An Interview with James Cham, Partner, Bloomberg Beta


James Cham is a venture capital investor with Bloomberg Beta, a firm focused on investing in the future of work. James invests in companies working on applying machine intelligence to businesses and society. Prior to Bloomberg Beta, James was a Principal at Trinity Ventures and a VP at Bessemer Venture Partners, where he focused on consumer services, enterprise software, digital media; and served on the boards of CrowdFlower, Open Candy, LifeLock, ReputationDefender, Sonic Mule, and BillShrink. He was previously a management consultant at The Boston Consulting Group and a software developer. James received an MBA from MIT's Sloan School of Management and Computer Science degree from Harvard.

How did you get into the world of Venture Capital?

After the startup that I was a part of got acquired, I went to business school. A good friend of mine introduced me to a firm called Bessemer, where I got my introduction to venture capital and how I ended up investing in startups.

And before Venture Capital you were a software developer?

That's right, I was a software developer in the late 90s to early 2000s. I was part of that transition from client-server over to web-based, enterprise applications, and I wrote a bunch of mediocre code and made a bunch of bad design decisions that other people suffered for as a result. So I’ve been through enough cycles to least understand what that feels like from a potential customer perspective.

Why did you invest in LaunchDarkly?

Let me take a step back. When we raised money from Bloomberg to start the fund nearly five years ago, one of the core claims was that we are living in a world where everyone's a knowledge worker. In that world, we should look at the best knowledge workers around. We should copy their techniques to find ways for them to scale what they're doing. And of course, the best knowledge workers in the world are software developers. This is in part because some of the best software developers are a mix of lazy and smart -- they spend all their time avoiding working on applications and instead work on frameworks and systems infrastructure. So broadly, that is what we’re excited about.

LaunchDarkly is exciting for two core reasons: One, there was an immediate sense of recognition of a problem. When I first heard Edith pitch the idea, I thought “Oh my goodness! I wish this existed when I was being yelled at as a software developer or when I was managing projects.” There's a sense that this should exist and this is the right way to do something. I think most software developers do this. You build your own bad bug-tracking system or slightly lame issues-tracking system. And I had done something like a features flag product for some other project, but I didn't call it that. There was a sense that Edith understood this and saw this more clearly than I did. That’s one excitement.

And then there's the other reality which is the excitement of seeing a leader like we did. There's a point when you meet her and say, “Oh, she's not just someone who has built something interesting, but she’s someone you can see leading something important.” That’s another important part of what made it exciting for me. As I've gotten to know her better, that’s only been validated more and more.

You met LaunchDarkly through Alchemist. What are your thoughts of Alchemist in general?

The thing that is most helpful about Alchemist is that it’s more systems driven. The people around it are quite credible and thoughtful. You look at the set of advisors: These are people who aren’t really famous and lightly involved, but rather accomplished and very deeply involved. From my perspective, that makes the process of diligence and validating people much easier.

There’s always a sense about Alchemist that you’re being as positive as possible about the opportunity, but at the same time you don’t lie. That's an important thing for an investor and really helpful.

What is the approximate size of your fund? How does that compare to other funds in a similar stage?

As the markets are fragmented, even in the earlier stage, judging how we compare to other funds does become more complicated. But the core physics of our first fund was $75M, and the second fund is also $75M. Our first check sizes range between $100K to $1M, and we participate anywhere from friends and family rounds to right before the Series A.

Does your fund have a specific vision or focus? I know you've touched on the future of work prior, but is there more to that?

We talk about the future of work, in part, because historians of science would say that it takes two generations of managers for any new technology to really make an impact on the economy. At the start of our fund, we were twenty years into the Web -- networked computers, which is another way to think about it. We were convinced that it is only now we’ll see massive changes in the way people work, because now you have a bunch of people creating businesses that are suited for the Web.

Within that vision, we have a focus both on productivity for knowledge workers -- we see a lot of opportunities to integrate and learn from developers -- and the way software ends up changing the way that people do business. New tools will be required to support this new kind of business, which include developer tools up to enterprise software.

We also believe that machine learning, model building, and AI in general are different than normal software development. I think they have profound implications that we haven’t understood yet, not just on all the cutting edge research we’ve done, but especially around the way that people make good software and machine learning models. Machine learning model building is different than software development. The economic characteristics are different, meaning machine learning will give rise to new business models. So somewhere out there, there’s going to be a person that is the Bill Gates or Marc Benioff of machine learning. They are going to do a mix of marketing, technical, and product insights and come up with a different way of providing machine learning or AI-driven businesses in a different light. They are going to charge in a different way or sell it in a different way. That’s the innovation or change in the way that people do business that we’re most excited about, and where we spend a lot of time.

