‘RAM’ could be your most important metric

This July, I moved back to Silicon Valley after living a year and working with startups in Helsinki (arguably Europe’s current ‘hottest startup capital’).  Between the move back and raising a new fund, I have had little time to post new  entries.  But after a catch-up coffee last week with a good friend who is a Founder-CEO, I felt the urge to write as our discussion reminded me of an important concept I feel every Founder needs to know…

Shahram Javey is the Founder of Aquacue Inc., and one of the most remarkable people I’ve had the privilege to work with.  I met Shahram a few years ago when Aquacue was tiny (4 engineers) and working out of Shahram’s Guest unit in his back yard.  A real ‘garage startup’.

I instantly liked what Shahram and his team were doing:  solving an interesting problem with an innovative software solution that had a payback measured in months.  However Aquacue had two challenges: the software had a hardware component; and the company was in the Water space (‘cleantech’).  Hm.

Nonetheless, I like the problem they were solving and the team, so I jumped in:  raised their series-A round, invested, and took a 18-month role as VP Business Development helping close their first, large deals.  They were acquired 24 months later at multiple from their first (and only) priced round.  Nice.

Shahram and I were reminiscing about the ‘good old days’ of cold calling new customers, scrambling to fix field units, saving Stanford University from a massive water leak (that could have run to a million dollars or more), and visiting 26 VCs (25 passed and missed a good exit).  While this may sound fun, let me be clear: those days were tough.  The team had to fight hard for every customer order and every dollar of venture capital.

That being said, Aquacue possessed something rare and valuable:  delighted, early customers that were motivated to test the product, use it, buy it – and buy again.  This provided a source of validation for new customers, credibility for the investors and confidence for the Founders.

Having early, fast customers is so important to a startup that I am going to create a new acronym:  ‘RAM’.

‘What the heck is RAM’?

You are familiar with TAM (Total Available Market), SAM (Serviceable Available Market) and SOM (Serviceable Obtainable Market).  Simply put, TAM is the total product category (example:  ‘footwear’).  SAM is the sub-category in which you compete (example:  ‘running shoes’).  And SOM is the market you can realistically serve, given your resources, location and product attributes (example: ‘upper income, general fitness runners in the Western US’).

But here is the problem:  early startups don’t need TAM, SAM and SOM.  They need their first 10 customers.  Then the next 10.   And the next 20 after that.  Quickly securing these customers is more important than calculating TAM, SAM and SOM.  These markets will be important later – just not right now.  Why?

It comes down to speed.  Speed is a critical advantage for startups:  planning fast, developing fast, executing fast, selling fast and yes, even failing fast.  Speed is one of the key attributes that separate a startup from an established business.  And it needs to be embedded everywhere:  how you operate.  How you make decisions.  And your first customers need to be fast, too.

As an early startup, you need fast customers.  I call them your ‘Rapid Adopter Market’ or RAM.  These customers will rapidly test, buy, critique, adopt, and rave about your product.  They are important for a small, unproven startup because they create the momentum and leverage that leads to scale.  Rapid adopters provide credibility (quickly), market validation (quickly) and will even fail you quickly – which is also a good thing.

How do you find rapid adopters?  Carefully.  Some may appear to be rapid adopters, talk about a great need for your product, their large budgets and the resources they will provide to get your product tested.  But inevitably something fails:  the review cycle takes months not days; the purchase sign off disappears into the ‘IN Folder’ of a finance exec; the testing goes on and on and on, and the AE is darn slow to respond.

You need to have a sixth sense to filter these customers out and find those who are serious and who move fast.   Perhaps a simple question can be: “who needs this yesterday?”

So the next time you are pitching to a VC and she asks about your TAM, SAM & SOM, go ahead and say that you don’t care – for now.  Tell her you are focusing on RAM because you believe finding early, fast customers is your single most important objective.

Back to the coffee shop with Shahram…  We chatted how life is different post-acquisition.  Certainly, there is no longer a ‘startup aura’ around the team, product and vision.  They are now part of a large, successful company and have capital, confidence and corporate commitment.  But we also reminisced about how strong a friendship was created through this startup experience, and how it will last for years.  Do we both miss those scary, sleep-deprived, anxiety-inducing days as a startup?

You bet we do.

Good selling.


Should I raise venture capital?

This month’s blog was inspired by a student at the University of Wisconsin-Madison, who is studying Entrepreneurship and hopes to found his own startup one day.

He is a reader of this blog and offered to contribute a guest post on an important question most Founders face:  “Should I raise venture capital?”   I’ll start with his  article and conclude with my own thoughts at the end.

The emergence of several internationally successful startups has paved the way for growing interest in ideas from outside Silicon Valley, and VCs have taken notice. Although bootstrapping has become a popular way for a startup to get on its feet, it is important for a small company to assess whether venture capital funding at some point can lead them to greater success. 

In short, there comes a time in the life of a startup when Founders must decide if it is better to own a small piece of a large pie, or they are better off owning a small pastry.

Let’s first look at the positives venture capital funding can bring:

1.  Money, Mentoring, and Experience

When you sign the dotted line with a venture capital firm, you are signing up for the wealth of experience that your new co-owners bring.  It is likely your investors have ran and/or owned a startup company themselves,  sat on the board of several successful companies in your space – or both.  It is also likely they have mentored and directly understood how other startups succeeded and failed.  Your investor, and their Partners, will serve as key advisors to your business and can help you scale your startup, as long as you are willing to share ownership.

2.  Networking and Recruiting

If the money and experience were not enough of a reason to sign the dotted line, the size of their rolodexes is a critical ‘boost’ to their value proposition.  Venture capitalists maintain an extensive list of contacts with firms, funders and key executives, ideally within your space.  And they will bring this network to you, quickly and efficiently.  Nice.

