Too Hot – Raise Enough for 6+ Months of Data!
In the last three months I’ve seen more than half a dozen young startups looking to raise 6-10 months of capital. This is a common rookie error and I’m not sure why it still persists given all the extant education available on the topic, alas…
You should assume it will take you six months to raise money. Then you need to prove something. Then you should assume it’ll take six months to raise the next round of (hopefully bigger) money at a (hopefully higher) new valuation based on all the cool shit you proved with the first money! This is the life of a seed-stage ceo.
Hunter Walk at seed investment firm Homebrew posted a great article about the Goldilocks situation of “second seed rounds”. In it he talks of the “Too Hot” firm, and his description is dead-on perfect with regards to not having enough runway to prove what your business needs to prove:
Ooh, these are tough ones. This startup usually has a chart that’s up and to the right, but with just 2-5 months of data because it took them longer to find product-market fit than they originally anticipated. The best Series A investors are telling them there’s lots of potential here but would want to see 6-9 months of data to better assess cohorts and repeatability of whatever seems to be working.
Try to aim for “just-right”. Too-hot is a crappy place to end up – sometimes even worse than “too-cold”. While variety is the spice of life, as a guideline you want at least six months of burn to prove things, and then six months to raise – so one year at minimum. 18 months is a good target.
I _still_ owe Scott Kirsner a beer!
Boston should be very thankful to have Scott Kirsner in town, doing what he’s doing. I know I am!
Last week, Scott helped assemble a shindig dubbed the “Thinking Big” Party. Definitely surf that link to learn more about the goal and Scott’s net-net (we strive for minimal regurgitation here on Myriad Missives!). You can also listen to one hour of audio of the presentation courtesy of the ever-present man-with-a-mic Dan Bricklin.
The formal discussion kicked off with Paul Maeder of Highland Capital Partners talking about some of his theories of Massachusetts’ challenges. First and foremost, he believes that we are selling too many MA-based companies too early, and thus they fail to grow into the big giants that the ecosystem needs. He said that there are 7 $1B+ companies based in MA, and only one – EMC – hasn’t been around forever (think Raytheon, Thermo, etc.). He categorizes these premature-liquidity-ations as:
We’re selling the seed corn in Massachusetts.
Paul went on to say that east-coast VCs have fundamentally different attitudes than west-coast VCs:
… we’re east coast people and we’ve been through the depression, hard times, and cyclicality – and in California everybody knows everything goes to the moon, so they actually make things go to the moon …
An interesting possible take or angle on what Jim Matheson was told, that:
The Boston establishment is about preserving wealth, not creating it.
Michael Greeley of IDG Ventures joined Paul in the rabble-rousing and lamented the sense of mentorship in New England – as compared to the valley. He’d like to see more of the “rock stars” giving back to the community, and believes this lack of mentors, and the vibrant angel community that flows with them in the valley, is a big liability for us. Of course this assumes that all these smart right-coast folks don’t get sucked west when their companies get acquired…
Dharmesh Shah was at the event and wrote an interesting post in follow-up. One of the things he touches on is letting entrepreneurs “take some money off the table” during a company’s growth – so they’re less inclined to take the first big number that comes over the transom. I’ve discussed this with a number of VCs over the years. One of the wiser VCs says it almost always doesn’t work though – rational theory, but tough to put into practice. It would be interesting to see real data on this, no?
All-in-all, thoughts and ideas worth consuming and digesting. It’s stellar that Scott et. al. are working to make things better – thank you and cheers!
Mary Kay Followup
On my flight out to SF Monday, I watched The Matrix on and off on the SciFi Channel (thank you JetBlue!) while I worked. I’ve probably seen the movie a dozen or more times, but it’s been quite a few years since I saw it last. Morpheus has a great quote that I thought was a worthy followup to my post about ideas versus implementation:
There’s a difference between knowing the path and walking the path.
Go Mary Kay!
I’ve never come across this quote before, and it’s a stellar one from the late, great Mary Kay Ash:
Ideas are a dime a dozen, but the men and women who implement them are priceless.
I have had the fortune and misfortune of working with, partnering with, and befriending a fair number of “idea people” over my 20+ year career now. For better or worse, I love “idea folks”. They’re creative, deeply knowledgeable about the arenas they love, and they’ve generally got more passion than an entire roomful of business folks with MBAs 😉 .
“Idea folks” seem to fall into two buckets. The first bucket consists of the folks who understand that the vast majority of ideas need to get past (sometimes well past) the idea stage in order to actually be valuable. At some point, the proverbial rubber must hit the proverbial road. The second bucket consists of (as you’ve already guessed) the folks who think that the mere contemplation of an idea creates pure value. These folks tend to have a tough go of their business life since there’s something fundamentally broken in their understanding of the commercial world.
When I meet and talk to first-time entrepreneurs, I try to ascertain where the meter sits for them along these two dimensions of ideas and implementation. There are great entrepreneurs who haven’t had an original idea in their lives. The best entrepreneurs (IMO/IME) are great idea folks and great implementers. The folks who are great idea folks but can’t implement have an uphill climb to become great entrepreneurs.