How does your fund differentiate itself from other funds?

On the one hand, the money is a commodity. The money is the same, and so the way you differentiate is you bundle different services along with it. Some of that is the personality of the partners and the way that they relate to other people. A part of that is also a set of things that we focus on. I think, we think through more than other firms ways that founders can make a dent in the universe through the way they talk about themselves. On that side, we’ve thought a lot out. And we work with our companies a lot around that.

So much of it depends on the specific relationship that each partner has with the founder that that investor has invested in, especially at the seed stage. There aren’t magic formulas.

How do you individually differentiate yourself from other individual VC’s?

The right way to compete along those lines is not to compete. Instead, I’m most interested in angles that people aren’t thinking about yet. And I’m most interested in thinking through angles that are poorly understood.

So if someone has just another generic SaaS company that’s growing at a certain percentage, then I'm probably not the right person for them. An old friend of mind would say that there’s two types of VCs. There are VCs that if they weren’t VCs, they’d be bankers, and others who are VCs because they spent too much time pitching. I’m definitely part of the second camp. There are a whole set of ideas that should be enabled and would be if someone stuck their neck out and said they believed this founder could create something special and make the world better. And that’s what I try to do.

​What makes an investment compelling for you? Is there something in particular that makes an investment more compelling than not?

There are all the things that people talk about: traction, the team’s experience, potential, etc. I think those things are all really important, but the thing that might be under appreciated is that core insight. Sometimes the founders don't understand what the core insight is. There is nothing quite as exciting as sitting with a founder and discovering together what actually makes them special. And oftentimes that core insight can be communicated in a paragraph or it could take a lifetime to get there. For me, that’s what I'm looking for that. It’s going to be in areas where I have enough preconceived notions that someone could surprise me.

What is the number one red flag for you that would make you pass on an investment?

The moment I feel like I can’t trust someone is probably the number one reason why. When it’s close or we thought we should have invested, that tends to be the number one surprising thing about most folks that we pass on. Investing in a company is not something you take lightly. We take it very seriously and it’s a relationship we take very seriously as well.

What separates the great founders who get an investment from you vs. the good founders who don't quite make the cut?

There’s a way in which the best founders help you believe. Whether it’s helping the investors believe or first customers or the first employee or the co-founders. And that way of getting someone to believe, it comes in all sorts of ways. It’s not generic. It comes in many sizes and forms, but that ability to impose your will on the universe. It only works if you can convince other people.

Would you be more likely to fund a very experienced team with a mediocre idea or a team of novices with an amazing idea?

Nuance matters a lot here. I think that there are plenty of times when the very smart, experienced team can take a mediocre, initial idea and because they are so customer-oriented or technically visionary that they end up building something better, smarter, or more interesting. However, generically, I hunt for people who have extraordinary insight and how they get there. The insights do not have to manifest themselves with the first product, but they manifest themselves somehow that makes them extraordinary.

Is there any piece of advice you would give founders who are fundraising that you think does not get shared enough?

I think founders forget how much power they have in a situation. There are cycles that founders get in where they end up feeling like this is just another boring sales call. But what the founders are doing is they're sharing their most precious things. They're sharing things that they probably care more about than almost anything else in the universe. When they pitch, they should treat it that way. That investors are lucky to get a view into this. The moment the founder forgets that, humans can smell it. You have to continue to be resilient and continue to believe because investors, although we do it through a financial instrument, at the core, we’re declaring we have faith in someone and we have enough faith that we’re putting our money and our goodwill behind it.

If you think about Edith and the way that they were together and the way that they communicated and seemed to take what they do seriously, even when things are difficult, that’s the sort of thing that an investor is looking for.

What areas are you excited about now and in the future?​

I’m excited for when things that we call AI-related start being machine learning-related and get boring. When everyone understands how to engineer a bunch of problems, things get boring, and that's when you end up with a lot of product innovation. I’m very excited about that!

Seed Fundraising - How to get “Reservations” from Angel Investors


At the beginning of your seed fundraising process, you may have to wait several weeks for the first “yeses” from any investor. During this time, if you’re not getting any commitments your round can appear stagnant. Reservations from Angel investors can help solve this problem; as your round’s availability decreases it will put pressure on other investors to say yes.

Here’s how to secure the reservations:

Ask for Money

Most Angel investors turn down 90% of the meetings founders request, so if you get a meeting, you must directly ask if the investor is interested in investing.

Steps:

1. Wait until 10 minutes before the end of the meeting, then ask if they have any questions. For example:

“That’s a quick overview of AcmeCorp - do you have any questions?”

