VCs typically consider the potential market size of a product or business to be the most essential factor.
Don’t ask for an NDA. They talk to so many people, they cannot guarantee an NDA. Also, ideas are usually not as unique as we think.
Consider how you can make the partner look good to their team and investors. For example, how their investment in your company will yield an exceptional return.
You need to talk about yourself and the team. As an early-stage company, they do not have much else to base their decision on.
The stage of their fund and other investments they have made will impact the outcome. If they have multiple funds, ask which fund will they be investing from.
There is a dating period. The fundraising process is often romanticized and overly simplified, but it is actually quite long. It is best to start talking to investors well before you need to start raising funds.
Keep in mind that the promises you make regarding progress should be realistic. Overpromising and not delivering will have negative consequences, just like in any other area of life.
Many of them may be interested, but if they want to take the lead on the deal, it's best to ask early. Some will lead and participate, some will never lead, and some will make a decision on a deal-by-deal basis.
Ask if they will be able to fund the next round and inquire about follow-on investments. Not investing in the next round can have a negative impact.
Watch out for aggressive terms. The biggest one: more than 1x liquidation preference.
If raising on a note, understand the implications of using pre and post-money valuation caps.
Why You Should Stop Worrying About People Stealing Your Startup Idea
Ideas are also not as unique as we think. As founders, we worry needlessly about someone stealing our idea. If you have an idea, there are likely numerous others with similar ideas. I like to think that ideas are like the air we breathe: it's all around us, so they can't really be "stolen," and if we don't take action, it's ultimately useless anyway. Ideas are only a tiny part of the entrepreneurial journey. The key lies in execution.
To this end, share your ideas openly with anyone who will listen and ask for feedback. Ideas are like seeds: they can germinate and grow if planted in the right environment and nurtured with the right resources. But they can also wither away if they are not cared for. It is up to the entrepreneur to ensure the idea is given the right conditions to flourish. Sharing helps create the right conditions.
Another argument we often hear for guarding our ideas is that we want to be the first to market. Being the first-to-market doesn't guarantee success - in fact, 50% of first-movers fail. The idea of first-to-market is too glamorized. Companies that are first to market with the idea that is not patentable carry the burden of education. They often have to create that market. Google was not the first search engine. Facebook was not the first social network. There are endless examples.
According to a study, approximately 61 percent of Americans have had an idea for starting their own business. Research also shows that the main reasons for not following through with starting a business are lack of funding (63%) and not knowing how to get started (39%). We worry needlessly about people stealing our ideas. We give people too much credit. People are too lazy to copy ideas. So, if you have an idea, don’t worry—just go for it! After all, if someone has the energy to copy your idea, you should be proud they think it’s worth stealing!
Starting something is difficult. Following through and finishing the project is even more challenging. 92% of Americans with business ideas don't follow through. But, once the idea is proven, you should expect competition, as those who didn't invest the time and energy to develop the idea will be quick to copy it. People rush to copy proven startup ideas. For example, after the success of Airbnb, numerous companies began to offer similar services, such as HomeAway, FlipKey, and Roomorama. Granted, Airbnb still holds the key market share. Still, they have also had to acquire a handful of companies who were essentially copying the business model for geography or a vertical that Airbnb wasn't active in. Similarly, once Apple released and successfully marketed the iPod, dozens of companies created their own versions of the device to try and compete in the same market.
Don't worry too much about people stealing your ideas, and instead, work towards moving your ideas forward. Ideas and dreams are plentiful, but effective execution is what ultimately matters. To be successful, it is essential to focus on turning ideas into tangible outcomes. After all, as the old adage goes, "A dream without action is just a wish."
Three Books Every Founder or Creative Type Should Read
There is no shortage of business books and lists recommending such books. A friend recently asked me if I could only recommend one which one would that be? I failed to narrow it down to one but could narrow it down to three. These usually don’t make it to some of the most popular lists, but I feel are the most practical ones.
DEEP WORK
Start Finishing
The Messy Middle
Deep Work by Cal Newport is an eye-opening read. Cal makes a compelling case for how our ability to focus uninterrupted on one cognitively demanding task is dwindling fast. The biggest distractors are the ones most of us are very familiar with: emails, social media, and news. He further argues that If we want to do our best work, we must reclaim that ability. The best way to do that is by creating systems and being extra diligent with our time.
Scott Belsky's book, The Messy Middle, discusses an issue many founders and creative people experience – the lack of motivation to continue working on projects or ideas after the initial enthusiasm has worn off. This is often because many creative endeavors, such as starting a business, require sustained effort for months or even years before any tangible results appear. Scott provides strategies for getting out of the 'messy middle' by highlighting common mistakes and by providing advice on creating effective plans and processes.
Start Finishing by Charlie Gilkey is a book I keep on my desk, along with Deep Work. Even if I am not opening the books regularly, it reminds me of the importance of finishing projects. Like Scott’s book, Start Finishing provides tools and templates to design our projects in a way that sets us up for finishing.
If you have thoughts about these books or have your own one(or three) books you recommend to every founder or a creative type, please share them in the comments below.
Pre and Post Money Valuations: What it Means For The Founders
Pre-money valuation, Post-money valuation, cap, discount rates, etc. are all terms a founder has to learn about as she is raising capital. Unfortunately, it’s a new concept for most of us. Below you’ll find a simple definition and two ways how it can affect a founder:
Pre-money valuation refers to the value of a company before an investment is made, while post-money valuation is the company's valuation after all the investment is added. Think of a glass of water: pre-money valuation is the value of the glass, and post-money valuation is the value of the glass plus the water (the investment) added to it. This seems minor, but it can significantly impact a founder.
This happens in two ways:
First, let’s say an investor is investing $2M at a $10M valuation. If that $10M is pre-money, the effective post-money valuation is $12M. If that $10M valuation is post-money, the pre-money valuation is actually $8M. This affects your equity but can also affect your next round of fundraising or exit potentials.
Second, let’s say you are raising a Convertible Note round. In this hypothetical example, the founder and investors have agreed on a valuation cap of $8 million. They are using the pre-money valuation method. The investor is investing $2 million. This will essentially lead to a post-money valuation of 10 million dollars. Another founder is raising a similar deal but has agreed on a post-money valuation cap of $10M. At first glance, these two deals look similar. But there is an important thing to keep in mind.
Now, let's say you are actually able to raise $3M. Most people will say to raise more than you need if the terms are favorable. In the case of pre-money valuation, it would be the pre-money valuation of $8M, and post-money of $11M. But raising on a post-money cap, the dilution affects the founders the most, i.e. the post is fixed, so it essentially becomes $7M pre, resulting in $10M post. In this case, the founder ended up with 72.7% equity in the first case and 70% equity in the second case. The gap widens as the additional raised amount increases.
An investor will prefer a post-money cap option. Rightfully so, as it limits their dilution. As a founder, you should opt for a pre-money cap as it allows you to raise more without the founder having to carry all the burden of dilution. In the pre-money example, the dilution is spread out between the founders and original investors.
As a founder, you may not have the final say in the terms, but it is still essential to understand what they mean for you and your team so you can make an informed decision.
P.S.- The examples above are oversimplified. In real life, there are multiple other things to consider.
