s, in turn the cost of starting a company started to decline (and still is today). Fast forward to 2005, and Y Combinator is started. Y Combinator cracked the code on scaling entrepreneurship and used their founder and investor network to help more companies succeed. Since the inception of Y Combinator, thousands of VC firms have started and have drastically changed the space. Capital alone is no longer a sufficient differentiator for a VC firm. Firms have started to specialize in specific verticals, offer extensive resources to their portfolio companies, and have created their own “secret sauce” for yielding the best returns. That brings us to today, where it is easier to start a company, yet harder to build a company than ever before. Access to capital can be the difference maker between a startup thriving or joining the startup graveyard. Below we will share the tips and tricks to systemize your fundraising process to better increase your odds of raising venture capital. Further reading and resources to help you learn more about venture capital: [Video] The Founder’s Guide to Investor Communication and Fundraising Types of Venture Capital Funds: Understanding VC Stages, Financing Methods, Risks, and More Are you ready to raise capital? First things first, you need to ask yourself, “are we ready to raise venture capital?” Or better yet, “what do I have to offer a potential investor?” As we previously mentioned, to raise venture capital you need some sort of combination of a compelling market, qualified team, or strong product. Understanding How VCs Work To understand if you’re ready to raise venture capital, you need to understand how VC firms function and how you can fit into their larger vision. In simplest terms, VCs go through a consistent life cycle that goes something like this: raise capital from LPs, generate returns through risky venture investments, generate returns in 10-12 years, and do it again. Easy, right? Actually, quite the opposite. A median VC fund is generally not a great investment for limited partners. Just as companies are in competition for venture capital, venture capitalists are in competition for capital from limited partners. In short, LPs are institutional investors (University endowments, foundations, pension funds, insurance companies, family offices, sovereign wealth funds, etc.) looking to create excess returns by investing in VC firms (generally a small % of their overall investment strategy). According to Scott Kupor, “If you invested in the median returning VC firm, you would have tied up your money for a long time and have generated worse results that the same investment in Nasdaq or S&P 500.” So why would an LP invest in a VC firm at all? Because VC returns follow a power law curve; a small % of firms capture a large % of industry returns. In simpler terms, LPs are in pursuit of VCs generating excess returns who are in pursuit of investing in companies that can offer huge returns. Which brings us to our next point… A Compelling Market VC fund returns are not the only place we see a power law curve throughout the fundraising process. The breakdown of a VC funds individual investment returns follows a power law curve as well. It might look something like this. Long story short, VCs are in search of home runs, not singles and doubles, to create the excess returns for their LPs. The best chance of being one of these companies that creates the huge returns for a fund, have a compelling market. As Scott Kupor, Managing Director at a16z puts it, “Everything starts and ends with addressable market.” As a founder, it is your duty to model the total addressable market and paint a picture of how you will penetrate the market to become a “home run” investment. Without a compelling market, a VC fund will have a tough time justifying making an investment in your company. With that being said, if a market is not big enough right now, strong and innovative companies can find and create new ones (E.g. Uber’s TAM). Markets fluctuate and you may have an investor that invests in specific products or teams to differentiate themselves. The Product On the flip side, there are investors who will base their investment decision of the product. No matter how big the market or strong the team, some investors will tout that a strong product is all that matters. The idea being that a strong and innovative product will sell itself and will have the ability to create new markets. As Peter Thiel states, “If your product requires advertising or salespeople to sell it, it’s not good enough.” The Team While the team may have no direct attribution to how large of returns your company can generate, it can display your ability to execute on the vision. Having a well experienced team is a great way to portray your credibility. Some very early stage investors, such as the Hustle Fund, may even place the most stress on the team when making an investment decision. As Elizabeth Yin of the Hustle Fund puts it, “of the two things I am most interested in for early stage investments is the assessment of the team… how well do they know the market? Are they executing?, etc.” So the question is not, “are we ready to fundraise?” It