I spent a few hours at Dogpatch Labs in NYC earlier this week to catch up with an old friend and also discuss the email space with a few members of the email mafia. I only brought my iPad and my friend, Joseph, wanted to see Flipboard in action. Of course it got the usual “oohs and ahhs!”. I ended the demo with a comment of: “Yeah, not sure on the revenue model, but it’s fine they raised 10 million dollars from Kleiner”. My friend was taken back and could not believe that an iPad app that just launched raised $10 million dollars. My answer: The co-founder sold TellMe to MSFT for $800 million and the other co-founder was an original engineer on the iPhone team. At that point pattern recognition kicked in, and hence the inspiration for this article was born. There are often fundraising announcements that bewilder entrepreneurs or even plant the seed that “Oh, they raised a ton of money just like that, holy shit, I can too!” Sadly, this is often not the case as there are a good list of reasons why they raised money. These reasons are beyond the usual Brilliant team in a huge market with a killer product. These reasons also apply primarily to the angel round to initial Series A round. If made public, the valuations may also be fairly high.
They Have A Strong Track Record
Entrepreneurs with a strong track record have what I like to call “the eternal checkbook”. They not only have money in their own bank account, but they now have the ability to raise funding for any startup they would like to found in the future. Look at the founders of Skype. They were also the founders of Joost, which bombed terribly after raising money from some of the best investors in the world. Guess what? They just raised a ton of money for RDIO, which only launched to the public a week ago. Look at this comment about Josh Schachter raising money in this TC article . “Even if the company fails, someone will buy it just to get Schachter. There’s no way we lose our money.” If you’re an entrepreneur and a good offer comes around to sell your company that’s more than an “acqui-hire”, I would suggest taking a further look not only at that dollar amount, but the implications that acquisition will have for the rest of your entrepreneurial career. Be honest with yourself, it will not be your last, we’re addicted to this game.
They Are In A Very Hot Market
Social gaming? Group buying? Cloud computing? Those are some of the hottest markets of the past 12-18 months. Throw in a little bit of location based mobile “something” for good measure and you get the idea. When a market is determined to be hot, each fund will want to make some type of bet in it. The top tier funds will get in on the best startups. The lower tier funds usually have a herd mentality and will want to make a bet on someone, so the odds of just being in the hot market make it a lot easier to get funding. According to the best stock analysis website I’ve ever looked through, VC investing is a funny business as most companies fail, but are eventually accounted for with the large homerun exits. Getting into a hot market such as Group Buying makes it seem more likely that a homerun exit could occur.
They Have A Strong Reputation Amongst The Tech Community
If you have a reputation amongst the tech community it’s going to be easier to get past the point of social proof, get introductions, and have an audience to launch your product to. Kevin Rose is a prime example of this. He launched Digg on a shoe string budget, but was able to leverage his G4 celebrity status to give Digg a boost in traffic. It also gave him the ability to get hooked up with the right group of early investors. A large portion of the investor meetings I’ve taken in my life were solely due to writing on this blog or work I’ve done in the tech community as a whole. Get out there and write, hold meetups, and make a name for yourself. Moot, who has not made much money with 4Chan was able to deploy this method when raising money for Canvas Networks.
They Are Thought Leaders With Strong Domain Expertise
What do Clara Shih and Laura Fitton both have in common (besides being awesome women entrepreneurs)? They are thought leaders in their space. Laura was already a leading Twitter consultant as well as the author of Twitter for dummies. Clara wrote The Facebook Era along with developing Faceforce while at Salesforce. I also believe Dennis Crowley is the right horse to back in the LBS wars as an entrepreneur. He has been doing this for over 6 years along with intense research during his graduate studies. He understands location based services at a product and scientific level that very few others can match. This domain expertise can also come from working at a related company in the field. Ryan Merket used to work at Facebook and has now launched an app store for Facebook pages. I would certainly back Ryan due to his domain expertise in the field. Having domain expertise is also a great way to build attention around the company as it’s a transitive property. If the founder is a thought leader on a topic, then their company in the space must also be something fairly smart.
