Greek Complexity

Hire the Right Type of VP Marketing — Or You’ll Just End Up With a Bunch of Blue Pens with Your Logo On Them

Snip: "Apologies to all those to whom this is already well known. But, I know many of you have never hired a head of marketing before. And as soon as you get your MSP (Minimum Sellable Product) out the door, and you’ve got your first 10 customers under your belt — you’re probably going to want to hire a VP or Head of Marketing to help you get more leads in, manage the process, and help get the word out. All good stuff. Let me just give you one tip. There are basically 2 types of SaaS and business web marketers. And if you hire the wrong type — the more common type — then instead of more customers, you may end up with just a bunch of Blue Pens with your logo on them."

More: http://ift.tt/18crEgg

This is an auto-generated post from my reading list.

The passionate VC -- no, that's not an oxymoron

We've all heard about why it's important for entrepreneurs to be passionate about what they're doing. But passionate investors?

Mark Suster explains why entrepreneurs should seek out investors who share their passion. Investors who will go the extra mile and give your company more patient long-term support than would be rationally warranted.

I've written about this myself as part of larger topics here, here, here and here. I have fallen in love, as Mark says, with a few entrepreneurs in my time, and in all those interactions, there was always something special that went beyond just the numbers, and that relationship continues to this day.

At the same time, entrepreneurs in Asia should be wary of placing too much emphasis on this. Not because passion is somehow an unnecessary ingredient in Asia. Quite the contrary. Most Asian countries are difficult markets and you want every bit of support you can get.

The reason for my caution is that the number of VC firms in countries like India, Singapore, Australia, Indonesia and so on is at least one order of magnitude smaller than in the US. This necessarily means fewer potential investors who're going to be truly passionate about you. If your #1 criterion for picking an investor is someone who passionately believes in you and your mission, then I'm afraid you are going to find yourself restricted to a tiny handful of prospective investors, perhaps as few as 1 investor (or even none) depending on where you live. The investor who's passionately interested in, say, tackling market inefficiencies in the media industry (me!) may not be as passionate about the next Flappy Bird app. Some other investor may have exactly the opposite perspective.

A related reason is that many investors here are, as one entrepreneur disparagingly said to me, "Excel VCs". By which he meant, accountants, bankers and spreadsheet mavens. So let's say you've actually hit upon a VC firm that's made a few investments in your sector and seems to understand what makes your company tick. That still doesn't guarantee passion. This can be true across stages and across investor profiles -- it's not only the growth stage guys (Series C and beyond) as you might think. One reputed investor once said something to the effect, "Why should a successful entrepreneur with an exit to his name become an angel investor? Far easier and less risky to just invest in real estate."

Finally, VCs in this region are faced with a huge surfeit of investment opportunities in sectors as diverse as logistics, manufacturing, hospitality, healthcare, non-banking finance and so on, apart from tech. This means that they probably haven't decided what it is they are truly passionate about... mostly because they don't need to.

All of which means that when you do come across your dream match, grab the opportunity with both hands. Don't be shy.

Mark again:

I write this because I know how difficult it can be to find a potential investor and to decide with whom you’d like to try to work. You may not have a choice – many don’t. But if you do – or if you’re simply deciding which VCs to put in super-human effort to targeting as potential investors, I would encourage you to think about their core beliefs and interests.

Yes.

My investor is shutting shop. What happens to my company now?

An entrepreneur asks: What happens to all the portfolio companies when a VC has to close shop?

Short answer: nothing happens. Companies are independent of their shareholders.

Long answer: this situation isn’t likely to happen for one simple reason. VC firms manage closed-end funds, which can have a tenure of anywhere from seven to 12 years (including fund extensions). Longer time horizons are more common than short ones. If you’re an entrepreneur accepting a fund’s money today, it is far more likely that your company will close shop before the VC does.

Of course, VC firms do go out of business too. Let’s take a hypothetical example:

• VC firm ABC Ventures raises its first fund, which has a life of seven years.
• ABC then invests in a few companies over a period of two-three years.
• For whatever reason, ABC does not raise any more funds after its first fund.
• At the end of seven years, ABC is required to liquidate its fund and return proceeds to investors in its fund who are known as Limited Partners or LPs.
• Ideally, ABC would have exited all of its investments before the end of seven years.
• If ABC still has shares in portfolio companies that it has not exited, then ABC will seek to convert these shares into cash by finding a buyer for them. LPs have invested cash in the fund and expect to receive cash when the fund is liquidated.
• ABC may technically have the right to pass on shares in its portfolio companies to its LPs, but this happens very rarely.
• Portfolio companies continue to live on, just with a different shareholder at the table.

When pitching to a VC, how forward-looking should my financial projections be?

Here's a fairly common question: When pitching to a VC, should an entrepreneur include plans based on anticipated future rounds of funding or should the projections and deliverables be based on only the current round that is sought?

There isn’t actually one “right” answer to this. Before I get to that, let me mention that perhaps the most important thing an investor wants to see in an entrepreneur’s projections isn’t the actual list of numbers but the thought process of how these are arrived at, how the entrepreneur plans to actually achieve these numbers and whether the order of magnitude broadly makes sense.