3.  Shared risk, the Big Picture and the Exit strategy.

It is inevitable that things will go wrong in a growing startup. The market may go against you, deals may not always turn out as expected or key employees may leave unexpectedly.  It is the job of an investor to support you when things get tough:  financially, intellectually and emotionally.  A good VC shares the risk with you, in good times and bad.  It is easy for Founders to lose sight of the big picture and focus too much on the current market.  A good VC will know the trends in your market and help make sure you are up to speed with where it is going. 

And finally, the VC may be with you for a long time.  When the day comes to realize your (current) startup exit, your investors can help you start on your next exciting venture.

At this point you may be somewhat convinced to pursue venture capital.  So let’s look at what may be perceived as some of the negatives of raising venture capital:

1.  Exit pressure

Some Founders believe VCs are in their company just for the exit, and their only priority is to sell the company or take it public.  At the end of the day, VC firms are indeed looking to multiply their returns. And this need for high returns will outweigh personal relationships to Founders.

2.  Loss of Independence

Although your title may still be CEO, it is not only your company anymore. Venture Capital firms will want some control, but what does that mean?   One or more board seats.  The right to veto key decisions.  The right to participate in defining key priorities. And yes, the right to participate in deciding your role and future with the company (as well as the roles of your senior management team).  The company you Founded and owned nearly 100% will become a thing of the past.

The Verdict:

Although the negatives of venture capital funding may be uncomfortable, the positives often outweigh in the final run.  Being able to worry less about every dollar spent can allow a startup to focus on what really matters:  focusing your company, defining its strategy, executing quickly and maintaining high employee moral.  The experience and objectivity a venture capitalist brings can be a big factor contributing to your success, whether exit or IPO.

A good venture capitalist will help lead you in the right direction and support your vision of success.


Nicely written.  I’d like to share a few  thoughts based on my experiences as an angel investor.

First, the venture capital world is changing.  Startups today need less capital, connections and mentoring than ever before.  Products can be built with hundreds (or even tens) of thousands of dollars.   LinkedIn is rapidly becoming as efficient as a VC’s rolodex.   And social networking connects Founders to extraordinarily talented and available Advisors and Mentors faster than ever before.

Another subtle but powerful change is that the world is awash in venture capital and VCs are often falling over themselves to find you and fund you (if your idea is good…).  The playing field is quickly tilting away from the VC and toward the startup.

Nonetheless I agree that the advantages of venture capital often outweigh in the end.  Given this, how do Founders select the right VC?  I encourage Founders to insist on three things from a venture investor:

Condition 1:  The VC who will be assigned to you has relevant experience.

And I don’t mean they funded a few deals related to your space.  I mean they have a solid track record of exits in your space (read: they know who the buyers are and can contact them when your startup is ready to be acquired).  And they have access to deep network of senior executives within your sector (read: they can help your Sales team).

Condition 2:  At least one of the Partners assigned to you has founded their own startup.

If your VC is not offering a Partner who has founded, co-founded or been a very early and key employee of a startup, turn around and leave.  Seriously.

Few things are more important in a VC than real startup experience.  Have they lived through the sheer terror of nearly missing payroll?  The pain of product failure?  The agony of losing a key deal?  Survived a tongue lashing by angry (but concerned) customers?  Lived off ramen noodles and a shoestring budget?   Dealt with spouse, family, children and friends frustrated at your unwavering passion for your startup?

No large-company background or MBA degree can replace the purity and relevance of the startup journey.  Insist that any VC firm provides a Partner who has been in your shoes and launched their own startup.

Condition 3:  The VC references are solid.

Each VC firm has a certain ‘karma’ about them, based on previous experiences with startups.  In my experience Founders often focus too much on the name of the firm and too little on the Partner being assigned to them.   I think it is much more important to have the right investor assigned to you.  Do they know your space?  Do you instinctively trust and respect that person?  Do they have strong references from other startups with whom they have worked, mentored and helped create exits?  Founders will generally go out of their way to help other Founders, and their feedback (on your potential VC Partner) will be very valuable.

In conclusion:  the true value of a VC is the experience, integrity, experience, connections and commitment they bring.  The VC – and their firm – become stakeholders in your vision, and committed to your success.

One final thought:  a VC relationship is like a marriage. And like a marriage, there will be good times and bad, highs and lows, and growing pains as the relationship changes over time.  If you understand and expect this, you are ready for bringing the right VC into your startup journey.

Good summer to all.


Raising venture capital: the ‘Art’ behind the Science

I am sitting at Mesh, Oslo’s new technology center for startups.  If you ever want to see an awesome startup place, come to Mesh (www.meshnorway.com).  It’s a coffee shop + accelerator + co-working space + night club all in one, right in the heart of downtown Oslo.  Startups and investors alike come to Mesh to work, network, negotiate over coffee, brainstorm new ideas and wind down at the nightclub.

The Mesh Founders built a place that is fun, productive, well located and destined to accelerate Norway’s startup community.  And the best part: Mesh itself is a startup, conceived by tech entrepreneurs with seed capital and sweat equity.  A place built by Founders, for Founders.  Neat.

But why talk about Oslo when this blog title is ‘Fundraising’?  Because being here is like deja vu:  I see the same struggles in Oslo as I see in other high tech cities around the world.  The most frequently discussed topic? ‘It’s really (really) difficult to raise capital’.

Hm.  Capital is difficult to find in Norway?

