When will the local growth stage capital arrive?

Over the years I’ve been asked no less than 100 times about startup capital in our region. Up until two years ago, the answer was generally that you had to go outside the region for seed, early, and growth stage capital. There were a few pockets here and there locally for seed and early stage but it wasn’t robust and competitive. Now, Atlanta’s startup community is brimming with seed and early stage capital.

Loosely defined, seed stage capital is for startups that are just getting started up to $500,000 in recurring revenue. Early stage capital is for startups that have product/market fit and the basis of a repeatable customer acquisition process with $500,000 to $5M in recurring revenue. Finally, growth stage capital is broadly for startups with $5M or more in recurring revenue.

If seed and early stage capital is now plentiful, what will it take for growth stage capital to be plentiful as well?

Time. And success.

With 15+ local funds doing seed and early stage, the foundation is in place to eventually have thriving capital providers at all stages. New firms coming into the market and providing growth stage capital ($10M+ rounds) from their initial fund is unlikely. What is likely is a small portion of the local funds doing well and raising larger funds. As almost all the current funds are under $100M, and most are under $40M, it’s going to take at least two 3-5 year investing cycles for the funds to achieve a scale of $250M or more to supply growth rounds. And that’s only if that have a high level of success (return 2x capital after fees, at least).

So, the pieces are in place but it’s going to take upwards of 10 more years for the growth stage segment of the capital stack to be available locally in our region.

The good news is that there’s an oversupply of growth stage capital outside of our region, and local startups are raising more capital than ever.

Our startup community is humming along nicely and we’ll eventually have growth stage capital locally.

Narrative Violations as Source of Startup Ideas

Bedrock Capital’s founders have an excellent post up titled In Search of Narrative Violations where the authors argue that some of the best opportunities exist in areas that go against the grain of the currently accepted beliefs. Citing examples at specific points in time like cleantech as a failure but Tesla was a winner and cryptocurrency as a failure but Bitcoin as a winner, people are quick to band together and say some trend or industry focus was overhyped and not successful.

Taking the cleantech idea as an example, if you read the article Why the Clean Tech Boom Went Bust from Wired in 2012, it’s clear many entrepreneurs failed and investors lost money. Fast forward to today, one major success from that early 2000s era — Tesla — has achieved a scale, both commercially and financially ($700B market cap!), that it more than makes up for all the losses. Sometimes the power laws are so dramatic that one win makes up for tens of thousands of losses.

Similar to points in time on the Gartner Hype Cycle, opportunities emerge even after the peak of inflated expectations and the trough of disillusionment starts to set in. Prognosticators have moved on to the next shiny trend yet opportunities still exist. If you were to follow the “experts”, you’d believe all the innovation was done. Only, it takes a number of years to really understand how a new technology or industry plays out.

Finally, this is similar to Be Non-Consensus Right. If everyone is betting on the same thing, it’s noisy and more difficult to build a great business. Opportunities exist in the consensus realm, but the challenges and challengers are stronger. Find the non-consensus startup ideas.

Pardot, in hindsight, was a non-consensus idea. Investors told us marketing technology was a bad idea because no large martech company had every been built. Fact. Marketing departments don’t have technology budgets, they have advertising budgets. Fact. The consensus was that martech isn’t a good area. If we listened to the “experts”, we should have shut the startup down and moved up. Only, we were non-consensus right and martech has now created $100B+ of value as a category.

Look for startup ideas in narrative violations and non-consensus right areas.

MVP Tree as a Critical Entrepreneur Starting Point

Shawn Carolan has a post up on Steve Blank’s blog titled A Path to a Minimum Viable Product and it is easily the most insightful piece for entrepreneurs starting out that I’ve read this year. With all the excellent literature out there about Customer Discovery and Minimum Viable Product (MVP), there’s not enough how-to around zeroing in on the best opportunities and not falling prey to chasing too many opportunities.

From the article, here are the eight steps:

  1. Define Your Big Mission in a Simple Statement
  2. Customer Archetypes
  3. Jobs to Be Done
  4. Execution Branches
  5. Scope Out Your Candidate MVPs
  6. Evaluate Your Candidate MVPs
  7. Pick, Beta, Ship
  8. Double-Down

Go read A Path to a Minimum Viable Product and share it with every entrepreneur you know that is searching for product/market fit.

High Velocity Venture Capital

Everett Randle has an excellent piece up titled Playing Different Games: Or why Tiger is eating your lunch (& deals). Here, the big idea is that Tiger Global’s rapid deployment of capital into startups is fundamentally different than traditional venture, and is a better model when executed well. From the article summing up the Tiger Global approach:

  • Be (very) aggressive in pre-empting good tech businesses
  • Move (very) quickly through diligence & term sheet issuance
  • Pay (very) high prices relative to historical norms and/or competitors
  • Take a (very) lightweight approach to company involvement post-investment
  • Above all, deploy capital, deploy capital, deploy capital

Historically, the VC business is opposite of the startup business. VCs are small, boutique partnerships that don’t scale. Serving on boards, and doing it well, takes time and energy, often limiting VCs to no more than 8-10 engagements. VCs typically have little skin in the game, only providing a tiny percentage of the fund’s capital. In addition, venture firms take many years, if not a full decade, to know how they did for a particular fund.