should be, “do we have the market, product, or team to warrant an investment from an investor?” If so, it is time to get started on the fundraising process. Further reading and resources to help you determine if you’re ready to raise venture capital: [Video] How to Raise Capital in 15 Days: Debt vs. Equity Financing The Free Visible Total Addressable Market Template and Evaluation Model Finding the Right Investors When you’ve determined you are ready to raise capital, you’ll find that the fundraising process often mirrors a traditional sales process. Like any sales process, the fundraising process starts by finding qualified investors (leads) that you’ll build a relationship with the end goal of them writing a check. Fundraising is often compared to a cocktail party, when the waiter comes around with a tray of snacks, you should always take one. You’ll never know when the waiter will make it back to you. The same with VC capital. However, it is important to remember that the average VC + Founder relationship is 8-10 years so you’ll want to make sure you’re starting with the right people to build a valuable and long-term relationship. We suggest starting with your “Ideal Investor Persona.” This is a firm or person, that is highly targeted in all facets of your business. We suggest starting with qualities below: Location – Where are you located? Do you need local investors? Or maybe you are looking for connections and networks in strategic geographies. Industry Focus – What type of company are you? Where should your future investors/partners be focused? e.g. If you’re a B2B SaaS company don’t waste your time with marketplace focused investors. Mark Suster suggest that it is best to prioritize investors with companies in your space. Stage Focus – What size check/round are you raising? e.g. If you’re raising a $1M seed round avoid a firm with $2B AUM. If you’re raising a $30M round avoid a firm with $75M AUM. Current Portfolio – How is the rest of their portfolio constructed? If current companies are doing well, there may be less pressure to exit so they can return funds to their LPs. If current companies are performing poorly, there may be more pressure for you to exit so they can return as much as possible their LPs. Fund Age — How long ago did they raise their current fund? How many investments have they made? If the fund is young, there will be less pressure to exit and a higher likelihood of them having capital saved for a future round. If the fund is older, they may feel pressure from their LPs and may be looking for an exit as soon as possible. Deal Velocity – Are you in need of capital as soon as possible? Or are you taking your time and looking for strategic investors? Varying investor’s have different philosophies for the velocity they’re making deals. Point Nine Capital and Kima ventures are both regarded as top firms in Europe. However, Point Nine makes ~10 investments a year whereas Kima makes 1-2 investments a week. Motivators – Who are the firm’s limited partners? What do want to get out of your investors and what do they want to get out of you? Do they need to match your values and culture? Once you’ve determined someone that meets your “ideal investor persona” you’ll need to do everything in your power to get a meeting with them. In fact, many VCs will use your ability to get their attention and set a meeting as a gage for your “hustler” prowess. Cold emails, your network, and events are all great ways to get a meeting. Regardless of how you get a meeting, it is vital to do your research beforehand. Start with current connections and do what you can to get an introduction. Other founders and current investors are a great source for finding new investors. Go into the first meeting full of knowledge and ready to question investors. Further reading and resources for finding the right investors: Our Free Fundraise Tracking Tool How To Find Private Investors For Startups How Rolling Funds Will Impact Fundraising Startup Syndicate Funding: Here’s How it Works Pitching Your Company Effectively Just landed your first meeting? Great! But the pitching does not start yet. Many founders will walk into their first meeting and immediately start flipping through their deck and give the same presentation to each investor. However, you need to remember you are selling your company and want to make sure your pitch is as tailored as possible to each investor. The first meeting should be most valuable for you as a founder. This is your opportunity to ask questions so you can figure out their pain points, figure out their motives, and other nuanced things you may not be able to find in internet research to tailor your pitch for future meetings. As Elizabeth Yin, Founder of the Hustle Fund puts it, “Your job in the first meeting with a potential investor is to ask a lot of questions – ala customer development style – to understand how you might be able to tie your story to their problems and interests. And so your pitch should not be stagnant, and although you may have created a deck before the meeting, it’s important to tie your talking points together as a solution to the problems you learn about in that meeting.” If