Wednesday, August 13, 2014

Fund raising is hard for everyone, some more than others

Early Stage Fund Raising is Hard For Everyone, Some More Than Others

Three high level take aways: 

  • Hard: less than one in ten companies get angel funding.
  • Harder: less than one in 200 companies get VC funding.
  • Hardest: less than one in 600 female founded companies get VC funding

Note that in each case above (and below) for illustrative purposes the ratios compare a given subset of companies to the total number companies started in the US on average each year.

Working through the numbers:

It is easy (all too easy from the investor side of the table) to toss out the glib comment to an entrepreneur: "Well, fund raising is hard for everyone you know" when talking about the time and energy needed to secure early stage capital. And this can then be followed by cliches such as: "You need to kiss a lot of frogs when you fund raise" or "get used to a lot of people telling you your baby is ugly". (Both true but neither very inspiring!)

I thought I should check out the numbers so that, while being pretty prone to these cliches myself, I could at least have some stats on hand. So here goes. I include some additional gender stats to reinforce the point that, while it might indeed be hard for everyone, early stage fund raising is incrementally harder for women entrepreneurs: 

1. There are 800,000 "establishment births" each year in the US on average over the last 20 years or so per the Bureau of Labor Statistics. An excellent report by Kauffman and LegalZoom provides a full down load on the demographics of new business founders in 2013 - 35% being women. So women found about 280,000 new companies a year on average

2. In 2013 roughly 70,000 companies receive angel funding of $25bn from 300,000 active angels per the Center for Venture Research (CVR) at the University of New Hampshire. The CVR reports that, on average over time, only 15% of companies looking for angel funding receive it (implying that approx. 470,000 or so do actual try and get angel money). In terms of gender the CVR data shows that women constitute approx. 20% of active angels. On the entrepreneur side, of those seeking funding 23% are women … and of those receiving funding 20% are women. So of the 800,000 new companies in total less than one in 100 get angel funding.

3. US VCs invested in approx. 3,400 new cos in 2013 committing $30bn through 550 active firms according to the National Venture Capital Association. The NVCA reports that 13% of VC deals involve at least at least one female founder, up from 4% a decade ago. On the investor side only 11% of VC investment staff were reported to be women in the most recent NVCA Census survey. And the the Forbes Midas List consistently shows that 5% or less of top VC decision makers are women. (To be exact 4 of 100 in the most recent 2014 survey.) Another perspective: about 35 percent of U.S. businesses are founded by women but just 2 percent of the money invested by venture capital firms goes to women-owned firms, according to a survey by the National Foundation for Women Business Owners and Wells Fargo & Co. Looking at just the number of deals, the NVCA stats suggest about 450 funded companies each year have a female founder ... which is equates to less than one in 600 of the 280,000 companies started by women each year. (Again note that I am comparing these numbers, not suggesting that of 280,000 companies founded in any given year 600 go on to get funded by VCs in that same year!)

Friday, August 8, 2014

Should Seed Funding Decks Include a “Potential Exits” Slide?

Should Seed Funding Decks Include a “Potential Exits” Slide?

A recent Hunter Walk post on seed funding decks promoted me to respond. The post argued that exit slides in a seed funding deck are a bad idea for a number of reasons, four in fact. I took the view that, since it takes to views to make a market, I should offer some thoughts that challenge the post and indeed many of the observations by other commenters that followed. 

My start point - as an investor, not a philanthropist, I generally like to see my money come back. Hopefully with a big multiplier. I am also well aware that mega successful "unicorns" are rare and that most exits (so where I get my money back) are acquisitions in the sub $100mn range. So as an investor exits are a legitimate area of interest to me!