2. When you’ve completed the questions and/or when there’s 5 minutes left, ask if they want to talk more about investing. For example:

“Does AcmeCorp fit within your investment thesis?”

“Is this investment something you might like to be a part of?”

“Would you be interested in investing in our current round?”

Ask Usual Check Size

If the investor expresses interest, the next step is to find out their usual check size. This will be an integral part of the reservation later.

Steps:

1. After the investor expresses interest, ask about their investment process, as this will give you an idea of the time they take to make a decision, as well as their usual check size. For example:

“What’s your usual process for investments like this?”

2. If they don’t reveal their check size, you’ll have to ask directly. For example:

“What’s your usual check size for these investments?”

“What size of investment are you considering here?”

“Do you have a fixed amount you usually invest at this stage?”

Secure the Reservation

Once you know the investor’s potential check size and when they will decide (roughly), it’s time to secure the reservation.

Steps:

1. If the investor’s check size, decision timeline, and other requirements fit with your plan, tell them you’d be open to having them involved. For example: “I’ve enjoyed our conversation and your approach seems to fit with our current raise”

2. Next, acknowledge they will need time (and perhaps further materials) to decide and ask for the reservation. This step is critical. For example:

“Should I hold that space for you while you’re deciding?”

“I will hold your spot, to give you some time to decide.”

“I usually hold space for investors while they’re in diligence, I’ll do the same for you.”

Once you’ve promised to reserve space for an investor, it would be wrong to give that space to another investor without fair warning. Thus, your round’s availability is reduced and all other potential investors start to feel the pinch of FOMO (fear of missing out). When new investors now ask for your fundraising status, you can respond with spoken for availability for example:

“We’re raising $500k and have 50% spoken for”

Practice these phrases before the meeting, and the early part of your seed fundraising will be much easier.

Thanks to Kaego Rust for her help on this article.

About Ash Rust

Ash Rust is a Partner at Alchemist and the Managing Partner of Sterling Road. You can find more of his writing about Seed Fundraising on Medium.

About the Alchemist Accelerator
Alchemist is a venture-backed initiative focused on accelerating the development of seed-stage ventures that monetize from enterprises (not consumers). The accelerator’s primary screening criteria is on teams, with primacy placed on having distinctive technical co-founders. We give companies around $36K, and run them through a structured 6-month program heavily focused on sales, customer development, and fundraising. Our backers include many of the top corporate and VC funds in the Valley—including Khosla Ventures, DFJ, Cisco, and Salesforce, among others. CB Insights has rated Alchemist the top program based on median funding rates of its grads (YC was #2), and Alchemist is perennially in the top of various Accelerator rankings. The accelerator seeds around 75 enterprise-monetizing ventures / year. Learn more about applying today.

An Interview with Toni Schneider, Founding Venture Partner, True Ventures

A Swiss native who studied computer science at Santa Barbara City College and Stanford University, Toni Schneider started his career as a software engineer working on NASA virtual reality simulators. He went on to become a startup founder and CEO, and an executive at Yahoo!, before joining the True team as a founding Venture Partner. Toni is well known for his role as CEO of Automattic, the company behind WordPress.com. He helped WordPress become a globally known brand that powers over 30% of all sites on the internet. For his work, Toni was recognized at the Crunchies as CEO of the year.

When he is not running one company or advising another, you can find Toni in his VW van crossing the US with his family, coaching San Francisco Little League baseball, or tinkering with old cars.

How did you get into the world of venture capital?

I got into it first as an entrepreneur and founder, raising money from VCs. I did that for three startups. Then I switched to VC while also still being CEO of a startup. True Ventures is the only VC firm I’ve ever been with. One of True’s co-founders, Phil Black, was a close friend of mine. He was thinking about starting a new VC firm and asked me if I would be interested in being part of it. So when he started True together with Jon Callaghan, I said yes and dove in to learn from them how to raise money from limited partners and make venture investments as we pulled together True’s first fund in 2006.

That’s so interesting to be on both sides. You began on the entrepreneurial side pitching to VCs and now you are a VC. How do you think that transition helped prepare you? Does it help you identify what you are looking for in a company that you want to fund? What a red flag would be, that sort of thing?

It's probably both good and bad. The good part is that I was able to bring a founder’s perspective to how we structured True. Our goal was to be very founder friendly. I could share honestly what it was like to sit on the other side of the table from a VC. That helped in creating a firm where we really think of founders and entrepreneurs as our customers and where we do everything we can to provide a good service to them.

Another advantage is that when I look at startup teams, I have a good hands on feeling for their abilities because I’ve run several startups and hired and managed many startup teams.

