Volatility and Security Are the Two Greatest Challenges Facing the Bitcoin Ecosystem


As part of the Digital Currency Council’s Continuing Education partnership with Inside Bitcoins, the DCC’s Vice President, Sarah Martin, had the opportunity to interview the thought leaders who will be speaking at the Inside Bitcoins Conference in New York City on April 27-29, 2015. Today, we share an interview with Luke Brown of Growthink.

Sarah: Tell us about how and why you got involved in Bitcoin and digital currencies.

Luke: Bitcoin kept coming up in conversations when I’d ask investors and entrepreneurs for a business topic they didn’t understand, so it became a challenge to learn about it, understand it, and see its potential. Then I saw a Wall Street Journal article about bitcoin ATMs and that really opened my eyes to the potential of digital currency.

Sarah: You have extensive experience with developing start ups. When you coach entrepreneurs on how to give pitches, what is one piece of advice you typically offer?

Luke: Entrepreneurs typically think of a pitch as an all-encompassing event. I have them break it down into three segments: the verbal portion (the speech), the PowerPoint slides, and the Q&A segment. Then, when they practice, they can focus on a section at a time. This reduces their stress level and results in a much smoother pitch.

Sarah: InsideBitcoins NYC has brought together many of the best minds in the industry. What do you hope to hear from others at the conference?

Luke: The three topics in which I have the most interest are how to increase security, how to increase use of the currency, and how the blockchain can have applications in mature industries as well as developing economies.

Sarah: As digital currencies evolve, what are you looking forward to seeing develop this year, or in the next 5-10 years?

Luke: The Mt. Gox failure still looms large in the public’s mind so in the short term it would be great to see the industry project stability. In the long term it would be great to see digital currencies used and accepted as commonly as debit and credit instruments.

Sarah: What do you see as the greatest immediate challenge facing the industry?

Luke: It’s a toss-up between volatility and security. While I love the volatility in terms of trading digital currencies, I think the public views volatility as a chance to lose money so they are less likely to start using digital currency. Security breaches have affected credit and debit accounts so it seems as if the general public understands that any financial transaction poses security risks of some type. Final answer: volatility.

Sarah: What’s your advice for growing the industry? How do we engage more people in digital currencies?

Luke: The challenge is moving beyond the early adopters such as those in the tech community, pro-privacy supporters, and libertarians. As more large companies begin to accept digital currency, like Dell and Microsoft did recently, other companies will hopefully follow their lead. The companies which use digital currency as a promotion to give customers discounts will also encourage use. Finally, when classes on digital currency become more common and people become more familiar with digital currency, that will also spur additional use. I think that’s going to happen sooner rather than later.

Sarah: Thanks very much for your thoughts, Luke. Looking forward to a great conference.


House Of Cards: The Risks Of A Startup-heavy Customer Base

By Nino Marakovic, CEO and managing director, Sapphire Ventures

Growth is king…for now anyway. Growth is now the most sought after and defining characteristic of a company. Growth defines momentum and is the key metric upon which companies today are being valued. Of course investors seriously consider other characteristics when evaluating the attractiveness of an investment opportunity, including size of the addressable market, profitability, sales efficiency and other quantifiable metrics, but investors today seem to be most enamored with growth.

Looking at just the SaaS enterprises in the Pacific Crest software company universe, companies with projected 2015 revenue growth of greater than 40 percent, 30-40 percent, 20-30 percent and less than 20 percent have average projected 2015 revenue multiples of 9.8x, 7.6x, 6.4x and 2.4x, respectively. This growth, especially with SaaS businesses, typically comes with heavy operating losses. While the public markets have become more discriminant in 2015 of accepting these losses and revenue multiples have come down, they remain tolerant of them.

Quality vs. quantity of growth
An important and distinguishing characteristic behind growth, though, is the cost to achieve it. Can you grow cost effectively, i.e. Magic Number and CAC Ratio (check out suggestions on how to do this in our previous blog, SaaS and the Impact of Cash Collection on Cumulative Cash Needs)? Is it a ‘nice to have’ versus a ‘must have’? These questions will help you triangulate in on TAM, customer need and willingness to pay for the solution.