Bottom line I agreed with the observation from Mike Wallach who also commented on the post:
"Frankly, with a few exceptions, the pretense that there is really no interest in possible exits comes across as a bit disingenuous on both the part of the entrepreneur and investor". And let's be clear VCs have a clear and singular objective 0 much more so than angel investors in fact. Namely VCs have a fiduciary duty to maximize FINANCIAL returns to their LPs and a defined fund life in which to do that.
Here goes with my thoughts on the various objections to including an exit slide:
1. Narrows thinking? => shows strategic thinking
The exit map today is a point in time view. The exit map tomorrow, reflecting the evolution of the business, market place, competitors etc will be different. Only if you think today's exit map applies for all time will it narrow thinking. Rather it too will evolve over time with names adding and leaving, perhaps rapidly! A constantly evolving exit map (to be discussed/reviewed at every Board meeting say) shows strategic thinking not narrow thinking in my view. Also I would note here that having an exit slide does not mean (to me) the entrepreneur has "planned an exit" and hence is locked into a given trajectory. If they had a hard coded exit plan then even I would be alarmed - that is indeed narrow (and fantasy) thinking.
2. Speak of the devil and he will won't appear? => actually you need to proactively speak to the devil
In my view it is simply not the case that most companies are "bought not sold". That maybe well be true for a small minority of visible and successful big winner businesses, but not the majority. Yes we all want the big winner that has multiple suitors at the door. But they are few and far between. The way corporate M&A teams work in my experience is to monitor multiple targets overtly (ie have on going dialog with some) or covertly (you are on their watch list but don't know it.) The M&A folks will be part of ongoing buy vs build decisions with potential targets rising and falling in priority as the acquirer's own business and business needs evolve. In that context most small companies need to get on an acquirer's the radar and stay there - that means yes identifying possible purchasers, building relationships with them and hence a track record and trust that will make a potential buyer's purchase decision easier if and when they decide to pull the trigger. Of course that should not be the main focus of the entrepreneur ... but in partnership with the Board is something that needs to be thought through constantly even from an early stage.
3. Tell me how to create value, not just realize it? => yes but thinking realization is part of your competitor/partner landscape
Every high growth entrepreneur that receives money beyond F&F is in it, along with their investors, in it to build something big. And of course solving a real problem with a unique scalable solution is the route to achieving that big business. But let's not over do this. I know very very few founders who build to flip - so this point seems a straw man to me. The exit slide is one slide. It shows a part of the picture that matters to most investors. (ALL investors are in it for an exit at some point. If they aren't then, I am sorry, they aren't investors.) And, to the "strategic thinking" observation above, to me a thoughtful exit slide shows me that the entrepreneur has a deep understanding of where her/his business fits in a broader context and crucially which large players don't do what he/she does. As such this is as much competitor and partner analysis as it is exit analysis.
4. Suggests risk aversion? => maybe but there are other ways to find this out!
All of my own nine investees have an exit map and yet also all passionately want to build big businesses. Maybe an unrepresentative sample but it seems too big a leap to go from the inclusion of an exit slide to an assessment of risk aversion. After all as one the other respondents in the thread noted many entrepreneurs are advised to include this slide ... and for good pragmatic (with no exit there is no "investment" just a non refundable "gift") reasons. Also there are other bona fide (to me) reasons as I have mentioned - the content (if robust) shows broad strategic thinking, it can show insights in to the way the M&A process actually works, it shows an understanding of the competitor/partner environment. There are plenty of other ways to assess risk aversion than jumping to conclusions from a slide in a deck.

Tuesday, February 25, 2014

#SXSW2014 - Women-Led: The Underserved Investment Opportunity

Booking your calendar for morning of Saturday March 8th at SxSW? 

Please join me at 9.30am along with Lauren Flanagan, Josh Henderson and Trish Costello for our panel discussion:
Women-Led: The Underserved Investment Opportunity

The Pitch:
Companies that are led by women or have diverse teams are shown to outperform those without women on the team, and yet private investments in these companies is far below what would be expected. Investors maintain that their decisions have nothing to do with the gender of the CEO. Less than 15% of venture investments are made in companies with a woman founder and/or CEO, yet according to the SBA women own about 50 percent of all businesses. There are many studies and impressive statistics to show the career and entrepreneurial potential of women indicating that they are an underserved business opportunity for investors. In 2000, the Global Entrepreneurship Monitor recommended increasing the participation of women in entrepreneurship as a necessity for long-term economic prosperity. Three investors who have 'made a market' in investing in women-led businesses reveal their rationale and ROI.

Sunday, December 22, 2013

New Year Resolution: Think Out of the Standard Exit Box!

Think Out of the Standard Exit Box!

New Year Resolution: I am going to try and be more lateral in 2014 when it comes to thinking about exits with the companies I am invested in and advising. So thinking out of the standard exit box!

The Thesis:

From pretty much day one startups that raise money from "strangers" (ie non Friends and Family investors, so people who want their money back ++) they need to be focused on "exit". (Well, Friends and Family want their money back too, they might not be quit so focused on it however!)

I find the way CEOs/Founder think about exit opportunities to be pretty informative. First with +/- 200 or so IPOs across the US each year (in all sectors) vs c60,000 Angel and c3,000 VC financings monetization through an IPO is really pretty unlikely. The realist thinks M&A. Second looking into the future for potential buyers means looking at the present from a market landscape point of view. 

