More Thoughts on the Next Level for Atlanta’s Startup Community

After last week’s post on Next Level for Atlanta’s Startup Community, a number of people chimed in with ideas. Let’s take a look at a few.

eSports

Ben Alexander highlighted eSports as a high potential opportunity for the region. Between Skillshot Media, Atlanta Reign, Hi-Rez Studios, KontrolFreek, and more, there’s real momentum. To achieve a critical mass, we’ll need 10x that many companies and thousands of employees in the industry.

Inclusive Entrepreneurship

Rodney Sampson offered a detailed analysis in his paper Building Inclusive Entrepreneurship Ecosystems in Communities of Color. Much is to be done in this area and Rodney should be lauded for his work.

B2C

B2C is much more difficult than B2B. Why? Human attention and desires are fickle compared to helping businesses do things better/faster/cheaper. With that said, a major B2C or DTC startup success story would do wonders to help the brand of Atlanta. Consumer products are always more exciting than business products.

Funding

This past quarter Atlanta companies raised $650M across 38 investments — the best Q2 ever — according to PitchBook – NVCA Venture Monitor. While the amount of funding fluctuates on a quarter by quarter basis, setting a new high bar with our best quarter ever is an indicator of progress. Funding is only one piece of the puzzle, but it’s an important one.

Atlanta’s startup community is making real progress, and has much work to do.

Keep the ideas coming.

Next Level for Atlanta’s Startup Community

Last week I was talking to an entrepreneur and the topic of the Atlanta startup community came up, specifically ideas to grow the community faster. Looking back over the last seven years, we’ve made substantial strides by adding Techstars Atlanta, Atlanta Tech Village, Backed by ATL, Engage, Atlanta Startup Village (14,000+ members!), several seed funds, two IPOs, four unicorns, and much more. Only, even with our continued success, there’s a feeling we haven’t accelerated the growth of the overall community enough to reach the next level.

In brainstorming what’s missing, several ideas came to mind:

Diversity and Inclusion

Programs like Startup Runway and It Takes a Village are helping address the diversity and inclusion challenges in the region but we need more, much more. Say there are 3-5 groups working on this for the startup community, we likely need at least 15-20 to make a big impact.

Angels

Looking at recent angel deals over the last 24 months, there are roughly 10 local angels that lead deals regularly (defined as 5+ deals historically). For every one that’ll lead and put a deal together, there are another 10 that participate because they trust the lead. With 10 lead angels and 100 secondary angels, there just aren’t that many regular angels. Many more startups raise angel money each year, but it’s almost always from a first time angel that isn’t a regular. We need at least 100 regular lead angels and 1,000 secondary angels — much work to be done.

Seed Funds

We’ve seen several local seed funds emerge including Valor Ventures, Knoll Ventures, and Tech Square Labs with a couple unannounced ones in the works. Seed funds are an important part of the community as they have committed capital that has to be deployed in a designated time period, as different from angels who might never do another deal. In addition, a strong seed fund community provides more support to angels helping them see a potential funding path forward, especially due to Series A rounds becoming what used to be Series B rounds. With 5-7 local seed funds today, we likely need 15-20 to achieve the next level of scale.

Startup Hubs

The Atlanta Tech Village is now seven years old and helped establish the startup center of gravity in Buckhead. The ATDC has been the startup hub in Midtown for decades. Downtown has the excellent Switchyards. Now, Atlanta is booming around the Beltline’s East Side Trail and growth in the Perimeter is robust, making both areas logical spots for more startup hubs.

Peer Connections

Atlanta is a very inviting, informal town for entrepreneurs. Groups like the Entrepreneurs’ Organization and Young Presidents’ Organization have strong local chapters. Only, there’s a gap in peer connections for tech entrepreneurs to network with and learn from each other, as separate from the long standing existing ones that focus on tech executives and service providers. The best example to emulate is Mindshare in Washington D.C.

Entrepreneur Education

Imagine you’re a first-time entrepreneur and have just quit your job to create a company. Where do you go next? Showing up at a startup hub and plugging into the community is likely the best answer. Only, it’s a hodgepodge of events and programs, serving a variety of audiences. We need stronger programs geared directly towards helping tech entrepreneurs get going — bootcamps that cover the most important topics.