Knowing that this is the norm, Tiger Global designed their approach to smartly take advantage of the traditional model, summarized as the opposite of the points above:

  • Wait for tech businesses to raise money and hope they get networked to you or you met them prior to the round
  • Require traditional due diligence and term sheet issuance standards so that investment errors and write-offs are minimized
  • Think about historical valuations and pay “fair” prices for startups
  • Get involved post investment via a board seat, regular entrepreneur calls, and continued value-add
  • Deploy capital on a schedule and hope that there are enough quality deals during that timeframe to do well

Here’s the conundrum: entrepreneurs still need everything in the historical venture playbook. Building a large business is hard and time consuming. Due diligence is important. Board work is important. Prudently deploying capital is important.

Knowing that the yeoman’s work is being done by the seed, Series A, and/or Series B investor to help the entrepreneur build a great business, why not stand on their shoulders and bypass the traditional model? Lighter touch, higher valuations, and faster speed results in a more scalable, higher velocity business.

Welcome to high velocity venture capital.

Plugging Into a New Startup Community

Over the last few months I’ve had the opportunity to talk to several new entrepreneurs and technologists that have moved to Atlanta as part of a wave of people seeking a better quality of life. The size of this migration has even surprised me. In a recent Bloomberg Businessweek article the author cites the Bureau of Labor Statistics report that Atlanta leads the nation in IT job growth — up an astounding 7.5% year-over-year.

Here are a few ideas for plugging into a new startup community.

Meetups

While meeting up in real life is currently limited, online meetups are still thriving. Check out Meetup’s site and join a group or two.

Angels and VCs

Entrepreneurial activity is near all-time highs as major societal change creates tremendous opportunity. And, thankfully, the amount of investment activity is keeping pace. Reach out to local angels and venture capitalists and introduce yourself. Many of these individuals are in the business of meeting people and making connections.

Attorneys, Accountants, Service Providers

Behind the scenes of every startup community are attorneys, accountants, and other service providers that provide much needed legal, financial, and other specialized work. As a bonus, there’s often a few rainmakers that absolutely love meeting new people. Find these rainmakers.

Colleges and Universities

Every college and university has an entrepreneur club. Seek it out. Find out what’s going on and get involved.

Entrepreneurs

Of course, the heart of every startup community is the entrepreneurs themselves. Look for entrepreneurs that are active in the community putting on programs, blogging about concepts, and tweeting ideas.

Conclusion

Plugging into a new startup community is a great way to make new friends, pay it forward, and be a part of something bigger. While the world is more remote than ever, it’s great to be local as well.

Seeing is Believing as a Potential Entrepreneur

Last week I was talking to a soon-to-be startup founder and I asked why he wanted to start this new company. Easy, he said — after working at other startups, and the most recent one being a success, he believes he can do it. Watching the founders in action showed him that he has the skills and work ethic.

Seeing is believing as a potential entrepreneur.

Many stories have been written about the quest to run a mile in less than four minutes. No person had achieved this feat until Roger Banister in 1954. Once he did it other runners realized it was possible and many more followed suit. Today, over 1,400 people have done it.

Seeing is believing for human potential.

As an entrepreneur, it’s one thing to read about startups on TechCrunch or watch founder stories on YouTube, but it’s an entirely different, more powerful experience to see another founder succeed. Seeing the founders in action shows they’re merely human, like everyone else. They had an idea, entered the arena, and made it happen.

Want to be an entrepreneur?

Join an entrepreneur group.

Work at a startup.

Seeing other entrepreneurs succeed is one of the most powerful forces for potential entrepreneurs.

Start With Customer Delight

This past week I had two conversations with entrepreneurs that boiled down to the same thing: every successful venture starts by delighting a customer. Simple, right? Wrong. Entrepreneurs love dreaming about the future, how the world should work, and what needs to be created. Only, as the creator of the idea, it’s easy to believe things should function a certain way.

We should sell to job titles X, Y, and Z because they’ve always been the buyers.

We should avoid doing X because it’s never worked for other companies.

We should charge X to ensure Y gross margins.

We shouldn’t spend more than X to acquire customers.

We should avoid custom work and one-off services as they aren’t scalable.

None of it matters if customers don’t love the product. Put another way, don’t optimize the business model around what makes a “good business.” Instead, optimize the business model around customer delight and then figure out the rest.

Start with customer delight. Without happy customers, nothing else matters.

More Capital Results in More Startups

For as long as I can remember, I believed that the amount of capital in a startup community was driven exclusively by the quality of the local startups. Want more capital? Build better startups. Now, I believe I was wrong and more capital results in more startups.

