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.
Today I participated in an idea session with my Outlander Labs teammates. No agenda, just a topic and a conversation about ideas. It was a topic that I’m not knowledgeable about, so my goal was to listen and learn. And boy, did I! The team’s collective knowledge was vast and we ended up with great ideas. Today was an opportunity for me to fill a knowledge gap, and it highlighted something else for me too.
As I listened, I noticed a pattern. Idea compounding. Sounds weird, so let me explain. Our team is composed of highly intelligent people who, individually, have great ideas and unique perspectives. As one person shared a thought, you could see the wheels turning in everyone else’s head. Then someone else shared an idea inspired by the previous one. This went on for an hour and resulted in more great ideas than we can possibly execute. A high-class problem for sure.
Our idea-generating exercise was highly effective because we approached the topic as a team. Had we assigned it to one person, I have no doubt that their ideas would have been really good. But approaching it as a team resulted in ideas that are great (or so we think).
I wish I had had the benefit of idea compounding in my early days at CCAW. I chose the solo founder path, and it was difficult. I was forced to come up with all the ideas, which were far from great. Years later I hired high-level thinkers and our idea compounding led to some of CCAW’s greatest breakthroughs. We overcame enormous hurdles and made tons of traction in a relatively short time.
Idea compounding is one of the many benefits of working with a team. And great ideas can be the difference between success and failure for early-stage companies. For any founder wondering why you should consider recruiting a co-founder: idea compounding is one of the many reasons you shouldn’t go it alone!
Sometimes You Just Need Breathing Room
I’m often asked why I didn’t raise capital from investors at CCAW, instead choosing to bootstrap. I think people expect to hear some strategic thought-out reason. The truth is much simpler. I didn’t know any better. That may sound ridiculous. Let me clarify a bit.
Not raising capital forced me to be capital-efficient, but it also resulted in challenges. Most of them I didn’t recognize until much later. We had customer revenue from day one, so I viewed us as different from companies that burn cash for months while they build a product. Customer cash flows were fine in the beginning, but as I started to think more strategically it wasn’t enough. We had enough money to pay salaries and other operating expenses, but sometimes we didn’t have enough left to invest in strategic projects. And if we did, we didn’t have enough for the entire project.
I found myself in a situation where I couldn’t afford the appropriate resources for the entire time it would take for these projects to pay off. This resulted in a start-and-stop rhythm. We’d start, run out of money, and stop until we got enough in the bank to start again. This extended projects unnecessarily and frustrated the team. Really big projects can require people who work on nothing else. With some of them, it takes a year or two before you see an ROI. That means paying salaries for two years without a contribution to revenue or profitability. We couldn’t afford to carry salaries on the books that long if they didn’t result in revenue. Our large projects were understaffed at times or simply never happened. Strategic projects are what move most companies forward. We never had enough runway to execute properly on our strategic projects. We had too many conflicting draws on our limited capital.
With the benefit of hindsight, I’d do lots of things differently. Mainly, I’d think hard about the resources needed to implement my vision. That would take time, but I’d identify the first major milestones. The milestones would be early indicators of success. For CCAW, that would’ve been early signs of increasing revenue. I’d determine what people and resources were needed and what the time frame was. I’d put all that into a simple budget. That budget, along with my vision, would have been great tools for soliciting investor capital. Had I gotten an investor, it might have given me the breathing room we needed to start working toward my vision. Notice I didn’t say it would’ve been enough capital to make the vision reality—just enough to show others that my team had what it took to make progress. If we were successful, I’m sure additional capital would have been easy to come by.
Hindsight is 20/20, and I wouldn’t change anything about my journey. The situation I’ve described isn’t unique to me. I regularly speak with entrepreneurs in similar situations. They just don’t have enough breathing room to begin executing.
If you’re in that situation, considering identifying short-term milestones that will show you’re headed in the right direction. Couple them with a timeline and budget and you’ll have a powerful tool that will help others understand your vision. Asking for a small amount of capital (just enough to allow you to make some progress) de-risks you as an investment. You will still hear “no” from lots of investors, but you’re more likely to find one willing to give you a shot. There’s a lot to be said for breathing room!