Storytelling

Easily the most nebulous, and possibly important, is how to tell the Atlanta startup ecosystem story better. Lots of B2B successes across MarTech, cyber security, FinTech, and health IT is excellent, yet doesn’t paint a memorable picture. B2B is the strength, but how do you make it exciting? Austin and Boulder are regularly mentioned in the national press. How do we get Atlanta on those same lists for startups?

What’s Next

Atlanta has rapidly become an R&D hub for companies headquartered elsewhere, and that serves a roll in recruiting talent to the region, but the real opportunity is growing the startup community with locally headquartered companies. Local startups invest more in the community, build greater wealth, and develop the next generation of entrepreneurs at a faster rate.

To get to the next level as a startup community, it’s going to take a substantial number of new success stories, many more organizations helping a variety of entrepreneurs, and a greater level of local investment. Atlanta has the basis of the platform, and with hard work plus a little luck, will be able to get there in 5-10 years.

Let’s make it happen.

What else? What are some more ideas?

Secondary as a New Primary Investor Capital Deployment

Recently I was talking to an investor that lamented how hard it was to invest in startups the traditional way. Today, there’s so much money for the “hot” startups that rounds fill up quickly and investors are aggressive (read: more sharp elbows). Historically, that was the end of the story, but now there’s more capital that wants in. Over the last five years, there’s been tremendous growth in capital applied to liquidity for founders, early employees, and early angel investors.

Secondary capital, where one shareholder sells equity to a new or existing investor, doesn’t directly benefit the company and used to be rare in startupland. Primary capital is when the company sells shares to put more cash into the business, usually to grow faster. Even today, primary capital is significantly more common than secondary capital for startups, but things are changing.

When thinking about many of the growth stage startups in our region, secondary sales of equity occurred in a material number of their recent financing rounds. Investors, with larger funds and stronger deal competition, often negotiate to buy X dollars more of the common shares of the startup at a discount (e.g. buy up to $10M of common shares at a 20% discount to the preferred price). Look for more investors to employ this model of buying a large chunk of preferred shares from the startup and a smaller chunk of common shares for the early shareholders.

Secondary sales, while rare in the past, are fairly prevalent today. Founders and early employees would do well to take secondary sales into account, especially when their startup hits escape velocity and reaches the growth stage.

Funding Climate Outside the Money Regions

Whenever I talk to a startup person outside our region (investor, journalist, etc.) they like to ask about the current funding climate in our region. Money is always a popular topic, especially when the economy is hot and startups are en vogue (bonus: public SaaS valuations are at an all-time high). Only, the funding climate outside the money regions (CA, NYC, etc.) hasn’t appreciably changed in the last 2-3 years.

More money is sloshing around on the sidelines waiting to be put to work. Limited partners have huge commitments in funds and venture investors are trying to put the money to work. Yet, this is primarily for growth/later stage investments when the metrics are solid and it’s clear the startup is going to win, simply a question of how much. For these growth/later stage investments, investors will travel. Distance is a pain but not that big a deal. If you can write a $50M check and underwrite a 3-5x return in 3-5 years, it’s a pretty easy ‘yes’, especially if there’s a direct flight (the money people still hate layovers).

Early stage investments — primarily post-seed and Series A — are still quite limited. The number of investors that focus on this stage (say, $750k – $3M in revenue) hasn’t appreciably changed, thus the number of startups that raise rounds in this stage hasn’t change (without more investors, the quantity of these types of fundings won’t increase). Investors at this stage often write checks that are larger than angels can put together, so it isn’t possible to bypass this funding source with more non-institutional money.

Seed/angel rounds are still the most challenging area. Idea stage startup are plentiful, but highly risk-loving capital is not. Local investors are still primarily wealthy people who didn’t make money in technology, and thus their appetite for startup investing is relatively low. To grow the angel community, we need to have more large startup exits. Today, there’s a strong cohort of local growth stage startups valued in the hundreds of millions and a few in the billions. Once this wave of startups, typically 5-10 years old, reaches exit maturity, expect the local angel community to ramp up and hit a new high.

