Capital is one of the highest hurdles early entrepreneurs encounter. Most people won’t work without compensation and most vendors won’t give away goods or services. It’s easy to see why lack of capital can be a challenge. When I meet with founders at the idea stage, though, I often remind them that capital alone won’t lead to success.
Capital is a tool. It helps you acquire the resources you need to build a vehicle that will carry you (and others) to your destination. The tool and the vehicle are cool, but what counts is the destination. Without it, the tool and vehicle have no purpose.
The most successful entrepreneurs I know all had a vision for their company early on. They saw a problem and envisioned a solution. Where others saw obstacles, they saw opportunity. In my opinion, it was their vision that allowed them to become successful. Sure, the capital they raised along the way (if any) was helpful, but the vision was indispensable.
If you’ve identified a problem you want to solve, consider taking time to develop and expand on your vision. If you’re successful in solving this problem, what does the world look like? Share it with people who can battle-test it and help you make it better. This simple exercise will be valuable and help you convince others (including investors) to join you on your journey.
What I Learned in School Today: Fundraising Timing
Today, Outlander Labs hosted its first Outlandish Speaking Series. It’s our way of giving Southeast founders the opportunity to hear from high-quality speakers they otherwise might not. At today’s event, (click "View Details"), Eric Feng, Facebook’s head of commerce incubation, shared insights about the importance of timing in start-up fundraising. Eric was a Hulu founder and general partner at Kleiner Perkins; he’s seen start-up life from a variety of angles.
Eric’s insights were fantastic. Here are some of my core takeaways:
- Missionaries vs. mercenaries – Missionaries are better entrepreneurs than mercenaries because they’re driven by passion. This video explains it well.
- Runway and risk – Fund-raising adds runway to remove risk and grow value. As you raise later rounds of capital from investors, you should be removing risk with each round. For example, you shouldn’t be raising your series B funding without building a product and understanding whether prospective customers want what you’re building (i.e., whether there’s a product–market fit).
- Seed stage – Early investors (pre-seed and seed) understand that pretty much everything is a risk because they’re investing so early in the company’s life cycle. You may have only two people (not a full team), the product might barely work (implementation risk), and you may not have a clear idea whether people will pay for your product (so you don’t have a product–market fit yet).
- Opportunity window – Understanding whether something is an opportunity or a window of opportunity is important. If a window will close on the opportunity, consider grabbing it as soon as you can. Later may be too late. All opportunities aren’t equal, so don’t wait forever if you see a good one.
Today’s session was great and Eric was an amazing speaker. He has a wealth of knowledge that he readily shared with the audience. I’m looking forward to next month’s Outlandish Speaking Series. If you’re interested in attending or seeing other Outlander events, feel free to check them out here or here.
Is Your Business Idea Capital-Intensive or Capital-Light?
In years of consulting with large corporations, I learned a few things. Purchasing inventory requires a lot of capital, and companies sometimes struggle to unlock that capital. They often resort to selling inventory at a loss just to get their capital back. Warehousing inventory is another financial burden. Leasing space to house inventory and hiring people to manage the warehouse is a big expense.
When I started CCAW, I had all these things in mind. I knew I wanted to help consumers acquire the parts they need, but I didn’t have the capital to accomplish this in the traditional manner. Bootstrapping forced me to get creative. I found ways to leverage the existing warehouse infrastructure and inventory of suppliers and manufacturers. We did it manually at first, but once we figured out the winning formula, we built technology that allowed us to scale it. We were able to do this in a very capital-light way (relative to others in our industry). Most of our capital went to hiring people and building technology.
Entrepreneurs setting out to solve problems should think about the amount of capital required. Will you need trucks, machinery, inventory, or legal help to bring an MVP of your solution to market? What else?
Most businesses will fall into either a capital-light or capital-intensive bucket. Great businesses can be built either way, but knowing early on which bucket you’ll be in is important. The amount of capital required will have a big impact on things like company strategy, your ability to raise capital from investors, and barriers to your entry.
If you’re thinking about entrepreneurship and have a solution in mind, take the time to understand whether it’s capital-intensive or capital-light. This will have a big impact on your decision-making!
Google Supports Black Founders with $5M
Earlier this year, Google’s CEO expressed the company’s commitment to racial equity. One of the initiatives it created was the Google for Startups Black Founders Fund. The fund provides Black founders with a share of $5 million in non-dilutive cash awards (i.e., Google has no ownership interest in the recipient companies). The grants were for $50,000 to $100,000. Each founder will also receive hands-on support from Google to help grow their company. Here are a few Atlanta companies that received awards:
- Clubba – Virtual after-school clubs for kids ages 7 to 13 led by college-student counselors
- Countalytics – Computer vision and machine learning to help clients save money by managing inventory more efficiently
- Kommute – Video messaging platform that helps teams communicate, collaborate, and connect remotely using the power of instantly shareable video
- MantisEdu – Immersive high-tech learning activities for students
- Musicbuk – Virtual education marketplace that gives students access to trusted, vetted, professional musicians for one-on-one music lessons
The full list of companies, with founder contact info, can be found here.
