Evolution of a Startup: Lessons Learned

Evolution of a Startup: Lessons Learned

I was recently approached by a friend in the venture capital industry who asked me to write about my experience as an entrepreneur and transplant to Silicon Valley.  Here's the resulting transcript of our discussion.  I'm publishing it in the hopes that it helps other entrepreneurs, as well as those who haven't yet taken the leap but want to.

Can you tell me about the fundraising cycles your company has gone through?

We began in Washington D.C. in 2008 in a townhouse on Capitol Hill. It was a terrible time to fundraise due to the financial crisis, so we self-funded a mobile consulting firm called PointAbout which built mobile apps for large brands, including Disney, The Washington Post, The Huffington Post, Newsweek, Cars.com and many others.  That firm quickly grew to over 30 employees (and a much nicer space in DC -- although still a townhouse!)

Two years ago, while still in DC, we launched our first product, AppMakr, which immediately got tremendous traction and tons of press in publications like USA Today, Entrepreneur, TechCrunch (a couple of times), Mashable, and the list goes on. We made a hard decision to sell the consulting firm and move to Silicon Valley to focus on making AppMakr successful.  Luckily we found a great home for PointAbout and packed our cars up summer of 2010 to move out West.  We raised a $1MM seed round by year-end 2010 based on the traction of AppMakr.  I wrote a fundraising manifesto of that experience to help other entrepreneurs in the same position, and I recently expanded on it with a post on how to optimize an AngelList profile.

By early 2011, we realized we had unique (and hard-won) expertise gleaned from building high-end apps via the PointAbout consulting business, combined with tens of thousands of "apps for anyone" apps made on our AppMakr platform.  So we set about solving some really big problems in mobile:  How to get developers more app installs, and how to keep existing users of apps coming back into the app.   At first, we were just working to solve these problems for AppMakr-made apps, but then we had a eureka moment:  Why not make this solution an API with mobile SDKs so any developer could drop it into their app?  And so Socialize was born, and we started to infuse every AppMakr app with the Socialize social platform, while also making Socialize available to any developer.

Learn more about Socialize in this 7 minute video

An app is only as powerful as the number of people using it on a regular basis, and we knew how to fix both problems with one big ace up our sleeve:  We knew how to make apps social.  But not just any type of social -- interest-based social, also referred to as the "interest graph."   We'd recognized that users of a mobile app all share a common interest.  By making the app social, we thought we could dramatically improve app discovery and re-engagement based on people's tendency to want to interact with others who share common interests (a thesis that's proven to be true, with boosts of up to 551% in app installs and 316% in app engagement).

To date we've raised a total of $1.5MM from angel investors for the company.  We also re-invested the proceeds of the sale of our consulting company PointAbout into Socialize (or to put it into poker terminology, we "doubled down" because we really believe in the company and our incredible employees!).  It was very rewarding to self-fund a large chunk of our company's growth.

What are 3 things that factor into your runway calculation?

We calculate our runway based on cash in the bank divided by current and planned expenses, which for a tech startup consists mainly of salaries.  You'll also want to have a monetization plan, which you may or may not yet be executing on depending on what part of the startup life cycle you're in (I do not recommend focusing on monetization at the expense of traction early on -- first, make something people demonstrate they want.  Then make sure you can monetize it, and finally scale it up while applying monetization in ways that doesn't kill your growth.  It's a tightrope that isn't easily traversed, and making it look effortless is a very hard-won skill!)

Founders will generally want to raise as much money as they can on terms that are favorable enough to the entrepreneur to make the fundraise worthwhile in the long run -- or to put it another way, you don't want to raise money on such unfavorable terms that you're only making your investors a lot of money.  Any time I feel I'm able to raise more money than I have previously raised without over-diluting the founders and employees, I do.  A successful and positive relationship with investors should be viewed as a partnership -- even a marriage:  You both need each other, and together you can achieve much greater success.  As an entrepreneur you should view yourself as the "fire starter" and the investor as the "gasoline on the fire."  I so often have entrepreneurs come up to me with an idea and ask how to fundraise based on that idea.  My response is always, "show me the fire."  Unless you have a great past track record, which I describe in more detail below, you'll have a very hard (impossible) time raising money on an idea.  Actions and results speak, so go start that fire first.

Each fundraising opportunity can be thought of as a 3-legged stool consisting of the terms of the raise, the size of the raise, and the runway that it gives you, and you need to balance all three appropriately.

Your ability to raise money will be based on how much demand there is from investors in your company. Founders have to make the call between spending extra time fundraising vs. spending more time focusing on the product. If spending an extra 6 months developing a product drives way more traction for your company, then find a way to do it before you fundraise -- the process will be way easier and faster and you'll get way better terms.  This balance is especially important because fundraising is so distracting that it can often stall product development in a small startup.  So one comes at the expense of the other.  Timing fundraising correctly is key -- especially when you add in macro factors outside your control, like the general investing appetite among angels and VCs due to IPOs (or a corresponding lack thereof).  One of the best examples I've seen detailed of a company fundraising based on traction comes from the founder of Fab.com via this post titled "Behind the Scenes: How Fab Raised $40 million with a lot of data and not much pain".  It's a fantastic post.

Silicon Valley is a very dichotomous world. On the one hand, you'll see founders who have a strong track record of successful exits or lots of social validation and fundraising easily, and then on the other hand you'll find everybody  else. When we arrived in Silicon Valley two years ago, we were definitely in the "everybody else" category -- nobody knew who we were.  And because the valley has a very tight-knit "social proof" and validation structure, it's very difficult for startups outside this geographic area to raise initial rounds (this largely changes if you're an established company with a strong track record raising a series B or later round).

