The Nature of Leverage in Fundraising Conversations Has Changed

Leverage. It’s the key to negotiating. Classic negotiating books like Getting to Yes define the BATNA, the Best Alternative to Negotiated Agreement. If you were to walk away from a conversation, what’s the next best choice? The BATNA singlehandedly creates leverage in negotiating.

Over the last few years, startup founders have exerted tremendous leverage in the fundraising market by taking advantage of the supply/demand imbalance. Too much capital chasing a sliver of exceptional startups. When demand exceeds supply, valuations and round sizes balloon. A fast-growing startup’s BATNA had been the other investor waiting in the lobby, term sheet in hand.

But the nature of leverage in fundraising conversations is changing. The 40%+ share price declines of Tableau and LinkedIn this morning illustrate the turbulence a company’s valuation can experience when growth slows or the finicky market decides to value it differently. The 16%+ drop in Q4 2015 figures indicate some Continue reading "The Nature of Leverage in Fundraising Conversations Has Changed"

With Smart Software, Sell Ironman Not Robocop

When buying machine learning enabled software, it’s easier to sell like Ironman than Robocop; a product that complements and augments the user’s skills rather than a true replacement. As machine learning continues to become a key differentiator among SaaS products, a secular and positive trend, startups are learning how to sell the promise of the software better and better. These are some of the objections customers raise during those sales pitches.

First, there’s a skepticism amongst buyers that a computer model can fully understand the complexity of a business process, handle exceptions and perform work equally well as a person. Many products have over-promised and under-delivered. For years, speech recognition sold a great promise. Only recently do millions of people reliably use Siri. Consequently, buyers have become skeptics of seemingly-too-good-to-be-true-intelligence.

In some cases, machine learning models have become sufficiently accurate and predictive that could entirely replace people. And at at Continue reading "With Smart Software, Sell Ironman Not Robocop"

The 12 Things I Know About You

I know 12 things about you.

  1. You have a great need for other people to like and admire you.
  2. You have a tendency to be critical of yourself.
  3. You have a great deal of unused capacity which you have not turned to your advantage.
  4. While you have some personality weaknesses, you are generally able to compensate for them.
  5. Disciplined and self-controlled outside, you tend to be worrisome and insecure inside.
  6. At times you have serious doubts as to whether you have made the right decision or done the right thing.
  7. You prefer a certain amount of change and variety and become dissatisfied when hemmed in by restrictions and limitations.
  8. You pride yourself as an independent thinker and do not accept others’ statements without satisfactory proof.
  9. You have found it unwise to be too frank in revealing yourself to others.
  10. At times you are extroverted, affable, sociable, while at other times Continue reading "The 12 Things I Know About You"

Chained Probabilities in Startup Business Models

In 1983, Lorne Whitehead, a physicist from the University of British Columbia proved he could knock down the Empire State Building with 29 dominos. A domino can knock over an other domino one-and-a-half times its size. Whitehead’s theory concretely demonstrates the power of a chain reaction.

Like a series of dominos, a startup’s success is a chain reaction. One small win leads to two other slightly bigger successes, which grow to four triumphs, then eight hits and so on until the company is a blockbuster. The first win might be witnessing a product capture the imagination of a random coffeedrinker at a local cafe. The second reaction might be closing the first paying customer. The third, hiring a top-notch executive.

At each point in the chain reaction, there is some probability the reaction continues. The probability of discovering product/market fit early, of hiring a great technical team, finding the right Continue reading "Chained Probabilities in Startup Business Models"

The Question to Ask Before Starting a Company in 2016

The Roman Turtle

My father keeps a copy of Michael Porter’s Competitive Strategy on his bookshelf. An imposing dark gray tome, Competitive Strategy is a business classic. I remember reading it sometime in high school, and not understanding very much of it. It was only six years later in a college macroeconomics class, my professor helped me understand the value of the Five Forces. For startups entering a period of increased capital cost, the wisdom of Porter’s Five Forces is more important to consider now than they have been in the past few years.

The Five Forces are:

  1. The Threat of New Entrants: How easy is it for new companies to pursue this market? What barriers to entry exist?
  2. The Threat of Substitutes: What switching costs exist to keep customers with one vendor? How differentiated are the existing products in the market?
  3. The Bargaining Power of Suppliers: How much leverage do the suppliers Continue reading "The Question to Ask Before Starting a Company in 2016"

The New UI for SaaS – The Question

Quick. Casual. Human. Chat differs from other forms of communication. Because of these three attributes, chat seems to be reemerging as a potentially disruptive user interface for both consumers and business users.

The typical teenages emits more than 3000 text messages per month, not to mention messages on other networks. Most retailers provide customer support via chat. Hundreds of millions of people have tweeted. The combination of these three forces expose nearly everyone on the Internet to brief, useful messages every hour.

It’s not that chat is new. Internet relay chat dates back to the earliest days of the Internet. But, the exciting advances promised by new startups extends much further than message exchanges between two people. These chats have consequences. Send a text message to book a flight. Post a note on Slack to provide peer feedback at work or file an expense. Wire $15 to a friend to Continue reading "The New UI for SaaS – The Question"

3 Questions for Startups to Answer for Themselves in a Volatile Fundraising Environment

65% of entrepreneurs believe that fundraising in 2016 will be more difficult than in 2015, according to First Round’s survey. The volatility in the stock market, the steady erosion of public multiples, and the broad decline of seed, venture and growth investment in Q4 2015 seem to portend a repricing of the startup market. In light of those changing circumstances, entrepreneurs should prepare a few different analyses for 2016.

First, the company should list the milestones they would like to achieve before raising the next round and a financial model that projects the capital requirements to attain those milestones. The SaaS fundraising market has become relatively efficient and good initial targets for raising Series A and Series B are roughly $100k and $250k in MRR, plus or minus $50k in MRR.

Next, the company should develop a cash flow forecast to answer the question, Can the startup achieve those Continue reading "3 Questions for Startups to Answer for Themselves in a Volatile Fundraising Environment"