you’ve done your research and asked the right questions, you’ll be armed with the information you need to effectively pitch your company. At the end of the day, pitching is storytelling and it is your job to figure out how each potential investor fits into the narrative. If done correctly, you’ll be able to control the conversation and better your chances of setting future meetings. Further reading and resources for pitching your company to investors: [Video] The Founder’s Guide to Investor Communication and Fundraising Data, Documents, and Due Diligence Once you’ve determined an investor is the right fit for your company, you’ll need to share data and different documents with your investors. Data & Metrics At some point throughout the process, investors will need to see the metrics behind your business. You should have a deep understanding of your key metrics and have them ready to share at any time. Generally, we’ll see that metrics potential investors want to see fit into one of the following categories: Growth & Financials — This more often than not comes in the plan of a business/financial model and historical data. Show them a strong financial model that creates growth for the business and returns for them and their LPs. Margins — Margins on your product is a large part of the path to profit and returns for your investors. Investors generally have a % they are looking for in the back of their mind. Customers — Your customers are your business. Clearly showing potential investors that you can attract, convert, retain, and engage your customers is vital. This can come in the form of customer satisfaction surveys, net promoter score, and retention rates. Documents & Due Diligence Going from “I’d like to close” to actually closing is a big difference. When facing due diligence it is important to be prepared, understand the process, and do your part to speed up the process as much as possible. There are a number of different corporate documents, protocols, references, etc. that you’ll need during the due diligence process. To learn more about the specific documents head over to our fundraising resources section. Signaling most certainly matters throughout this process. You’re likely only meeting a few times before jumping into a 8-10 year relationship so everything will be magnified throughout the process. Be prepared and transparent throughout the due diligence to help avoid speed bumps and start your relationship off on the right foot. Further reading and resources for sharing data, decks, and documents: Our Free Guide for Building Your Financial Model Nurturing for Later Rounds Inevitably, you’ll hear a slew of “no’s” and maybe’s” throughout the fundraising process. An investor “no” can always be turned into a “yes” at a future date. As you would nurture a lost deal in a sales process, the same should be done with your potential investors. If you’ve asked the right questions, you should have a good idea of what they’re excited about and be ready to pull the trigger to pick the conversation back up. How exactly do you keep potential investors engaged? We have found it best to send out a short update on the state of the business and industry. Share a promising metric or two showing strong growth in the business and any significant wins/improvements. If possible, address any concerns with the industry, team, product, etc. that you have discussed in the past with numbers. Hundreds of emails land in investor’s inboxes so be sure to include a quick snippet of what your company does and any personal notes. By building a strong relationship with potential investors, it will make it that much easier when you set out to raise at a future date. Most importantly, make sure you are armed with the right information and data to stay top of mind. Startup Funding Tracking We’ve talked with a lot of founders who have raised money, and we continue to hear the same things: Fundraising is a difficult and time-consuming process, one that is often unstructured and chaotic. Done poorly, it can cost startup leaders countless hours of valuable time—not to mention their valuable sanity. One of the key challenges of the fundraising process is it is non-linear. Seasoned founders will tell you that fundraising is essentially a sales process, requiring a founder to prospect, nurture and move potential investors through a “pipeline.” While this is true, it doesn’t tell the full story. Most sales interactions have a natural order to them, an order that both sides generally understand. The fundraise process? Not so much. There is no proven playbook for getting funded, because every company is different, and so is every investor. Often, these interactions need to be managed on a case-by-case basis. When managing a fundraise, a little structure goes a long way. We’ve built our Fundraising CRM to help founders track their fundraise simply, but effectively. Use it properly, and you’ll be on well your way to completing your round. How the CRM Works The Fundraising CRM is free for all users. To get started with your raise, login to your Visible account and check out the “Fundraising section” To help get started, we include generic pipeline stages