What a lot of folks fail to consider when evaluating a company, whether public or private, is where this growth is coming from. Investors want to see startups with long lists of growing customers, and startups are keen to provide those lists to investors. Sure, everyone does a customer concentration analysis, and everyone is looking for big brand-name logos in the investor deck, but what happens when these customers happen to all be in the tech sector? And what happens when an increasing proportion of them are startups themselves?

Tech startup concentration
Think about it. It’s a dangerous proposition for private and public companies alike. If your customers are all tech startups, what happens if, and certainly when, the market corrects and many of these customers disappear. You don’t have to look back too far to see how this game plays out. Look at the 2001 tech bubble burst when growth was feeding growth at unsustainable levels. MicroStrategy, Startups.com and Inktomi, all of which relied heavily on other startups as customers, vanished overnight or saw their stocks fall to pennies on the dollar. Ask Ben Horowitz about the early days of Opsware (formerly Loudcloud) when many of its “dot-com” customers quickly turned into “dot-bomb” customers. And remember Sun Microsystems’ late 90s slogan – “we put the dot in dot-com”? Well here’s an apt account of what happened in Sun’s heyday and its aftermath, as described on Wikipedia:

"In the dot-com bubble, Sun began making much more money, and its shares rose dramatically. It also began spending much more, hiring workers and building itself out. Some of this was because of genuine demand, but much was from web start-up companies anticipating business that would never happen. In 2000, the bubble burst. Sales in Sun's important hardware division went into free-fall as customers closed shop and auctioned off high-end servers.

Several quarters of steep losses led to executive departures, rounds of layoffs, and other cost cutting. In December 2001, the stock fell to the 1998, pre-bubble level of about $100. But it kept falling, faster than many other tech companies. A year later it had dipped below $10 (a tenth of what it was even in 1990) but bounced back to $20. In mid-2004, Sun closed their Newark, California factory and consolidated all manufacturing to Hillsboro, Oregon. In 2006, that factory also closed."

We’re seeing a similarly concerning reliance on startups as customers in many of the earlier-stage companies we see today through our direct fund and fund of funds prospecting efforts. It’s cheaper than ever to begin to scale a company and many of these startups are early adopters of new technologies. Consequently, this has created more and more customers for startups.

Those most at risk
Sectors like marketing, HR, customer success/retention and next-gen software infrastructure are booming with more and more players popping up by the day. Many of these companies rely on the tech sector as their primary avenue of growth. The companies in these sectors have growing pipelines of young startups that are eager to use their technology solutions to improve internal processes (e.g., payroll, HR, infrastructure, etc.), more efficiently target customers (e.g., SEO, SEM, etc.) and more effectively monitor, retain and upsell existing customers (e.g., customer success, etc.). In many cases these new offerings only need to be moderately better or marginally cheaper to find adoption among these earlier-stage companies.

The problem is that many of these customers will not grow to become sustainable businesses themselves. In the case of a market correction and associated pullback in venture funding, many of those customers will disappear and companies that rely heavily on them for growth will be hit particularly hard.

The right mix of customers
Let’s be clear, we’re not suggesting you don’t sell to startups. They can be good customers. With the growing number of unicorns out there, they can be great lighthouse logos. And they can be low hanging fruit. But there are risks associated with selling exclusively to customers that rely on the capital markets to weather long periods of unprofitability. Young customers also don’t have the long sales cycles, customization requirements and bureaucracy of more established companies making them easier targets (look for more on this topic in a forthcoming blog). But beware of developing a culture of selling only to fellow startup journeymen and women. You must be careful because you can quickly build a house of cards that only needs a single blow from the broader market to topple if you don’t expand at the right point.

So while it’s great to have startups as early customers to get validation, our advice is to shock proof your business by prudently and purposely diversifying your customer base as soon as you can. Your Series A should be used to build the initial customer base, but once you exceed a dozen customers and as you approach your Series B, you should make sure to begin diversifying away from selling exclusively to younger companies.

There's a clear danger of an overreliance on other startups as the predominant segment of your customer base, especially as the private markets continue to get more and more frothy and a correction is surely around the corner. Grow your business quickly, but do so in a sustainable and enduring way.

