5 Startup Fundraising Tips Most VCs Won’t Share

This was inspired by my recent talk at Techweek LA. I previously summarized general fundraising tips for first-time startup founders. I recently realized there are some additional tips that aren’t in the interest of any given investor to share with a founder in the course of trying to land a deal. That said, if the investor has confidence in their worthiness, they probably won’t mind sharing this advice.

5. Do due diligence on prospective investors 


It’s okay to turn the tables. Do reference checks with other founders, ask about date of last investment, investment size, amount of capital left to invest, and if the investor is claiming a value-add, investigate its credibility. In general, be discriminating and picky. As an operator you would do the same with prospective employees.

4. Don’t spend much time with prospective investors in between fundraising


Your startup is young. You need to focus. As an operator, it’s hard enough to build one thing well. Apply that to fundraising. It’s okay to casually engage with interested investors in between fundraising, but be aware of your time investment and be clear that you are not fundraising.

3. Believe the “no”, not the why


There is an incentive for investors to not reject you outright, and furthermore, to not be caught sounding like an idiot in retrospect by providing an incorrect reason. The incentive is the fear of missing out; they may not be ready to invest now, but want to preserve a future ability to invest. If you receive a soft no with an accompanying reason, keep in mind that may not be the actual reason. Many successful startups receive 20 no’s (or more likely ambiguous “not nows”) with a variety of accompanying reasons before a yes. When it comes to validating your business, trust your market, product, and customers/users, not investors.

At FundersClub we choose to give a clear (and fast) “no” to founders we cannot fund and provide accompanying reasons. As founders of past startups ourselves who’ve raised VC and angel capital, we hate being left in limbo. We always caveat that the feedback represents investor sentiment–helpful to founders for optimizing the fundraising process, i.e. understanding investor sentiment–but not necessarily a reflection of reality.

2. Run a competitive fundraising process


As an operator you would never sell your product to a sole customer. Think of your stock and the opportunity to be an investing partner as a product. A competitive process can also speed up your fundraise, which will help you get back to focusing on the growth of your business.

1. Your key metrics & product-market fit matter more than raising money


The currency of success in startups is growth of your key metrics, not amount of raised capital. In fact, 2/3 of companies that IPO never raise outside VC capital.

Drinking Dom Pérignon On A F#!@ing Boat

Starting a company is hard. Keeping a startup running on an even keel is even harder.

Those circumstances explain why I received the below calendar invite from my friend Brian Armstrong, CEO of the bitcoin startup Coinbase, about a year ago. A notable aspect of the invite, other than the loose allusion to a Saturday Night Live skit (possibly NSFW due to liberally descriptive nouns/adjectives), is that it was for a date two years in the future.

2-year calendar invite

The plan is for a celebratory champagne toast on the Pacific in honor of a little agreement we have, which we call THE PACT.

What was the agreement? Pretty simple. We agreed that no matter what happened, we would not give up on our startups for at least two years. The reality is that our journeys will still just be getting started when this event actually occurs, but at least we’ll be two years into them.

One of the keys to not failing at a startup is to not give up. As goofy as agreeing to drinking champagne on a boat two years from now sounds, it’s actually helped to establish a tangible driver for our pact.

I’ve had the pleasure of knowing Brian as a friend, fellow Y Combinator founder, office neighbor, and via FundersClub, an investor. Both Coinbase and FundersClub are disrupting decades-old industries. Both have had to address initial market skepticism, initial regulatory questions, and have had to address all the challenges associated with building a new marketplace / transactional technology and bringing multiple ecosystem participants together. It’s fair to say we’ve both had our share of roller-coaster days. While most would say we’ve come a long way and that this ride has trended upward, there will no doubt be more down days ahead for both of us.

I’m sharing this because if you’re a founder, I want you to know you’re not alone. When the going gets really tough, often the best thing you can do is to commiserate and carry on. The dirty secret of every successful startup is just how broken and challenging things are on the inside, particularly in the early days.

Consider forming a pact of your own with another founder you know if you’re both working on something really big. It may be that at the darkest hour, when you’re truly being tested, the only thing that will keep you going is knowing that you can’t give up because you both agreed not to do so.

10 days and nights unplugged

I had always wanted to time travel, until the moment that I actually did. In a world obsessed with the past and the future, the present is underrated. Even if the future is your aim, you can’t get there without taking the right steps for today, and you can’t take the right steps for today without focusing on them.

How did I become so zen? Last month I discovered a backdoor to transporting to the early 1900s and took the plunge, at least connectivity-wise. Here’s how to do it yourself: smash your cell phone.

This should have been a trivial event to recover from, but Andreus at customer support left a lot to be desired, ending with me not-so-temporarily phone-less. Combined with the fact that I tether to my phone in lieu of home wifi, this meant that I spent 10 days and nights in a total blackout (outside of the office).

In the digital dark, those moments were eye-opening.

Normally I can use the constantly updated timestamps of emails, texts, and various alerts I receive night and day as a sort of ghetto watch that winds me into automaton action. “9:45 am – Reminder! You have a meeting with Very Important Person in 15 mins” –> goes to meeting, “9:50 am – ROFLOLOLOL CHECK THIS OUT ALEGZ” –> wastes 5 minutes looking at a cat picture, now late for meeting, “10:00 am – Google Alert: everyone hates you” –> distracted from meeting by noise. In this mode, it doesn’t matter if my eyes are open.