Starting off in programs like Y Combinator give you an instant catapult into the former category, because being selected for YC provides a lot of validation in the eyes of investors.  We've fought our way into investor's mind-space the hard way, by getting tons of press for both Socialize and AppMakr and great traction from users, but if I were to do it again I would definitely a) get out to San Francisco as quickly as possible and b) go through a program like YC or 500 Startups to short-circuit the process.  You could say we did it the 'old fashioned way,' if there is such a thing, but I definitely wouldn't recommend it to anyone.  If you're not in San Francisco, don't kid yourself into thinking that making an impact in your startup community trumps building a successful, world-class company.   While you certainly can make an impact wherever you are, the opportunity cost of not being in the valley is incalculable and will likely cost you many millions of dollars personally.  There are many things outside of your control as an entrepreneur, so control the things you can and optimize them.  Location is one of those things.  (This advice doesn't apply if what you really want to focus on is making an impact in your startup community... I'm assuming you want to 'go big or go home' with your startup).

When you have raised a given amount of money, how do you think about balancing the amount of runway vs. the burn rate?

It's a vexing process. The process of adjusting your spending consists of a series of evaluations that, when plotted on a timeline, might look like an inverted Fibonacci Sequence. What I mean is that, say you have a runway of 13 months:  You might make some big decisions about whether to fundraise and/or reduce burn to extend runway when you have, say, 8 months of cash left in the bank, and then you'll really be thinking about it when you have 5 months left, and you'll start freaking out when you have 3 months left, and when you have 2  months left it'll be all you think about, etc.   (The caveat here being that if you can bank more than 13 months of runway on favorable terms, you definitely should).  The closer you get to the end of your runway, the more the balance tips to reducing burn or raising funds, and the more often you think about it.  The best tip I can provide here is to focus on making a killer product and don't expand your team faster than absolutely necessary.  If you think you need to hire someone, you can probably wait until the pain is double what you're feeling now.  You can never get the money back that you spend, so be very judicious about spending it.

What are two things investors want to see when you pitch to them?

This sounds silly, but investors really do want to see graphs that are going up on the right.  If your numbers are not increasing exponentially, they'll likely be far less interested.  When you think about it, it makes more sense than at first blush:  If there's not something about your business that's exploding, you probably haven't found a good product/market fit yet.  There's a fantastic blog by Marc Andreessen about product/market fit that I recommend to any founder.

Investors also want to see gross numbers in sizes that matter. For example, in the case of Socialize, one metric for our performance is the number of people using apps that have integrated Socialize -- a number that's been doubling every month for the past 6 months, and has now rocketed past the 2 million mark. Four months ago, the number of users was under 100k.  That's the kind of growth investors look for.  Also interesting to note:  an exponential growth curve looks almost exactly like a linear growth curve at the beginning -- how's an investor to know which yours is?

Can you give an example of a PR effort you managed?

We timed our AppMakr launch so that Mashable, Techcrunch and multiple other sites all wrote about us on the same day.  That gave us great mindshare when we launched.

We also make sure our website has a clear and focused value proposition. I spend a lot of time honing our message to be as relevant as possible. We do a lot of A/B testing of our message, then use the results to influence our product roadmap.  Here's a tip:  Making a slick product video to show your company off can cost upwards of $10k.  Here's a way to hack it, called "PowerPinch" for under $500.   It's fantastic for presentations too -- everyone's tired of PowerPoint.

What's a weakness of your business and what have you done to address it?

Easy question. Our business relies on selling our product to app publishers and developers, which is very difficult because there's no single major distribution channel to tap into.  You can't just say "we're going to spend $1MM targeting app developers."  Savvy investors know how hard this is and give major kudos to companies that have figured out how to successfully get the attention of developers. We've expended a lot of effort making our SDK as easy to use as possible for developers to drop into their app: Five minute install, open-source for easy customization, or build against our API if you're hard-core.  I won't go into the details of our secret sauce targeting developers, but the graph at left speaks for itself, as does our nearly 6,000 SDK downloads.  Find a hard problem to solve, and be the best in the world at solving it.

When you first moved into the valley a year and a half ago, how did you reach out to the first angel investors?

It was very hard to arrive in a new city not knowing anyone, but that really motivated me to create a personal brand and a great brand for our company.  We were among the earliest companies to use AngelList, and I also took the time to do fun things like interviewing Naval on my tech blog to get our name out there.  (A good litmus test: If you can get on the front page of HackerNews, you're doing something right). The valley is a difficult place for newcomers in the sense that people prioritize the time they'll spend with you based on how relevant you are to them.  If you're not relevant, and if you're not doing something amazing, it's incredibly hard to expand your network in the early days.  Everyone is time-constrained.  As Dave McClure says (paraphrasing), "it doesn't matter if people love you or hate you, as long as they care, because you can always iterate on hatred, but you can't iterate on apathy."

Being an entrepreneur in the valley often feels like getting up every morning, being punched in the face, and then jumping up to do it again the next day.  Creating something from nothing is incredibly hard.  You have to absolutely love what you're doing to be successful at it, and you have to pick the right team to do it with, or your life will be miserable.  I was lucky to find some incredible co-founders in Sean and Isaac, and that has let us build an incredibly talented team of A players.

I love to create value and build a product with a fantastic team that will pay rich dividends in the long run. It's a very different life from the consulting business we started back in Washington, DC, and it's not for everyone.  But if you think it's for you, get off your butt, get out here to San Francisco, and start giving it a try.  You only live once!

If you have any thoughts or questions for me, please leave them in the comments below.  I'd love to continue the conversation with you.