Awesome Client Testimonial for Growthinkers Sam Park, Jonathan Gomez, and Ethan Bennett!

Great job guys!!

"Hi Jonathan and the growthink team, As we close in on the completion of our Business Plan and Pitch Deck etc,

and await the final delivery tomorrow, I want to seize this opportunity to thank you for a really great job, well done.

The meetings we've had have been very positive, proactive, productive and progressive and the recommendations from you have been invaluable. When our success story is told, your contribution would reflect as a significant part of our story.

While it was expedient, it was not convenient to have to shell out money at this stage as a start up, but it is indicative of our commitment to due diligence and process and the fact that we are all determined and willing to pay whatever price is required to succeed.

On behalf of Team OKAYHOUSE/ariya, those you met and the ones you didn't meet, I say thank you very much and God bless."

How To Get Your Voice Mails Returned

Have you ever received a phone message which was so good you had to call back? The answer for most people is no and because most voice mails are terrible, it doesn’t take much to have your voice mail message stand out from the crowd. There are several great tactics which will help you maximize the chances that your voice mail messages will get returned. The first…

Is Phone The Preferred Method Of Communication?
If the person you’re calling prefers text or email communication, the telephone should be your last resort. If you do surveys or offers to customers or prospects, it’s a great touch to ask their preferred method of communication. Assuming phone is the preferred method of communication, you’ll need to make another assumption, which is…

Assume Your Message Will Not Be Returned
Many people think they’re too busy and too stressed and they’re just not going to even listen to voice mail messages, let alone return them. Not leaving a message, however, guarantees you’re never get a return call back. When you do, it’s always a nice surprise.

You Only Have One Goal When Leaving A Message
It’s easy to think of your goals for when you eventually speak with the person you’re trying to reach. That’s one step too far. When leaving a message, you have one goal and only one goal: to get your message returned. Keeping that in focus will improve your chances of getting your call returned.

Keep Your Message Less Than 30 Seconds
Your message should be like an elevator pitch: short and concise. Record and time yourself to get an idea what you can say in 20-30 seconds. Messages longer than 30 seconds are often deleted before being played in full.

The Message Rules
* Speak slowly
* Using your full name sounds more professional
* Spell your name if it is not common
* Sound friendly but not over the top
* Make the call about them

Give Them A Deadline
Saying “When you get a chance, give me a call” ensures your call won’t be returned. A good rule of thumb is four hours. If you call before 1:00 pm their time, you say, “When you get this message, please give me a call back by the end of the day.” If it’s after 1:00 pm, give a deadline of noon the following business day. Deadlines make people act. Those who don’t return your call are seldom worth chasing.

Repeat Your Number Twice – Differently
The first time you say your number, say the last four numbers as separate digits. 5047 is five zero four seven. The second time, say it as two two-digit numbers. 5047 is now fifty forty-seven. People hear and remember numbers differently and this improves the chance your call is returned.

Your Name Is Not A Reason For Them To Call You Back
Leave your name towards the end of the message.

End With The Sweetest Sound They Know
Dale Carnegie said a person’s name was the sweetest sound in the world to them. Finish your message with, “Thank you, _______.” The manners of the term “Thank you” and ending with their name define the end of the message and leaves them with a very positive feeling.

The type of message will vary depending on whether it’s a cold call, a response to an inquiry, or another call with someone you already know. Writing a general script for different scenarios will help you keep your focus. Testing, refining and testing again will give the best results for you, your company, and your industry.

What the Seed Funding Boom Means for Raising a Series A

This article is by First Round Partner Josh Kopelman.
Shortly after my first child was born, a friend gave me a copy of a book called “The Blessing of a Skinned Knee.” The book was full of contrarian wisdom. While most new parents' natural instincts are to improve their child’s life by removing obstacles, eliminating every potential source of pain, and helping them avoid adversity, the author of the book cautioned against overprotecting your child. Specifically, her thesis was that grit and resilience are extremely important life skills, and that it is important for people to learn how to overcome adversity (like a skinned knee) at a young age. That way they aren’t surprised when they inevitably experience obstacles at an older age.