Suddenly without this normal chatter, I was forced to be where I was at any given moment, and to open my eyes. I was not informed about what just happened or by what was going to happen, and instead had to intuit it or seek it out myself. I had to think carefully about what I needed to address, when, and how.

I had to memorize my daily schedule of meetings and calls, plan out travel ahead of time, and become much more independent overall.  I had to pay attention to everyone I spoke with or met. Twiddling on my phone for supposedly justifiable reasons simply wasn’t possible.

In turn, my coping mechanisms for being without a digital connection transformed my internal thoughts too–in a reinforcing cycle, my altered thinking changed my actions. Everything became extremely deliberate, thoughtful, and well-planned.

The experience was dream-like. For those 10 days, I was living in a parallel reality. After a few days plugged back in, I’m finding myself falling back into automaton mode and am praying I don’t forget the lessons I was forced to learn.

Specific pros from the week that I remember:

  • deeper interactions with friends and family, old and new (e.g. organized weekend trips, spent time with family, had more face time interaction)
  • more attention to my surroundings (e.g.  cleaned my apartment more than normal, cleaned my desk at the office, learned the major roads of SF by heart after being reliant on GPS-navigation previously)
  • more attention to my personal well-being and those around me (e.g. got more exercise, started flossing more regularly, encouraged others to eat healthier)
  • more time to engage with old media (e.g. started reading the first fiction book I’ve picked up since 2003 and read Orwell’s Politics and the English Language at the recommendation of a friend)

Specific cons that I remember (I’m convinced that these are simply due to me forgetting how to operate without my phone):

  • missed a 24 hour turnaround deadline because I wasn’t even aware of the deadline
  • could not be easily called; had to originate most calls
  • wasn’t used to not being told whenever I had a meeting, led to me being late more than usual

Is there really an actionable take-away from all of this? Sure, you could make the bold declaration that you’re going to disable all alerts on your phone, or perhaps even power down your phone periodically, but would you really forego texts from close friends and family? What if there’s an emergency?

In my case, I saw the light, but I’m also right back where I started, phone in hand, alerts buzzing. That said, my perception of what’s important has changed. By being thrust kicking into the present, I realized there are actions and habits I don’t take normally enough, and am adjusting my life accordingly.

I encourage everyone to take a connectivity vacation, and uncover what in their life might be untended. That, and to generally be more mindful of the present.

BTW, all I did was break my phone. Augmented reality (think Google Glass, digital contact lenses, etc), self-driving cars (already legal in Nevada, Florida, and California), brain-machine interfaces, and brain-brain interfaces are all in the pipeline. I wonder what epiphanies await our future selves when technologies like those break down.

Investor humility

Last week I had the pleasure of conversing with Josh Kopelman in front of a live audience of startup investors at the UPROUND 13 conference. The focus of the discussion was on Josh’s lessons learned as an angel investor, and later, as an early stage VC investor.

Josh is no stranger to startups. While an undergraduate student at Wharton, he co-founded Infonautics which would go on to IPO on NASDAQ. He followed this up by founding Half.com which was acquired by eBay a couple years later, and subsequently helped start TurnTide which was acquired by Symantec just six months after being founded. Josh’s career as a startup investor is just as storied, with First Round, the VC fund he founded, backing such high-profile startups as Uber, Fab, Warby Parker, and Square. BTW, part of that storied history also includes releasing quirky holiday videos every year–I’m simultaneously proud and embarrassed that FundersClub made it into last year’s one.

For someone who has accomplished so much, I thought it’d be worth asking about Josh’s biggest regret as a startup investor. In an incredibly timely revelation, just two hours before Twitter announced its IPO filing to the world via a tweet, Josh revealed on stage at UPROUND that he missed out on being the first investor in Twitter. Josh made the first offer to Ev Williams but was unwilling to move up on valuation to where Fred Wilson, one of our friends at Union Square Ventures, was able to get comfortable. The Wall Street Journal was in attendance at UPROUND and detailed Josh’s story. Luckily for Josh, his failure to participate in Twitter provided the perfect backdrop to repent and turn a miss into a success. First Round would go on to back Twitter’s co-founder Jack Dorsey to launch Square.

When I asked Josh about bad habits he used to have as an angel investor, Josh revealed a tendency early on in his investing career to invest on the merit of what he thought a business could become, not what the founders were seeking to build. Pulling out his cooking analogies, Josh pointed out that in a kitchen, while similar ingredients might be present, one could alternatively create a soufflé or brownie. An investor might be investing in the soufflé, when in fact the founding team wants to bake brownies. Investor-founder alignment on vision is critical for the sanity of both investor and founder.

There were several other lessons shared by Josh, as well as by several other prominent VCs and angel investors, but I think the main takeaway that day was actually a lesson on humility. In spite of the stereotypical image of the egomaniac VC, I’ve noticed that some of the best startup investors around are also some of the most humble people I know. It’s good to see intellectual honesty and humbleness being rewarded in the startup investing community, as those are features that allow the industry to continue to learn and evolve.