They Are Ex-Googlers/Facebookers/PayPal Mafiosos/Other Company
Quora raised 11 million dollars from Benchmark, Friendfeed raised a large amount, and PayPal is known for feeding its offspring of former employees with funding. One way to set yourself up for funding at a later date is to be an earlyish or standout employee from a startup that became one of the major leaguers. Your founders will most likely be rich at some point and the backers of those companies will be eager to talk to you. The other option is to do a good job at a normal company and then raise money from the well to do employees there who angel invest or have gone on to the nice life as VCs.
They Have Intense Growth
Formspring went from being a form builder SaaS tool like Wufoo, to having 8 million unique visitors in a matter of a few months. Facebook did the same by starting out as a simple dorm room project that spread at Harvard and continued onwards to other campuses. YouTube continued to raise money after its first round just based on the sheer growth it was having. If you have a consumer product with intense growth, there is a good chance raising money will not be a problem for you. It’s even become a cliche amongst entrepreneurs that so many of us try to predict hockey stick like growth. Having it already? Now that’s something. Traction and intense growth is like crack for investors.
They Were Vetted By a Pre-Seed Fund
YCombinator and all the other Pre-Seed funds show their value not only in the mentorship, but in their ability to help attract capital for companies afterwards. I was talking with a VC after the W10 class Demo Day, and he told me that close to half the companies had already closed their next round of financing. That blew my mind: before even launching to the public, most of these companies had closed their next large round of financing. There needs to be a good screening of dealflow and YC seems to have that nailed down well. They’ve done this enough with well over 100+ companies, some successful exits, and have trained the entrepreneurs for months through mentorship. Along with what’s shown as a product, that’s a fairly good basis for getting funding for the next round.
They Have Strong Customer Validation
If you can walk into an investor meeting with strong customer validation it’s an easy way to refute the most important question they will ask: “but will people pay for it?” It shows that you not only have a product that people want, but a product that people are willing to pay for. When things go to the due diligence stage this will let them easily talk to actual customers and see why your specific solution is the right horse for them to back.
They Nailed The Customer Acquisition Model aka Printing Money
Everyone thinks they should just raise money because all the cool kids are doing it. The cool kids are doing it for the reasons outlined above. Odds are you’re not one of the cool kids and you can’t just raise money like that. A real basis for raising capital comes from accelerating growth and adding fuel to the customer acquisition model. If your company has a profitable customer acquisition model down that’s proven along with a handle on churn then raising money becomes the equivalent of printing money. Put a dollar in, get some multiple of it back, and lock the market up. Rinse, repeat, profit, and exit.
They Have A Truly Unique Product Solution
Some products go above the call of duty. They are technical masterpieces with a secret sauce that makes them an obvious choice to back. I would say this point is often addressed in highly technical businesses. I look at companies like Cloudera as one example. Think of companies where you have said “holy crap, how do they do that?” and now you will understand why they were able to bag funding.
They Are Founders So Smart You Cannot Ignore Them
My friend Brian Wong was able to raise 200k from True Ventures a few weeks ago. Sam Altman did the same at a young age with Loopt. Throw in others like Mark Zuckerberg and Steve Jobs. You get the picture. It’s hard to see this through press articles or even conference interviews, but some founders are so good you cannot ignore them. They are that bright and the type of individual that a VC/Angel will want to back. It might be part charisma and part technical chops.
Many founders meet multiple attributes on this list, so it’s often a combination of these attributes that become the reason why “they” got funded. I also hope this list serves as some type of water on the face effect for new entrepreneurs. Too often the tech press makes it seem like a piece of cake to get funding. It’s not. Most of the attributes listed above take time to develop, but any entrepreneur can develop them overtime (and should).