Flow Ventures

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Investors: What Have You Done For Your Startups Lately?

July 27, 2009 by raymond

Over the last two weeks I’ve spent over 24 hours driving to various client meetings for one of our startups. Yes, the ratio of driving time to meeting time (6:1) is pretty high, but these were crucial meetings that were significant milestones for the startup. During these long drives I had a lot of time to think about the crazy things we investors do to help our startups.

At the same time, behind closed doors I hear a lot of entrepreneurs quietly complaining about how little hands-on help or “value add” their investors bring after closing a deal. So I thought I would put out a challenge to Angels and VCs: What Have You Done For Your Startups Lately?

If you’re wondering what more you can do, here are some suggestions:

  • Work your Rolodex – Remember all those times you bragged about your fabulous network? Besides the week after closing, when is the last time you systematically went through your contacts and opened those doors?
  • Make sales calls – Don’t just shoot off intro emails. Pick up the phone and call in favors. In the early days most sales will be through personal persuasion/coercion.
  • Have a good elevator pitch – I’ve met a lot of investors who can’t give a convincing elevator pitch for their startups. Your elevator pitch should be as good as the CEO’s.
  • Know the details – Knowing the size of the market is great for evaluating a business plan, but do you know the crucial details of the business? What specific segments are they targeting? Who are their customers or prospects? What are the features and technology. What’s the price? Knowing the details makes you a knowledgeable ambassador for your startup rather than someone who can just put someone in touch with the CEO.
  • Give feedback – Investors have a habit of dropping out of sight then giving harsh feedback at board meetings. I always tell entrepreneurs to manage upwards, i.e. manage your Board. But the same applies for investors. Be a hands-on mentor to your entrepreneurs. And don’t forget that praise is feedback too.
  • Get your hands dirty – Besides providing sagely advice from the “high level” think about giving day to day help once in awhile. You can be sure your startup needs it. If you’re financially minded (which you are because you’re an investor right?) get into Excel and help the CEO develop projections and budgets. Sit in on practice pitches and help build their next sales deck. Look over their legal documents and fire up your MacBook to test the latest deployment on Safari. Getting tactical means saving the management team precious time.

At Flow we take hands-on to the extreme because that’s our model. Not many investors are writing code, closing sales, executing marketing plans and recruiting employees. But no matter what your model is you can be sure that your startup needs you.

The Thinking Behind Starting Up: 10 Posts

July 20, 2009 by raymond

The Flow Ventures blog has been up and running for over six months and during that time it’s naturally gravitated towards topics for early-stage startups. Partly because that’s our focus at Flow and partly because people still overlook all the difficult work that happens right at the start of a startup. Things like idea screening, brainstorming, finding strategy, and finding competitors are all things entrepreneurs should be doing for themselves, not just when requested by outsiders.

I often tell people that the very first step in a startup is relatively risk free. You haven’t committed your time and money yet and you haven’t made promises to others that obligate you to a certain path. You have time to noodle around finding great ideas and discarding bad ones. This is the time to spend at whiteboards, in cafes debating your ideas, and doing research on the Web and in the real world. This is the time to assume your idea stinks and try to convince yourself that it doesn’t (not the other way around).

We’re going to keep focusing on the early stages of startups but here are 10 blog posts we’ve written so far that provide some practical ways to think about idea and business creation:

Writing this list makes it obvious that there are lots of gaps in our coverage. Hopefully, we’ll fill in some of those gaps over the rest of the year.

A method for finding out if you have a painkiller or a vitamin

March 15, 2009 by raymond

The more pitches I hear from startups the more I realize that entrepreneurs have a hard time figuring out if their startup is a painkiller or a vitamin. I mentioned this briefly in a previous idea screening post but I’d like to propose a method to help.

I’ve come up with five measures so far:

  1. Do you have a problem or a feature? – “Mobile access” is a feature, not a problem. E.g. I don’t really want mobile access to my tax return. A lot of startups have a feature idea at their core, not a pain point, mostly because the initial idea was created by an engineer.
  2. Do you have a specific target market? – A telltale sign of a feature looking for a problem is to target “everyone” or “small business”. Saying everyone needs your product doesn’t mean a trillion dollar opportunity. It just means you don’t understand the problem.
  3. Can you describe the person who will use your product? – How, where and when do they work? What are they doing exactly that causes them ‘pain’? What alternatives do they look for? Can you draw a picture before they use your app and after?
  4. Is the pain measurable? – Any convincing CEO can make you believe that bad UI is as painful as a root canal. But how do you measure it? Extra clicks? Time lost? Money lost due to errors? If you can’t measure the pain you have two problems: 1) you might be wrong and 2) you can’t tell if your solution is an improvement.
  5. Is it verifiable? – Sure, you may find some way to quantify pain but how do you verify with the people who matter, i.e. users? Have you identified ways to double check, like surveys, focus groups or one on one interviews?

