This article is Part 3, the final part, in a three-part series that share Startup Funding insights from Austin’s top VC leaders that comprise nearly $1 Billion of VC funding.
Part 2 included the following topics:
- If most VCs fund seed stage and Series A, what’s the outlook in Austin for funding future stages (Series B, etc.)?
- What is so special about Austin? Why are people coming here?
- Where do entrepreneurs get started?
Here is the continuing panel discussion from the following VC leaders:
- Krishna Srinivasan, General Partner, LiveOak Venture Partners
- Morgan Flager, General Partner, Silverton Partners
- Rajiv Bala, Principal, S3 Ventures
- Matt McDonnell, Partner, Notley Ventures
- Tom Ball, Co-Founder/Managing Director, Next Coast Ventures
- Chris Shonk, Partner, ATX Seed Ventures
How do I get funded?
Chris: Internally, we talk about Fight Club. Is anybody here a Fight Club fan? We’ll find you hopefully and, if not, you’ll find us; it shouldn’t be that hard. There’s a web everywhere. We’re not elusive. If you’re not talking to us and we’re not talking to you, you might want to challenge your own business development prowess, right? Consider that a test. The big thing is there’s a certain amount of risk that is appropriate and you’re willing to take as an entrepreneur when you throw your hat in the ring without quitting your day job. There’s crowdfunding; there’s never been a better time to be an entrepreneur. You can have customers pay you ahead of time. You just have to build it …. Get out there and check it out. The angel network – HAN, which is Houston, and CTAN, which is Austin, are two of the largest angel networks in the whole country. So there’s plenty of capital. I’d say the way to find us is to look at what we do and what we’ve invested in – it’s ecommerce and software – and then what stage we’re in – and build something compelling and come talk to us about it. We’re around; we’d like to help. Talk early; it is a dating conversation, yet we will give you a fast “no.” One thing that no one talks about in being VCs is that you don’t have to be that bright. The later stage you are, the less bright you have to be. Because there’s pattern recognition in throwing resources together and 90% of it is timing – or 80%. So think about that – if you’re a relatively smart individual and you’re getting pitched by 5 Machine Learning Jedi every day, you’re going to know a couple of things about Machine Learning just through osmosis. So just know your investors and what they’ve invested in and what they can do besides money…. If you need just money, I’m not your guy because that’s the wrong answer for what our strategy is. If you need cofounders or need customers or seeing around corners, and seed money to do that, that’s our way.
Morgan: At the end of the day, VCs are capitalistic enterprises and everyone is looking for a return. So the real question is, if it’s money and not any kind of passion, we’re financially motivated. Is that the person that will deliver the financial result? In most cases, it’s not…. You want to hire great people, you want to talk to important people and get great customers. How do you get that done? So a big part of that is the passion of the founder. You have to get people excited when it’s initially just a thought or a piece of paper with stuff written on it. And that comes from somewhere. If it’s just “I want to be rich.” Then I’ll ask, “What happens when shit hits the fan and it doesn’t look like you’re going to be rich. Do you just stop? Is that your motivation? Or someone comes to you and says “I’ll take a $350,000 job if that comes my way”…. That (passion) has to come across. I want a person to be broader than that…. And if that doesn’t, maybe someone else will be interested in it, yet that’s not what we look for.
Krishna: Passion is working with authenticity. When people come to us, you recognize that there’s a long list of things to you don’t know; you don’t know if the product is going to work. You don’t know if the customer is going to love it. Even if customers love it, you don’t know if they’ll love it for a long time or if it will churn. You don’t know if you can build a sales force that can efficiently scale the business and go to market. The entrepreneur will have conviction for some things and not convictions for others. There are so many unknowns…. The big turnoff is a lot of hand-waving about many aspects of the business as opposed to an honest, self-actualized perspective on what someone knows or doesn’t know about the business and …how you’re looking to de-risk certain things … – to give an intelligent, thoughtful conversation about that is one of the most important things.
Rajiv: I think authenticity is really one of the most important things we look for. One of the best things we look to hear from the entrepreneur in a first pitch meeting is “I don’t know.” If we’re getting to that point, then there are a lot of things we don’t know in these businesses. Mike Tyson said “Everyone has got a fight plan until I punch him in the face.” And we’re going to go through a lot of ups and downs together and some near death experiences. If we can be honest with each other in that first meeting, we can set off on a great path to date a little bit….
Tom: Intellectual honesty is the term we use for that – being able to say, “I don’t know.” I don’t know about you guys, yet how many deals do you do per year? We make 2 or 3 investments per year. What does it take to get our money? You’ve got to rise to the top of 900 other things that we look at for the year to be the top 2 or 3. It’s not one variable. Sometimes it’s “wow, that’s a great entrepreneur and a great market fit because they’re going to figure things out. We’d be lucky to be in business with them.” Other times it may be “that’s a great business plan and business model; I know a bunch of people who can help this person. Let’s get them there.” So it’s not a simple formula. That’s why it’s dating. A lot of variables go into this equation. I wish I had a simple answer because if I did, I’d probably go back and be an entrepreneur and raise a bunch of money.