The disadvantage is that it comes with biases. I had a certain experience as an entrepreneur and certain things that worked for me and certain things that failed. That very much shaped my thinking around startups. While it gives me a good point of view, I also have a harder time going outside of my own experience and being open to different approaches to starting businesses.

What for you personally makes a startup look like a good idea? What is something compelling to you as a startup you would fund?

For me it always starts with the team. I look for strong founder qualities, which in my mind are the ability to be very charismatic, and to have a really exciting, big, long term vision combined with flexibility when it comes to everyday execution that's going to be very zig-zaggy for a startup. There will be new challenges every day. So you look for somebody who's comfortable asking for help and being adaptable near term, but has an audacious long term vision that they don't waver from. The charisma and communication skills will help attract a lot of people to their startup.

Finally, someone who has a lot of depth in their area of expertise. This is something I always look for. As I dig into an idea, do I feel, “Wow, this person is three steps ahead of me and has really thought it through and knows everything about the space they’re about to get into”? Any good idea is going to have more than one team chasing after it, and I want to bet on the team that has a lot of depth.

There's a lot of emphasis for future founders on idea generation, but it honestly sounds like the idea comes second to more of the team, from what I just heard you say...

First step is to be in the right place at the right time for your skillset. There are other factors that play into it, but without the right people, none of it is going to work.

The second step is the product and the idea. The product needs to be unique and truly compelling and have a story that can be articulated in a simple way. What does the product do? Who is it for? What makes it unique? It's surprising how often founders can’t answer those three basic questions in a straightforward manner. I want to invest in a product that gets me personally excited, that I believe will have a positive impact on the world, and that will make customers say, “Wow, I want that, that’s different. That’s a totally new approach.”

For the third step, like everybody else in the VC business, I look at the market. Is this something that if it works out - there can be a ton of risk associated with, frankly we want a ton of risk - but if it works out, could it be a very big business? Is it a big market that seems ready for a massive change? That has to be in place as well, otherwise you can have an amazing team with an amazing product, but without big growth and revenue potential it won’t be a VC scale opportunity. That's not what we’re in business for.

What was the number one red flag that would caution you away from investing in a team or a startup?

On the people side, it's teams that don't seem to have the right chemistry or the right understanding of what their roles are going to be, or teams that don't have a track record together. That for me is maybe not a red flag, but definitely a yellow flag.

The biggest red flag usually comes up during initial due diligence. It happens quite a bit that I'll think “Wow, this is a really good idea, I'm going to dig in,” and when I do, I realize that there are already a bunch of teams doing the same thing and the idea quickly doesn't seem so original. It feels like more of a rehash or tweak of another idea. That usually throws cold water on a project for me. That’s the biggest red flag, that an idea isn’t that unique.

It's only one percent of startups go on to become really big. You really do have to filter out ones that you don't think are capable or have a clever idea.

Yes, and even when everything fits, even when you check all the boxes that I just described, it's still hard. Because nothing ever plays out exactly the way we plan and hope. Another filter we use at True is that we focus on one type of deal. We do two to three million dollar seed rounds. That’s it. If it’s something that is a really good idea with a good team, but two to three million dollars is not enough to get it off the ground or it’s already past the seed stage, we won't do it even though it might be a great opportunity. We are really trying to stay focused on one stage of investing, do it well, and have a whole portfolio of companies that go through the same stage so they can all learn from and support each other.

Seems like True has a specific focus on seed round innovative companies, what else do you look for?

We’re not thesis investors. We don’t have certain sector or certain type of business that we look for. We’re not a “SaaS fund” or a “Crypto fund”. We invest behind great founders and then double down when things are working. For example, we were early investors in Fitbit, a couple of years before hardware startups and connected devices became a trend. We weren't looking for that trend, we just liked that team and particular idea, and when we saw it working for them, we followed on with a bunch more hardware investments like Ring and Peloton. We follow wherever our founders take us. Recently, we've invested in robots, satellites, and biotech, which are all new areas for us. We try to be very open-minded about what the subject matter might be.

You really do try to treat founders and startups that work with you very well. Is that how your fund differentiates from others? There are certainly quite a lot of VC funds around here.

One thing that makes us different is that we invest earlier than the majority of VCs. We're really close to an angel stage, but we're a full service VC firm. We are there in the very beginning, often when it’s just two or three people with an idea, and we have our founders’ backs all the way through. Most VC firms want to see revenue traction and product-market fit before they even look at something.