Fundraising tips for first time startup founders

This is an extended version of my recent talk at SXSW Vegas. Many first-time entrepreneurs obsess about fundraising, and worse, let it take priority over what actually matters–building product and talking to customers/users. Having raised >$30M of angel and venture capital across three of my own startups, I’ve made my share of fundraising mistakes and want to spare first time founders some pain with some hard-earned lessons.

This is a long post, but I wish someone had shared these with me when I was first starting out. Hopefully if you’re a first-time founder you’ll read this and find this useful.

1. Before fundraising, consider not fundraising

Excluding certain specialized industries (e.g. pharma, med devices, energy are some that come to mind) it’s generally pretty inexpensive to build a company these days. Hardware or software. I’ve done both. Even if you’ll eventually need to raise capital, it’s likely possible to prove out your initial assumptions and verify “product-market fit” (ie that people want what you’ve got) before raising. As a sign of just how much has changed, when I was starting my first company less than a decade ago, I had to buy RAM, CPUs, motherboards, and other components, build my own servers, and colocate them due to the amount of computation we were trying to perform that surpassed hosted server capabilities. These days nearly everything has been turned into SaaS (including server hosting), greatly lowering the amount of money required to verify that your business is real.

Avoiding raising money may make sense not only in the beginning of your startup’s rollout, but also for the rest of its history. The proposition of taking $1 from an investor and purporting to return $10+ to them creates a lot of pressure that may not make sense for your business or market when compared to bootstrapping.

VC money in particular carries the expectation that you’re going to build a $1B+ business, and relatively quickly. Somewhat ironically, as reported [pdf] on by the Kauffman Foundation, of the fastest-growing private companies in the United States over the 10 year period 1997-2007 identified by Inc magazine in their annual Inc 500 list, only 16% had taken VC money. Although correlation is not necessarily causation, by that data, one could speculate that you have a higher likelihood of building one of America’s fastest-growing companies if you avoid VCs than if you work with them. Of course, many of today’s most recognizable tech giants did partner with VCs, and I personally have involved VCs in all of my above-mentioned startups, so you’ll have to evaluate your specific circumstances. I’ve recently started to ask myself why this discrepancy exists. I have a working hypothesis that the very best VCs do positively contribute to building category-defining large businesses, especially technology-driven businesses. However, there are many business models that simply don’t need VC capital to grow quickly; I have not yet reviewed the data to understand if these types of businesses get very large or simply grow and flatline. Companies like Dell, ShutterStock, and Esri all purportedly never raised VC capital.

The take-away from all this is don’t take it as a given that you must raise capital to start a successful company.

2. If you must fundraise to prove initial assumptions, raise as little as possible at first

As mentioned above, it’s possible these days to start a software or hardware startup with no or very little capital. I estimate $5-50k is enough to prove out initial assumptions and demonstrate that real demand exists or does not exist for most products or services. That’s a sufficiently small amount that you can conceivably scrape the sum together from family, friends, and friends of friends. These individuals will be more willing to invest on the merit of you and your character as a person rather than your non-existent business. Other relatively low-hassle sources at this stage include university entrepreneurial grant programs and business plan competitions which are becoming increasingly more prevalent. Even Airbnb income (if you have a spare room to rent) has been used by founders to finance their early operations. If none of the above is at your fingertips, you can still figure out how to hustle to put some money in the bank, ideally by doing something at least tangentially related to what you’re trying to build so you can gain helpful market insights, experience, and connections at the same time. It’s probably a waste of your time to speak with people who call themselves angel investors or VCs at this point, although you could get lucky if someone happens to like you. Some people advise that you speak with investors early and often to help develop relationships for down the road. That may hold true for later in your trajectory, but right now, it’s a waste of your time. Besides, they’ll probably try to give you advice about what to do. That’s the worst thing ever at your nascent stage–customer demand and data should be your guide, not investors’ advice (unless they truly know their stuff, but assuming you’re exploring some novel insight into a market, it’s unlikely most investors will be able to offer good advice that trumps simply getting your hands dirty and getting close to the customer/user and giving them what they want).

3. Do as little (and spend as little) as possible to test your initial assumptions

Effort and exertion do not equal results and output. It’s not cool to be pulling multiple all nighters working on your startup. Execute smartly. Determine what the minimum amount of work is that you need to do to test your initial assumptions, prove or disprove them, rinse, and repeat. Get over the desire to put something out there that’s perfect–instead, focus on the absolute minimum thing that is useful to people, get out there with people and talk it through with them, see what they say, and revise. The wonderful thing about this approach is it’s actually easier to execute on than to try to build the perfect robust solution that you think the market wants.

4. Beg, borrow, and steal. Don’t pay for space or people.

There’s something special about being scrappy. I think it puts you in the right mindset to focus on what really matters. You simply have no ability to get bogged down in nice-to-haves or distractions, because if you do, you will die. In order to stay scrappy, you definitely should be begging, borrowing, and stealing your way to resources you need to prove your initial assumptions. Try to stay scrappy as long as you can.

Assuming you’re building a software company, all you probably need that normally costs money is space and people.

