From guns to funds

This post was first published as a guest post for Startup Weekend http://perth.startupweekend.org/2012/08/28/from-guns-to-funds/ but was originally taken from a talk given at Bay Tech Startups in Finance, a meetup event I organise in San Francisco

NOTE: LONG POST (lots of links to other resources & reading also)

The title sounds misleading, I assure you it’s not. In January 2011 I started a company called Planwise, by May 2012 we had traction, product, customers, a great team and seed funding. Somewhere along the way someone pulled a gun on me.

This post is a narrative from a talk I gave in July 2012 in San Francisco called “Idea to Seed Funded” and combines the story with practical advice and resources on how to get your startup going.

Let the story begin

 

Idea & Incorporation

Planwise (Mifii Inc as it was known back then) started with $35,000 in initial capital in January 2011, incorporated in the US. We had to incorporate there, to be able to get a visa for me to be there. By April 2011 over 1/3 of our capital had been spent on lawyers without a line of code cut.

Learning: avoid legal if at all possible in the early stages but if you do need to engage to do things like sign contracts with co-founders, leases or get visas then negotiate hard. Find a law firm that specialises in startups, get references, and negotiate both a fixed price for the specific work required and get deferred (6 – 12 month) payment terms.

We also spent $2,000 on formal market research, I can’t recommend it highly enough. The numbers helped guide our early product ideation but more importantly helped solidify the market opportunity. The point of your startup capital is to fund early ideation & prototyping to prove the market opportunity. Having a comprehensive, US ‘census relevant’ survey helped hugely with our early conversations. We used http://www.gmi-mr.com/ (for the US market)

Co-founder & Prototyping

If you’re starting a company built on technology, and let’s face it, if your’e reading this you probably are, then a technical co-founder is critical. For a bunch of reasons you should have a co-founder anyway. If yo’ure out to create an amazing product, solving an important problem for lots of people then it’s a whole lot more fun to do with someone else. For pure startup reasons it is a whole lot tougher to get funded without a co-founder, and if you do have one and neither is technical (read: able to code at least your prototype & beta versions) some angels/incubators won’t even talk to you.

Further reading:

http://www.quora.com/Technical-Co-founders

http://venturehacks.com/

http://venturehacks.com/bookstore

It’s also important to structure your co-founder relationship properly. I believe in keeping cash bought and work earned equity separate. Have a 50/50 for work earned, agree a valuation for cash bought. At day one, value it at cash. Be honest with yourself, your idea (everyone’s idea in fact) is worth nothing at the idea stage :D

I got a co-founder in early 2011, we courted for months, we set off down the road together but when it got to the all important step of ‘burning the boats’ (i.e. leaving his job to come on full time) we hit a roadblock and we decided to part ways.

Was it easy? no. was it managed because of the structure we put in place, yes,

For prototyping – start with wireframe tools like Balsamiq, create low fidelity, highly interactive mockups and step through these with a broad range of people including those you might have invest in the future (mine included 2 of the 3 who would later invest). Let them get invested in your product evolution. Listen.

Resource: www.Balsamiq.com

Objective – is to get a majority of people identify with the problem and confirm in theory that your solution could/would save that problem.

Twitter can connect you with some amazing people..  There is only two type of people in this world who fall for flattery.. Men and women …   be prepared to have any conversation when you get their time.. They will often see a more pressing problem than the one you hit them up about. In our case I met an amazing ex Flickr guy for a ‘coffee to talk about UI design’, he gave me 2 hours which ended up being all about what problem we were actually solving and for who.

Review your focus – who’s problem are you solving? What are you looking to support? .. If you’re building a consumer tool you need to ensure that you are solving a problem that affects a lot of people and often. We had to change our focus from mortgages, connecting consumers & banks … to any spending/income/debt decision, focused on the consumer.

Learning: listen to those who present different views – go back to your early targeted investors and get their input/buy-in on these changes but be sure to own the product strategy yourself.

Brand & Positioning

Our original name was Mifii … I kid you not.

It failed the 3 rules of good names

  1. Hard to read, when you see it
  2. You aren’t sure how to say it, when you hear it
  3. You’re not sure how to spell it

… it had to go. Don’t get stuck on your name, be pragmatic

How much difference does it make…  huge. Mint vs wesabe example, well documented on quora.. Be prepared to work on getting a good name.. We spent months on it. It paid off.

http://www.quora.com/Why-did-Wesabe-shut-down-while-Mint-did-so-well

http://blog.precipice.org/why-wesabe-lost-to-mint

Spend a decent amount of money to create your core brand, give designers something to work with (a good name and a clear vision of what you stand for) and create something interesting in your brand story. We are focused on helping people make better financial decisions, but we know people care less about money and more about the things they want to do in their life.