The second thing we do that differentiates us is we are focused on the personal needs of a founding team, not just the business needs. We know what you will need as a founder, as a leader, to get really good at your job, to get through the ups and downs of doing a startup. If something goes wrong, we want to be your first phone call. We don't want to be the kind of investor where you feel like, “Oh God, something went wrong, how do I break this to my investors? I don't want to talk to them.” We hope to have a trusted relationship so that even when things don't go well, we're going to be there and help you through it.

Part of how we do that is to connect all the founders within our portfolio and they help each other improve. That's our founder network and platform. We have events and tools that facilitate direct, open, and honest collaboration. It’s optional, but most of our founders take advantage of this amazing peer network. I think it’s super valuable and quite unique among VC firms.

What made you to want to invest in Laura and her startup, Atipica? What made them stand out from the pack of other investments you were evaluating at the time?

Laura and Atipica really hit a lot of the boxes I mentioned earlier. She’s a very charismatic founder with a big vision, a great communicator with deep knowledge in the area of diversity, inclusion and hiring. She had spent several years working on the idea and product, talking to a lot of companies about their needs, so she had depth of expertise. We started working together a little bit over two years ago. It was still early days in diversity and inclusion tools and she was well ahead of many of the people we talked to. She had a small team, pre-revenue but she already had some pilot customers. So it was the right stage for us and we felt like our seed investment could help her build out her team, get the product launched, and get to the next stage.

The hiring and recruiting sector in particular was interesting to us at the time. We had just had a successful exit to LinkedIn with Connectifier, and I was and still am on the board of another investment we made in this space called Handshake. They’re in the college recruiting space and doing very well. So I was personally excited about hiring tools and got quickly interested in Laura’s vision to make the recruiting and hiring process become more fair and inclusive and help companies understand why they're having such a hard time building diverse workforces.

Is there any piece of advice that you would give founders who are up and coming next generation founders that you don't think get shared enough currently? Something that people are failing to focus on when they're thinking, “I want to become a founder”? Is there some aspect you see time and time again they forget and you would caution them to focus on?

Try and get as much perspective as possible. When I was an entrepreneur raising money, I felt that I knew and loved my team and my business, and I could pitch them all day long. But when I went into VC meetings, I was new at it and had never heard any other pitches. On the flip side, those investors had heard tons of them, yet I had no idea how I stacked up. I've definitely seen founders come through True who think they nailed it but they didn't. And I’ve seen founders completely hit it out of the park with us and were like, “Was that OK? I have no idea!”

My advice is to connect with other founders and see other pitches, or at least get some information on how high the bar is. I think that's how you get better. Don't try just work on your own idea, on your own pitch within your own bubble, but really try and see what else is going on out there, who's doing really well and connecting. How are they doing it? What's the subject matter?

A lot of what you're describing was actually the impetus behind why Alchemist got started. The founder, Ravi, felt the same thing, a lot of startups didn't really know how to compare and weren't really swapping notes and sharing. Alchemist has become like a community where you can share ideas, help each other out and that everyone is trying to get the best out of everyone else.

Exactly. The most worthwhile part of being a part of a program like that is learning from each other and getting perspective.

Then the last thing I'm really curious about is seeing how you get to see all the upcomings startups, tech products and services. What areas do you personally think are going to be the most exciting and you are most excited about in the upcoming near future?

I get that question a lot and actually I don’t know. Literally someone will walk through the door tomorrow with an incredibly exciting idea that we couldn't anticipate. All the super interesting things we have gotten really excited about are little bit out of left field. We're trying to be truly open to new people and ideas because our next great investment can come from anywhere.

About the Alchemist Accelerator

Alchemist is a venture-backed initiative focused on accelerating the development of seed-stage ventures that monetize from enterprises (not consumers). The accelerator’s primary screening criteria is on teams, with primacy placed on having distinctive technical co-founders. We give companies around $36K, and run them through a structured 6-month program heavily focused on sales, customer development, and fundraising. Our backers include many of the top corporate and VC funds in the Valley—including Khosla Ventures, DFJ, Cisco, and Salesforce, among others. CB Insights has rated Alchemist the top program based on median funding rates of its grads (YC was #2), and Alchemist is perennially in the top of various Accelerator rankings. The accelerator seeds around 75 enterprise-monetizing ventures / year. Learn more about applying today.

Checklist for Running Your First Board Meeting


A first board meeting is a big and life changing milestone. As founders, you survived weeks of due diligence, followed by a term sheet and then a wire of a few million dollars. Now it is time to be a CEO and experience and run your first board meeting with the investor or investors who sit on your board and blessed the deal.

It can be overwhelming. Here are a few coaching tips, based on my experience as a board member, to help first time CEOs be prepared and maximize the limited time you have with your board.