When first starting out, the ideal setup is living and working in the same spot, which ought to eliminate work space overhead since your office is simply your bedroom or living room. Even if for some reason that does not work (maybe you have loud roommates, maybe you’re married, maybe you live in a car–yes I know founders who spent part of their early days homeless)–you have plenty of options. I discovered my first office for my very first startup one summer by discovering that a particular door at one of Stanford’s libraries could be opened without a key or key card. A quick ping to some of my Stanford friends for WiFi access info later and my team was online and working. Even years later, when starting FundersClub, rather than paying for our first office (which we could afford to do), we asked for and received free office space. We had heard rumors that Eric Schmidt had a beautiful office in downtown Palo Alto with floor-to-ceiling glass windows and 360-degree views of the Valley that was relatively unused. We figured out who he knew that we knew, got a warm intro to his people, and got what we asked for. You’d be surprised by what you can get simply by asking for it.

As for people, there are plenty of folks willing to work for free. Younger people tend to be willing to do this because they have a lot to prove and learn. The most ambitious and hungry young people especially tend to be willing to work for the chance to prove their muster and get hands-on, and those are exactly the type of people you want on your team early on. Many older, more experienced people are also willing to work for free, though for different reasons–their day jobs are boring whereas your startup is exciting. I haven’t proven this personally but I suspect stay-at-home moms and dads are also another great source of free, professionally bored, highly experienced labor.

5. Before deciding to raise a more substantial seed round, ask yourself “Why now?”

“Why now?” is a great question to ask yourself about your startup in general as a reality check on why now is the right time to be starting your business. However, it’s also applicable in the context of deciding when to fundraise.

To run an optimized fundraising process, you need to be situationally aware of where your business stands and where investors’ expectations lie. If you raise when these misalign, you will waste a lot of time raising money.

Quick story. Jeff Lawson, founder at Twilio (the telecom-as-an-API company), was fundraising in 2008 during uncertain times. The first 10 investors he met with said no. So did the 11th, 12th, 13th….and 20th. Finally he met a partner at a VC firm that thought what Twilio was up to was interesting and next-stepped Lawson to a full partner meeting with the intent of making the go decision following the meeting. Lo and behold the VC firm also decided to pass. Lawson and his team said “Screw it!” and figured out how to launch without funding. They began to see traction including paying customers, and within 2 months of launch, had closed their first seed round. Today, they’ve raised >$100M and have built one of the most promising tech startups out of Silicon Valley.

The point of that story is to demonstrate that for Twilio, for 2008, what the market needed to see was traction in order to “get” Twilio. One could get frustrated with myopic startup investors who lack the same vision and insights of founders, but it’s more productive to accept that having a keen understanding of investor demand will save you a lot of time and frustration and help you fundraise effectively.

Know what the early inflection point is for your startup. 1 hour spent fundraising after this point could be equal to 1,000 hours spent fundraising before this point in terms of results. Remember, executing a startup well is not about sweat, it’s about smarts. Speaking in generalities, for most consumer/web/mobile startups, this point is at a minimum demonstrating growth on the metrics of adoption and engagement, and in many cases also showing growing revenue. For most enterprise startups, some sort of prototype and early serious interest from meaningful customers in the form of letters of intent, trials, or actual revenue is good (and obviously growth is even better). For consumer-facing hardware companies, strong pre-sales are almost expected by investors these days. Its harder to define this point in general terms for other types of companies. I’m not saying you can’t try to fundraise before you reach these points–for some business models, you might be forced into this. However, you should know it will take exponentially less time to do so after, and your time is golden.

6. Don’t die prematurely

If you’ve validated your core assumptions and reached an early inflection point, raise enough to not die prematurely. From a fundraising point of view, the worst thing ever would be to ramp up with early funding, and then run out of powder midway through reaching your next inflection point. The likelihood of this happening is pretty high when you consider that the average successful startup pivots 3 times.

Imagine your dialogue with investors at that point: “Hey guys! Remember me? I said I was going to do this thing. Well it didn’t work. But we learned some stuff. We’ve had to go back to the drawing board and pivot. Now we’re doing this new thing. Can you back us again?” They might, but you’re not speaking from a position of strength at that time unless you’ve found traction with the new direction.

Part of startup success is about taking a lot of shots and not dying. The longer you have, the more shots you can take, and the more likely you are to live rather than die. Therefore I typically recommend that startups with early traction raise 18+ months of runway vs. the conventional 12 months (or vs. the advice of those who say to raise as little as you need to reach your next milestone…I only agree with that if your next milestone is demonstrating initial market demand as noted in #2 above).

7. Be authentically passionate, confident, and formidable when speaking with investors.

Credit to Paul Graham for citing “formidable” as a characteristic to exude when speaking with investors. When advising founders I had previously been citing being “authentically passionate” and “confident” as important characteristics, and I’ve since realized they are are subcomponents of being formidable. These character traits can’t really be faked. How you say what you say–your body language, tone, expression–are as important as what you’re saying. You really need to be convinced (or deluded) that your version of the future is the correct one and that you’re the right person to drive the change. Starting a company is really hard. Investors will want assurance that you will aggressively execute and stick by it when the going gets tough, because the going will get tough. Other investors have told me time and again when evaluating entrepreneurs that they like to pattern match for personality type.

One way to be especially formidable is to be upfront about challenges that stand between you and success. It’s a little counterintuitive, but by walking through the ugly underbelly of your endeavor to investors, you’re actually building trust and demonstrating your sophistication and knowledge of your pursuit. Too many founders only speak to the upside potential without addressing very real issues that lie in the way. It’s one thing to say electric cars are the future. It’s another to explain that existing battery tech has never been used to power vehicles with the mileage range demanded by consumers, that there hasn’t been a single new successful US car company started in the past few decades, and that key infrastructure is missing to make consumers comfortable with the vehicles. What you’re really doing by showing your ugly side is laying out a blueprint of key challenges to overcome in order to succeed–and that makes you seem calculatingly fearless and strong.