For example, if an entrepreneur is focused on a market that just doesn’t seem big enough to justify a VC investment, then the conversation ends right there. Or if the entrepreneur’s projections appear to show that her company will achieve, say, a 90% share of her SAM with 80% gross margins, then that would come across as over-optimistic and lead to a lot of skepticism.

Now, let’s assume that those first-level issues are solved and come to the specific question here. As I said, there is no one correct way to present numbers. My personal preference is a mix of the two approaches described in the question.

• Make projections based on the current round of funding. This doesn’t mean you have to perforce assume you will be profitable just based on the current round of funding. If you plan to be profitable after the current round of funding, that’s great. If you don’t plan to, that’s fine too.
• Then add information on when you plan to raise your next round of funding, how much you anticipate this to be and what you will do with the money. (You can plan to raise money even if you think you will be profitable before then).

Naturally, you know less about your plans for the distant future compared to your plans for the next few months. Smart investors know this too so don’t worry too much about predicting the distant future with 100% accuracy.

One last point: one of the most common mistakes when providing financial projections for early-stage, unprofitable companies is the statement, “This is my last round of financing.” No, it isn’t.

Andreessen on start-ups without business models (prepping for a future career in politics)

From a longer interview:

WSJ: How do you get behind startups with no business model? With Pinterest, how do you get from zero revenue to a $3.8 billion valuation?

Mr. Andreessen: There are two categories of companies like this. You can guess which one I think Pinterest is in.

There are the ones where everybody thinks they don't know how they're going to make money but they actually know.

There's this kind of Kabuki dance that sometimes these companies put on where we're just a bunch of kids and we're just farting around and I don't know how we're going to make money. It's an act. Facebook always knew, LinkedIn always knew, and Twitter always knew.

Now, there are other companies that honestly have no idea. Like, they really honestly have no idea. You need to be very cautious on these things because one of the companies that had no idea how it was going to make money when it first started was Google.

That's an insightful take on the question.

Though notice how he manages to argue two opposing viewpoints and get away with not answering the interviewer's question about valuation! That was almost politician-like and very amusing.

Are these companies likely to have strong business models in future? Quite possibly. Are they therefore worth tens of millions, hundreds of millions or billions today? No one knows.

More here "Andreessen: Bubble Believers 'Don't Know What They're Talking About'"

9 questions for start-ups to ask their investors -- and what not to bother with

First-time entrepreneurs who're out to raise their first or even subsequent rounds of funding don't always realise that they can (and should) do DD on their prospective investors, not just the other way around. Why don't they realise this?

The most obvious reason is the skewed balance of power. The entrepreneur wants money and the investor holds the purse strings. But is this really a skewed balance of power? It really depends on who the specific parties are. A strong entrepreneur who has a good investment opportunity to offer and several interested investors can certainly shift the balance back in his favour. (This has been most obvious in Silicon Valley in the recent past, where super-star entrepreneurs raise money at valuations unheard of in Asia.)

Another somewhat related reason for entrepreneurs' diffidence is the unwritten but widespread belief that investors are omniscient super-beings who are above question. That's one big reason why MBA grads, senior guys in operating roles, and even investment bankers clamour to move to investing roles. Nonsense. Just as there are good and crappy entrepreneurs, engineers, journalists and marketing professionals, there are good and crappy investors too.

Ok, so you're convinced. You know the value of doing your homework on your investors. What questions should you be thinking about?

1. Ask the investor straight out: what is your vision for my company? There is no right answer to this question, but the answer will tell you a lot about how this investor thinks, what her aspirations are for making this investment, whether she prefers to let you run the show on your own or sees herself getting involved, and so on. Whatever the answer may be, you will get some insight into how you will engage with each other in future. You can then decide whether there is congruence with your own expectations.
2. Do I enjoy engaging with the investor? Does this person provide supportive feedback that also challenges me? Does this person complement the skills I already have available within my company and board of direectors?
3. Who is doing the work of evaluating my company? Has the work been delegated to a junior employee? Or even an external consultant?
4. Who is the actual person going to be involved with my company after the investment?
5. Is the investor an employee of her firm or a partner with some influence and stake in her firm's success? This is less about the person's title than the responsibility given to her and her willingness and ability to assume these responsibilities.
6. What do others say about this investor? This is a broad question that can cover several areas such as personality, influence, level of involvement with portfolio companies, and so on. You have to be careful what you find out as your sample size of responses is likely to be small. Treat this as one input among many.
7. Does this firm have an eat-what-you-kill philosophy with individual investment partners responsible for their own successful or failed investments? Or are you likely to be working with more than one investment partner equally incentivised to make your company successful?
8. What are this firm's ongoing reporting requirements? Do you need to hire a finance person just to create investor reports?
9. Does this firm have a track record of making follow-on investments? If it does, do follow-ons typically happen in successful companies or in troubled ones?