Checklist For Your First Board Meeting:

  • Get On Calendars: Executives’ calendars fill up months in advance. Remember that you are asking for 3 hours of a partner’s time, several times a year. In some cases, investors will have to fly in for the meeting. As a best practice, ask one of your board members’ administrative staff to own responsibility for scheduling the meetings.

  • Pick the Best Dates: The board meeting should take place after the quarter ends. This gives your finance and sales team enough time to close the quarter, giving the complete picture of sales data. Your cash runway is a key metric. Missing one deal could have a big impact. Having board meetings after the end of the quarter ensures you have the actual bookings number. (Note: most boards also have standing calls during the quarter.)

  • Share Decks: Email your board decks at least 72 hours in advance. This will help the board be prepared to ask meaningful questions and give feedback. Board members might also request that you pull additional information for the meeting. Emailing decks ahead of time gives you and your leadership team a few extra days to meet any such requests.

  • Use the Preferred Template: Ask the lead investor if they have a template that they would like you to follow. Chances are they sit on multiple boards and have a preference how they like to review the data. Once you have the template, share it with your leadership team. Have them fill out their section. For example, Sales, Finance, Product, Operations will each have their own slide or slides. Each section should start with a high-level overview of the insights and learnings of the quarter.

  • Prioritize Board Discussion: Always have two or three meaningful topics that you want to discuss with the board. Interact with the board as you prepare your slides. They are a sounding board for what you want to cover. Remember they have done this before and can only help when they know what problems you are trying to solve.

  • Leave Time for Governance: At the end of each board meeting, you will do the housekeeping: approve stock grants, minutes and other items that the board needs to vote on. Always have the most current cap table handy. That gives the board perspective on the impact on the employee option pool as they approve grants.

  • Hold a Dress Rehearsal: 24 hours before your board meeting, meet with your leadership team and do a dress rehearsal. It is important that everyone is on the same page. This might be the first board meeting for them as well.

  • Take a Breath: Congratulations on making it this far! Give yourself and your team the credit you deserve for the huge milestones of a Series A raise and first board meeting. There’s a vast amount of work ahead, but this is an achievement to celebrate.

About Darren Kaplan

Darren Kaplan is the co-founder and founding CEO of hiQ Labs (www.hiqlabs.com), a data science company, informed by public data sources, applied to human capital to make work better. Mr. Kaplan is an Alchemist Accelerator mentor, working with Augmented Reality, Cyber Security, and HR enterprise SaaS startups.

About the Alchemist Accelerator

Alchemist is a venture-backed initiative focused on accelerating the development of seed-stage ventures that monetize from enterprises (not consumers). The accelerator’s primary screening criteria is on teams, with primacy placed on having distinctive technical co-founders. We give companies around $36K, and run them through a structured 6-month program heavily focused on sales, customer development, and fundraising. Our backers include many of the top corporate and VC funds in the Valley—including Khosla Ventures, DFJ, Cisco, and Salesforce, among others. CB Insights has rated Alchemist the top program based on median funding rates of its grads (YC was #2), and Alchemist is perennially in the top of various Accelerator rankings. The accelerator seeds around 75 enterprise-monetizing ventures / year. Learn more about applying today.

Emotional Triggers and Investing

Directors like James Cameron, James L. Brooks, and Steven Spielberg are masters when it comes to understanding human emotion. In just a few short scenes, they can leave a whole audience in tears. They aren’t doing anything magical. They’re just appealing to the same human emotions we all have. As an Alchemist Accelerator Partner, I teach founders how to apply the same principles to fundraising. Get an investor emotionally excited and investment comes naturally. Try to beat them to death with numbers and figures, and you’ll just spin your wheels. Investors see thousands of pitches a year and fund a handful. If you want to win, you have to get them excited and snap them out of their default behavior of “no.”

Luckily for founders, investors are human too. So naturally, they have common emotional triggers that spark excitement, and ultimately, investment. In working with hundreds of founders, as well as raising $5.4million in seed funding for my own startup, I’ve identified eight emotional triggers nearly all investors respond to. By focusing on conveying these points to prospective investors, founders stand much better chances of raising capital and ultimately building great businesses.

The eight emotional triggers are:

  • Big Market

  • Rapid Growth

  • Why Now?

  • Unfair Advantages

  • Founder Strength

  • Founder Bond

  • FOMO

  • Confidence

Big Market

Investors live and die by their returns. The only way to get big returns is to invest in companies that have potential for big exits. For most investors, big market is a fairly binary measure: “Is the TAM (total addressable market) large enough to get me outsized returns on my investment?” they’ll be thinking. If the TAM is over $2B, you’ll get a check and if it’s less than $2B, they’ll likely have to pass—even if they really like you. So make sure you help your investors know exactly how big your market is by helping them do the math. If an investor is asking questions about how many customers are in your space or how big you think the market is, don't make them guess at the answers. Give them all the data they need to help them understand the TAM. This is especially important if there's a general perception your market may be too small.