There has never been a better time to be an entrepreneur. The number of seed-funded companies has quadrupled over the last four years. Over 200 Micro-VC firms have recently raised over $4 billion to invest at the earliest of stages. AngelList and FundersClub are growing in popularity. This all adds up to an awesome environment for entrepreneurs to get started. While it used to take weeks or months to raise a seed round, we’re now seeing some rounds get raised in a matter of days. Incubators and accelerators are pushing out larger numbers of companies — many getting term sheets within hours of walking off the demo day stage.

Ironically, I believe this current “Seed Surge” is unintentionally exacerbating a Series A Crunch. The current free flowing seed stage capital is giving lots of founders a false sense of confidence when going into their Series A. As Y Combinator President Sam Altman recently tweeted, “…seed money is so easy to raise in the current environment that founders assume they can just raise more money whenever they want…”

I recently worked with a team of talented, young founders who had raised their Series Seed financing without breaking a sweat. They had their choice of investors (I’m thankful they chose us) and their seed round was oversubscribed by 2x. They set out to raise their Series A round six months later — and they were in for a rude awakening. They ended up raising money, but not as much as they hoped for, it was much much harder than they expected and took months to cross the finish line. In the CEO's words, “Our seed round was super fast and hyper-competitive, and then we went into the A and started getting interrogated about our data. It was like graduating from elementary school straight into college.”

This experience mirrors that of many founders and startups I've seen both inside and outside the First Round community. I believe, across our industry, the unprecedented amounts of seed funding available to startups early on is setting them up for a tough reality check at Series A. You can call it a “crunch” or whatever you'd like, but it's significantly impacting companies' long-term success. Looking at this trend, I think the key is to stay lean and thoughtful after the initial money hits the bank.

Below is my thinking on why this is so critical, and what founders can do to avoid getting killed in the crunch.

What's Happening?

Seed funding is more plentiful and easier to raise today than I've ever seen during my career. What that means, ironically, is that this makes everything much harder. It sets an expectation — especially for young, first-time founders — that something they expected to be challenging is relatively easy, and this sets strong expectations for the next time they do it. The problem is that the number of A rounds hasn't changed. That amount of Series A capital HAS NOT increased. So, if you have 4x the number of companies with seed funding, that's 4x the players competing for the same money… making it 4x harder to raise an A round than it was five years ago.

I talk to a lot of founders about their Series A experience, and more often than not they say they were shocked by how hard it was to get a term sheet, how long the process took, and how much more complex the conversations got. As one CEO I spoke to noted, “The way that seed funding is all about your idea and team, Series A is all about the numbers. We weren't tracking cohorts or anything at all. I didn't know about LTV or CAC, or how to answer questions about the economics of scale. We walked into an interrogation that we weren't prepared for.”

One reason this happens is that founders mistake casual conversations with VCs for serious interest. Founders get a bunch of emails or calls from VCs, and then feel like they have to start their fundraising process immediately or miss out. This can (and does) lead to a lot of hasty pitching before companies are ready. And here's the deal on the VC side: both partners and associates are paid to get out there and build relationships with promising young companies, but there's no commitment. Investors want to make sure they get “the call” from founders when they begin fundraising — so they're motivated to send “happy vibes” in order to stay around the hoop. These happy vibes are heard by a founder’s “happy ears” — often leading the founder to draw false conclusions about the true level of potential VC interest.

Series A investors are always looking to catch a company before they run an official process, as it's almost always in their best interest to pre-empt a competitive funding situation. That means that they're aggressive in trying to get early meetings. As first-time founders see their inboxes fill with email from VCs, they often assume that the volume and intensity of VC interest will translate into an easy funding round — and often (mistakenly) decide to start a fundraising process too soon.

The real danger with pitching earlier than you planned is that you probably haven't hit the right milestones yet and haven't had the time to set up a fundraising strategy. After raising a seed round, every startup should get smart about the inflection points they need to pass in growth, revenue, etc. to demonstrate the traction (customer acceptance, virality, revenue, engagement, etc.) they need to land a Series A. It's more important than ever to hit those goals as Series A investors have more choices than ever to fill each general partners' 1 to 3 investments a year.

