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The best sign I have that a company I’ve invested in is dead, or near death, is the silence.
This is why I encourage all of the founders I work with to send regular and detailed updates to all of their investors at least once per quarter, ideally once per month.
Even if you don’t have investors yet, the process of taking a step back and asking yourself what’s going well, what’s not going well, and what you could do differently is hugely valuable.
It doesn’t have to be complex.
In the simplest case just start by sending out basic financial details: how many new customers you have, how much cash you earned in the last month and how much cash you spent in the last month and how much cash you have left in the bank.
Then, later, as you grow, include some commentary about your current constraints – i.e. why aren’t you growing faster?, an update on your team – new hires?, open roles?, how you’re feeling about the culture?, and maybe point to some of your key numbers – how much are you spending to acquire each new customer? how much does it cost to support each customer each month? how many customers cancel (or “churn”) each month?
For bonus points, ask other people in the team to contribute a short paragraph about their area – e.g. the product/engineering teams might want to list the things they’ve recently released and the things they are working on next; the customer support team might like to highlight their Net Promotor Score; the sales and marketing team might want to talk about recent promotions they’ve run and the effects of those.
It shouldn’t take long as these are all details you should have at your fingertips anyway (and if not, then you have bigger problems than not keeping shareholders informed!)
Make sure you talk about both the good stuff and the bad stuff. Investors are smart enough to realise that startups are not a smooth curve up and to the right, and will appreciate the honesty. More than likely they will want to try and help you solve the problems, when you’re up-front about them, rather than stressing about the fact that there are problems.
The real payback on doing this will come when the time comes to raise more investment in the future. There is nothing worse for an investor than an email from out of the blue asking for more money. If you’ve taken the time to keep everybody informed of the progress then you’ll spend much less time telling them where you’ve been, so you can focus on where you want to go next, and you’ll likely find them much more enthusiastic about continuing to be part of it.
So, even when you think you have nothing interesting to say, say something.
It could make all the difference.
I found this fantastic rant by Dave Grohl, of Nirvana and Foo Fighters, describing his documentary Sound City:
“This movie wasn’t made for cynical middle-aged music critics, it was made for my daughter, or for the teenager down the street who’s trying to figure out how to start a band. When I think about kids watching a TV show like American Idol or The Voice, then they think, ‘Oh, OK, that’s how you become a musician, you stand in line for eight fucking hours with 800 people at a convention center and then you sing your heart out for someone and then they tell you it’s not fucking good enough.’ Can you imagine? It’s destroying the next generation of musicians! Musicians should go to a yard sale and buy an old fucking drum set and get in their garage and just suck. And get their friends to come in and they’ll suck, too. And then they’ll fucking start playing and they’ll have the best time they’ve ever had in their lives and then all of a sudden they’ll become Nirvana. Because that’s exactly what happened with Nirvana. Just a bunch of guys that had some shitty old instruments and they got together and started playing some noisy-ass shit, and they became the biggest band in the world. That can happen again! You don’t need a fucking computer or the Internet or The Voice or American Idol.”
— Rock n Roll Jedi, Delta Sky Mag
I wonder if people in other vocations feel the same about how reality television distorts their experience?
Do chefs love MasterChef? Do property developers love The Block or Property Ladder? Do people who work with troubled kids love Super Nanny? Do architects love Grand Designs? Does anybody love The Beauty & The Geek?
I doubt it.
Because if you substitute musicians for start-up founders, what Dave Grohl described is exactly how I feel about Dragons Den and the like.
All of these shows are entertainment, which is fine. No harm, no foul. Very little reality, despite the name. Except that it seems that many people often fail to make that distinction.
Despite all of the evidence to the contrary, people do believe that entering a talent show is the path to a career as a singer, and they keep lining up every time there is a call for auditions. These train wreck shows seemingly have no problem finding folks who think that inviting cameras in to film their wedding planning or their house build or their blind date with a stranger is a normal and constructive thing, without appreciating that the only possible winner from that equation is the person selling advertising around the eventual show when it screens. Even the viewer, as entertained as they might be at the time, is a loser by any reasonable measure of opportunity cost.
It is, to use Dave Grohl’s patter, fucking nuts!
And, it makes me sad and angry to see it happening more and more in my industry.
A contrived start-up experience has as much in common with a real start-up as being a contestant in Survivor has with living unassisted in the Amazon for three weeks.
But, there is a large and growing group of people who think that the only way to a successful start-up is via an accelerator program, where they get locked in a room for twelve weeks, inundated by mentors, pressured into customer discovery and product pivots and whatever else is the buzzword de jour, taught to pitch and then pushed on stage to pimp their pre-pubescent start-up to a room full of investors. And then… who knows what?
This is just Startup Theatre: a scripted experience that has very little in common with the things that successful startups in the wild fill their days with, in my experience. The only thing missing is the film crew, although surely that can’t be far away.
The latest “season” of Lightning Lab had their demo day in Wellington last week.
This is how I saw it promoted on Twitter:
UPDATED: removed the link to this tweet, which has now been deleted. :-/
Seriously? Did it rain? Were folk hustled?