 8. Choose investors wisely. Money is a commodity for the best founders, but not all money is equal.

Sometimes you’re not going to be in a position to pick your investors. If that’s the case, see #5 to be sure you’re not prematurely ramping up fundraising. Most high potential startups have their share of investors trying to get a piece of the round though, so hopefully you do have a choice.

If it’s not just about money, what matters? There are a lot of parameters to consider when selecting investors. I think the ones that matter most are below, but beware as these need to be considered together; optimizing for any single one could get you in trouble.

You probably would not hesitate to conduct reference checks on new employees joining your team. Likewise, I strongly recommend conducting reference checks on investors you’re considering adding to your team to ensure there are no red flags raised by founders in their portfolios.

a) Ease of fundraising

Is this an investor who’s going to string you along only to not invest after the 5th meeting and weeks (or months!) of back-and-forth?

b) Post-fundraising investor overhead

Say an investor optimizes on a) and writes a big check after an hour-long coffee meeting or 30 minute phone call. If this same investor subsequently calls you twice a week every week demanding updates or other hand holding, you might not be so happy. I have heard horrible stories of founders who took money because it was easy to take only to later regret it due to the trouble that the investors brought with them.

c) Value-add

Most investors think they bring value-add. Many do not.

d) Signaling

FOMO, or the fear of missing out, is for better or worse, a strong motivating factor for many startup investors. Who wants to feel like they opted out of the next Facebook, Apple, or Google, after all? Certain investors have established a strong record over time which leads to their investment in a given startup signaling to the market that the startup is a high promise startup. Having such investors can help to more quickly close your round. Perversely however, it is exactly the type of investors who are especially vulnerable to FOMO who tend to fail at a)-c) and who in general may not have the organic strength you ideally want. Conversely, there are certain investors who act as negative signals and you will want to avoid these.

e) Mutual respect

This is a rather soft criteria, but you will want to surround yourself with investors who have your back and respect your leadership. Running a company is hard work, and it will only feel harder if you don’t enjoy mutual respect with your investors. I’ve met multiple first-time founders running successful, high-growth startups who’ve received term sheets from certain VCs conditional upon a leadership change or an onerous Board structure. Screw those VCs. While you must be open to the idea that you’re not the best person for the job if the data speaks to that, if the data says the opposite, don’t start off the relationship with people who are betting against your continued success.

BTW, from a founder point of view, we started FundersClub to try to optimize a) through e) for our portfolio founders.

9. Get it over with quickly

Fundraising is a distraction from building product and talking to users. One way to get it over with quickly is to set aside a discrete period of time (e.g. 2 months) during which you prioritize fundraising over everything else. Everything else will suffer, but at least the damage is time-limited. Furthermore, treat it like a sales process, use a spreadsheet or CRM to track leads and progress. Don’t let fundraising happen to you. Instead, control your round and be deliberate about it. What happens if you reach the end of the allotted time period and you haven’t closed your round yet? Most likely, the market is telling you something important about your pitch, or more likely about the facts on the ground. The right answer is probably not to continue to bang on a door that will not open, but to instead return to execution. That’s after all what building a business is about, not fundraising.

SEC lifts ban on general solicitation

In short, a lot of noise is about to be introduced to the private markets, and distinguishing signal from noise will become critical for investors, and standing above the crowd will become critical for startups.

Today is a historic day in the world of private fundraising. The SEC commission has voted to lift the ban on general solicitation. When the new rules go into effect, companies who follow SEC guidelines can market and discuss their fundraising efforts for the first time in decades.

Why the change?

As one SEC commissioner noted in today’s 10am EST meeting announcing the SEC’s recommendations, “The world looks very different from 1982 when the [private offering] rules were adopted. Technology has changed the way we interact with each other.”

Why does this matter?

The lift of the ban increases transparency into available private offerings, and eventually, greater efficiency will come to the capital private markets, where 4x more capital was raised in 2012 than in IPOs.

For decades, private companies (e.g. startups) have been handcuffed from being able to reach a broader investing audience, forcing them to deal with an insider’s group of investors and to engage in backroom deals where they typically don’t have a fair position. If you think of private company stock as a product, what seller of a product isn’t allowed to market their own goods, after all?

Conversely, millions of investors are unaware of promising private investment opportunities, again, leaving a very small group of backroom-dealing investors to be able to access these opportunities.

Why be cautious?

It’s not all good news for investors or startups. In tandem, well aware that the lifting of the ban is a big change with potential for negative impact, the commission has recommended adopting rules requiring more information disclosure from those raising money privately, tighter monitoring, and rules preventing bad actors (e.g. felons) from taking advantage of general solicitation. Surprisingly, the SEC is first lifting the ban, and then later developing and implementing further rules.

One commissioner opposing the adoption of the lift of the ban ahead of more specific investor protections gave an analogy. Imagine trying to make a railroad train go faster with a faster engine. Wouldn’t you want to first inspect the tracks to make sure the railroad tracks can handle the faster speeds before putting the new railroad cars on the tracks and risking a derailing? (I was breaking out the popcorn at this point in the meeting, BTW).