Rapid Growth

The only thing that separates a startup from a small business is rapid growth. It’s literally the definition of a startup. The easiest way to demonstrate a rapidly growing company is to, of course, be growing rapidly, which typically means you’re adding users, customers, or revenue quickly. However, if you’re pre-revenue or pre-launch, growth projections can also help to convince an investor that your business is about to take off. If you've done the work in Excel to know you're adopting the best business model, now is the time to use it to convince someone else.

Why Now?

The why now question is really a two-part question of movement. Why has this business never been possible until now? What has changed now to make this business possible for the first time? After all, fresh ideas are nearly impossible so chances are others have come before you and failed. You need to explain what has changed that will make your vision succeed. Market movement creates opportunity. You see it. They see it, but only you know how your business can best seize the opportunity to create billions more for the benefit of both of your organizations.

Unfair Advantages

Investors recognize there are lots of smart people in the world, so becoming a successful company in a crowded marketplace requires more than just efficient execution. Describe precisely how you're creating a new earnings engine as well as any unfair advantages you may have. For example, if you have extreme domain knowledge around analyzing very large datasets or have worked in the industry you're targeting with your new product (e.g., healthcare), you should highlight that in your pitch.

Founder Strength

Building any successful company is hard. Building a multi-billion dollar company is nearly impossibly hard. When investors invest in your business, they can’t just believe in your idea. They have to believe in YOU. The best way to convince them is to show them a history of exceptional achievements. For example, if you have a new security technology, are you already an inventor holding patents or do you have a CISSP? Name drop. Make connections to your market. Mention achievements and show off logos. Be sure to share all of your founding team strengths.

Founder Bond

Co-founder conflicts are among the top reasons startups fail. It’s not talked about every day on TechCrunch, but investors see it all the time in their portfolios. So when a potential investor asks, “How did you and your co-founder meet?” he or she actually doesn’t really care about your cute story of growing up together and your mutual admiration of Pokemon. What the investor really wants to know is if you and your co-founder are committed to each other enough to stick it out through the ups and the inevitable downs of startup life. Founders who have bonded because they've known each other awhile often have an edge because (presumably) their relationship has already weathered some turbulence.

Fear of Missing Out (FOMO)

In the public markets, investors pay big money for the privilege of investing in stocks at a future date, at a current known price. It’s called option trading and it’s a multi-billion dollar market in the U.S. alone. In the private market, investors get “free options” all day by telling founders simple things like “We’re still discussing things internally” or “We’re still working through diligence items.” As a founder, it’s your job to move these maybes to real answers. The best way to do this is by appealing to what we all fear, which is missing out on something that might be amazing.

Confidence  

Investors are looking for founders with confidence. After all, if you aren’t confident in your own business, why should the investor be confident in your ability to make it successful? One of my fundraising mentors, Michael Carter, used to remind me, “It’s your job to be confident.” That haunted me during my own fundraising process, but it also provided a healthy reminder that confidence isn’t an emotion. It’s something you can project through tone, body language, and deliberate actions—even if deep down inside you feel anything but confident.

Emotion stays with us, making the discovery of the right human connection a significant factor in an evolving investment strategy. Talk. Uncover. Discover. Emotional triggers have the power to accelerate your funding success.


About Michia Rohrssen

Michia Rohrssen

Michia Rohrssen is the CEO of Prodigy, the fastest growing auto startup. He is also a founder/blogger at B2BFounder.com, providing actionable insights from a founder in the trenches. Before Prodigy, he served as Head of Growth at VentureBeat and CEO of Smarter Solutions. Learn more at https://getprodigy.com.

About the Alchemist Accelerator

Alchemist is a venture-backed initiative focused on accelerating the development of seed-stage ventures that monetize from enterprises (not consumers). The accelerator’s primary screening criteria is on teams, with primacy placed on having distinctive technical co-founders. We give companies around $36K, and run them through a structured 6-month program heavily focused on sales, customer development, and fundraising. Our backers include many of the top corporate and VC funds in the Valley—including Khosla Ventures, DFJ, Cisco, and Salesforce, among others. CB Insights has rated Alchemist the top program based on median funding rates of its grads (YC was #2), and Alchemist is perennially in the top of various Accelerator rankings. The accelerator seeds around 75 enterprise-monetizing ventures / year. Learn more about applying today.

