What VCs want to know (and why)


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Some insight into what information VCs are looking for from early stage companies, and why startups themselves should be gathering and focusing on this self-same information

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  • This is why User Growth and # of Users are Bullshit Numbers
  • This is why User Growth and # of Users are Bullshit Numbers
  • This is why User Growth and # of Users are Bullshit Numbers
  • What VCs want to know (and why)

    1. 1. What I would want to know if I were you How to pitch VCs, why investors look for what they look for and what to do about it. Ben Wirz, Director Business Consulting, Knight Foundation Twitter: @bthewirz
    2. 2. About Ben• Russia/Journalism/Investment Banking• VC/Private Equity (11 Years) – Mgmt @ 2 start-up companies exited at 15x and 2x (Energy, Manufacturing) – Invested in 15+ companies• At Knight Foundation since 2010 — Evaluate/consult startups & other grantees — Identify opportunities for Knight Enterprise Fund — Work with 10-20 startups at any given time. 2
    3. 3. About Knight Foundation"Thus we seek to bestir the people into an awareness of their owncondition, provide inspiration for their thoughts and rouse themto pursue their true interests.“ -John Knight, 1969The John S. and James L. Knight Foundation is the legacy of afamily who created the largest newspaper chain in the US. – Journalism & Media Innovation: Since 2007, Knight has invested $100M+ in new technologies & techniques, including 200+ community news & information experiments – Engaged Communities: Knight looks to develop in people a strong sense of belonging, timely access to information, the ability to understand information and skills to take action. Strong ties in 26 US cities. – Fostering The Arts: Knight seeks to weave the arts into the fabric of the eight Knight resident communities (Akron, Charlotte, Detroit, Macon, Miami, Philadelphia, St. Paul and San Jose/Silicon Valley) 3
    4. 4. About Knight Enterprise Fund• Early stage investments Information & Engagement Platforms: in mission-aligned media Dramatically improving users’ engagement with information and their communities. innovation companies Marketing: Providing innovative ways to build audience and brand.• Not lead, co-invest & help fill out rounds Distribution: Offering cross-platform content delivery systems.• $100-300k typical investment Design: Developing smart UX/UI that augments engagement.• Value added investor Social Media: -26 communities Providing technology that lets content creators harness social -23 universities media. -Hundreds of media Media Operations: relationships Creating tools that significantly simplify or lower costs for operations. -Large network & strong brand Sustainability: Developing improved/scalable media revenue models. 4
    6. 6. Investors Focus On 3 Things:1. Problem/ Opportunity2. Team3. Product/ Solution
    7. 7. What Is The Problem You Are Solving?Be sure to include:• How big is it?• How painful is it?• How much is solving it worth?• How do you know it’s a real problem?(Hint: This information should be coming from potential or actual customers)
    8. 8. How Will You Solve The Problem?Explain Your Value Hypothesis: Explain Your Growth Hypothesis:How the product or service will How new customers will discoverdeliver value to customers once your product or servicethey are using it. Solve This First!Sample Hypotheses: Sample Hypotheses:+ Lower consumer cost/time + People will tell their friends (viral)+ Better experience (increase willingness to pay) + We will advertise (paid)+ Improve supply chain for customers (B2B) + We will market directly to enterprise customers+ Increase volume for customers (B2B, B2C) + We will employ partners to distribute product. Source: Value, Growth Hypothesis concepts come from Eric Ries, The Lean Startup
    9. 9. Why Do You Think You Can Solve It?Pre-Minimum Viable Product: After Minimum Viable Product:• Do customers recognize that Traction vs. $/Spent in terms of: they have the problem you are • Engagement (Value) trying to solve? (market) • Conversion/Activation (Value)• If there was a solution would • Retention (Value) they buy it? (market) • Churn (Value)• Would they buy it from you? • User Growth (Growth) (Team) • Marketing Effectiveness• Can you build the solution you (Growth) are proposing? (Team) • Payment (Value)• Are you capable of iterating? • Customer Lifetime Value (Value) (Team) • Cost of User Acquisition• Will you be able to market the (Growth) solution? (Team)
    10. 10. What do you do if VC says no?Ask them whether its because: – Wrong Problem? • One they are not interested in solving • One they do not believe exists – Wrong Approach? • Do not believe in value/growth hypothesis – Don’t believe you can solve it? • Wrong team • Not enough traction
    12. 12. Imagine you are a VC From Experience You Know: • Business plans are wrong, all startups are built on untested flawed assumptions (risks). • 70-90% of startups fail • Key risk is scaling too quickly • i.e. spending money based on assumptions instead of knowledgeConclusion (as a VC):Best way to analyze a startup (as a VC) is to:(1) Determine what has been proven, and what is still being assumed(2) Determine if team is capable of learning from and improving on inevitable mistakes.(3) Invest when reward for testing remaining assumptions outweighs risks.Conclusion (as a Startup):• Think about productivity not in terms of how much stuff you are building, but how much stuff you are learning, make sure you are learning as quickly as possible.