Norway is a very wealthy country with one of the highest GDPs and largest budget surpluses (per capita) in the world.  It has an energy-driven economy that is on fire, unemployment around 3%, GDP projected to stay strong for the next several years and a ‘national pension fund’ that has saved ~$150,000 for every citizen in the country.

Yet even in wealthy Norway it is difficult to find venture capital.  Startups voice the same complaints I hear in Finland, Argentina, Singapore, Brussels and Barcelona:  It is not easy to meet investors.  We are uncertain what to say.   It’s difficult to get them to fund our idea.

So I thought it might be helpful to write a blog that helps Founders get into the heads of investors.  A ‘view from the other side of the table’, so to speak.  I dusted off my own list of insights that I regularly share with Founders.  I also checked with some of the smartest VCs and angels I know and asked three questions:

1.  How can entrepreneurs most efficiently meet an investor?

2.  What is most important to hear from a Founder in his/her first pitch?

3.  What are the most common mistakes you see Founders make when raising capital?

They were generous in providing their thoughts.  So in no particular order, here are our collective, top insights on the ‘art’ of raising capital:

1.  Know your VC.  Be sure to know the VC to whom you are pitching.  What categories do they invest in?  What stage?  Where have they created successful exits?  Make sure you fit their filter because this is where the investor can offer you maximum value.  Few things frustrate VCs more than blind business plans that have no alignment with the firm’s focus.  Don’t waste their time or yours with a request to pitch an idea that is not in their area of interest.

2.  Arrive by introduction.  A great way to get a meeting with a VC is by introduction from someone the VC knows and trusts.  This includes investors, Founders, advisors, attorneys, limited partners and portfolio companies.  One particularly smart investment is to create an Advisory board and make sure it has members with good ties to VCs.  One of the most powerful things an Advisor/Board member can do is open a door to a source of funding.  The investment world thrives on trust and if someone can make that trusted introduction, you are that many more steps ahead.

One of the smartest, most successful VCs I know offered this advice:  “Find another Founder with whom I (the VC) am already working, and who has some experience in your space.  That Founder will likely be more than willing to set up an introduction.  Why?  In my experience, Founders really go out of their way to help other Founders.  For me (as a VC), this type of introduction really ‘cuts through the noise’ and I will go out of my way to meet you, if a Founder I know recommends you”.

3.  A 10 minute pitch.  The best pitches last 10, maybe 15 minutes.  Tell the VC up front that your pitch will be short, and you hope to leave 50% of the time for questions.  In this way, there are three possible outcomes:  Pitching on time and getting no questions means they did not like it (the good news:  you know this and won’t spend any more time chasing this investor).  Pitching on time and getting lots of questions means you are getting great, free advice at worst case and strong investment interest at best.  Both are good outcomes.

Pitching too long and leaving no time for questions means you screwed it up.

4.  Problems & Markets; not Products & Solutions.

It is really important to hit on the problem you are solving early in the pitch.  If the VC doesn’t understand what the target problem is, as well as who cares about that problem, all the terrific product and solution details are for naught.

Founders often spend their entire pitch talking about their product.  Yes, it is ‘your baby’ but the solution is secondary to the problem and your insights into the nature, size and urgency of that problem.

Start your pitch talking about the problem you are solving, followed by a detailed description of the markets that have that problem.  Right down to an actual ‘day in the life of your customer’ story if possible.  Once you’ve established clarity on problem and market, move on to your unique approach, product or solution.

Although this sounds very rational, you would be surprised how few Founders actually present in this sequence.

5.  Talk about risk.  Don’t downplay risk.  It is a given in venture capital and a negative if you don’t understand and explain yours.  Moreover, some risks are more acceptable than others.  VCs want companies and teams that accept higher technology, product and team risk; but where sales/market risk is as low as possible.  Think about this: you generally have more control over technology, product and team risk, yet little ability to control market risk (short of massive marketing budget to create market pull).  Don’t downplay market risk, but be aware this is one of the most difficult to manage.

6.  Money for Milestones.  Few things are more frustrating than hearing an entrepreneur ask for capital ‘so their company can execute for ‘x’ more months’  Do you realize how uninteresting that sounds?  Investors provide capital in exchange for accomplishing meaningful, measurable milestones that increase valuation.  They generally do not care how long you will spend their capital, they care more about how will you use that capital to achieve results.

I advise Founders to talk about fundraising in three stages.  First, look back:  what did you accomplish with the capital you raised so far?  Next, look around: what meaningful things will you accomplish with the new capital you are asking for?  3-5 key milestones is enough. And finally, look ahead: what additional capital do you expect you will need and what future milestones will you accomplish with that?

Think:  money for milestones (not time).

7.  The Market matters.  Investors want to understand your markets; those who use, pay for, resell or otherwise benefit from your solution.  The most relevant source of market validation is customers.  It is less important from research reports, analyst reports, other VCs active in the space or your own intuition.

If you believe there is a strong market for your product/service, go get evidence.  Find clear indicators of demand for the features, functions, price points and business model.  Create assumptions and test them, ideally before fundraising.  Share your assumptions and test results with the investors.

8.  It’s all about the percent.  As you get closer to a funding event, understand that investors generally care more about the percent of ownership than size of investment.  This can lead to some interesting, if not amusing, opportunities for Founders.  Consider one team of Founders I worked with some years ago.  A VC was showing considerable interest.  The Founders’ initial ask was for $2M at a pre-money of $8M, giving the VC 20% of the company.  The VC agreed to give $2M, but only at a $4M pre-money valuation, resulting in 33% post-valuation ownership.  They would not back down.