The people who are advising founders to approach investors in this way are naive and wrong. Be aware that you’re creating a significant selection bias by doing this, because smart investors do not want to be hustled and won’t be tricked into investing in your dinguses.
Likewise, if you think this is the best way to access people who you would otherwise struggle to connect with, you’re massively underestimating how easy it is to reach smart investors in a small place like New Zealand (or a large place like San Francisco, for that matter) if you have something compelling to pitch them. But you do have to get the train in front of the tender. Otherwise you’re not really a founder.
(I keep talking about smart investors, but I realise I haven’t ever explained what I mean by this. It’s possibly a subject for a future post, but for now I’ll define it simply as those who typically contribute more value than they capture, both in terms of dollars and, more importantly, in terms of advice and support.)
So far the results from these sort of programs locally are pretty skinny. But, we only need to do this a few more times before one of these companies becomes Dropbox or Airbnb. That’s how the maths works, right?
In fact, we believe in accelerators so much that we now have a government grant programme designed to accelerate accelerators. That’s four derivatives, if my calculus is correct!
(The questions I would ask those that approve this sort of funding are: a) how will you measure the impact you have on the companies who benefit from this investment?; and b) what is the control group?)
Please, don’t hold your breath.
You may reasonably ask: if this is so wrong, why is it increasingly common and popular?
I think the explanation is simply that doing a start-up is hard. And more than likely a complete waste of time and effort. So we’re all attracted to this sort of reality television approach because we think it might be an easier route, or increase the likelihood of a successful outcome.
But, I think the short cut we hope to find in this approach is a mirage.
I tried to opt-out of this debate a while back, as I figured there was little chance that I would convince anybody who believed otherwise, and there was no shortage of better things to put my time and energy into. I still believe that. But, I’ve realised I never explained the alternative.
I think Dave Grohl has the answer: You have to enjoy the walk.
If you’re a would-be founder, don’t be impatient. Realise that the person promising you a short cut is probably trying to sell you something. Rather, find some friends to work with, and understand that for quite a while you’re going to suck. But suck in the knowledge that you’ll look back later and realise how much you enjoyed sucking, or more accurately how much you enjoyed sucking slightly less each day. Accept that it’s better to suck in relative obscurity. Don’t be tempted too soon by the glare of the spotlight. Tell your story to everybody who will listen, and if you have something that’s actually compelling word will spread. And know that after taking a few small steps forward each day you’ll look back and be staggered by how far you’ve come.
If you are a would-be investor, don’t be lazy and sit back expecting good ventures to come to you. New early-stage investors often fall into the trap of thinking their job is to pick which companies to invest in, but the smart investors realise that the best companies select their shareholders, rather than taking any money they can get. So, get out there and find the people working on interesting things and roll up your sleeves and help them out in whatever way you can. There is a huge dark net of start-ups, beyond the prominent few that make all the noise. Pick one or two, validate that they are willing to take guidance, and prove that you can contribute more than just cash. And then, when the time comes, there is a better chance they will choose to talk to you.
Of course, doing all of these things still provides no guarantee. Not every group of friends playing grunge in their garage in the 90s became Nirvana. Sorry I don’t have a better bridge to sell you. But, since you’ve read this far, I assume you’ve decided it’s all worth it, despite the odds.
I’m Chair of the Board of Directors at Vend.
In some ways, this is a role I stumbled into.
I was one of the original investors, back when Vend was just Vaughan. We would spend a day a month and go deep on the business model and strategy. It evolved into a “proper” board after we raised more money and we added Miki to be an independent third voice in those meetings. It has since levelled up several more times, most recently after Barry was added as a fourth director.
I have, on more than one occasion, been told that I don’t look like a chairperson.
I’d like the record to reflect that the company has done okay despite this. What was just Vaughan is now 122 people, more-or-less, working in four offices in Auckland, Melbourne, Toronto, and San Francisco. And counting. We’ve grown from a handful of brave initial customers to over 10,000 retailers who use Vend to run their businesses – selling everything from jewellery to polo gear; gasoline to music lessons. We’ve raised over $35m, from what would have seemed to us at the beginning to be a dream list of investors from NZ, Australia, Germany and the US. We’re trying to spend that wisely to fuel further growth.
I try not to be offended, because I doubt that was intended. But I am always tempted to ask what they think a chairperson looks like. Or what role they think would be more appropriate for me.
The thing is, I’ve never really looked like the things I was.
I didn’t look like a computer science student in 1994. I wore shoes, for a start.
I didn’t look like a management consultant in 1997. I borrowed a suit jacket for the job interview. I never really got comfortable wearing a suit and tie.
I didn’t look like a founder in 1999. I can only imagine what the property managers I was cold calling made of the sloppy kid trying to convince them to advertise on the “internet”.
I didn’t look like a manager in 2003, when I came back from London to run the growing development team at Trade Me.
I didn’t look like an angel investor in 2007, after we had sold the company and I was starting to think about what to do next.
I suppose this should give me confidence to not put too much weight on what others think I do or don’t look like today.
I figure the best thing is to show them what I am, by doing the job as well as I can, rather than waiting for their permission. Maybe doing that will cause them to change their mind about what makes a good director or chairperson. Or, maybe not. Whatever.