With the introduction of the public disclosure and even advertising of the availability of private company securities, it only makes sense that the quality of the private company securities and the standing of the people making the offerings become extremely important.

Get ready for a wave of less than credible issuers (including offline and online folks) pushing all sorts of private offerings. In this new normal, issuers will be put under increased pressure to demonstrate the merits of the opportunities as well their own qualifications to investors, and investors will be wise to heavily scrutinize the reputation of issuers and the quality of offerings before proceeding with an investment.

In short, a lot of noise is about to be introduced to the private markets, and distinguishing signal from noise will become critical for investors, and standing above the crowd will become critical for startups.

What are other implications?

VCs have long been saying that for the best startups, money is a commodity. Particularly at the early stage of a company’s development, with the expected increase in capital base addressable by private companies, investors will be put even under more pressure to demonstrate how they can add value beyond their dollars.

What’s the timeline?

The trigger is from when the SEC’s release gets published in the Federal Register. The release usually is published 10 days after the public meeting.  Rules often go into effect 30 days from publication, but it can be 60 days or 90 days. I believe Mary Jo White, SEC Chairman, specifically stated 60 days in today’s meeting. In other words, expect these changes to go live in mid to late September.

Happy birthday Nikola Tesla!

I had the pleasure of speaking on the VC panel at START SF last week with Aileen Lee (Kleiner Perkins Caufield & Byers / Cowboy Ventures), Mike Maples (Floodgate), and Jeff Clavier (SoftTech VC).

There really wasn’t any controversy amongst the panelists. While not necessarily a bad thing, it was 9am and I hadn’t had enough coffee yet. In an effort to create a lively pick-me-up of a conversation, I pointed out that I completely agree with the VC cliché, “There’s too much money chasing too few good deals.” People think that’s surprising coming from me because FundersClub brings more capital to the table. But this is not the really interesting part.

Let’s ignore the fact that that statement presumes that “chasing deals” is a preferred mode of VCs, as if they’re supposed to be flocking around hot “deals” as opposed to partnering with the founders of top companies to help build value (thanks Sam Altman for commenting on this recently). The main point the truism conveys is that everyone wants to fund the obviously great startups. Okay. Great. Not surprising.

What was actually meant to invoke more controversy is that I quickly also pointed out that simultaneously, the converse is true: there is not enough money chasing not enough deals (BTW I was tempted to replace “chasing” with “pursuing” and “deals” with “companies” there). In other words, while there’s an excess of funding in some markets, geographies, sectors, trends, etc, there’s an extreme shortage in others, and the inefficiencies of much of the VC and angel financing ecosystem means a long time may elapse between real opportunities existing and real capital being available to fuel growth of these opportunities. Likewise, lags exist so that some startups are funded to the point of becoming the living dead, zombie companies that would not naturally exist otherwise seeking market demand long past or never present. Solving these inefficiencies is really really hard. But if someone addresses them, a lot more investors and founders will be smiling. It’s heartening to see VC being disrupted right now, both by incumbents and newcomers.

In honor of Nikola Tesla’s birthday (July 10), enjoy this (mostly) tongue-in-cheek stab at the industry [Youtube]. If you’ve ever closed VC funding, you’ll appreciate this. Thanks to Dave Graham of Greenstart for sharing (and I hope the Nikola Tesla statue emitting WiFi actually gets built).



These are my notes from an early chat with Boris Silver over coffee back in the summer of 2012. We would go on to become co-founders at FundersClub. We didn’t have a product. We didn’t have users. We had no team. Our bank balance was $0 (or more accurately, negative, and we didn’t actually have a company bank account at the time). We didn’t even know if the idea we had to disrupt venture capital and startup fundraising was possible.

However, we knew what sort of ideals we wanted to live and work by. And we knew what sort of people we wanted to work with as we tackled what many thought was at once an admirable yet impossible concept. I credit our progress to date in part due to defining and understanding who we were and wanted to be from our earliest days.

In the end, we settled on the below list of values. While very particular to Boris and my personalities, and to the FundersClub organization, I still thought it’d be helpful to share:

  • Love
  • Honesty and integrity
  • No fear
  • 80/20
  • Question

Love. I’m actually surprised that “love” didn’t make the first cut in my notes, as it drives much of our work to date. If you optimize for love, if your users/customers love you, then you know you’re fulfilling a core need and really delivering a game-changing experience. If you’re merely liked, merely useful, you haven’t attained user love, you aren’t really exponentially improving life for your users. You aren’t really needed. It’s a wonderful experience to provide something people really need and love, not what they merely want.

Honest and integrity. Goes without saying. Yet so often founders let issues like ego and pomp get in the way of things. This is as much honesty and integrity with others as it is with oneself. Tied to this is a degree of humbleness, recognizing that one is never above the ideals of truth, and that one can indeed be incorrect…possibly more frequently than one is correct. Cold, hard truth keeps even the most experienced founders on their toes.