Now, this was a top tier, Sand Hill Road VC with a deep network and a solid track record of exits.  Thus the Founders were motivated to close the deal, but did not want to give up 33% of their business.  So they sharpened their pencils and concluded they could accomplish most of their original objectives for $1M.  They went back to the VC and asked for just $1M at the $4M valuation.  The VC countered they would be happy to offer $1M, but at $2M pre-money valuation – resulting in the identical, 33% post-investment ownership.

Do you see what is happening?  The VC wanted a certain percent ownership; the size of check was much less important.  The end of the story was that once the Founders understood the percent game, they went back to the VC and asked for $3M in exchange for 33%.  The VC agreed.  Everyone was satisfied.

As an aside, A-round dilution between 20-35% is ‘about right’.  Owning 40%+ can really muck up your cap table.  Owning less than 20% is often too little to be interesting to a VC.  If they believe in you, they want you to make it big.  And when you do, they want to be sure their fund has a meaningful share of that big exit.

It’s a fair deal.

9.  Get an outside Board.  Many Founders resist adding outside Board members in their first round (or two).  I see this particularly in countries where Founding teams are used to receiving Government grants up through (and beyond) their first million in funding.  I think this is a mistake.

Founders often view an outside Board member as a sign of losing control.  They worry they will have to be more accountable for their point of view or having someone push them to work harder and produce more results.  I agree these things happen, but I also think they are good.

Worried about losing control?  Get used to it.  As your company grows (and I know you expect this, right?), this is going to happen anyway.  So look at losing control as a positive sign that you are indeed growing.  And fast growth can be easier when an experienced Board member helps you through those early stages.  Worried about being accountable for your decisions?  Few things strengthen execution better than a well- defended decision.  Open, direct and honest feedback makes ideas stronger.

An outside Board is a good idea and a sign of a confident Founder.

10.  Some of the most common mistakes Founders make during their pitch

* Too much pitching product.  When pitching the idea, don’t spend too much on the solution and not enough on the problem and market opportunity.

* Having a poorly defined (or not defined at all) Minimum Viable Product.  Note:  if you didn’t fully catch what I meant by MVP, I recommend you read “The Lean Startup”.

* Being overly optimistic on development milestones

* Being overly optimistic on projecting the rate of market adoption.  The market adoption rate is the speed that customers will pull product out of your hands, and it is a vitally important metric.  Be brutally honest with yourself and your investors: How fast will your market really adopt your solution?  What evidence do you have that supports your thesis?

* Trying to maximize valuation in the early rounds.  This may feel good – for a little while.  But an overly aggressive valuation ultimately decreases your company’s attractiveness for the next round.  Think ahead.

* Not being willing to take critical feedback from investors.

*  Forgetting to sell their stock.  At the end of the day, you are building a business case that your company will eventually be worth $X and your investors will do their own math based on the probability of you reaching that value.  But to put it simply, you are selling the future value of your company’s stock.  Don’t lose sight of this.

Back to my visit to Mesh…  On my last day in Oslo, the Mesh Founders asked if I could meet a number of startups at their coffee shop.  I was happy to do so and had the pleasure of meeting four startup teams.  We sat for 30-45 minutes each, discussing their ideas, brainstorming ways to de-risk their business and just getting to know each other.

During those four hours, I also noticed a great thing happening at Mesh.  I saw a constant stream of young, energetic entrepreneurs coming in and out of the coffee shop.  Continuous meetings of small groups.  Lots of networking and socializing.  People introducing themselves, Facebook checks, Java programming.  Laughter, concentration, casual banter and intense discussions.

I couldn’t put a finger on it, but I had a growing sensation of being somewhere very familiar.  Then it hit me:  Mesh felt almost exactly like Coupa Cafe in Palo Alto.  Despite being halfway around the world, it felt like I was back home in Silicon Valley.

I hope every startup city can create their own Mesh, Coupa Cafes, or Cafe Torrefaziones.  Every startup city needs these kinds of places.  Nice work, Mesh team.  And great success to you!

In closing, an investor’s decision is part science and part art – yet ultimately guided by well-honed intuition.  I hope these insights help you to see what your idea looks like to an investor, and puts you that much closer to reaching your fundraising goals.

Good luck.

Chris Vargas

Helsinki, Finland / Los Altos Hills, California

May 9th, 2013

Lost in ‘startup’ translation: What to know before going to the US

“We can’t raise money from local VCs.  Can you introduce us to some investors in Silicon Valley?”

I often receive this question from Founders outside the US, and cringe almost every time.   If you are a Founder of a startup and you are not among the ranks of Rovio, SuperCell, Spotify or Skype (in otherwords: 99.99% of startups out there), take a moment and see yourself from the perspective of the VC.

You see in your startup an exciting, high potential idea that is ready for  ‘smart’ VC money.

A US investor, however, sees a startup that has not yet been endorsed by its local investors community, a founding team with few, local, trusted references, an offshore corporation subject to completely unknown laws, and a 16-hour trip to get to their headquarters.

Hm.  Can you see why a US VC may be reluctant?

The next time I cringe is when Founders say:

“We want to move to the US market – probably Silicon Valley.  We plan to send a few locals to start closing key accounts, hire an A-class team and really get our company going in North America!”

Seriously?  Most startups vastly under-estimate the time, cost and difficulty of entering the US market.  Here are just some of the challenges:

Hiring.  How will you hire A-class talent, when the A-players in the Valley have little interest to work for a foreign startup from a country they’ve never visited and for a CEO they know very little about?  There are thousands of local startups competing for the best talent, what makes you believe they will join yours?  Most importantly, A-players actually almost never interview for jobs; they are brought in by VCs or ‘networked-in’ by other A-players.