that are easily customizable to fit the needs of your fundraise. We’ve included what we have found to be the most common stages for an investor: Research — Any new investor that you’re prospecting, or has contacted you, but has yet to discuss potential investment. Contacted — Any investor that you’ve emailed or called to discuss the opportunity to invest in your business. Meeting — Any investor that has agreed to sit a meeting. From here, you can continue to move through the funnel or move directly to “Keep in Touch” or “Passed” depending on the meeting outcome. Light Diligence — Any investor that has expressed serious interest in your business and has started to perform due diligence on your company. Partner Meeting — Any investor that would like to bring in the partners of the firm to get sign off from the remaining partners. Term Sheet — Congratulations! Any investor that has extended a term sheet to fund your startup. Closed — Any investor that has wired the money to your business. Keep in Touch — Any investor that has passed on your business for the time being. We suggest keeping these investors in the loop with brief milestone Updates throughout your startup’s journey. Passed — Any investor that has permanently passed. This is a firm that you feel is unlikely to invest in the future. A crucial part of the fundraising process is keeping your eyes on communication and making sure you’re nurturing investors through the funnel, especially if you have a lengthy fundraising cycle. The notes section of each contact can be used to keep tabs on your communication and meetings with different investors. We hope this tool will help simplify your fundraising process and get funded faster. Startup Fundraising Resources At certain points in a company’s life, fundraising becomes a full time job for the founders or CEO. That is, of course, in addition to all the other full time jobs that come along with being a startup founder — hiring, selling, cleaning up dirty dishes. Constant outreach, pitching, deck revisions, not to mention the time spent answering diligence requests. One of our goals at Visible is to improve the fundraising process for companies and there are a ton of other great tools and resources that focus on the same thing. We’ve curated 100s of fundraising articles and resources for our Founders Forward Newsletter. You can find our favorite startup fundraising resources below: Startup Funding Tools Foresight Product, market and team get a lot of investors excited but not having your numbers down is a dealbreaker and hints at a lack of professionalism. Foresight helps you make sure you know your numbers as well as any CFO or accountant would. By the way, we spoke with Taylor Davidson, founder of Foresight, to get some insight into his best practices for building a great startup financial model. Visible Hey! That’s us! As we mentioned above, we offer a fundraising CRM to help founders track their fundraise from start to finish. Visible is the best way to report your performance numbers to your potential investors, helping you combine data, visualizations, and narrative to tell a compelling story about the growth of your business. Startup Fundraising Content Venture Deals: Be Smarter Than Your Lawyer and VC This is, without a doubt, the best book you can read on venture financing. Buy it for yourself and for every single person on your team. The 20 Minute VC Podcast We’ve talked before about the importance of thinking like an investor. This interview podcast gives you a look inside the thought process for investors like Mark Suster, Kanyi Maqubela, and Aaron Harris. Elizabeth Yin Blog Elizabeth Yin is a co-founder and General Partner at Hustle Fund, a pre-seed fund for software entrepreneurs. Previously, Elizabeth was a partner at 500 Startups where she invested in seed stage companies and ran the Mountain View accelerator. Elizabeth covers the ins and outs of venture fundraising on her blog. The Fundraising Wisdom That Helped Our Founders Raise $18B in Follow-On Capital One of our favorite post covering how to run a successfully fundraising process. The post from the team at First Round reviews surveys founders that have raised $18B+ of combined capital. They also introduce the idea of “taking on investors in sets” which we believe to be a key component of running a good process. Berkshire Hathaway’s Letters to Shareholders While he is known as an investor, Buffett is also an entrepreneur whose Shareholder letters are a masterclass on how to attract and retain long-term investors for your business. For a free compendium of Buffett resources, check out BuffettFAQ Founders Forward Newsletter We search the web for the best tips to attract, engage and close investors, then deliver them to thousands of inboxes every week. Subscribe for the Founders Forward Newsletter here. Startup Fundraising Platforms SeedInvest For high-growth companies with proven traction, SeedInvest is a great platform to connect with over 14,000 individual accredited investors. Angellist Funds Raising on Angellist – where many top investors run what are known as “Syndicates” – can be a great way to tap into a network of well connected VCs, Entrepreneurs, and