- 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.
Very fortunate to have the opportunity to hear Steve Ballmer speak and to do Q&A with him today. Among the takeaways ,the most poignant and relevant were:
* There's plenty of capital available for good business ideas.
* Telling Satya Nadella, upon Nadella being named CEO of
Microsoft: "Be bold - but be right!"
* Ballmer's self-described leadership style is fluid based on
time and situation.
* "Get rid of your dead wood employees. High performers
* Ballmer describes his personality as "hard core", meaning
he thinks he's relentless, persistent, and tenacious. He told
a story of happily winning a $20 golf bet from the Dean of
Marshall School of Business, Jim Ellis.
* Ballmer said it took Microsoft 15 years to master selling to
* He described many Microsoft employees coming to him with
great ideas, yet those same employees were unable to execute
on their own ideas. In that situation, even a company as large
as Microsoft still suffers from some of the same pains as many
* He considers recruiting and company culture vital. He and Bill
Gates placed high importance on that, even when they had just
The phrase “consumerization of the enterprise” feels a bit tired, but certainly has merit as it applies to consumer design and strategies to infiltrate larger organizations. Lately, I’ve noticed something taking afoot with entrepreneurs, especially those who are building local, mobile service offerings — they’re offering their customers a new service (like ClassPass) but slapping on a subscription model at the end. No more piecemeal transactions. This has been on my mind for a few days, and finally had the time think through why this is happening:
- Investors are tired of piecemeal transactions: I could rattle off 10s and 10s of consumer startups which were either p2p or some distributed model where the company had to grind out transactions (usually for physical goods), and things went ok for a while and then just tapped out and flattened. Unless there’s one transaction a week (at minimum), ideally looking for 2-3 per day (hence, food) it seems investors would rather back models like Spotify where the consumer feels he/she cannot live without the service and charge on a monthly basis.
- Subscriptions enable bundling: Every businessperson loves a good excuse to bundle. If done correctly, the consumer pays extra for they actually use, even though they have the right to use more. Startups can then also tweak the pricing and tiers to offer specific bundles and create even more options around how to segment customers, thereby (theoretically) extracting the most revenue from them.
- Consumers demonstrating a willingness to subscribe: And, maybe investors are pushing this a bit, but well, consumers are responding. Look at ClassPass, growing like a weed and not even yet two years old. Rather then offering freemium models, these startups are just going right for the monthly or annual subscription. Maybe it’s that these early services are focused on cities and customers with disposable incomes. That is certainly a factor for why it’s being adopted. (For instance, I pay a monthly fee to Gmail, Dropbox, Boomerang, Sanebox, HelloSign, Spotify, Netflix, etc….I now wonder if any individual transaction that I make is on the table for a “subscription bundle.”
- Consumers also willing to pay more for convenience of subscription: My theory is that having the subscription, even if it may cost a bit more, reducing the cognitive load for customers to not be burdened with each transaction piling up. It removes that disincentive and in turn creates loyalty to the service.
Subscriptions fit nicely with services versus most physical goods: I have been forced to try some physical products on a subscription. I get why they do it, I’m sympathetic to that. But, I rarely end up needing it. As a service, though, it’s easier to subscribe and know that I could use a service once in a month, or maybe 5x that month. It’s nice to not have to think about that.
Today is Phil Frost's NINTH year anniversary with Growthink.
Phil started with us on March 1, 2006.
Phil has been instrumental in the growth of Growthink and Growthink Publishing, and has also been helping with Guiding Metrics.
Thanks Phil for all your efforts!
We hope you have a wonderful day full of happiness and that your wishes come true! Happy Birthday!
Over the last decade, the estimated number of new tech startups formed in the U.S. each year ranged from 16,000 to 20,000, and the total amount of venture funding per year for software startups increased from ~$5 billion to $19 billion.
Most recently, over the past five years, terabytes of structured data about these startups have been proliferating on the web (see CrunchBase profile growth and App Annie traffic volume below).
In addition to reflecting a more active venture industry, these numbers are indicative of a rapidly expanding demographic of founders and emerging geographic hubs of innovation. Despite these changes in the startup formation landscape, internal processes used by venture capitalists to source and create value for founders have not kept pace with modern-day software innovations and the proliferation of data on seed-stage startups.
Demographic Shifts of Early-Stage Startup Founders
There is significant student demand for entrepreneurship in both undergraduate and graduate programs, which is partly a result of an imbalance between an increasing number of college students – many of whom aspire to be mid- to executive-level professionals – and the inherently small number of leadership roles at large companies.