So let’s look at an example:

Bad Better
Problem or Feature? We create social networking tools for non-profits We help non-profits engage more volunteers and raise more money from funders, using social networking tools
Clear market segment? Non-profits Geographically-distributed non-profits with less than 10 staff whose target volunteer base is 18-35
Detailed description of user? People who work at non-profits 3 user types: 1) the Volunteer Coordinator & Fundraiser (who regularly communicates with volunteers and funders), 2) volunteers who network with the non-profit staff and other volunteers, 3) funders who don’t want to network but enjoy the profile they receive on the network
Measurable? All non-profits wish they reached more people We measure the # of volunteers needed each year to deliver programs minus turnover to calculate the total annual volunteer hours needed. There is often a deficit. We measure the annual budget deficit that needs to be covered by outside funding. We measure the opportunity cost of programs not delivered due to insufficient funding. If we’re successful, the # of volunteers, funders and programs goes up.
Verifiable? We talked to a local non-profit and they loved our product We have identified a list of 25 non-profits in our target market. Within 30 days we could contact each one, ask them to complete a survey, and give us feedback on some screenshots of our product. If feedback is negative we will try other segments until we find the right one

Of course, having answers to the five questions doesn’t guarantee that you have a painkiller. It just makes it more obvious whether the pain you think you solve is really all that painful. Stated one way, the lack of a social network is no big deal for a non-profit. Stated another way, helping find volunteers and funders is a life-or-death part of how non-profits operate.

The main benefit of this process? Forcing you to spend more time digging into the problem. You may abandon your original problem but you may also find some legitimate pain points that are a lot more interesting to tackle.

Next time I’ll post a few more examples and analyses. Feel free to send me some examples from your startup.

When does $5 million = $50 million? Comparing entrepreneur payouts.

December 8, 2008 by raymond

There has been a lot of healthy discussion about the true implications of VC investments. Markus Frind (plentyoffish.com) wrote about it a year ago and Basil Peters (AngelBlog) has been analyzing how VC math influences a startup’s DNA.

In a nutshell, a $50 million exit = a $5 million exit when you factor in two things: risk and payout (the cash you actually take home). In the example below, the upper tree shows a $50 million exit and the bottom shows a $5 million exit:

The $750k represents the expected value in both cases. How come they are the same?

The VC-backed example represents a “home run or bust” investing philosophy. The exit is bigger ($50 million) but so is the risk (only 1 in 10 will make it). Also, your portion is smaller, only 10% at exit in my example. So if there is only a 10% chance you’ll earn your $5 million payout, the expected value is only $500k (10% X $5 million). Add to this a 50% chance of a “sideways” exit, i.e. not much, and you get $750k.

The other example is a startup done lean or with some friends, family and Angel money. The exit may be much smaller because the funding isn’t there to go big. But nor is there the desire to “go big or go home”. So out of a much smaller $5 million exit, you retain $2 million (a bigger chunk) plus your chance of success is now 25% instead of 10%. So 25% X $2 million = $500k. Add to this a 50% chance of a “sideways” exit, i.e. not much, and you get $750k.

Some people may object to the numbers:

  • 10% ownership at exit is too low – Actually, you may own less these days given lower valuations. See this presentation from Union Square Ventures.
  • 90% chance of failure is too high – I agree this may be pessimistic but there are a lot of VCs out there who don’t have one home run every 10 investments.
  • The success rate is too high for modest exits – Few people would claim they could get higher rewards with lower risk…

I’m definitely not suggesting that the numbers I’ve used are the right ones for you. But they are a revealing way to explore alternatives when funding your company. Every option has pros and cons and it’s up to you to understand them. This method gives you a way to quantify those options.

You may be surprised to find out that bigger is not necessarily better, at least not in terms of how much money you take home when you exit your company.

Bulletproofing Your Ideas: Part 1 – The Quick Screen

November 12, 2008 by raymond

As entrepreneurs, we all have great ideas and we love turning them into reality. Unfortunately, most people spend more time justifying why their idea is great rather than questioning whether it is great. Here’s an example:

    1. Have brilliant idea, e.g. Curling Rink Management Software

by Reverend Aviator (cc)

  1. Daydream about becoming the Microsoft of curling
  2. Write business plan about how you will dominate the curling software market
  3. Convince poor souls to jump on board your curling startup
  4. Do an investor road show to raise funds for MyCurlingERP.com

What’s wrong with this picture (besides thinking that curling is just plain wrong)? The problem is that there was never a rigorous process for vetting the idea. This is a missed opportunity because vetting can reveal hidden strengths and weaknesses in ideas.

I use the following quick screen process for evaluating ideas:

  1. Are you an expert in the field? If you aren’t you’re probably overestimating your idea or underestimating the difficulty of executing it.
  2. Does your idea make something 10 times better than the alternative? If your answer is “how am I supposed to measure that?” you’re in trouble already.
  3. Do you understand how the industry makes money? Understanding how people give away things free is not the same thing.
  4. Can you win? Being #17 in an industry sucks.

If you answered NO to all 4 questions it’s a good indication your idea needs major surgery. If you answered NO to some of the questions, it’s time to focus on improving its weaknesses.

photo by Divine Harvester

photo by Divine Harvester (cc)

E.g. if you aren’t an expert in the field take the time to recruit one. Better yet, try to recruit the industry’s best expert. If your value proposition is a combination of ease of use + slightly cheaper + runs on a Mac + is multi-lingual, you’re probably proving your idea is only incrementally better. No one ever switched painkillers because of better taste and they won’t adopt your solution unless the thing they care about really works. Prove that and the UI can be ugly.

Don’t understand how your industry makes money? You probably won’t make any. Before inventing a new revenue model study the revenue models of your competitors and complementors. One tip: if no one is making money in an industry (e.g. curling software) it’s a good sign you won’t either. Finally, seeing a path from your idea to dominating some industry niche is very important. If there are insurmountable barriers to entry or high capital requirements to win, your idea may never get a chance to win. Think about this in advance.

The point of idea screening is not to generate ideas. That’s your job. Screening protects you from your natural tendency to believe that your ideas are great. If they are great, screening will help you prove it.

If you have other ways to screen your ideas feel free to post them.