Matt: I agree with everything that has been said. I think the other thing to keep in mind is that metrics also tend to raise money. If you have a clear line that if you put $1 in and you get $2.36 out and here’s why and I can tell you that story up and down. And when I ask you a question and you are honest when you don’t know the answer. The metrics really do matter. Storytelling is good and authenticity is good, but being able to tell it in a believable way is something that maybe people take for granted. That’s really a differentiator. There’s a company that pitched us not too long ago that had deep experience in waste management; and that was compelling because they had spent twenty years in an unglamorous business and they banged their heads against the wall and realized “I could do this better.” That’s what we mean by authenticity – that there really is that kind of passion and deep experience and the metrics are also quite helpful in addition to the entrepreneur.
Chris: The hand waving and the buzz words that I mentioned earlier is that there’s a lot of misdirection going on right now that you may not want to hear, yet it’s really important that we need to take this town to the next level with bitter honest truth. Some of these incubators where you’re sitting on bean bags, there’s groupthink there’s and a lot of misdirection there. You know who knows? The customer knows. Spend more time with customers. Take me down a deep customer journey and show me data. That’s better than the “who’s who” awards and these exits; that’s all noise. Show me your customers. That shows you’re smart enough to find out who pays your bills and take care of them. Then it’s all about – how big can this thing be? But who’s on your cap table or who your mentors are – all that absent of your customers and knowledge of your industry and where you want to go – is just useless for early stage VCs.
What’s the one thing that you would like to see the entrepreneurs bring to you?
Krishna: This is not big picture, yet I’ll talk about the small picture. When one of you wants to talk to any of us, talk about what in your life journey has contributed to the insight you have about your business. You really want to talk about that. You have a certain perspective about what problem you want to go after. Maybe that problem that you want to tackle in the first place is directed by your personal experience or your own personal journey. I strongly urge you to lean on your personal experience to come up with the right companies…. Then be prepared to talk about how those experiences and life journey makes you uniquely qualified to have that insight to start your company.
Tom: What problem you are solving? How do you make money? Keep it simple. That first meeting is: why are you the right entrepreneur to do this? What’s the problem? How can you make money at this? What’s it ultimately going to end up being?
Rajiv: Make sure you solving a problem. Your goal in that first meeting is to make sure you can continue the conversation after that. Be authentic and passionate and care about your business and you will continue to do well.
Morgan: One of the things that is commonly misunderstood among VCs is that a lot of entrepreneurs don’t talk about the team. There is no greater social proof than having a lot of great smart people who have other options yet are choosing to do your thing. So talk about how great they are and why they joined you. The other one is investors look for risks. You’ve got to identify your risks. That is true. The other thing people don’t necessarily talk about is “What could go right?” If things work out, what is it about your business that may make it impossible for someone to compete with you? Or is it some technology? People call it barriers to entry. It doesn’t need to be a particular technology. Yet if everything worked out in the way you talked about, would this be a big outcome? If you look at the really big outcomes, they all had something differentiable, unique and sustainable. Talk about that. Do some thinking about why that is. At the end of the day, we want to create big outcomes. Big outcomes have certain characteristics. So identify what those are in your business and be prepared to talk about them.
Chris: One thing that would be great to have more of is self-awareness in founders and know your limitations and be “open kimono” and articulate those up front. These are my limitations; I may not be the guy for this. The other thing is that there is a rampant situation that people who are not technical founders are trying to start technical businesses. Get a technical cofounder. It’s a big deal. If you’re building a product and you don’t know how to build a product, get a technical cofounder; there are plenty of people coming out of grad school. … Not only that, who’s going to build the team of other builders? What’s that person’s ability to lead? At some point you will need to build the company and it’s not just a CTO or a VP. It’s people building a technology. What’s that person’s role going to be?
Matt: I’ll go in a slightly different direction. Everybody on the stage believes that are certain things that will be true 10 years from now. Take advantage of that. If we have excess capacity of all sorts of assets in the US, which is part of the pitch of AirBnB or Zipcar, what are the things that the angels or VCs or banks are committed to in the future? Build off of that. If you have an investor that believes that blockchain will be the future of the world, you should anchor to that thesis about what they think the future will look like. I think people miss that a lot. It’s not just money. We have biases and opinions as VCs and you should understand those. You should tailor that conversation along the lines of what that person is already inclined to believe about the future. Make sure that fit really is there and recognize that we all have particular viewpoints and use those to your advantage as an entrepreneur.
If you enjoyed reading this article, you can read Part 2 by clicking here and read Part 1 by clicking here. In addition, you can view the entire video of this session (courtesy of Golden Arm Media) by clicking here. The event was sponsored by Team Austin at Impact Hub.
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