Sales culture.  Do you really understand how to sell in the US?  Most international startups do not.  They often confuse being fluent in English with being able to sell to Americans.  Selling in the US isn’t about being able to speak the language.  It’s about knowing how to create trusted relationships and build a trusted brand with customers.  Knowing how to find the right contact within a large organization and having someone in your network who can connect you.  Making that cold phone call and delivering the right message, tone and attitude.  And naturally, knowing when to banter about last night’s Niner’s game too.

(Note that I’m referring to startups that need to personally meet actual customers, channels and partners in the US.  If your business is completely web-based, you will likely be able to scale without having to relocate to the US).

If I were the Founder of a US startup and wanted to enter, say, the Finland market, I would not think to send a few Americans to Helsinki to try to build trusted customer relationships, hire the best possible talent and raise local venture capital.  It puzzles me why Finnish/Nordic/Singaporean startups think they can do this in the US.

Equity culture.  Do you understand equity culture in the US?  I find that most international startups don’t have a clue because when I look at their cap table, I see only the Founders owning equity.  Incredibly short sighted.  I rarely see the hard working, rank-and-file employees with equity.  It will be difficult if not impossible to build an A-class team in the US with a ‘Founder’s-take-all’ attitude.  Not even the B-players will find your startup interesting.

As an aside, the US truly stands ahead in this attitude of sharing wealth among all employees, from the CxO down to the newly hired administrative assistant.  I think it is a key advantage of the US startup culture:  sharing the rewards of success widely, and in turn creating a healthy, vibrant and motivated ecosystem.

Network.  Do you have a strong network in the US?  Personal connections to your first 25 customers? Those who have these valuable connection receive a subtle but critical advantage.  Many Europeans have a difficult time understanding this because they cling to a belief that a good product will sell itself.  Beyond those great products that customers run to purchase/sign-up, (think: Dropbox, Facebook, Angry Birds, AirBnB, etc..), the vast majority will need to win through good customer, channel and partner relationships.

International Founders often make the assumption that the skills that made them successful in their smaller home markets will translate successfully to the much larger US market.  A subtle but important shift needs to occur when entering the US market.  If you don’t understand this, you can easily get lost in ‘startup translation’.

Some of the differences are quantitative: valuations, term sheets, compensation expectations, cost of working/living, and depth of business networks.  Others are more qualitative: the role of sales, negotiation styles, equity culture, the role of the Board & Advisors, credibility with the investor community, etc..

These are some of the most common ‘translation pain points’ I’ve seen international teams face when they relocate to the US:

Translation 1The market is much larger than you realize.  Although the US (313M) is smaller than the EU (505M), South America (387M) or Asia (Bn+), its seamlessness surprises most international entrepreneurs.  The US is a single, tightly integrated market bound by one set of laws, language, currency, culture and mindset.  This often throws off the European entrepreneur who is used to crossing borders, languages and cultures on an almost daily basis.  I worked in Europe for Cisco Systems for 6 years and witnessed, sometimes painfully, the significant diversity of each national culture and the friction this causes in reaching scale.  The US market is large and efficient, which is why one can often reach scale much faster than in Europe/South America/SE Asia.

Translation 2:  Raising venture capital is (much) more difficult than you realize.  The US VC market has more venture capital and does more deals than anywhere else in the world.  However international startups face more barriers than their US counterparts.  First, there is risk in investing in an unknown team, whose core operations are far from the VC’s home.  It is not just geographical distance, but cultural, operational and legal differences that make investors wary.  VCs prefer to invest near their home base, which offers a rich ecosystem of startups that are known, trusted, accountable and accessible.

Second, many startups – particularly those from Europe and Singapore – often receive their first investment rounds from their Government and this creates unique problems.  For starters, cap tables look odd.  Operating Agreements have strange and cumbersome rights and protective provisions that may be a deal-killer for later stage investors.  There are often bureaucratic reporting requirements.  The company Board still consists of only the Founders.  No one from the Government has stepped in to guide the startup, bring in a deep network of stakeholders or push the Founders (hard) to exceed their goals. Founding teams are weakened by this lack of guidance, accountability and healthy control structures.  Government venture capital feels good in small doses but is destructive in larger quantities.

Finally, many international startups are unprepared for the rigorous selection process of venture funding, particularly in Silicon Valley.  The US market is the most mature in the world.  Its VCs are deeply experienced – and its Startups benefit from this more mature ecosystem.  They know how to play the funding game better.  Many international startups come from countries where they are large players in a smaller market, and find it difficult to transition to being a smaller player in a very large ocean.

Translation 3:  The sales culture.  Earlier in this post I discussed some of the differences in sales culture. There is another subtle but key difference worth mentioning.  I’ve observed in many European startups a somewhat negative perception of the sales role, that ranges from tolerance to outright disrespect.

In general, you will find a very different attitude towards sales in the US.  Sales and Engineering are at the heart and soul of most US startups.  These guys are the rock stars.  When sales execs make over a $1M commission per year, the rest of the company cheers loudly.  Why?  Because when sales are pouring in, the people who make the real money are the equity holders and in the US, that is everyone.  Which is a good reason to cheer (see the next ‘Translation’ below).

You probably already love your engineers.  When you move to the US, learn to love your sales team, too.

Translation 4:  Equity culture.  The US startup community thrives on equity and international Founders need to be ready to allow employees to become owners.  Every employee!  Plan on an Employee Stock Ownership pool of 10-20% and be ready to negotiate single digit ownership percentages to critical, senior employees.  And don’t forget that if you start to offer the US employees stock, you will need to offer the same to your employees back home.  Do the math.  It will add up to significant dilution.  If you don’t want to offer equity to employees, perhaps you should not be in the US.