The one question you don't see above is whether this investor has experience making investments in your specific sector. This is partly because, at least in the tech world, industry cycles move very quickly, and a five-year old investment may have little relevance to you today. More important, what matters more from your perspective is whether the investor has done her homework on your industry, has overseen investments in at least a few start-ups before yours and has evaluated at least several hundred firms in total. You're the expert in your industry sector, not your investor. The investor only (only!) needs to be good at helping you with the overall company-building process and everything that entails.

When a founder goes through multiple funding rounds and ends up with a very reduced stake in the company with little say in board matters, is it better for him to quit at that point or continue working with the company?

It is important to remember that even late-stage investors are looking to invest in the entrepreneur as much as the company. It is the entrepreneur who decides (or at least, should decide) when and how to run one’s fund-raising process. That means deciding the amount to be raised, valuation, identity of the investor, etc. Certainly one’s existing investors will have views on each of these but the entrepreneur should be the face of the company when talking to investors.

If you accept all of this, then it should be clear that late-stage investors will not want the entrepreneur to take the back seat when it comes to making decisions post-investment. Really the only reason for an entrepreneur to find himself side-lined is sub-par performance — and if that does happen, your shareholding has nothing to do with it.

This being said, this is ultimately a personal decision. If it turns out that you do not feel comfortable answering to several investors or if starting another venture from scratch feels more exciting than guiding your current venture further forward, you can certainly consider handing over the reins to someone else. This is not that unusual a decision. However, be aware that, for better or for worse, the future value of your shareholding depends on someone else’s performance from that point on.

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This is a cross-post of my latest column answering entrepreneurs' questions for Yourstory.com.

Are there any commonly accepted benchmarks for the ROI expected on investments and exit period for their investments?

Very broadly speaking, investors expect 3-4x of invested capital within three years and more than that for any longer period as pretty much the minimum for a given investment.

Early-stage investors are prepared for several of their investments to fail so their return criteria may are likely to be considerably higher. This also means that the required return on the entire fund is going to be lower than the required return from any one investment.

Note again that these are very broad-brush statements that do not apply to all investors.

Exit period depends on the type of investor and the stage of your company. If you are a 10-year- old company raising money from late-stage investors, don’t expect that they are looking to invest for a further 10 years.

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This is a cross-post of my latest column answering entrepreneurs' questions for Yourstory.com.

What are the typical challenges when one gets funding from multiple VC’s?

That’s quite a perceptive question. I believe that it always pays to understand the perspectives of one’s counter-parties, whether they be investors, customers, employees or anyone else. If you do this, you understand both the areas of congruence for you and your counter-party as well as potential pitfalls.

Here are some things to watch out for on the investor front:

• It is not very common to have many VCs early in the game. Companies tend to acquire multiple investors only after two or three rounds of funding. This means that your relationship with your earliest investor may be different from your relationship with your later investors. This doesn’t have to be a challenge in and of itself — just make sure that you build trust with all of your investors, disclose all necessary information to everyone equally and don’t play favourites (even if you do have a favourite).
• Ensure that you have a good idea of each investor’s desired time horizon for an exit while you consider which investors to raise money from. Some investors (possibly your earliest investors) may be looking to exit sooner than others. If you know this in advance, you can manage the situation appropriately, e.g., by finding a buyer for one investor’s shares instead of selling the whole company.
• Similarly ensure that everyone is reasonably aligned on exit price. You don’t want to be in a situation where you have an offer on the table that some investors jump at while others say, hell no. Even if one group of shareholders has the legal right to overrule another group, this is not a terribly fun situation to be in. A collaborative approach is much better. You can maintain alignment over time by initiating discussions on price expectations at reasonable intervals.
• Sometimes two or more investors will want to be heavily involved with your company — and may have differing opinions on key issues. It is your job as the entrepreneur to navigate this delicately and ensure that your company isn’t derailed by disagreements or decision paralysis.
• Investors often have varying views on the legal rights and protections they may need. Unfortunately, maintaining a simple, aligned set of rights comes down to who has greater bargaining power. If you are a super-star entrepreneur running a high-flying company, you may be able to convince all investors to agree to a basic set of protections. If you are not in this fortunate situation, your most paranoid investor may drive the agenda and all your other investors may (quite reasonably) ask that the same protections apply to them too.

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This is a cross-post of my latest column answering entrepreneurs' questions for Yourstory.com.

How does a founder identify a VC who may also be able to bring strategic inputs to the business?

Short answer: talk to them!

Longer answer: unfortunately, there is no neatly formatted, searchable database of investors that will tell you who you should approach. Instead, here is a non-exhaustive list of things you can do:

• Look at other start-ups in your industry in a related space and see who has funded them.

• Talk to other entrepreneurs and ask for their advice on who to approach.

• If you have already identified an investor and want to understand them a little before approaching them in person, speak to entrepreneurs they have funded in the past, focusing on entrepreneurs in your own industry, or ask your existing investors to make introductions to people they know and respect.

• Some investors will give you insights into how they think via their Twitter accounts, Quora answers, blogs and other such forums.

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This is a cross-post of my latest column answering entrepreneurs' questions for Yourstory.com.