No fear. Acting out of of fear is just about the worst thing that one can do in life. Startups are constantly pushing their teams out to the edge of the cliff, putting structure to things that previously had no definition. It’s important to act out of logic and reason rather than fear in these circumstances. Case in point, fewer than 3 months after launching FundersClub, TechCrunch wrote up that Boris and I risked jailtime were we found to be committing felonies. We could have hung up our hats at that moment (We can share with you what it’s like to have to explain to your family and friends that no, you’re not going to jail, and the rumors they heard were false). Let facts rule the day, not emotion and fear. The truth is we had vetted our operations with 3 separate securities law firms and had engaged in informal dialogue with the SEC to ensure we complied with appropriate regulations prior to moving a single penny. The SEC no-action letter we received soon after was not surprising to us but did capture people’s attention in view of the fear-mongering.

80/20. This can mean a lot of different things to different people. To us, this primarily represents the ideal of taking action over analysis. Another way of stating this is that it will take longer to develop the perfect plan of action vs. to develop an imperfect plan, proceed, and refine the plan as circumstances warrant on a constant feedback loop. Seems like a simple enough concept, but it’s fairly common for startups to spend too much time in the “pre-launch” phase, perfecting a product or service with no consideration for what real users/customers think.

Question. The existing system was not created for disruption. Game-changing startups by definition are disruptive. Be prepared for being told that what you want to do is impossible. It very well might be, within the framework that everyone else is approaching a problem. But question, not in an annoying fashion, but in the pursuit of possibility and curiosity. In the words of Albert Einstein, “The important thing is to never stop questioning. Curiosity has its own reason for existing. One cannot help but be in awe when he contemplates the mysteries of eternity, of life, of the marvelous structure of reality. It is enough if one tries merely to comprehend a little of this mystery every day. Never lose a holy curiosity.”

I’d encourage you to define your company’s values as early on as possible. Define who you woud like to be, live by it, and you will become that ideal. Hire by it, fire by it. It’s your startup. Let your values drive it.

Something big is happening with food

Someone once had the crazy sounding, crazy idea to cook food. With fire!

There are a lot of similarly crazy ideas being forwarded by food-related startups out there these days. Throw what you know about food in the blender–what we eat, how what we eat is produced, and how it’s distributed is all being reconstituted 😉

Although many of these startups are still in their early days, many are also showing strong and sustainable traction. Could this foretell a future “new normal” for food? I think so.

Let’s start with the more normal sounding, crazy ideas and progress to the crazy sounding, crazy ones.

Flashback to the Internet in the early 2000s. You probably remember Webvan, the startup that raised $1.2 billion to bring online ordering and home delivery of groceries mainstream (if you don’t remember, yes that really happened). There are a host of reasons cited for why Webvan failed and its bankruptcy was quite public. So it would seem a bit crazy to take another go at things, but that’s not stopping Instacart (which allows for 1-hour delivery of groceries from chains that people already know and love and that is much beloved by its many repeat customers). New technology is allowing Instacart to deliver the compelling consumer experience that Webvan could not sustain or even imagine, and FundersClub and FC’s friends at Khosla Ventures and Canaan Partners are proud to be investors. eBay, Google, Amazon, etc all have their eyes keenly on this space.

Just as folks in the future will look back on hailing a cab as an archaic and silly practice (instead of ordering one from a smartphone), they will undoubtedly see us repeatedly venturing out to buy the same necessities week after week as similarly archaic. Physical grocery shopping is not the epitome of convenience, and will evolve to being focused on discovery, experience, and novelty.

It’s not only groceries that are getting this treatment, but also complete meals–take for example the Y Combinator and FundersClub-backed Goldbely (which allows for next day delivery of specialty and gourmet food from restaurants, bakeries, ice cream shoppes, and more from around the US).

Entrepreneurs are also presently hard at work massively disrupting how food is produced and how it’s distributed and sourced. Whether it’s solving the inefficiency of today’s food supply and distribution network, trying to sever the long-standing tie between fossil fuels and fertilizers, creating efficient marketplaces for at-scale food sale and purchase, or other efforts, entrepreneurs are busy at work applying technology to solve what is one of our most pressing problems to address as a species. Taking on a system where governments and private corporations control double digit percents of the global food supply, control the means to grow and produce food, and are using both to maintain the status quo, certainly seems pretty crazy. I’m looking forward to witnessing more and more startup founders take on this space. It feels naive to think that startups alone will address world hunger, but it also feels like they are the only ones focused on finding efficient, new solutions.

Now to the developments that may make you think we’re living in a scifi movie, and may even make you cringe. What is interesting is that these concepts are coming out of the lab and into real life in response to paying customer demand that spans consumer to industrial, as well as due to the existence of complementary technology just becoming commercially viable for the first time. In view of that, it’s difficult to dismiss these as crazy and impractical, just as crazy and happening whether you’re ready for them or not.

NASA just announced that it’s beginning a paid trial with a small private company to explore the concept of 3D printing food for astronauts on long duration space missions. Although still at the concept stage, there are plenty of implications for terrestrial people as well, both of the end-world-hunger variety and of the eat-foods-that-you-can’t-find-in-nature variety.

Separately, a group of engineers have just announced the disturbingly-named but awesomely disruptive Soylent (a meal replacement that is meant to rival regular food from a health point of view and that helps people distinguish between eating to address hunger vs. eating for pleasure). Even the Economist picked up on the story less than a week after the company that manufactures Soylent launched its web site for consumers to pre-order Soylent meal replacement powder. Just a week later, over $330,000 orders and counting have been placed. Disclosure: I’ve ordered a one-week supply of Soylent.