    13. 13. In other words, what do you do when: Most startups say they are here… …but are actually here 1. Discovery 2. Validation 3. Efficiency 4. Scale (avg 5-7 months) (avg 3-5 months) (avg 5-6 months) (avg 7-9 months) Riskiest time to invest Best time to invest Answer: Move up the curve with minimal amount of $
    14. 14. Discovery Phase (T+ 5-7 months)Purpose: Key VC Considerations:Validate whether startup is solving a 1. Teammeaningful problem and whether 2. Problemanybody would hypothetically beinterested in their solution Key Graduation Milestone: -Customer Validation of ProblemEvents: -Complete Minimum Viable Product• Founding team formed• Many customer interviews conducted Key Stats (Avg):• Minimum viable product # of employees: 1• Team joins accelerator # of $ raised: $200k• Friends and family round Monthly User Growth: 6%• Mentors & advisors Source: Startup Genome Project
    15. 15. Think of yourself as Plato1. Accept that you don’t know what customer wants.2. Set out explicitly to figure it out.3. When you get significant agreement on problem, build MVP.4. Stay lean.A startup is anorganization formed tosearch for a repeatableand scalable businessmodel.-Steve Blank. 15
    16. 16. Expect to Solve Challenges through Testing & Iteration (like Aristotle) Today Launch Current Funding Horizon Alpha 1st Iteration 2nd Iteration etc Current Funding Horizon 16
    17. 17. What is Minimum Viable Product (MVP)?MVP = F(Customer, Problem, Time or $$$)• Primarily, MVP is a way to test your value hypothesis• Focus on CUSTOMER – Qualitative Discovery, Quantitative Validation• Get to know habits, problems, desires (FUN MATTERS) – what causes pain? what causes pleasure?• Define 1-5 TESTABLE Conversion Metrics of Value – Attention/Usage (session time, clicks) – Customer Data (email, connect, profile) - Revenue (direct or indirect) - Retention (visits over time, cohort behavior) - Referral (users evangelize to other users)• Note: Paid Solutions drive FOCUS (& pay rent) SOURCE: DAVE MCCLURE, 500 Startups, Metrics4Pirates Presentation, June 2011
    18. 18. Lean Startup Canvas = System to Chronicle Learning Also Check Out: Lean Launch Lab
    19. 19. Validation Phase (T+ 8-12 months)Purpose: Key VC Considerations:Get early validation that people are 1. Teaminterested in product through 2. Solutionexchange of $ or attention. 3. ProblemEvents: Key Milestone:• Core features refined -Product market fit• Initial user growth• Metrics & analytics Key Stats (Avg at end of Phase): implementation # of employees: 4• Seed funding # of $ raised: $800k• 1st key hires Monthly User Growth: 21%• 1st paying customers• Product/Market Fit Source: Startup Genome Project
    20. 20. To test MVP, First Make Assumptions ExplicitRevenue Sources %Online Donations 10% How many monthly uniques/page views will you haveWealthy Individuals 30 What % of readers will donate?Advertisement 25 What % of registered readers will donate? How many registered users will you need?Foundations 30 Is this realistic? What % of target audience does thisEvents 5% imply? What growth rate will that require in registeredTOTAL 100% users What % of non registered readers will donate How many non registered readers will you need What growth rate will that require What will average donation size be Registered vs. Unregistered Monthly/Annual/One-time 20