Angels. Seedrs Seedrs has helped European companies of all sizes – from idea stage to the publicly traded firms – raise capital more efficiently. Kickfurther If your company is dependent on effective inventory purchasing and management then Kickfurther, where you leverage backers and people who love your brand to fund inventory purchase orders, can be a great place to look. Republic Since the SEC enacted the Title III of the JOBS Act a majority of the US population can invest in startups for the first time. In order to allow more investors to invest in more startups, the team at Republic built a platform for startups to raise capital from the new found investors. Earnest Capital Earnest Capital provides early-stage funding, resources and a network of experienced advisors to founders building sustainable profitable businesses. Startup Fundraising Fun The Pro Rata Newsletter “Dive into the world of dealmakers across VC, PE and M&A. By Dan Primack, the best-sourced deals reporter on Earth.” Related Resource: 7 Essential Business Startup Resources

As a founder, landing your first meeting with an investor is an exciting experience. You’ve got your deck together and a talk track ready to go. You’re ready to walk in, paint your picture, and walk out with plans for your next meeting. However, we often see pitches can go off the rails and it can be easy to lose control of the conversation. But the first conversation should be most valuable for you as a founder. The average VC + Founder relationship is 8-10 years so it is important to make sure that you’re building a relationship with the right people. As Elizabeth Yin, Founder of the Hustle Fund, puts it, “an experienced fundraiser knows that the goal in going into your first fundraising meeting is to ask lots of questions and walk away understanding what next steps make sense.” While it can be intimidating questioning an investor, the following questions should help you start your own due diligence and tailor your pitch for future meetings. How old is the fund? It is important to understand where a fund is at in its lifecycle. In general, a fund lifecycle is 10-12 years. After the 10-12 years a VC fund is expected to return capital to its investors (limited partners). If a fund is getting older, they may feel more pressure to generate quick returns to please their limited partners. This pressure could be passed down to you and could force you into an early exit. If a fund is younger, they are likely ready to deploy capital and will have additional capital set aside for your future rounds. How is the rest of the portfolio performing? Remember that VC funds have pressure to generate returns for their LPs. Say a fund has raised $100M and owns 10% of each investment on average. Their LPs are likely expecting a minimum of a 5x return which means the portfolio would need a cumulative exit value of roughly $5B ($5B x 10% = $500M). So what does this mean? If you are the single shining star in the portfolio, there could be a misalignment of incentives. You could have the ability to exit for a life-changing outcome but your investors need a larger exit so they could block the sale. On the flip side, you could get pressured into an early exit. If the rest of the fund is performing well, you may have more slack and be able to take your time as the rest of the fund can generate substantial returns as well. Related Reading: Understanding Power Law Curves to Better Your Chances of Raising Venture Capital Who are your investors? Understanding where your potential investors’ capital is coming from will help you understand their behavior. VCs raise capital from Limited Partners (LPs). Generally, LPs are institutional investors like university endowments, foundations, pension funds, insurance companies, family offices, sovereign wealth funds, etc. A firm usually keeps the names of their LPs under wraps but this can be a sign of their openness and transparency (remember… 8-10 years, you want to build this relationship on trust). What happens if you lose all of the capital you invest? Everyone is generally aware that a VC investment is very risky. Your potential investors should understand that there is a chance they’ll lose all of their investment but press on this issue. As Jason Lemkin simply states, “If they look too nervous, find another.” Can you help us with our next round? Outside of having their own additional capital to invest in your next round you’ll also want to understand how a firm can help you with other investors. Try to understand what companies they have helped make introductions for and what % of their portfolio has gone on to raise future capital. Don’t be afraid to do your own digging and reach out to founders of companies in the portfolio to understand how the firm helped throughout their fundraising process. While they are hundreds of questions you could ask a potential investor we have found that the 5 above will help understand their behavior and decision-making process. Once you have these answers, it will be easy to go back to the drawing board and (1) decide if you’re ready to enter an 8-10 year relationship and (2) tailor your pitch for future meetings.