Our brand stands for knowledge, calm, insight, simplicity.. nothing to do with money however the green we use is actually sampled from US money as an example … We spent almost 1/3 of our startup capital building our core brand and blog and UI concepts..  Allowing us to sell the vision to everyone in a far more effective way. A strong vision helps secure customers, advocates, investors and most of all, passionate team.

 

Learning: set an end point for your vision, but let the specific evolve. Most things people will ever do will be for emotional reasons, so try to understand the emotion behind why someone has the problem you’re trying to solve.

At this point we started to make enough progress that it made sense to bring on advisers. I will say the following about advisers.

Informal is good,.. Formal is better – be opportuntistic… be active on twitter… help other people (be an adviser, it will help you understand how best to use them yourself) …  structure equity, ~0.5 – 2% of pre-funded but fully vested capital for 2 year commitment. Document their role, core and other areas and leverage them as much as you can

Resource: http://www.quora.com/Startup-Advisors-Board-Members

Friends, Family & Fools

In June 2011, after we had created a prototype, which was testing well (formal surveys showing 90%+ people wanted to use the beta product once available) and had even been accepted into a major conference to launch the technology, my cofounder and I parted ways. Remembering that he was the guy cutting code, we found ourselves with

  • No product
  • No developer
  • No capital

So, on the advice of some incoming angel investors who had a relationship with Bulgaria, I got a one way ticket to Sofia. Over the weekend I flew world markets dropped 10%… so by the time I landed they pulled out so to further compound I now also had

  • No investors
  • No money
  • no return ticket

The investors had stumped up the first week’s rent to my 6’5 mid 60s ex mercernary bulgarian landlord – when I turned up to pay rent at the end of the first week with essentially the last 100 EUR I had left, he pulled out a magnum, slammed it on the table, and while gently stroking the barrel said

“.. I want you to know what happens if you try to run away without paying..”

I turned 33 the day before, happy birthday, you’re at rockbottom.

Learning: things can always be worse :) .. one day you’ll have a gun pulled on you too (metaphorically or otherwise), you need to choose what to make of it. I spent an afternoon watching TED talks for strength and motivation. I then focused on the uber short term.

I hit up one of my advisers, who I had met less than a year prior and shared the situation with him. I got him to agree to fund the next 2 immediate milestones, the second conditional on hitting the first. I agreed to underwrite his investment if we couldnt get to seed funding, I gave him superb terms. He deserved it, when no one else will back you, back the people who will, reward them, then work like a fking banshee to hit the milestones. With less than $15k invested we were able to get a showcase ready product from start to stage within 7 weeks, and in late September in front of over 1000 people at Finovate in NYC we showcased publically for the first time Planwise.

Within 2 days we had attracted further angel funding.

Learning: Fools who invest early.. Only look like fools to other people … in reality they are people who you’ve kept close enough to your vision and progress, who have been active in shaping it.. So are better informed than the outsiders looking in and calling them fools

Product & Traction

With a successful showcase, a small amount of angel funding (< $25k) and some publicity starting to build we turned our attention to beta.

A beta is primarily to provide a basic but working version of your core product to real people so you can establish with authority that they will actually love it, use it or pay for it. When you launch a beta getting enough people to it to have reasonable data is critical. To do this, you need publicity, you need to get traffic from established sites. We developed relationships with sites focused on technology, startups and beta launches early.

When we were ready to beta, they were ready to cover us. We ended up getting a feature in Sprouter.com which sent ~1000 people to our beta, of which about 25% signed up. Combining this with our own efforts on blogging (which we had in place since August 2011), twitter, facebook and other sources.. we were able to get 500+ people through our beta in around 10 weeks.. and only about 20% were our mates, which is important.

A beta will have one of 4 outcomes

  1. It will suck so bad people will tell you that you should give up – good, learn this, change direction or go back to your day job. Better you know this now before you raise & burn heaps of capital which will then haunt you for years to come
  2. People will like the concept, and get it, but not take to it so strongly as to power new users coming from existing users.
  3. People will love the concept and actively start telling other people about it but conversion/action on this means that growth with be single digit and/or flat.
  4. It will be an absolute smash hit, driving 25%+ weekly growth that is self sustaining – and people will line up to hand you money.