While the funding climate hasn’t changed recently, the overall tenor of the startup community is humming along nicely. Look for the funding climate in the idea/seed stage to grow nicely in the next 3-5 years once we have a wave of big startup exits.

Dilution Dance for Each Financing Round

10 years ago when we went out to market to raise money for Pardot, potential investors talked about wanting to buy 33-40% of the business in the Series A. As an entrepreneur, the thought of selling that big of a chunk in one single round bothered us, and we ended up passing. Fortunately, we were able to get to a nice exit without raising institutional capital. Now, typical funding rounds are in the 15-30% dilution range (not counting growing the employee option pool, which usually adds 5% more dilution).

Today, entrepreneurs have more choices. Options like revenue financing, investors that will do straight secondary (liquidity for the entrepreneur), and more varied pools of money (e.g. family offices doing venture-like deals, etc.) were unheard of in the past. It’s a great time to be an entrepreneur.

Another feature of today’s market is that you can sell even smaller chunks of the business, especially if the startup is considered “hot.” Investors are sitting on so much cash, many of the rules like “I need to own 20% of the company” no longer apply. If you want to sell 10% of the startup, many more investors are likely interested, assuming it meets their criteria.

Entrepreneurs would do well to find the balance between selling as little of their startup as possible and raising enough money to reach their next milestone or inflection in the business. Times are good, so it’s advisable to raise a little extra, but of course that’s extra dilution as well. There’s a dilution dance with each financing round, and entrepreneurs with desirable startups would do well to assume the standard “rules” are all negotiable.

‘I’ vs ‘You’ When Giving Advice

Back in 2008 I had the opportunity to join Entrepreneurs’ Organization (EO) and go through a day long program called Forum Training with the excellent Ellie Byrd. In addition to meeting a number of great people, the most valuable education to me was learning about the Gestalt Protocol.

The Gestalt Protocol, in it’s simplest form, says to share personal experiences for the purpose of giving advice only using ‘I’ and never ‘You.’ Most often, when people give personal advice based on their experiences, it’s in the form of “You should do X because that’s what worked for me.” Instead, remove the use of ‘You” and reword it with ‘I’ so that it’s like “I did X and here’s what I learned.”

When giving advice, especially from a person that’s in a position of power or more experience, it’s too easy to start telling the other person how to do things, even while they lack the details and context of the situation, beyond what they’ve been told. In addition, when receiving the advice, it becomes less valuable when the advice comes across as directives without the corresponding experience and learnings behind it.

By following the Gestalt Protocol and using ‘I’ instead of ‘You’ when giving advice, it becomes more about experience sharing and letting the other person understand what did, and didn’t work, from a similar situation in the past, without passing judgement on the specifics of the current scenario. Personal experiences, delivered via the use of ‘I’ make for much better sharing and mentoring.

Mentors would do well to follow the Gestalt Protocol and focus on sharing personal experiences.

The Struggling Executive Who’s Really a Manager

One of the more common conversations I’ve had with entrepreneurs scaling their startup goes something like this:

Me: How are things going?

Entrepreneur: We’re having a hard time with leader X?

Me: Why’s that?

Entrepreneur: It feels like he’s always reactive.

Me: What do you mean?

Entrepreneur: Well, we keep having issues in his department and it feels like they’re things that shouldn’t be issues.

Me: What should he be doing?

Entrepreneur: He should be proactively spotting things that could be potential issues and addressing them so that they they’re non-events.

Me: Sounds like the struggling executive is really a manager, not an executive.

I’ve had this conversation with entrepreneurs numerous times and it’s always the same issue: a person was put in an executive position and they aren’t really an executive, they’re a manager.

Managers see short-term, right in front of them, and are often reactive.

Executives see long-term, around corners, and are proactive.

Managers bring problems forward.

Executives bring solutions forward.

Now, not all managers are like this and not all executives are like this, but the key difference between and a manager and an executive is the ability to see further out into the future and proactively get things done.

The next time you’re having an issue with a leader, ask the key question: are they a manager or an executive?