As a founder, the day-to-day can often feel like a juggling act. Constantly, trying to optimize time between building a product, growing revenue, attracting capital, and delighting employees. At the end of the day, one could argue that the overall health of the business comes down to attracting capital and retaining employees. Without capital, a business fails to exist. Without talent, a business fails to flourish. When a founder sets out to raise capital it can often feel like a siloed process where the rest of the company has little to no knowledge of the status. However, a company’s ability to fundraise is often one of the only external benchmarks a startup employee may have. So how do employees think about the company’s fundraise? And what does it mean for a founder? Finding the Right Valuation For a startup employee, measuring their company’s success can be difficult. More times than not, an employee’s only external benchmarks are how much capital their company has raised and at what valuation. Employees use their company valuation as a measurement for their overall company success and in turn their desire to stay and grow at the company. It is the founder’s duty to find the right balance between the company, investor, and employee needs. When there is high demand for a round, it can be easy to raise at the highest valuation possible. If you overvalue the company, you’ve raised the bar for what it takes to clear the valuation bar for your next round. If you undervalue the company, employees may start to wonder if things are actually going well. Inevitably, a company’s valuation will eventually meet the true worth of the company. Deciding how to portray and manage this is in the hands of the founders. At the end of the day, employees will want to see the valuation of the company moving up and to the right. Raising the Right Amount With a valuation comes the amount fo capital the company actually needs to raise. Most employees would be thrilled to open Crunchbase and see news that their company raised a huge round. However, this may not be in the best interest of the business. When a founder thinks about how much to raise, they need to keep their next 12 to 24 months in mind. As Scott Kupor, Managing Director at Andresseen Horowitz puts it, “Raise as much money as you can that enables you to safely achieve the key milestones needed to raise your next round of fundraising.” Remember that raising too much money can be death for startups as they recklessly burn capital. Scarcity is the mother of invention. However, raising too little money at an aggressive valuation can weaken ambition to hit big goals in a short amount of time. Just like everything in a founder’s day to day work, fundraising is about finding the right balance. It is the duty of the founder of balance the needs of their company, their employees, and their investors. Want to learn more about raising capital? Check out our other fundraising posts.

The ideas below are largely based off of Scott Kupor’s new book, Secrets of Sand Hill Road: Venture Capital and How to Get It. We highly recommend giving it a read! If you’ve read our blog before you know we often compare a fundraising process to a traditional sales process. You might find potential investors to fill the top of the funnel, set meetings and build relationships with future investors in the middle of the funnel, and eventually close them at the bottom of the funnel. Throughout a traditional sales process one of the first things a seller does, is finding the motivators behind a buyer’s decision to make a purchase. However, we often see founders forego the research to understand an investor’s motivation. Sure, they’ve got to return capital to their investors. But how do they raise capital for their fund and who are their investors? Understanding the Limited Partner and VC Relationship A VCs job is to raise capital from limited partners, generate returns in 10-12 years, and do it again. Venture capital firms are funded by limited partners (LPs). LPs are generally institutional investors like university endowments, foundations, pension funds, insurance companies, family offices, sovereign wealth funds, etc. These institutional investors often have much larger funds and use a small % (typically 5%) of their investment capital to diversify with venture capital funds. Historically, a VC fund is generally not a great investment. According to Scott Kupor, “If you invested in the median returning VC firm, you would have tied up your money for a long time and have generated worse results that the same investment in Nasdaq or S&P 500.” So why would an LP invest in a VC fund at all? The Power Law Curve VC funds do not follow a normal distribution, they follow a power law curve. For the sake of this post, a power law curve is when the distribution of returns is heavily skewed. Or simply put, a small % of firms capture a large % of industry returns. This means that a small % of VC funds take home a large % of venture returns. VCs are constantly working to make their way into the “winning” part of the curve so they can continue to attract capital from limited partners. How does a VC fund become a “winner?” The best VC funds portfolio returns also follows a power law curve. A small % of a