Effectively, the career path for most people in large companies flattens out at the junior and mid-levels. Consequently, there are many recent graduates and experienced professionals who are willing to forfeit their dreams of being a big corporate executive in return for startup equity and the experience of forming or joining early-stage companies.
The difference between this generation and previous tech generations, however, is that this trend is spreading from traditional startup hubs – communities that are surrounded by top research institutions and publicly traded tech companies (i.e. Silicon Valley and Boston) – to new business capitals and urban centers, specifically cities that have access to investors, engineering talent, domain experts, and antiquated industries that are in search of technology innovation.
Emerging tech centers such as New York are embracing the rise of startup activity, with New York specifically beginning to track all of its startup formation activity online at destination sites like Digital.NYC.
The rapid growth of VC deals in NY Metro, Midwest, and LA compared to stable growth in New England.
Data and Volume of Startups Formed Are Overwhelming Traditional VC Operations
At the same time that startup activity is expanding across geography and demographics, the volume of data online that tracks seed-stage startups is growing exponentially. The massive quantity of constantly updated data online about startups’ founders, product traction and competitors has only existed for a few years. While much of this data is still fragmented, a large amount of it is easily assessable through APIs, and can be used in real time to detect signals of high growth startup activity.
This has given rise to tools such as DataFox, MatterMark and CB Insights, which are all aiding startup investors in quickly assessing public information on private companies. But these tools are not being used as core, end-to-end solutions that drive ongoing venture investment decisions and value creation for venture firms’ portfolio companies.
Although there has been substantial change in the tech community over the past decade, early-stage venture capital operations and processes are for the most part the same as they were twenty years ago. Conventional venture capital deal sourcing stems from personal relationships that provide access to exclusive and proprietary deals.
This information flow plus thoughtful investment theses, due diligence and sharp character judgments are the primary basis of top investors’ investment decisions – methods that have historically generated alpha for limited partners. Portfolio value creation has been derived from general partners’ personal networks (including existing portfolio companies), community managers, business development functions, and some VCs’ operating experiences/know-how.
These are tried-and-true methods that have always been employed by top VCs, and will continue to be used for years to come. But these approaches overlook new-age founders because there is a growing number of founders who do not inhabit traditional venture capital networks, and the rate at which companies are formed today overwhelms traditional manual methods of deal sourcing and vetting.
Algorithmically Searching the “Gulf of Startup Experimentation“ for Winners
Because of the reduced complexity to code, shrinking costs to build software, and lowered barriers to access initial funding, new founders are taking advantage of the ease of starting a company. These changes are partly responsible for the significant growth of startup formation in the tech sector, as well as the changing demographics of founders and new methodologies such as Lean Startup which encourage rapid experimentation.
This growth has created an entirely new asset class that is adjacent to the traditional seed to series A funnel (see diagram below). We refer to the extension of the seed market as a massive “Gulf of Startup Experimentation.”
Within the gulf, there is a small group of very talented technologists, product managers, designers, and domain experts who are capable of transforming their experiments into high growth startups that are difficult to replicate. Several of these startup experiments in the gulf are being financed by angels, accelerators and seed investors; and the founders of these startups are making themselves and their companies known online through platforms like Product Hunt, AngelList and CrunchBase.
In order to efficiently discover the companies within this gulf that are capable of raising competitive Series A rounds, top venture capitalists must become more sophisticated at filtering and partnering with the best founders in the gulf – a process that is imperfect if it only relies on human intelligence and personal networks as sources of the information. Traditional methods of deal sourcing and vetting simply cannot scale to sufficiently evaluate the rapid experimentation that is occurring, they need to be supplemented by a technology-based approach.
The future deal flow for top-tier seed to early-stage investors will be complemented by artificially intelligent algorithms that help sharpen investors’ view into the gulf of startup experimentation, specifically through intelligent sourcing and tracking. Investors will also use software to identify opportunities to influence outcomes (i.e. value creation) for startup management teams. These algorithms will analyze general partners’ relationships, understand a firm’s investment strategies, and proactively discover founders that the VC firm is uniquely able to support.
We are in the very early days of the adoption of software and algorithms as a core part of venture capital firms operational DNA. Several VCs have started to experiment with complementary software and statistical models to aid investment decisions; however, very few firms have retrofitted their entire day-to-day operations (i.e. from sourcing to portfolio company management) to be supported by a fully integrated software system and intelligent algorithms that contributes to the VC’s ability to generate alpha for limited partners.
The change in the industry requires innovative and emerging VC firms to discover the role that software plays in venture capital and to share knowledge with the ecosystem.
Happy Belated Birthday, Darlene!
Happy Birthday to Growthinker Luke Brown!!
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