So You Wanna Build a Marketplace
I met with an entrepreneur who’s addressing a unique problem in the automotive space. He’s done lots of customer discovery and is looking to build an early version of his MVP. And he wants to build a marketplace and asked for my insights. We didn’t build a marketplace at CCAW, but we overcame challenges similar to those encountered by marketplaces. After a decade of hitting our heads against a wall, this is what we learned:
- Customer acquisition – Don’t outsource customer acquisition or use third-party software long-term. Third-party platforms (Shopify, Magento, etc.) are cost-effective to begin with, but they will eventually hinder you. These platforms aren’t built with your specific problem in mind. They have to appeal to many, so they must be somewhat generic. This will prevent your solution from being great. It will only be somewhat good. You try to customize the platform to overcome this. The more you spend to customize it, the harder it is to transition away from it. Such platforms will never be as good as building your own technology from scratch. All successful marketplaces (Airbnb, eBay, Etsy) built technology to nail solving the problems they saw.
- Product catalog – This is hard to address, but it’s critical. Don’t underestimate it. Understand the products you’re selling and build technology to manage the catalog properly. Don’t outsource the catalog or use third-party software long-term to manage it. We had about thirty thousand products in our catalog at CCAW. Taking the time to build technology to store that catalog gave us a huge competitive advantage.
- Pricing – This is one of the most important things in marketplaces. The right products with the wrong prices won’t sell. If pricing is calculated (i.e., not provided by the sellers), invest in developing your own technology long-term. (Are you seeing a pattern here?) We built a dynamic pricing engine at CCAW that became part of our secret sauce. It was frustrating and took a year to perfect, but once it was finished it was a thing of beauty and a big competitive advantage.
- Supply – This advice is more specific to the automotive industry, but I’ll share it anyway. You don’t want to go too big or small when you’re finding your first suppliers or sellers. Find companies large enough to have adequate systems and processes in place so they will be reliable and provide data in a consistent automated manner. Medium-sized players usually have these things, plus they’ll value the relationship. Big players typically won’t see the value in working with early companies; it’s more of a nuisance to them. Smaller players will be eager to work with you, but their lack of systems and processes will be an issue. Starting with one or two medium players is usually enough to test. Remember, your goal is to learn what you don’t know. We started out with one supplier at CCAW. Once we finished learning, we courted larger companies that were by that time eager to work with us because we had our act together and they’d heard good things about us.
- Supply side operations – Don’t worry about things like shipping, returns, and customer service at the MVP stage. You can manually handle this stuff with a patchwork of tools like Excel, Gmail, etc. They’re important, but not as important as getting the demand side (customer acquisition) right. First things first. Focus on acquiring customers effectively before you invest in supply side operations. If you can’t get any customers, you won’t need better systems on the supply side.
My biggest learning was the importance of focusing on the demand side when you’re building a marketplace MVP. Yes, you absolutely need supply, but you don’t need to have a world-class supply side operation or a ton of supply sources. Understand the customer’s pain points and address them. Doing so will help you accumulate customers and keep them coming back. If you nail this, you’ll have more customers than you know what to do with and then you can fix everything else!
I used to enjoy reading box office rankings every week. Movies were ranked by total gross sales that were reported by theatres nationwide to a central organization, which published the data. It was my way of staying in tune with popular culture. It also helped me understand just how massive the movie business is. Yes, I know this is super nerdy, but hey, it worked for me. I haven’t followed these in a few years and hadn’t thought much about why until yesterday.
A sharp founder connected the dots for me. Box office sales are no longer an accurate reflection of consumer movie-viewing habits. This has been the case for the last few years, and the pandemic accelerated this trend and at the same time completely halted the collection of this data. Content creation has historically been dominated by large studios, with movies being distributed through theatres. Box office receipts helped creators understand how their content performed with audiences and estimate its future value. Equally high-quality content is now distributed (and sometimes created) by platforms like Netflix, Hulu, and Amazon Prime Video. As I understand it, these platforms don’t share their viewership data. So how do creators know how their content is performing on a platform or across multiple platforms? They don’t. Without viewership data, it’s difficult for creators to understand the value of their content. This is a big problem that creators are trying to solve. There are companies actively working on it, but I don’t believe anyone has solved it in a way that all stakeholders will readily adopt.