There's enormous risk in raising too early that many founders forget.
Once a company has taken more than a handful of meetings, it can be viewed as a “shopped deal.” Information travels quickly in the startup community. Great fundraising processes are run tightly, like a tactical mission. Containing information is a huge advantage for founders. If a VC knows that 20 of her peers have already had a look and passed, that's some serious negative signaling. How many people eat at a restaurant after 20 of their friends tell them it stinks?

Of course, there are some VCs who can avoid the herd mentality — but even with them, you'll likely start at a deficit. Of course that doesn't mean you won't be able to raise a financing in the future, it just means you're setting yourself for a much bigger challenge. Once a deal is shopped, you often need to demonstrate more traction by focusing on solid execution for 9 to 12 months before you can take another swing.

It's almost impossible for a startup to get a second fresh look.
Another, related trend we're seeing is that startups are seeking larger and larger A rounds. It's pretty clear that the market can't accommodate it, yet we keep seeing companies setting out to raise $15 to $20 million Series A rounds — just a few months after they've raised their seed round. To invest $15 million, an investor needs to have 3x the conviction that that they have for a $5 million investment. I think this desire to raise $15M+ at series A is being caused by a couple different things.

Founders often see a handful of data points and believe that a new normal exists. For example, a given founder sees their friend raise a large Series A and sees a few tech press articles on large Series A's and they immediately believe they can do it too. Of course, it might be possible. But it's far from typical. 

I also hear a lot of later-stage investors giving early-stage founders bad advice. For example, a founder takes a first meeting on Sand Hill Road and mentions a large target round size. When the investor doesn't blink, the founder now thinks it's achievable, even if it's not.

A simple piece of advice: It's much easier to increase a round size than to decrease it.

The most successful founders I see wait to raise — they wait to demonstrate traction and hit proof-points that represent real step-change for their companies — and when they do, they ask for a lower range. You never want to call a VC back and say, “Hey, I know I told you last month that I was raising $15M but now I'm going to raise $6M after talking to a bunch of people.” Every investor will know what that means, and it will raise red flags about you and your company. It's much better to call and say, “So I was going after $6 to $8M, but it looks like we're going to be able to do $12M given the strong investor interest.”

I can't tell you the number of stories I've heard about rounds that failed because founders raised too early and asked for too much. It's an industry phenomenon, but founders' mindsets are only just now beginning to change.

I think founders vastly underestimate the risk of busted financing.

So, What Should Founders Do?

The good news is that companies don't have to fall into the Series A trap. There are a lot of opportunities to capitalize on these same trends and use them to your advantage.

For example, some of the smartest founders I work with are taking advantage of the seed funding boom to raise larger early rounds, buying themselves more time to get more done and hit more of those critical inflection points. If you're only new and shiny once, get as much out of it as you can.

When you raise seed money, you're raising on the strength of your vision. As I always say, there's nothing like numbers to fuck up a good story. And that's exactly what happens at the Series A. 

You're suddenly judged on the data that you should have been collecting all along to show traction, growth, potential. So why not raise $2.5M in seed money instead of $1.5M to give yourself the best shot at perfecting this data? You should target 18 to 24 months of runway post Series Seed. The best time to raise follow-on capital is when you don't need it, and 2 years of runway gives you the best chance to land in that situation.

The other benefit of raising seed money in today’s environment is that more companies have their choice of which seed investors to work with. There's a chance to be more thoughtful about the investors you want.

My advice: Do your research and see which firms and people have a track record of working hard to help their startups win. While there are some super-angels who add tremendous value, there are others who are neither super nor angelic. 

Rather than having a “party round” full of VC firm logos, I believe founders are better served by having investors who will roll up their sleeves and open doors, make introductions, help source and recruit great talent, give feedback on a Series A pitch, and call in favors to make things happen. And make sure that your investor is willing to do real work for a seed investment. It's tough for a firm that writes both $250K checks and $25M checks to offer the same level of service and support.

Once you have the money in the bank, you need to pause and map things out carefully. It always surprises me how startups fail to plan realistically around their spending. It's vital that you have a clear picture of the traction and proof points you'll need to show investors when you eventually do raise your A. And these proof points have to both demonstrate a significant jump in valuation and de-risk your concept. That is more difficult given how expensive good people are and the current price of Bay Area real estate.