When international founders get nervous at diluting their ownership, I tell them that the ultimate goal of dilution is to create a stronger network of stakeholders who all share the common goal and motivation to increase shareholder value.   I remind them that 10% of a billion is much more interesting than 100% of a million.  Do the math.

Translation 5:  More expensive than you realize.  The US market is expensive. Salaries can appear astronomically high in markets such as Silicon Valley and New York City.  Even in cities like Austin, Boulder and Seattle, executive salaries are much higher than what you pay to equivalent person back home.

And there are other costs.  Office leases in prime areas are extraordinarily high.  San Francisco is a fantastic city to live – and also fantastically expensive.  A studio in SOMA is around $2,000/month; a two-bedroom apartment around $4,000.  Mountain View may be a tad less expensive. The cost of healthcare is spiraling relentlessly out of control.  Companies are generally expected to offer healthcare plans to employees, which adds to the cost structure.  And expect to spend a significant amount of time decoding the US healthcare system, because it is complex: how to buy insurance, the myriad of plan options available, rules on where to go for healthcare, etc.

Visas.  You will need a small army of lawyers to help ensure that you and your team can arrive legally and stay legally in the US.  Google “Sarbanes Oxley”.  When your company grows, you will be required to comply with this law that requires costly and detailed accounting, auditing and internal compliance reporting.

Our legal system is driven by an insane need to provide liability protection, which results in long, complex documents.  Finally our tax system is among the most complex in the world.

Fortunately the US has many accountants, tax experts and immigration lawyers who can help you through all these issues.  But it is still complicated!

Translation 6:  Networking.  This is perhaps the most difficult to describe.  In the US, we have a drive to constantly meet and mix and talk and openly share ideas.  It is in our genes and it is our lifeblood.  It is the casual banter over a business meeting coffee, which to a foreigner feels full of seemingly random talk.  It is the speculation about next week’s Giants game or chatting about which colleges our children are applying.  It is a distinctly different approach to work-life balance and a tendency to mix business and personal life much more than other cultures.  I wrote a longer piece that attempts to illustrate our networking culture.  See:  https://generationsiliconvalley.com/2012/10/04/create-your-own-coupa/.

In closing, I see many international startups abroad that are indistinguishable from their US peers:  driven, customer-focused, networked and perfectly capable of integrating into the US market.  Equally, there are many international startups that do NOT need to enter the US market.  They will do just fine building a global brand from their home countries.

However I continue to meet startups that have a dream of ‘going to the US’.  It is likely the market size, the abundance of venture capital, the ‘cool’ factor of living in young, hip SOMA, the great weather in Silicon Valley – or some combination of the above.  But if this is your startup, be prepared to shift your expectations of what it will take to enter, gain grow and scale in the US.

Don’t get lost in translation in your journey of becoming a great, US-based startup.

Chris Vargas

Helsinki, Finland

Will US VCs come to the Nordics?

My thesis is ‘no’.

At least, not until small regions such as the Nordics can build a credible, sustainable number of exits.  Why the pessimism?

Let’s go back to last Wednesday, when I was having lunch with a friend from a top tier Silicon Valley venture fund.

Madera restaurant at The Rosewood was, as usual, alive with energy.  The Rosewood is a beautifully designed, recently built complex of offices, apartments and hotels tucked on the corner of Sand Hill road and Hwy 280.  Its lunch times are legendary for a super high concentration of Founders and VCs.  Its Thursday evenings are legendary for a super high octane night life.

My gaze was on the menu, but my mind was thinking about the meeting with Fred (not his real name).  After six months of living and working with startups in Finland, the most poignant question I hear is: “why aren’t the US VC funds establishing offices in the Nordics?”  Today, I would try to change that by convincing Fred his Partners were missing out on some extraordinary opportunities by not having a presence here.

Fred arrived on time, as usual.  We asked about our kids, reminisced about meeting Bonnie Raitt backstage, and then got down to the business of investing.  We ended up talking for nearly two hours, and it was going well until he made a thoughtful, but very painful point…

A little background on Fred: he is one of the sharpest and most successful VCs I know, yet with that rare sense of grace and humility.  He has remarkable insights and generously gives time for founders and friends alike.  Unfortunately today’s insight made me shiver for the Nordics.

Venture capital moves towards large numbers,” he explained.  “To high concentrations of startups, businesses, consumers – and exits.” 

“There are definitely some great startups in the Nordics”, he continued.  “And I would love you to send me any that you believe are outstanding.  However the really large numbers just aren’t there.  When I compare the Nordics to other regions such as  China, India and Brazil, it is difficult to make a case for investing heavily there right now.  We need to remain opportunistic.”

The words sank in.  I shifted my salad on my plate, searching for a thoughtful response.  This is the Nordics we are talking about, after all.  The region which is bursting with passionate founders, smart engineers and great startups.  The Nordics is becoming a global leader in sectors such as gaming, mobile business and healthcare.

Take Finland, for example.  It is ‘top of the charts’ in almost every global ranking:  Competitiveness, Education, Engineers per capita, Healthcare, Quality of life, the list goes on.  It has honest, hardworking people who do what they say, who under-promise and over-deliver.  What’s not to like about investing in Nordic startups?

Unfortunately, all four VCs I met on this particular visit to Silicon Valley shared Fred’s point of view.  I was beginning to see a pattern: it has little to do with having a great startup culture and more to do with fundamental economics.

Venture investing thrives in large numbers.  Think regions that have thousands of startups, millions of businesses and billions of consumers.