And a little bit more on the edge of the cliff, Dr. Post at Maastricht University and Dr. Gabor Forgacs of Modern Meadow  have been making headlines recently for their lab-grown beef and other meat products. Disclosure: I have *not* ordered lab-grown meat…yet 😉

It’s easy to be a skeptic of some of these more out-there concepts, or even some of the less controversial ones. Customers don’t actually want them, the government won’t approve this, you’ll never overcome the established players, it’s not safe, it’ll taste disgusting, WHY???, this will never be cost-effective, the impact on the environment is disastrous rather than helpful, etc. Meanwhile, startup founders are busy ticking off each of these objections as they reimagine our very definition of food.

Hope, trust, opportunity, and Mogadishu

If you have unique, legitimate insights that shed light on an opportunity, don’t let inexperience in that industry alone be a reason to stop you; move boldly forward.

Hope, trust, and opportunity aren’t words I would naturally associate with Mogadishu, Somalia. Known to many Americans as the site of Black Hawk Down and to many others as one of the most dangerous cities in the world, all I knew of the place were transmutations from pop culture and 24 hour news channels.

Black Hawk Down, Mogadishu

So it was pretty eye-opening to run into the current mayor of Mogadishu, Mohamoud Ahmed Nur, in Switzerland earlier this month (Quite literally. He was dashing into the reception for an event I was attending. A friend I was with pulled us right into his path. Yes, unfortunately I can’t claim credit for recognizing him myself).

I asked Nur how he was doing. Tired. He had just criss-crossed across 4 or 5 different African nations with the same message he was about to tell this new audience in Switzerland. But as he spoke, his eyes lit up and his voice gushed.

He told of hope, trust, and opportunity–including entrepreneurial opportunity–in this forsaken land. I think all of us, including here in Silicon Valley, could take inspiration from the ongoing transformations occurring in Mogadishu and what it means for us.

Nur had himself once written off his native city, choosing to reside in London and refusing not once but twice in a row when tapped by the President of the transitional government to take the helm of the city. The third time, in 2010, he gave in. He realized in a spark of insight that while the local people had descended into darkness, what he called a box of darkness, as a relative outsider he possessed the ability to create a window of light, of hope, the start of new foundations for renewed opportunities in Mogadishu.

Three years and countless death threats and assassination attempts later, light is indeed coming to Mogadishu–Nur shared that today the once-dark streets are now lined with solar powered lights. People are buying and selling goods and services using their mobile phones as a means of transmitting and receiving funds. The garbage piles that used to line the streets (and which gangs would charge international aid workers a fee to remove) are gone. The land is ready to be put to work, with rich soil for agriculture, abundant metals and minerals useful to industry, and even beautiful beaches and coral reefs awaiting tourists.

What does this mean to us, thousands of miles away in our relative stability and comfort? There’s more than one take-away from Nur’s story, but I’ll save that for a future post (such as the greenfield opportunity for entrepreneurs who dare to take on 90% of the world’s problems, and to look beyond the 10% echo chamber we tend to read and talk about most of the time).

For now, I’ll just point to the fact that it was in part Nur’s status as a relative outsider that allowed him to see the same present as everyone else, to envision an alternative version of the future than the ones that most in Mogadishu saw, and then make that vision become reality. Call it naive optimism even, but it was the perspective of Nur and others like him that helped hope, trust, and opportunity take hold where most had written such progress off as impossible.

I can’t help but think of the boldness of many entrepreneurs when reflecting on the above. It takes a lot of boldness and confidence to take on a new idea. It takes even more to do so when you technically have no experience in the industry you’re seeking to disrupt. Yet time and again, such founders have seen success. Fred Smith penned the plan for FedEx while an undergraduate at Yale. The founders of Airbnb had never run a hotel or acted as apartment landlords before. And it’d be hard to imagine the Facebook founding story if the founding team had been former employees of MySpace or Friendster instead of college roommates.

In all the above cases, being an outsider alone was not enough. Each person had unique insights that gave them a leg up on anyone else attacking the same problem. Although he had lived away from Mogadishu for years and years, Nur saw what worked in London, including the regeneration of Kings Cross. Fred Smith had been an amateur pilot while growing up, and thus could understand the potential of airplanes on logistics when combined with the power of computers. The founders of Airbnb started renting out part of their apartment because they couldn’t afford to pay rent on their own. And Mark Zuckerberg had been observing his friends using AOL Instant Messenger to check their friends’ profiles, as well as the success of his hack on the official Harvard facebook directory, Facemash.

Some of the founders of startups in the FundersClub portfolio were newcomers to their industries too prior to founding their companies, yet have gone on to see great success. Jessica Mah of inDinero comes to mind, who took on the entire accounting industry despite not having an accounting background at the outset of her journey (she’s now licensed by the Internal Revenue Service to prepare tax returns and represent taxpayers before the IRS, and she employs a full team of tax and accounting experts).

If you have unique, legitimate insights that shed light on an opportunity, don’t let inexperience in that industry alone be a reason to stop you; move boldly forward. The perspective of people entrenched in the industry might very well be blinding them to the opportunity that you see. Surround yourself with the right people to make up for your lack of industry insights if needed, but don’t let lack of industry experience alone be a reason to abandon ship.