VC funds investments will yield the majority of their returns. What does all of this mean for a founder? Why the Market Matters VCs are in pursuit of investments that will yield massive returns for their LPs. Generally speaking, this conversation starts and ends with total addressable market. Without a compelling market, a company is capped by the returns they can generate. This does not mean that the market has to be big now, but has the chance to develop into a major market (check out this example on Uber’s TAM). Check out our free guide for modeling your TAM here. Why the Fund Age Matters When raising capital, be sure to ask investors questions about the age of their fund and the capital they’ve committed. Remember that a VC generally returns funds to their LPs in 10-12 years. If their fund is getting older in age, they may feel pressure to create returns for their LPs. This pressure may be passed down to portfolio companies and could force you into an early exit. A younger fund will feel less pressure to generate returns and will likely have capital set aside for a follow on round. A younger fund may be eager to put capital to work and will help speed up the fundraise as well. Why the Portfolio Performance Matters It is also important to understand how the rest of the portfolio is performing. Are there a number of standout companies? Would you be the standout company? If the overall fund is performing well, your likelihood of raising capital at a future date is higher. If the overall fund is performing poorly, you may be pushed to exit so they can generate returns for their LPs. Understanding the motives behind a VCs investment process is an easy way to conduct your own due diligence on potential investors. Remember that fundraising starts and ends with relationships. To find the right investors for your raise get started with Visible Connect, our investor data base. Give it a try below: Be prepared, do your research, and ask the right questions to make sure you’re building relationships with the right people.

A guest post for the Founders Forward blog by Florent Merian. Visible is on a mission to move founders forward. We’ve built an automation tool that lets you, founders and startup leaders, instantly create and send updates to your team and your investors. We often preach treating fundraising and investor communication as a process. It should be no different from any sales, marketing, or product process that you would implement at your business. In this blog post, we explore how you can apply your support process to your investor communication and why getting feedback from your investors is so important to build trust, engagement, and a successful long-lasting relationship. Know your investors, enhance your relationship To get feedback from your customers is vital to increase your business. So is feedback from your investors to build transparency and trust in your relationship. As Fred Wilson, partner at Union Square Ventures, reported, “founders and their teams spend a lot of time preparing for a meeting, and then they give the meeting their all, and often the Board leaves, and nothing is really said about it.” As he stated, “one of the most frustrating things about board meetings is that it is difficult for founders and CEOs to get feedback on them.” By engaging with your investors to know how they feel after a meeting and how you can improve, you better know them, their expectations and you get valuable insights to improve your performances as a startup leader. Related Resource: Navigating Investor Feedback: A Guide to Constructive Responses Build a personalized online survey to get insights There are several ways to ask for feedback. For instance, you can build an online review with a simple web tool, and share it with your investors when done. You can ask them the following questions: What are the three things we’re doing well? What are the three things we need to do better? What would you like to see followed-up on from this board meeting? Are there any topics you’d like to explore in-depth at the next board meeting? As your investors might be overwhelmed by emails and might not have the time to reply, personalize your survey with their first name to make more engaging and make sure it has a responsive design, so it’s accessible from any where and from any device. Then, you can collect data as part of your process to review your performances, to improve your management, and ultimately to foster your business development. This way, you can get valuable feedback from your investors and you can rely on it to improve your next meetings and updates. Get continuous investor feedback The same way you would do with your customers, regularly request feedback from your investors. Send them surveys after your Board meetings and keep them informed of your activity with regular updates to build and maintain a trustworthy relationship. Remember founders who regularly engage with their investors are 200% more likely to receive follow-on funding. To engage with your investors by getting feedback and sending updates regularly helps you maintain a trustworthy relationship, and it also enables you to build a better company. Thank you for your read! How about you, how do you engage with your investors?