Having a good handle on exits is important of itself, but it also tells me how thoughtful the entrepreneur is about her/his competitive environment. And crucially who has a product gap that their business might address ie fit in to/add value to. This perspective can and should also drive strategic decisions too. Simply put, with the M&A exit in mind startups need to think "acquirer value" not "shareholder value". ie what maximizes the value of the entity as seen from the perspective of a potential acquirer. In the tech space the current industry giants have been the dominant M&A players - but increasingly there are opportunities for more creative "non standard" routes to exit.

An interesting recent post highlighted that an increasingly broad range of companies is acquiring tech start ups. In her Techcrunch article Lena Rao argues that "As software eats the world, non tech corporations are eating start ups". She makes a key point that I think founders and investors should take note of. (For the record the top 5 acquirers in 2012 were Facebook, Google, Groupon, Twitter and Cisco.)

Lena provides several big data related examples. And of course mobile will continue to be a key area. A recent example - Snapette. I caught up with Sarah Paiji Co-Founder and CEO of NYC based Snapette recently and she was pleased to have closed the sale of her company to PriceGrabber in August. Snapette is a mobile app and in its own words is: "the perfect shopping tool to help you find designer fashion currently in stores near you". Acquirer PriceGrabber is a leader in online shopping discovery/ecommerce with 26mn uniques driving over $1bn in annual retail sales for its partners. BUT like many established players in most any business, even online in this case, it was lagging in mobile. So Snapette addressed that gap making the point that its not just about the big players but companies in your ecosystem for whom you provide a solution to a pressing strategic problem.

Non standard might include financial buyers. In talking about this topic with Cynthia Schames we agreed that the majority of Private Equity (PE) acquisitions are of more mature businesses with assets and cash flow that can support leverage. Still there are some that focus on the tech space ... the most significant recent example by far is Silver Lake Partners who played a key role in the Dell going private transaction. For those not familiar with them take a look at Silverlake's portfolio. Can't recall anyone having them on an Exit table, but they have big fire power for later stage acquisitions.

So a useful year end entrepreneur exercise might be to: 
A. List all the obvious buyers for your company and then 
B. Brainstorm some non obvious ones too!

The Execution: Getting it Done

Never mind posts, whole books are needed to cover the nuances of getting to and managing exits in practice. However a recently exited entrepreneur just gave me this great one paragraph summary based on their experience:

"... it's all about relationships - doing an acquisition is even more of a marriage than hiring an employee, and people need to trust the people they're allying themselves with and investing in. So I would say to cultivate these relationships early, build trust, get insights into how your product can help these potential acquirers, and possibly even do strategic partnerships with them earlier than anticipated (when it makes sense)."

And if you do want to read "The Book" on the subject then, as David Rose pointed out to me, you need to add Early Exits by Basil Peters to you Holiday gift wish list.

Tuesday, November 26, 2013

Investing in Women Entrepreneurs ... with help from Isaiah Berlin, Hedgehogs and Foxes

While catching up with Laura Sachar, one of the cofounders of Starvest, last week I was asked: "So, why do you invest in women entrepreneurs?" and I answered:

1. I want to exploit the power of diversity 
Early stage investing is partly a numbers game. So anything that can tilt the odds in your favor seems to me worth pursuing and diversity is one such factor. The a priori chances of success in any individual angel investment are very low ... the vast majority of returns come from no more than 10% of your investments. Of course the most fundamental numbers game point that angels need to grasp is that volume/diversification are essential as pointed out in "Angel Investing by the Numbers" for example. But for me the compelling evidence that gender diverse teams make better decisions is an additional and important one of those tilt factors. (See for example the 2011 HBR Article: "What Makes Teams Smarter?") 

2. I want to invest in an under appreciated opportunity
Women entrepreneurs, and specifically women CEOs, are under appreciated when it comes to the investment process, specifically when pitching in my view. ie there is what economists could call a "market failure". So a situation where capital is not appropriately allocated to set of investment opportunities based on non rational criteria, in the sense that the level of interest in those opportunities is not appropriately correlated with the chances and degree of success. There are (sadly) plenty of examples of women CEOs describing the differentially tougher challenges they faced when raising early stage capital. See for example the stories of Erika Trautman, Kathryn Minshew, Jules Pieri and Elizabeth Yin. The male dominated nature (80% of angels, 89% of VCs, c95% of the most senior VCs) of early stage capital providers is the obvious issue here and, as I recently noted, likely means the VC community is not as innovative as it likes to think it is.