Venture investing also thrives in environments that foster risk:  entrepreneurs willing to move across their country (or the world) to restart their lives.  Flexible labor laws that allow companies to grow/shrink/adjust on a dime.  Tax rates that inspire – not punish – wealth creation.  And a drive, an insane hunger, for a better life.

These are not exactly the features of the Nordics – or Europe.  At least when compared to China, Malaysia, India, Brazil and the US.

European culture and labor laws do not foster flexible job growth, rapid downsizing, creative destruction or imaginative job-hopping.  The high European tax rates that create a high quality of life, also dis-incentivize entrepreneurs to make their first million.  Or billion.  It scares me how much Monsieur Holland seems to determined to go after successful, wealthy people with a hefty tax axe.  And the hunger for a better life?  Well, life is already pretty darn incredible in the Nordics.

I am sure Fred and his firm will miss some billion-Euro-size Nordic exits, and several multi-hundred ones too.  There have already been some good exits (Skype, MySQL) with more likely to come (Rovio, Supercell, Spotify). But if US VCs are really focusing on large markets, how do talented entrepreneurs in the ‘other markets’ secure access to quantity and quality of capital?  Should they continue to make the pilgrimage to Sand Hill Road, trying every angle to get a meeting with VCs like Fred?  What does this mean for startup centers in Helsinki, Oslo, Buenos Aires and Auckland?

I suggest a solution for these smaller regions is three-fold.  First, build success, one exit at a time.  Nothing speaks more strongly than that.  Prove to the VCs that world class companies sustainably exist here.  Two, build your own ecosystem from within.  Don’t wait for the ‘Silicon Valley ecosystem’ to come to you.  And three, find a category (or two) and dominate them.

Where is this happening in Finland?  Ilkka Paananen, CEO of Supercell, seems like he was beamed straight from Silicon Valley to Helsinki.  He is smart, fast, genuine – and correct.  Peter Vesterbacka of Angry Birds is a marketing machine.  And that silly red, Angry-bird sweater he wears everywhere is… really cool.

Risto Siilasmaa from F-Secure made a fortune from his company’s IPO, and is now giving much of it back by investing in dozens of startups in Finland.   Linus Torwalds (we all know Linux…) profoundly changed the world through sheer brilliance and today he is an tireless ambassador for Finnish innovation.  Marten Mickos from MySQL (now CEO of Eucalyptus) generously gives his time, insights and network to Nordic entrepreneurs.

These are just some of the foundations of a new ecosystem in Finland.   There are many more, and they are creating a new DNA.

Transforming a small region to having steady, large exits and large, local VC funds won’t happen in one year.  Or 3 years.  Think 10 or maybe 20 years.  Is it worth the wait?  Yes.  Silicon Valley began over 50 years ago and is now one of the anchors that will guarantee US global technology leadership for decades to come.

The visit wasn’t all doom-and-gloom:  each of the four VCs took an interest in, and agreed to meet one (different) startup from Finland that I carefully screened and shared.   Nice.

And, Fred promised he would visit Helsinki this Winter.  I am hoping that trip will inspire him to change his mind and hang a ‘Silicon Valley VC shingle’ in Helsinki.

Yes, I am a hopeless optimist.

Chris Vargas, Helsinki, Finland

Fundraising: What investors want

“How did the meeting go?” I asked the Founder.

“Well, he seemed quite interested” came the reply.  “However at the end he said he was not comfortable with this technology and is going to pass”.

Something didn’t make sense.  I knew the VC well, knew he liked this particular space, and made the introduction on that basis.  I expected him to suggest at least a follow-on meeting.  So the next day I gave him a call.  “I heard from the Founder that you passed.  Curious to know why, so I can better calibrate to what you are looking for”.

“Chris”, he said, “I really appreciated the introduction.  I liked the problem he was solving, the solution, and the high margin business model.  I also saw great signs of customer traction.  You were spot-on in bringing that deal to me”.

Then his mood turned thoughtful.  “I might miss a great one here”, he started slowly, “but I passed for an important reason:  the Founder does not understand my business”.

He continued, “an early stage investment is like a marriage:  both sides commit to know and support each other.  I make a 100% commitment to learn a Founder’s world:  their customers, market, solution and financing needs, team, milestones – everything.  When things become rough, we will need to trust and understand each other.  I just did not feel he understands my world of early stage financing.  So I passed”.

His comment stuck in my head over the next few days.  More importantly, I began to see this from the Founder’s point of view:  he had no idea what the VC really wanted to see.

This lead to the broader question:  Do startups really understand what investors want to see?  What is important to them?  Entrepreneurs who seek funding would do well to understand this.

So I wrote a list of ‘What Investors want to see in your idea”.  A cheat-sheet, if you will, for startups.  Mind you, this is just one investor’s perspective (mine), but I’ve heard many investors echo the same thoughts, so I feel it is accurate.  Knowing – and being able to explain each of the questions below, will significantly improve your chances of getting quickly to ‘Yes’ or ‘No’ from an investor (and avoid the dreaded “Let me get back to you…”).  That’s already a significant step forward, right?

What follows are 9 areas where investors see risk, each crystallized to three questions

(1)  Problem / Need

What is the problem you are solving, or the need you are filling?  How urgent is this problem?  What evidence do you have that the problem exists (quantifiable, measurable)?

(2)  Market

What market(s) have this problem?  What is the size and growth rate of this market?  How do customers currently solve this problem, and why is this insufficient?

(3)  Approach

Describe your approach (solution, service, product) for solving this problem.  What is your unique insight?  What is innovative and defensible about your approach?  What benefits does the [User, Customer, Channel, Partner, Market, insert..] realize?

