Thursday, March 17, 2011

Hack Your Funding | Hackers & Founders Event with Naval Ravikant

"There are no shortcuts to getting funding," admitted Naval Ravikant, the man behind AngelList and Venture Hacks, at tonight's Hackers and Founders event at Microsoft.

But at least, for the first time in some 30 years, the past few years have seen innovation in funding, which ought to change the way that entrepreneurs approach their companies and fundraising. Naval calls this change "the rise of the entrepreneurs."

So what's changed?

We're in an age of "free leverage," as Naval calls it. The barrier to entry is obviously significantly lower than it was when he was building his first company. Naval had raised $8 million in Series A funding based on a whiteboard presentation, which seems incredible today. The company then proceeded to burn through the cash quite rapidly to build a product. These days, there are IP platforms given away (e.g., Facebook), labor platforms (e.g., YouTube, Quora), and ... now capital platforms (e.g., AngelList).

Because we're now in a world where a group of strangers, who met on a startup bus some 5 days ago can arrive at South by Southwest with a working product and customers, the best way to think of startups of today is as working in continuous mode on all fronts. That means continuous deployment (as opposed to releases that take from a month to a year to launch), consultants for discrete projects through sites like Mechanical Turk, Elance, or TaskRabbit (instead of employees), and ... continuous fundraising!

So what's important when raising money in this climate? (In order from most to least important...)

Traction. Most important is traction, says Naval. You've got to show that you can get customers because that's very hard to predict early-stage. If it will take investment dollars to build the product that can go in front of customers, at the very least you need to have done your homework and tested the market, whether by doing Facebook or Google ads or other surveys.

Team. After traction, the next most important thing investors will consider is the team. Or, as Naval puts it "you." Don't take it personally. If you can make investors swoon with your elevator pitch, you have it made. But if there's something about you, your background, or your perceived ability to execute that the investors just don't buy, they won't buy. And what's worst, this is the thing they will be most reluctant to tell you.

Social Proof. If you've got traction, and a great team, the next hurdle is social proof, or branding. Are there "brand name" investors interested in or that have already invested in your company? Did your team go to "brand name" schools (think Harvard or Stanford)? Did they work for "brand name" companies (think Apple or Google or Facebook)? Do you have high quality "branded" advisors? Are "brand name" companies using your product? Before approaching investors, the more of these that you can nail an affirmative answer to, the better!

Product. Product is king, but comes fourth in this lineup, because if it's really king, you'll be able to show massive traction, which is the first line of inquiry.

Market. If the market is not big enough, it can be a turn off for investors. Which is not to say that companies cannot create a market where there wasn't one before. It's just harder to predict.

Pitching. You'll need to have (1) a high concept pitch, (2) an elevator pitch and (3) a presentation (~ 10 slides). Notice this comes last on the priority list for funding.

Though there are no real hacks to get funded, here are a few pieces of advice Naval has for improving your experience:

(1) If you want money, ask for advice. Don't take up a lot of the investor's time. Don't ask for in-person meetings. But if you can establish a dialog by email or phone where you receive advice and follow up in a month or two with your progress, get more advice, then follow up again, your chances of getting funded improve over someone merely pitching.

(2) Get "branded." See the point above about social proof. Investors are pattern-seekers. If they see familiar names, they get excited.

(3) Don't get attached to a single investor. Talk to multiple investors without committing to one immediately. If there's interest, you can leverage that to get to a higher valuation and better terms. And there is more than one good investor out there. This will obviously not apply to every company--only the ones lucky enough to generate serious investor interest.

(4) Raise continuously and reward first-movers. This is a new concept in fundraising. But putting together a major round saps everyone's resources. And today companies can get built with much less. So taking in money in smaller chunks, continuously, at higher valuation with each successive investment, is the way to go. Why not offer a Groupon special to the first investor, a 50% discount, proposes Naval. Not a lot of companies are recognizing the need to reward first-movers with significant discounts, but Naval thinks the industry is moving towards this.

(5) Put it online. Cast a wide net. Get qualified leads. And no, this does not mean that you should put up an "Investors" tab on your website, offering to sell your stock to any taker. That would violate SEC rules and get you in a lot of trouble fast. But using resources like the AngelList can be a great way to reach many investors at once.

(6) Investors are users, too. So provide them with something visual that they can love and understand immediately. If you have a product they can test-drive, excellent. And if not, provide screenshots or a demo.

Excellent presentation by Naval in all. I've only covered some highlights from the talk above, but slides should be available on slideshare for those interested.

Thank you, Naval, for taking the time and preparing a thoughtful and interesting presentation!

Inna Efimchik

Emergence Law Group  Emergence Law Group, specializing in assisting emerging technology companies in Silicon Valley and beyond, provides incorporation, financing, and licensing services as well as general corporate counseling.