Congratulations to all the founders who received awards. And kudos to Google for this initiative and the impact it will have on the community. I’m excited for these founders. The sky is the limit!
Do Investors Compete?
Today I was asked an interesting question: do I complete against other investors for deals? I decided to share my thoughts (based on limited experience). Some things to consider:
Rounds – Investment rounds frequently aren’t filled by a single investor (for one reason or another). Investors often work together toward a common goal of providing enough capital for the round to be closed.
Expertise – Many investors are great in one sector (e.g., healthcare) and good in lots of others. When an investor comes across a company in an industry they’re not great in, they may seek the perspective of one who knows the sector well.
Awareness – Investors sometimes make each other aware of founders and companies because it’s impossible to know all of them.
Stage – Investors often focus on a specific stage of investment. Outlander Labs is pre-seed, for example. Other stages include idea, seed, and series A, among others. If two investors are focused on the same industry but different stages, they’re probably not competing.
Community – For investors to do well, the overall community needs to do well. Investors know this, so they tend to cooperate rather than compete with each other.
LPs – Venture capital funds usually raise money to invest by obtaining capital commitments from limited partners (LPs). The relationship between LPs and venture funds is important. Great LPs can be helpful to funds. They can be sources of deals and also provide expertise. Sometimes LPs can be invested in multiple funds, which is useful because having LPs in common can be a relational bridge between investors.
In my opinion, the answer to the question, at least from a high level, is “no.” I’m sure there are exceptions on a deal-by-deal basis. I don’t see other investors as competition. I see them as peers working toward a common goal: helping great founders and companies reach their full potential!
Enjoy Every Last Bit of the Upside
Yesterday I listened to a podcast on which Bill Gurley was interviewed. Bill is a partner at Benchmark, a highly regarded West Coast venture capital firm that made early investments in companies like eBay, Uber, Instagram, Zillow, and Snapchat. It’s in the top tier of U.S. venture firms because of its outsize returns to investors.
Bill has been a technology investor for many years. He experienced the dot-com bust and the financial crisis. On the podcast, he shared what he learned from previous downturns: “the best way to protect against the downside is to enjoy every last bit of the upside.” I was surprised. To summarize his explanation, he said that the biggest returns usually come from investments made at the very end of a cycle. If you pull back too early because you’re anticipating a downturn, you’ll miss the best investment opportunities. He didn’t say this, but I assume he thinks that timing a downturn is nearly impossible so people should stay the course until the downturn happens.
Bill is embracing the current reality. He’s accepting his situation and investing accordingly until trends turn and there’s a new reality.
I’ve thought about this and debated with others it over the last day, and I think Bill makes a good argument. Accepting (rather than fighting) a trend positions you to take advantage of whatever opportunities it presents. So what if you don’t like the trend? The trend doesn’t care. If you fight it because you think it’s wrong, you don’t understand it, or you think it will (should) change, you’ll miss out.
This isn’t applicable to everyone or to all situations, but it’s an interesting perspective and food for thought from a wise and experienced investor.
Think of Investors as Partners
I’ve shared my views on the importance of bidirectional relationships, which I believe is one of those good-life principles. But for entrepreneurs, understanding how to approach relationships with investors is imperative.
Don’t view a good investor as a cash machine, but rather as a partner in building your business. Yes, they provide capital and seek a return on it, but they can also add value in a variety of other ways. They can make warm introductions to potential customers or vendors. They can tap their networks to help recruit for key positions. They can help you navigate turbulent times by sharing their experiences and strategizing with your team. A good investor may invest a lot of time as well as money. They aren’t just making an investment in your company—they’re investing in the founder—you—too. Quite reasonably, they are likely to want to get to know you before making an investment. In fact, they like to establish the relationship long before they commit funds.
These ideas may help entrepreneurs approach investor relationships correctly:
- Pitching – Don’t expect to walk away with a check. Their feedback can be many times more valuable, especially if you’re early stage. Pay close attention to it. And ask questions. Two good ones: “Is there anyone you think I should know?” “Can I help you in any way?”
- Updates – Send them a clean, succinct monthly update. This will help keep you top of mind. Have a clear ask.
- Touch base – Periodically reach out to ask them what they’re up to and how they view certain markets. Share some of the things you’re doing that may not make the update. Ask if you can connect them with anyone or help them in any other way.
- Make connections – If you know someone who could benefit from knowing the investor, or vice versa, make the intro. Both will appreciate it.
- Share knowledge – If you learn something that you think an investor could benefit from knowing, pass it on.
Approaching relationships with investors correctly can be a game changer. Start developing them early.