(4)  Go-to-Market

How will you reach the target market?  What will it cost (money, time, resources) to reach and service this market?  Describe your Customer and Market development activities (very important).

(5)  Monetization (business model)

Who do you invoice, and why do they pay?   What are your expected margins and the margins for your channels and partners?  How have you validated this strategy to date?

(6)  Competition and Freedom-to-operate

What competing solutions currently exist?  Soon to exist?  What barriers could reduce your market traction (competitive, IP, regulatory, etc..)?  What is your unfair competitive advantage and how is it sustainable?

(7)  Financing

What capital have you raised to date, and what milestones have you accomplished?  What capital are you raising now, and what milestones will you accomplish?  Approx. how much additional capital will be needed beyond this round and for what purposes?

(8)  Team

Describe the team and how their experience is relevant.  Describe the extended team:  Board, Advisors, Investors, etc..  What gaps exist in the team and how will they be filled?

(9)  Exit

What are the possible exits for the investor?  If acquisition, show 5-10 possible acquirers and explain which department would be interested in you, and why they might buy you.

So there you have it.  Do you know the answers to each of these questions?  Think about it.

Last thought:  what is the most important investor decision criteria?  Each investor will differ… but I believe it is ‘rate of adoption’.  How fast does the market pull product out of your hands?  How quickly can it integrate your solution? The rate of adoption directly correlates to your growth rate which directly correlates to your future valuation – which is a pretty important metric for investors.

Chris Vargas

Helsinki, Nov 2nd, 2012

Networking: Create your own Coupa

I stepped into the room and did a quick scan.  It was absolutely packed.

To the left, several Facebook engineers were huddled in deep discussion.  To the right, a group of coders hacking away intently on laptops.  Deeper in the noisy room I spotted an ex-colleague from Cisco, chatting with a well-known VC.  I had heard earlier that he was considering leaving Cisco and this was probably one of many meetings he was having on his way to a new startup.

I edged my way carefully through the crowded room to my friend’s table.

This place is jamming today,” he said.  I ran into two guys from my last startup and they have an interesting idea in the security space.   We should stop by and say ‘hi’ on the way out”.

Was this a tech conference?  Demo-day event?  Startup accelerator?  It could have been any of those places, but this time I was at Coupa café in Palo Alto.

Coupa café represents the heart and soul of Silicon Valley.  More value has been created at Coupa – and other places like it – than can possibly be imagined.  Deals and term sheets have been done, serial interviews completed over multiple cups of coffee, introductions to friends and friends-of-friends, a constant stream of ‘hello’, exchange of contacts, and catching-up on new directions.  Coupa makes the world feel like two degrees of separation.

Coffee shops are great places for networking – and constant networking is the lifeblood of Silicon Valley.  It is a distinct attribute that stands it apart from the rest of the world.

Not every business meeting needs to be held in a cool coffee spot, but a healthy amount is important.  This can be an odd concept, particularly among my non-Silicon Valley colleagues.  I often get a response like:  “Why would you want to meet at a noisy, crowded coffee shop where we will probably be interrupted, when we can talk in the quiet of my meeting room?  What’s the point?

Ah.  But that is point: to meet in these noisy, crowded, energetic places, complete with the occasional interruption.  Coffee shops are about spontaneity, randomness and serendipity; places where unexpected ideas, insights and innovation run wild.  I’ll wager some of our most valuable, life-changing events began with such random encounters.  Networking (like crazy) opens oneself to new encounters and new possibilities.

Networking is sitting next to a stranger at your child’s soccer game, starting up a friendly conversation, being introduced to his/her friend-of-a-friend’s startup – and investing in it (I’ve done this – twice).  Networking is reaching out to an old colleague and inviting them for coffee for no other reason than to see what you’re both working on.   Networking inspires equally familiar and completely new ideas.

Networking is also about opening up and sharing.  Good ideas shared and with smart people quickly turn into great ones.  However this does require letting go of the belief that a great idea is some type of competitive advantage.  Not true.  The real competitive advantage is the ability to execute that idea, to build and motivate a team around it, to develop customer traction and to create a profitable, scalable business.

Coupa café happens to be one of my favorite networking places.  However Silicon Valley has many, many other places like it: unique, packed, noisy, interesting places where smart, innovative, passionate people meet.  Where ideas and visions are explored; where success and failure are shared openly.

Back to the meeting that morning…  As we were getting ready to leave, someone was settling into a coveted spot at the table next to us.   He glanced our way and suddenly said, “Hi Chris, long time no see!”.  He was a blogger at a very well known internet site; one of the ‘super-connectors’ with unusually high leverage in the online world.

I chatted with him briefly and then (most importantly) introduced my friend, who was working on his next startup (note to entrepreneurs:  my friend was about to meet someone who could bring thousands of eyeballs to his company’s home page, with one stroke of the keyboard – from a random meeting at a coffee shop).

Nice to meet you” the super-connector said.  “I’m curious to hear about your new idea.  Got a minute…?”.

I smiled as I left the café, leaving the two of them to talk.  Serendipity.

In closing, whether you are an entrepreneur in Buenos Aires, Beijing or Barcelona, can you name the places where everyone meets?  Do you know where your local startup ‘world’ gathers and chats over a coffee, tea, lunch or dinner?  Where ideas are shared, connections made and teams created?

If you don’t have these, go out and start one.  Pick a great spot.  Make sure the coffee/tea/food is awesome and the place has a special feeling.  Start to have as many meetings as possible there.  Let word start to travel that this is the place to meet, network and connect.  Let chance and serendipity take over.

Create your own Coupa.

Chris Vargas

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Steve Blank

Entrepreneurship and Innovation

Silicon Valley is a state of mind...