 

Plan for 2, possibly 3. You can def raise money on 3, but should be able to raise money on 2 as well.

Pitching & Failing 

We got on to Angel List, it didn’t work for us but you should be there anyway. The following is what I recommend

  • Start early
  • Build a great profile, make sure all your advisers & employees do the same
  • Show an early traction story then approach Angel LIst team with that story
  • Demonstrate you have read all the core posts on how best to use Angel List and quote these in your approach
  • They will promote startups that are ready, in the right markets… initially to only a small group of angels…  to see how it goes.
  • Research those who respond well before replying, but reply quickly

Resources:

http://www.quora.com/Brendan-Baker/Posts/Startups-How-to-Hustle-with-AngelList-in-10-Steps

http://www.slideshare.net/brendanbaker/pimping-your-angellist-profile-angelpad-7286378

Result? It didn’t work for us – our traction wasn’t strong enough… none of the investors who reached out understood or had invested in consumer internet focused on finance. Our metrics and assessment of the market/problem were not relevant to these investors… they expected internet / mobile level traction story (100,000 users growing at 30% a month). The successes I had in the Australian market didn’t seem to carry a lot of weight either.

It was a positive learning experience but we knew that we had to try something else.

Traction – in the valley and elswhere this is becoming the ‘currency of angel investing’ – it’s important, but it’s more important to the actual success of your startup and plays only a part role in your getting funded.

You can read a ton about traction but honestly early stage investors are really investing in two things

  • Market
  • Team

To short circuit a large dialogue, basically if investors believe in you and your ability to capture a market they already believe in, you have a good fit for investment. Traction helps communicate this to people who dont know the market you’re chasing and/or don’t know you. But if you’re getting a “2″ in traction above, then you going to need to come at this a different way.

 

Learning: If traction doesnt win you investors, find & chase people who already know you/your team and already understand and believe in your market.

Resources:

http://www.quora.com/Brendan-Baker/Startups-How-to-Communicate-Traction-to-Investors

Focus & Funding

Trying to launch.. And trying to get funding.. At the same time.. Is incredibly hard, don’t do it.  If your beta can’t get you funded … get to launch first…then come back to it. We launched our live version in April 2011. I started pitching people who new our market and I had a previous working relationship with in May. We closed in June.

 

Learning: Try to learn why you didn’t get funding.. Ask hard questions, don’t worry about scaring people off.. If they’ve not committed after 1 month then they are unlikely to commit, so nothing to lose by understanding what isnt working

Your reasons will be different but get in the habit of asking why why why – find the root cause of their disinterest in investing.

 

Learning: Go back to your roots – find people who knew you in a former life, who you have had some, any success with, even if that was also associated with some failure. Qualify that they trust you, and focus on the market you’re playing in … in short, find people from the industry who you’ve worked with and still have a relationship with.

Come in at your initial terms but be prepared to negotiate to get the deal done. Remember to appeal to their ability to help you over and above the money alone. This resonates with people who are successful.. Typically they invest and/or run businesses they either know/understand or can control.

Convertible notes are great for seasoned investors.. For everyone else they are confusing and only make your life harder. Keep the investment structure simple, give new investors the right to top up and know how to put together a basic shareholder model and illustrate their investment with this model.. Don’t’ focus on exit .. But do focus on the intended amount/timing/valuation of next round … likely a Series A

 

Resources:

http://www.bothsidesofthetable.com/2010/08/01/my-seed-funding-policy/

http://www.bothsidesofthetable.com/2010/08/30/is-convertible-debt-preferable-to-equity/

This is the first ‘exit’ valuation point for your seed investor and puts a level of support under their holding – don’t be afraid to give a board seat to a lead angel investor but set the expectation that this may need to end for a Series A to complete.

The right/likely investor will (likely) do the following things

  • Return your calls
  • Offer areas they can help in within the business
  • Bring in other angels
  • Return feedback in a timely manner

If you’re getting 0 from 4 here, start looking for more or new people.

The right people, at the right time, will make a decision in days and execute it in weeks. They will be as keen to get you the money as you are to have it.

Today

We find ourselves with 12 months to get from a ‘mid 2′ in terms of traction with our product to a 4.0 – This will position us to raise or fund the next stage of our growth. With a clear vision & brand we have attracted some amazing people to work with us and advise us and get called by VC most months (we’ll be ready for those conversations in a few months).

Your journey will be different but hopefully you can learn something from mine – I’d love to hear your story and your challenges so feel free to contact me on twitter @vinaeco

 

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