It's much easier than you think to spend $1 million.
Keeping your burn rate low until you have product-market fit will give you the best chance at building a big company.

So many companies say, "Alright, we have 12 months worth of cash, let's launch in 11 months." This isn't a good plan.

If you take 11 months building your product, even if you assume you'll ship on time (which hardly ever happens), you'll run out of runway before you really know what it's like to be out in the market collecting data. There's nothing that increases your odds of a successful A round like a successful launch followed by customers that really love what you've built. 

A successful launch is defined by the months that come after it. Let's say you're an eCommerce company and you know the Christmas holidays will represent 40% of your revenue to date. You don’t want to be in a position where you have to raise in November. You're going to want to make sure you have enough cash on hand to raise in February after the milestone.

These inflection points change year to year — so be sure you know what's currently fundable. For example, in the hardware space, a year ago, $1M in pre-sales on Kickstarter with a great product idea was sometimes enough to raise a Series A. Now, investors are demanding pre-sales in the millions with a product that's either functional or actually in production given the risk of bringing hardware to market.

When thinking about timing, remember, a good fundraising process will take between 4 and 8 weeks. Adding in preparation and time to close, you're talking a few months. Remember this math when you're thinking about timeline and proof points. Cutting things too close can be dangerous.

Keep in mind that capturing this data isn't enough, either. Your Series A pitch should be much more polished and rehearsed than you probably think. While it's an uncomfortable thing to do, and easy to dodge, your fundraising pitch is a make-or-break proposition. I've seen founders who spend more time working on weekly payroll than their pitch. You literally have to make it the most important, if not only, priority once you start the process.

Founders need to be able to demonstrate mastery of their numbers in conversation.
We recommended spending no less than 4 weeks preparing for a Series A. We've even gone as far as to build an internal team at First Round called “Pitch Assist” that works with our founders to nail the strongest fundraising story.

All of this can make it sound like you should start rationing funds immediately. But there's no need to be that extreme. You don't want to hobble yourself when you really should be building and growing fast. Raising a larger seed and regularly checking your progress against the milestones you need to hit will put you in a good position.

Get the feedback you need from your advisors and other entrepreneurs about the proof points they think you'll need to show. Prioritize advice from people who have worked in a similar sector or know your business model best. If you're a SaaS business, get advisors or seed investors that know this space cold. They should understand the exact metrics in the market that are generating strong interest from follow-on investors.

Depending on your business, you may create more enterprise value with aggressive customer growth instead of a monetization strategy. Progress in all dimensions is not the same when it comes to persuading investors. I highly recommend doing diligence on the firms you really want in your A round. Talk to other entrepreneurs who have pitched them or seed investors who know them to find out what they usually ask or expect. Firms are extremely diverse when it comes to what they want to see from entrepreneurs. The more you know, the more you can tailor your strategy to each meeting.

Adversity is not necessarily a bad thing. 

As Walt Disney once said: “All the adversity I’ve had in life, all my troubles and obstacles, have strengthened me… You may not realize it when it happens, but a kick in the teeth may be the best thing in the world for you.” Starting a company is not easy. It's hard to build an awesome product, to hire talented people, and to raise capital. Don’t let the Series Seed Surge fool you into thinking that future financings won’t be a struggle.

The Key Takeaways:

  • The Series A crunch is happening industry-wide, busting funding rounds and limiting startups' potential. 
  • That said, it's never been a better time to be an entrepreneur raising seed funding. It's 4x more available.
  • To avoid the crunch, only start a Series A fundraising process after you've hit major milestones. Starting too early is very risky.
  • Be rational about the size of the round you want to raise. It's always easier to increase a round than to shrink it, so let the market bid you up.
  • Consider raising a larger seed round to give yourself more runway to rack up more proof points before your A.
  • Take your time during your seed round to choose the right investors who will help you raise the next round.
  • Know what the key inflection points are that you need to hit to show successful step change.
  • Give yourself enough time in the market to get the volume of data you need, and figure out what is most compelling to share with prospective investors.
  • Don't panic. Do everything you can to prepare for the next step.