Distribution varies by industry, but at a high level it’s how a product or service reaches customers. Distribution methods have been evolving over the last decade, with the pace of change constantly accelerating. Especially now, with COVID-19 looming over everything. After entrepreneurs achieve product–market fit (i.e., customers readily pay for their solution), they should be thinking about how their product or service will reach their customers.
How John Created a Restaurant Platform in 30 Days
Yesterday a close friend connected me with a new founder. This founder, John, has a background in logistics and wants to apply that knowledge to help businesses in his underserved community. He talked to a few restaurateurs about their specific challenges and figured he could help.
I spent about thirty minutes with John and learned a ton about the opportunity he sees and about him as an entrepreneur. John noticed a few things about restaurateurs in his community. One, many don’t have any online presence. No website. No anything. There are a variety of reasons for this, but lack of familiarity with technology is part of it. Two, they don’t have the ability to accept online orders for pickup. Customers stand in long lines or are stuck on hold when they call in orders. Three, most of these restaurants are looking for a delivery option that better meets their customers’ needs. Four, the pandemic has stoked their desire to find solutions to one, two and three. They need these solutions quickly so they can survive in this new world. But they don’t have the knowledge, relationships, or capital to execute on them quickly.
John figures he can solve some or all of these problems. Now, a few things to take note of. He doesn’t have a technology background, but he knows technology will be key (knowledge gap). He doesn’t have a lot of money (capital gap), so he needs a cost-effective technology solution. He doesn’t know any developers (relationship gap). He was able to find the help he needs via . . . wait for it . . . Google. He connected with technical talent overseas. He described his problem and they suggested an off-the-shelf solution. He is now able to offer the following to every restaurant he targets:
- A website for ordering
- A mobile app for ordering
All for a small amount of capital. Now, the technology isn’t DoorDash or Uber Eats quality, but it’s good enough. He can offer restaurants an online presence with their own mobile app and the ability to offer online ordering for pickup. He used his logistics background to assemble a small team of delivery drivers. Add it all together, and voilà! He created an MVP that solves all three problems he learned about. And he did it all in about a month.
He has signed up a handful of restaurants as customers and is delivering a significant number of orders daily. Every day he’s learning more about his customers and their problems. He’s adjusting his solution based on those learnings.
John is a great example of an entrepreneur looking for a product–market fit. He’s trying to find the ideal solution to his customer’s problems using an MVP he cobbled together quickly. Is the current solution perfect? No. Is it scalable? In the long run, probably not. Is he learning and adjusting quickly? Absolutely. Will his adjustments lead him to a great solution that customers readily pay for? The way he’s going about things makes success more likely.
If you see a problem and have an idea about how to solve it, consider starting with an MVP. It doesn’t have to be perfect or pretty.
You Can’t Solve This
When I identify a problem that I’d like to solve, I try to remind myself to be self-aware. Am I suited to solve this problem? I ask myself. As much as I want to, I may or may not be the right person. I have to be honest about my abilities; otherwise I could fail to capitalize on a great opportunity.
I’ve addressed (notice I didn’t say solved) problems I had no business addressing. With hindsight, I can see that I usually lacked one or both of the following:
- Sufficient understanding of a problem based on experience or deep knowledge of the space.
- Relationships in the space that could open closed doors or lead to potential customers.
At CCAW, we moved into a new product category that we weren’t qualified to enter. I saw an opportunity to solve a customer’s problem with acquiring certain parts. The result: a slog. We spent years trying to understand and solve the problem. We later learned that no one had solved the problem because of the extreme degree of complexity and dependencies involved. In the end our attempt was marginally successful and took way too long. One of our main competitors lapped us (a few times, actually).
In retrospect, no one on our team had any knowledge or relationships in the space. We were clueless outsiders trying to solve something we didn’t understand. We eventually figured something out (kinda), but it was painful and prolonged.