Reflecting on Laura's question some more afterwards it stuck me I could have elaborated on the reasons for this under appreciation in the following two ways:

1. Pattern recognition
StartUp land loves to talk about "pattern recognition". Summarizing how this impacts diverse (aka not young straight white male techies) founders Dave McClure succinctly put the issue as follows: 
“There’s a soft bias toward doing things that are familiar. That's white male nerds.”

At a deeper level, and in the context of women entrepreneurs, the gendered nature of behaviors (which can encompass all of verbal and non verbal communication as well as appearance) come in to play in my view. Characteristics gendered masculine  ("assertive", "decisive" etc) are more commonly associated by both men and women ... with leadership. In their HBR article and book: "Women and the Labyrinth of Leadership" Alice Eagely and Linda Carli summarize this finding, and the so called "double bind", as follows:

Study after study has affirmed that people associate women and men with different traits and link men with more of the traits that connote leadership. Kim Campbell, who briefly served as the prime minister of Canada in 1993, described the tension that results:
I don’t have a traditionally female way of speaking….I’m quite assertive. If I didn’t speak the way I do, I wouldn’t have been seen as a leader. But my way of speaking may have grated on people who were not used to hearing it from a woman. It was the right way for a leader to speak, but it wasn’t the right way for a woman to speak. It goes against type.
2. Another framing: Hedgehogs vs Foxes
When it comes to the specifics of women start up CEOs pitching their companies evidence is more anecdotal but I have repeatedly heard "the way we pitch" cited as an issue. While individual comments aren't a good basis for generalization common observations I have personally come across can be bucketed as follows: 

a) The scale of vision 
So ... just not as bold as the guys. Many women CEOs I have spoken say that they feel were disadvantaged by the way they made the case for their company. ie not emphatically calling out the inevitability of their soon to be $1bn business. Exhibit A: On the guy side of the ledger one of the founders of Rap Genius summarized the secrets to their success in the great post "How RapGenius Raised $1.8mn In Seed Funding Without Knowing What We Were Doing" stating:

"So fundraising is a psychologically trying experience that depends very little on any sober analysis of the quality of your product and much more on how you can project confidence and manage your own psychology."

One women CEO I know reported being dumb struck by some of the unsubstantiated over the top (or so she felt) claims her (male) co-founder made in their first pitch meetings together. After some discussion and reflection she said she learnt to mimic at least some of his bravado!

b) Leading with more problems and giving detailed answers
Women entrepreneurs (again some not all) report that they feel they tend to balance positives with more negatives and, perhaps as a result, feel they can give too detailed answers in a pitch context. Result: they deemed less compelling (and hence less likely to get the second meeting) compared to the other six guys the investor saw that day who were all oozing conviction and who hit any question succinctly out of the park! As one CEO put it to me:

"The detail, no matter how thought-out or on point, can often hurt you because in the vagueness it's easier to sell a dream."

Hence ... maybe another case of Hedgehogs and Foxes?
While I might be connecting too many dots here, these issues reminded me of the decision making paradigms laid out by Philip Tetlock in his brilliant book: "Expert Political Judgement". He classifies thinking styles using Isaiah Berlin's prototypes of the fox and the hedgehog with his years of study indicating that the fox (the thinker who knows many things) is more successful at predicting the future than the hedgehog (who knows one big thing). In what seems to me to be a parallel with the world of what "works" when pitching vs what works for pundits and the media he noted the perverse inverse relationship between the best indicators of good judgment and the qualities that the media most prize in pundits. ie the media loves hedgehogs for their conviction ... but they are actually the worst people to have making a prediction! So maybe women CEOs are the foxes of the pitching world and men disproportionately the hedgehogs!? Hence, just as you are more likely to get an accurate prediction in most any domain from a fox as opposed to a hedgehog, seems to me that CEO foxes are worth extra consideration too!

PS #1: Just over a year ago RapGenius raised $15mn from Andreessen Horowitz. See: "Are Rap Genius's Founders Insane, or is it just a gimmick?"

PS #2: Note that in answer to Laura I did not say either: a) because with women making 80% of purchasing decisions in the economy having a woman on the founding team ups the chances of bringing relevant expertise/experiences to bear that will enhance product development and sales/market decisions (which it will!) or b) because it's an issue of "fairness" (which it is). The point being, this investment thesis makes sense enough just framed in clinical investment process and organizational decision making terms. Add these further two considerations and the case is even more powerful.