Who are you waiting on to tell you that you qualify?
PS I’m currently thinking about who could be the fifth person on the Vend board, and I’m determined to not limit ourselves just to people who look like directors. The ideal candidate would be somebody with a sales and marketing focus, ideally with experience in retail and/or small-medium business, who is excited to help us grow to the next level and beyond. Y’all are the closest thing I have to an old-boy network (and with the added benefit of not being all boys!), so if you know anybody who we should consider for this role please do let us know.
In finance, a derivative is a contract whose value is based on the performance of another underlying asset.
An option, for example, is an agreement to purchase a stock at some date in the future for a pre-agreed price. The option makes a profit or loss depending on whether the actual price on that future date is above or below the pre-agreed price. Once in place that option becomes something which can be valued and in some cases even traded independently of the underlying asset – although their prospects are inextricably linked, at least in one direction, because without the underlying company there is no option.
While some people have become famously rich as a result of derivatives, many are very critical of them – e.g. Warren Buffett called them “financial weapons of mass destruction” in 2002. A few years later a form of derivatives called Collateralised Debt Obligations (or CDOs) were one of the causes of the global financial crisis.
In calculus, a derivative measures how much one value changes in response to changes in some other value.
For example, as an object moves we can measure its speed (the first derivative of its movement) and its acceleration (the second derivative of its movement).
Or, when measuring the revenues of a business we can consider the amount in dollars, the percentage revenue growth (the first derivative) or the acceleration in revenue growth (the second derivative). See: Size vs Growth vs Acceleration
Again, without the underlying objects, there are no derivatives.
I’d like to propose some new types of derivatives for start-ups: all of the other people and organisations who depend on the founder/s and their ventures.
Active investors are first derivative founders. They are the tender not the engine, although many acting in this role think of themselves in opposite terms. Passive investors, or anybody investing indirectly via a group or fund, are second derivative founders, since they are two steps removed from the underlying venture.
Incubators and accelerators are first derivative ventures, since ultimately the success of an incubator or accelerator is a function of the ventures they work with.
Government grants are first derivative capital, in the hands of the founder. Allocated funding for government grants is second derivative capital, in the hands of the development agency. When the government funds a development agency to fund an incubator to fund ventures … well, I start to lose count of how derivative that is.
Mentors and consultants and advisors are first derivative team members (ref: this great tweet – most first derivative team members mistakenly believe that others ideas are more worthy than their own).
A shared working space is a first derivative office.
There are a lot of people who would like to see a bigger more vibrant and more successful ecosystem of startup ventures in New Zealand.
In order to achieve this more people need to realise that what we’re missing are more impressive underlying ventures. Until we have that we can layer on as many start-up derivatives as we like and it will make little difference.
Contrary to popular opinion, the derivatives are not pre-requisites, it’s the other way around.
Of course, not everybody can be a founder – indeed that would be an undesirable mess. But, if you are currently involved in a first, second or even third derivative capacity, my advice to you is to think about how you move up the chain, because that is how you will make a bigger impact.
Today we’re pleased to launch Rabble, a directory of kiwi technology companies.
We’ve created this in response to a few problems that we’ve seen startup companies struggle with first hand.
We hope to help people who want to work on startups find a great place to work. The biggest constraint for just about all of the good startups we know is finding good people to join the team – and meanwhile, smart people continue to work for big, boring companies. We want to liberate a few from corporate slavery.
We hope to help investors to find better places to put their money to work. We despair to see people joining clubs in the pursuit of deal flow, unaware that the best opportunities are never going to come to them there. We know you have to work to be an investor of choice, but we also know that great companies are out there desperate to find the capital they need to get to the next stage. We want to make the connection.
Last but by no means least, we hope to help startups find the right advice and the things they need to get them moving faster – whether that is a clueful lawyer to assist with a shareholders’ agreement or a printer to help create the perfect t-shirt. We know that startups can be demanding but very rewarding clients, so if we can help those who want to help startups then that would be great.
But, to start with we just want to make a list. We’re putting the M back in MVP. We realise that a list by itself doesn’t really do any of the above very effectively, but we hope it’s a foundation to build on.
Check it out here: http://rabble.co.nz
We’ve focussed initially on four categories of companies:
We’ll hopefully add more categories soon – we’re interested to hear what others you think we should add next.
We’ve added about 100 companies that we know of from our own networks and who have been mentioned in the media recently.
Of course, this is by no means an exhaustive list. If you would like us to include your company, or one that you know we’ve missed, please send the details to firstname.lastname@example.org.
And, even if we already have your company listed we’d like to hear from you too, so we can make sure we have the right people associated with each listing. If you’d like us to update any details we may have incorrect, or even just add a better logo, get in touch and we can sort it out.
But, at this stage, we mostly need your help in spreading the word, on Twitter or Facebook or wherever. Please tell anybody you know who might be interested – perhaps they are potential employees looking for a job, perhaps they are investors wondering where to start, or perhaps they are suppliers who would like to work with startups. Either way, we hope that Rabble can help them.
Please let us know what you think. At this early stage any feedback is useful and appreciated.