I now approach problems differently. If I know I’m not qualified, I identify where my gaps are and try to fill them. Working with partners who complement me—my strengths are their weaknesses and vice versa—has worked well. I’ve also had success working to fill my gap. For example, when I lack experience, I look for opportunities to gain experience and learn (even if it’s unpaid).
Entrepreneurship is all about solving problems for paying customers. If you aren’t qualified to solve the problem, you probably won’t do it very well. (Not good for customer satisfaction!) Ask yourself if you should be solving this problem. If the answer is no, try to better position yourself.
Did You Create a Job or a Company?
When I started CCAW, I told people I was an entrepreneur. I had quit my job and created a company that had customers, and I controlled my own destiny (kinda). One summer when I was in New York with friends I tagged along as one of them visited his uncle in Connecticut.
The uncle was entering the later years of a wildly lucrative career. He’d worked in corporate America and then started a successful company with his wife. That company changed the family’s life. When I said I was an entrepreneur, he became more interested in me. He asked lots of questions about my company. Then came the most important question of the conversation: “How many employees do you have?” I remember thinking, Why does that matter? Little did I know that the answer would tell him more about my company and my mindset than anything else we discussed.
At the time it was me and a part-time contractor or two (I was bootstrapping so funds were tight). I proudly told him about my contractors, and he replied, “OK. Keep going; you’re not quite there yet.” What does that mean? I wondered.
In hindsight, I think he was telling me (politely) that I wasn’t an entrepreneur yet. I was on my way, but I hadn’t arrived yet. I had succeeded in creating a job for myself, not a company. I was a solopreneur, not an entrepreneur. At the time I didn’t know there was such a thing as a solopreneur.
Solopreneurs are workers. They’re usually the one and only full-time employee. They handle all aspects of a business and execute most tasks. With no full-time team, everything falls on this one person. If the solopreneur doesn’t work, the work doesn’t get done. They are the business. This setup limits how big the company can get because there’s only so much one person can do. Freelancers of all kinds, barbers, and massage therapists, for example, are often solopreneurs.
Entrepreneurs, on the other hand, are managers. A team conquers by dividing the work. The entrepreneur delegates so he can focus on growing the business. He usually has a larger vision for the company and realizes early he can’t do it all alone. The business has its own identity independent of the founder. If the entrepreneur doesn’t execute, the work still gets done. I like to think of an entrepreneur as the driver of a machine that does the work. Businesses from which you purchase a product or service without interacting with the owner are likely run or were started by entrepreneurs.
Over time I realized that I didn’t want to be a solopreneur because I wanted to grow. I had a bigger vision for CCAW. I eventually hired a great team and focused on building CCAW into a machine that didn’t need me. We went on to accomplish some great things. Looking back, there’s no way I could have done it alone. It was a team effort.
I’m thankful for the conversation I had with my friend’s uncle. Although we met only once, he left a lasting impression on me. His entrepreneurial wisdom was priceless.
If you’re thinking about starting a company (or you have one already), have you decided whether you intend to be a solopreneur or an entrepreneur?
Old Problem Needing New Solutions = Opportunity
Over the last few months I’ve heard a number of entrepreneurs express concern for the mental wellness of their team. They’re unsure how working from home is affecting them. Are they sad . . . anxious . . . happy . . . neutral? A few of them began conducting one-on-one video meetings with every team member (not just their direct reports). This is thoughtful, but it won’t scale. If more than 50 or 60 people are on the team, there’s not enough time in the day to meet with them individually.
Understanding employee morale has always been a priority for leaders. In the past they could walk the halls and get a pretty good idea. No more. Gauging the morale of employees who are working from home is a pressing problem.
Today I met with an entrepreneur who’s looking to solve it with software. A few years ago, he realized employers had a retention issue. He predicted that an early understanding of how employees are feeling about things could prevent team turnover. If a manager is aware of an issue early on, it can be addressed before it causes the employee to resign. This entrepreneur has raised some funding from investors and I’ll be excited to see the next version of his product.
The pandemic is challenging everyone, but it’s also creating opportunities for creative entrepreneurs. People still have the same needs, and they’re actively seeking new ways to get them met.
Opportunities like this don’t happen often. If you’re an aspiring entrepreneur, seize the day!
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.