Many years ago when we tried to raise money for Pardot, we thought we’d checked all the boxes. Great market. Great customer base. Great growth rate. Yet, capital was still incredibly hard to come by. I didn’t feel our difficulty raising capital was a function of local capital as we pitched investors from Boston to Silicon Valley. Our difficulty was because we didn’t do an amazing job convincing investors we’d build a big business. Regardless of our fundraising challenges, our community had limited capital and we looked nationally.

Fast forward to today and our community is brimming with capital and startups. Seed stage investors have raised over $100M, which is an enormous amount when the check sizes are often $250,000. Coupled with all the investors, there’s a commensurate number of pre-accelerators, accelerators, university initiatives, and scale up programs. Startups are everywhere.

Investors have to put capital to work in order to earn their fees and profits (ideally!) from their own investors. If there’s more seed stage capital now, which there is, it translates into more startups raising that type of capital — the money has to go somewhere.

But where are the new startups coming from?

A few ideas:

  • Science Projects – A couple developers put something together on nights and weekends to demonstrate a prototype. Before, they’d have to have some traction to raise money. Now, it’s a less of an issue and science projects are getting funded.
  • Spin Outs – A team within a startup identified an unrelated issue and started building a solution. After a few conversations, they decide to spin it out as a new startup and raise capital.
  • Bridges – A young startup is making progress, but not enough to raise a big new round. Instead, investors do a bridge round in an effort to keep things going with an eye towards hitting a meaningful milestone.
  • Less Tech – Before, most startups were software/Internet businesses. Now, more have a tech component but aren’t primarily tech, and are raising money from tech investors.
  • Startup Programs – Accelerators and other community programs are achieving their intended function by helping startups raise money at higher rates.

Put simply, investors take more risks now. More ideas and “projects” are getting funded. More programs are prepping startups to raise money, and succeeding in their efforts. It’s a great time to be an entrepreneur and the capital is flowing.

More capital does equal more startups. The money has to go somewhere.

Complexity of Startup Messaging

Last week, during two separate conversations with entrepreneurs, it was offered up that their startup’s messaging was too complicated. Tons of jargon, buzzwords, and technobabble were attempting to drive home a particular feature set and positioning. Only, it was doing the opposite.

More complexity is a failure to distill messaging down to its essence.

More complexity is a crutch for not taking the time to present what really matters.

More complexity is the easy way to avoid being uncomfortably narrow.

In school, we’re told to do assignments where you have to write 1,000 words. Volume of words is a primary driver of the output. More words is conferred as more value. In business, it’s easy to fall into that trap.

In lieu of more words, the focus needs to be more clarity. More thought over more verbosity. More crispness over more jargony.

The next time you describe your product, competitive position in the market, or value add, reduce the complexity of the verbiage. Increase the understandability. Make it clear.

The Hunt for Authentic Demand

There’s a never-ending debate in the entrepreneur world: build it and they will come or demonstrate authentic demand first before building it. The first approach — build it and they will come — a.k.a. the “Field of Dreams” approach is the most common. Inspiration for a new idea hits an entrepreneur and they work to bring it to life. Entrepreneurs that study the Lean Startup take a more modern approach whereby customer discovery is employed to truly uncover a meaningful pain or opportunity before building a solution. Customer discovery yields better outcomes but there are plenty of pros and cons with each approach.

Entrepreneurs should start with The Mom Test: How to talk to customers & learn if your business is a good idea when everyone is lying to you and unlearn their natural tendencies of leading the witness during customer discovery as well as being too broad with the initial idea. Entrepreneurs are naturally optimistic and eager to get to validation. Most people want to be supportive and say it’s a good idea regardless of whether they’re the ideal customer or having any expertise to back it up. Asking harder questions and seeking objective feedback takes more work, and delivers better results.

Once the basics are in place, it’s time to hunt for authentic demand. Authentic demand represents prospects that want to buy something but have no options — there’s an unfulfilled market need. The hunt for authentic demand is no different than a sales rep looking to build a pipeline, and that’s precisely how entrepreneurs should treat it. Here are a few sales tactics to use in the hunt for authentic demand:

  • Cold Calling – Pick up the phone. Call the people that fit the ideal customer profile. Ask great questions. Yes, most people don’t like answering the phone but there are still plenty that do, especially in certain industries.
  • Outbound Emails – Email is easy, fast, and effective. People respond to unwanted email when the message resonates and the pain is real.
  • LinkedIn InMails – More expensive than email but often more effective, LinkedIn InMail works. Tailor the message. Find the authentic demand.
  • Social Media – Follow the ideal buyers. Understand their view of the world. Find a connection point and make the ask.
  • Networking – Talk to anyone that’ll listen — friends, family, co-workers, etc. Share the story and ask for intros.

Treat the hunt for authentic demand like a sales process. Come up with a goal — say 100 activities a day — and develop a system. Then, work the system. The more experiments and activities, the more certainty that authentic demand is real (or non existent and it’s time to move on). If there’s authentic demand, and the hunt was a success, the greater the chance of the startup succeeding.

Start with the hunt for authentic demand.