    21. 21. Boil down assumptions to 5-7 key Metrics that you can measureSeven metrics that matter:1. Acquisition: (rate of gaining new users)2. Engagement: (how deeply are you engaging users)3. Virality: (new customers coming from existing customers)4. Monetization: (% of total users participating in the business)5. Churn: (loss of existing users)6. Lifetime customer value (projected monetization returns by class of customers)7. Program Productive (Yield on promotional activities, both paid and viral) Source: Escape Velocity, Geoffrey Moore (2011)
    22. 22. Look for Product/Market FitPMF = F(Customer, Solution, Alternatives*)• Product / Market Fit occurs when value hypothesis is validated: – Customers like your stuff better than other options – Not static, Not optimal – just Local Max 4 F(customers, solution, time) – make sure you’re moving in optimal direction 2 local max• Q: what competitive solutions are available? – … that your customers know about? – how are you diff/same? – in ways that people care about? (will pay for)• KILL a FEATURE regularly (or rotate 1% tests) – Q: what is MOST $ cust pay 4 LEAST func MVP relative 2 BEST alt?• NICHE 2 WIN: RE-define cust + DIFFerentiated features SOURCE: DAVE MCCLURE, 500 Startups, Metrics4Pirates Presentation, June 2011
    23. 23. Efficiency Phase (T+ 13-18 months)Purpose: Refine business model Key VC Considerations:and improve efficiency of 1. Solutioncustomer acquisition process to 2. Teamavoid scaling with a leaky 3. Problem (for Scale)bucket. Key Milestone:Events: -Conversion Funnel Optimization• Value proposition refined -Growth Theory Validated• UX Overhauled Key Stats (Avg at end of Phase):• Conversion Funnel Optimized # of employees: 4• Viral growth achieved # of $ raised: $900k• Repeatable sales process &/or Monthly User Growth: 29% customer acquisition channel Source: Startup Genome Project
    24. 24. Develop a marketing strategy based on what customers are doingQ: What channels? Which users? Why?A: High Volume (#), Low Cost ($), High Conv (%)• Design & Test Multiple Marketing Channels + Campaigns• Select & Focus on Best-Performing Channels & Themes• Optimize for conversion to target CTAs, not just site/landing page• Match/Drive channel cost to/below revenue potentialPurpose: Step on the gas! Drive growth aggressively.• Low-Hanging Fruit: Events: – Blogs • Core features refined • Initial user growth – SEO/SEM • Metrics & analytics – Landing Pages implementation • Seed funding – Automated Emails • 1st key hires • 1st paying customers • Product/Market Fit SOURCE: DAVE MCCLURE, 500 Startups, Metrics4Pirates Presentation, June 2011
    25. 25. Conversion Funnel vs. Cohort Analysis
    26. 26. Scale Phase (T +20-27 months)Purpose: Step on the gas! Drive Key VC Considerations:growth aggressively. 1. Team 2. SolutionEvents: Key Milestone:• Large A Round -VC Financing• Massive Customer Acquisition -Real Revenue (Breakeven?)• Back End Scalability Improvements Key Stats (Avg during Phase):• 1st Executive Hires # of employees: 17• Process Implementation # of $ raised: $3M• Establish Departments Monthly User Growth: 43% Source: Startup Genome Project
    27. 27. Outcomes (from Best to Worst) 1.Success 2.Failure (allows for better resource allocation) 3.??? Not Sure Be sure you know what success & failure look like! This is more difficult in a nonprofit context. 27