Desired Proof Points to Raise a Seed Round

Over the last few weeks several entrepreneurs have reached out asking for advice on what’s required to raise a seed round of several hundred thousand dollars. Now, most seed rounds are still a huge leap of faith, but with enough validation some of the risk can be reduced.

Here are a few desired proof points to raise a seed round:

  • A Must-Have Product – In the nice-to-have vs must-have product debate, it needs to be a clear must-have product (see 5 Questions to Determine a Must-Have Product).
  • Modest Metrics + Revenue – The seed stage is all about proving product/market fit and the start of a repeatable customer acquisition process. Progress with simple weekly metrics is important combined with low six-figures of recurring revenue.
  • Strong Weekly Growth – With modest metrics and revenue, the key is showing that they’re moving in the right direction on a weekly basis. Weekly revenue growth of at least 5% is ideal (see Recurring Revenue and Week Over Week Growth).

Raising a seed round is done based more on belief than hard facts, but having these three proof points greatly increases the chance of success.

What else? What are some more proof points to raise a seed round?

4 Questions to Ask Before Making an Angel Investment

Continuing with yesterday’s post Book Review: Angel by Jason Calacanis, there are a number of recommendations and best practices that Jason uses as part of his angel investing strategy. Mid-way through the book he offers up four excellent questions to ask before making an angel investment.

From the book (pg. 141):

  1. Why has this founder chosen this business?
  2. How committed is this founder?
  3. What this founder’s chances of succeeding in this business–and in life?
  4. What does winning look like in terms of revenue and my return?

Too often, investors get enamored by the idea. Jason’s advice: it’s all about the founder. Ask these four questions the next time you’re considering an angel investment.

What else? What are some more questions you like to ask before making an angel investment?

Book Review: Angel by Jason Calacanis

When I read Jasaon Calacanis had a new book called Angel: How to Invest in Technology Startups, I knew I had to read it. Now, Jason’s style is very different from mine, but his wit and insight are excellent. Overall, I’d describe the book as a strong introduction to angel investing combined with a heavy dose of in-your-face attitude.

A few notes:

  • He invested $25,000 into Uber at a $5 million pre-money valuation (Uber is now valued at $70 billion)
  • Was one of the first Sequoia scouts where Sequoia supplied the capital and he received 45% of the profits
  • Prefers founders who are willing to pursue their visions long before an investor comes along
  • Recommends selling half the angel equity in future rounds, if possible (called “idiot insurance”)
  • Believes only way to be successful as angel investor requires being based in Silicon Valley (I believe angel investing should be viewed as charity work)
  • Offers starting with advising and/or AngelList as a no/low cost way to start investing

If you’re curious about angel investing in tech startups and want a heavily opinionated view point, Angel: How to Invest in Technology Startups is a great place to start.

What else? What are some more thoughts on the book?

Investment Failure as an Angel

Last week I was catching up with a friend and he said he could never be an angel investor as he’s too worried the investment would fail and be worthless. I offered up that most angel investments fail and it’s better viewed as charity that helps entrepreneurs. Thinking more about it, investment failure doesn’t bother me for several reasons:

  • What Could Be – Investing is a leap of faith that there’s an opportunity to build a great company.
  • Opportunity to Learn – Every deal is different. Every market is different. Every entrepreneur is different. There’s so much learning with each investment.
  • Paying it Forward – Helping entrepreneurs is a core value for me. It’s what I enjoy doing.
  • Upside > Downside – If we succeed, the return could be 10x or 100x the original investment. If we lose, the downside is only the original investment.

Investment failure as an angel is never fun but the enjoyment and potential upside outweighs the risks.

What else? What are some more thoughts on investment failure as an angel?

Another Publicly-Traded SaaS Company Going Private

Earlier today Vista Equity Partners announced they were acquiring Xactly Corp (NYSE:XTLY) and taking it private for $564 million. Vista has already bought several public SaaS companies including Marketo for $1.8 billion and Cvent for $1.65 billion, among other acquisitions. Public markets are supposed to price in all known information, yet Benjamin Graham’s famous quote still rings true today:

In the short run, the market is a voting machine but in the long run, it is a weighing machine.

The idea is that opinions on public companies fluctuate, along with their corresponding stock price, on a regular basis. Only, over an extended period of time, their value is based on the underlying substance.

Let’s look at info on Xactly Corp from Google Finance:

  • Xactly Corporation is a provider of cloud-based incentive compensation solutions for employee and sales performance management.
  • 450 employees
  • Current annualized run rate $97.2 million
  • Annualized year-over-year growth rate of ~20% (hence slightly less than a 6x exit valuation on run rate not including cash on hand and debt)

For more information on Xactly, read the notes from the S-1 IPO filing.

For Vista Equity Partners, they must believe they can generate annualized double-digit returns on the investment. Here are a few ideas how they might do it:

  • Substantially Increase the growth rate through new strategies or direction
  • Roll up a number of smaller SaaS companies in the sales performance market grow much faster through an in-organic approach
  • Do nothing and believe that the momentum and potential for SaaS over the next 10 years is greater than what the public markets believe

My guess is that it’s a general bet on SaaS and better long term potential than markets price in. I’m interested to see how it plays out over the next 5-7 years.

What else? What are some more thoughts on another publicly-traded SaaS company going private?

Fast Growth and a Big Market to Raise Money

As a follow up to Common Investor Questions at The Atlanta Tech Village, one of the questions I received was why do investors have a hard time finding investment opportunities. There are a number of excellent startups with customers, management teams, and decent growth. Only, they can’t raise any money. What gives?

Just because the startup is making progress, without fast growth and a big market, most investors will pass. Fast growth is an indicator of product/market fit and latent demand for the product. Big markets present an opportunity to build a major business and generate out-sized returns. Investors often require both be present.

Most startups aren’t growing fast (> 100% year-over-year), even though they are a growth-oriented company (see the definition of a startup). They want to grow fast but haven’t achieved their goal. Most markets aren’t big enough to generate venture-like returns. Entrepreneurs pitch that their product serves a big market, but most of the time it’s a much smaller slice of the market.

Investors want fast growth and a big market. Startups that don’t have both rarely raise money.

What else? What are some more thoughts on fast growth and big markets as requirements to raise money?

Common Investor Questions at The Atlanta Tech Village

Several times a month I meet with investors from out of town that are interested in the Atlanta market and startups at the Atlanta Tech Village. With so much capital that needs to be put to work, investors are eager to find startups that have the beginning of a big business and the potential for strong unit economics.

Here are some of the common questions investors ask:

  • What startups should we be paying attention to in the building?
  • Any entrepreneurs we should meet with the next time we’re in town?
  • Do you have any startups doing X, Y, or Z (e.g. specific areas of interest like machine learning, health IT, marketing SaaS, etc.)?
  • Any startups growing fast with X to Y range of revenue (e.g. $1 – $2 million in recurring revenue)?
  • What events or programs should we consider for future visits (e.g. Atlanta Startup Village)?
  • Anything we can help with?

As expected, the questions from investors are fairly consistent as they’re looking for startups that meet their criteria and the opportunity to invest. Surprisingly, investors don’t have enough strong startups to invest in.

What else? What are some more questions investors should be asking?