Funding Basics: Fundraising 101

If you’re unfamiliar with how venture capital funding works, it can seem akin to playing the lottery. Anyone can try, but only a few lucky entrepreneurs actually win. Fortunately, fundraising isn’t as random as a Powerball drawing and founders can improve their odds of success by engaging with right-size partners, recognizing what investors find intriguing, and understanding the technical aspects of term sheets.

How do I know?

I was a VC.

Establish a Strategy

As an Associate at Draper Fisher Jurvetson and now as Founder of the Alchemist Accelerator, I’ve met hundreds of people with good ideas and great demos, but far fewer with a strategic plan for fundraising. Founding teams can save time (and alleviate stress) by researching fund sizes and prioritizing meetings based on the outcome they expect. Founders and the venture capitalists they choose will need to make the economics work. Investors will need to pay back their funds. A rule of thumb is that one out of every 10 investments in a VC portfolio will drive outsized returns. And a typical fund has 30 investments. So 3 companies in a given VC fund portfolio will likely be responsible for the fund’s performance. Given this, most investors want to see a path to paying back at least ⅓ of their fund size with an individual investment.

Investors are also constrained by the number of investments they can make. Because they have to limit the number of board seats they take on, they often can only make 2 or 3 new investments per year. And each investment has to deploy enough capital for them to deploy the cash in the fund. For these reasons, investors at large funds (e.g. funds that are $300m or larger in size) will care much more about whether they have enough ownership in your company to create an exit to pay back their fund than the check size of your investment. In fact, if you are asking for too little money (e.g. less than $3m) it can be more difficult for that investor to justify the investment given the size of their fund and the limited number of new investments they can make each year.

Ideally, founders approach a mix of VCs during the fundraising process, recognizing that there will be more traction with those that are a good fit. Don’t get too excited about meetings because every firm will want to meet for fear of missing the next big thing—think Google! That’s why it’s important for startup teams to have a plan.

Choose to make scarcity of supply an asset. Optimize for a short, yet intense fundraising process. Establish a list of three dozen firms, then agree to pursue 12 active discussions at a time—segmenting top-tier / second-tier VC firms, angels / high-value investors, and corporates / strategic investors into separate thirds. This will enable the rapid replacement of non-responsive firms, and help ensure the arrival of term sheets at the same time.  

Share Your Story

VCs meet (and subsequently) invest in startups for a variety of reasons. The startup meets all of the criteria of previously proven successful companies in their portfolio; the startup is somehow connected to the VCs personal network that she trusts; or the firm likes to make contrarian bets. Whatever the reason, the dance between startup and VC always begins with a presentation.

During a seed or series A round, fundraising meetings focus on the idea and its potential. In series C and later rounds, VCs spend time evaluating the idea, the market, and results. How has the company executed to date?

Early round fundraising presentations are expected to be lean, including a brief overview of the team and the market potential. A dozen or fewer core slides is ideal, coupled with a large appendix of slides that goes deeper into specifics. An overview of capabilities and a product demo will also be expected. Sequoia Capital has a good template for creating solid fundraising presentations.

But wait... Before presenting, stop, summarize how and why you are there (don’t forget to mention explicit connections). The goal of this is to try to address from the top the two fundamental questions wrestles with: “Are you any good?” and “If you are so good, why are you talking to me?”. At the beginning -- from the top -- you want to signal strength (that you are in fact a company the investor should want to chase), and that you are talking to them because of some privileged access that investor has. For example, “Before I begin, let me just set some context. As you may know, we have been heads down with customers and will be beginning our official raise next quarter. Our attorney XXX spoke very highly of you and recommended we get your guidance in advance of that”.

You then want to unearth any biases upfront the investor may have before you go into your pitch. VCs often provide the best feedback before you speak. This time is also the best chance you have of understanding any bias or concerns VCs may have about differentiation, distribution, market factors, or some other issue you’re going to cover.

You can simply ask “Did you have a chance to review the information I sent over?” They may not have, but if they have, you can invite them to share what’s important to them upfront so you can cater your talk better to them.

At the end of the day, VCs want founders to like them and VCs want to like the founding team’s energy and passion. After all, funding is a long-term commitment (typically 3—7 years). Additionally, potential investors want to be sure the market opportunity is large enough and that a startup’s entry point is specific enough to ensure a big return.

About Ravi Belani

Ravi Belani is Fenwick & West Lecturer of Entrepreneurship at Stanford University, and Managing Director of the Alchemist Accelerator. Ravi formerly spent six years as part of the investment team at Draper Fisher Jurvetson's Menlo Park global headquarters, where he led investments and served on the boards as the first institutional investor in companies such as Justin.TV & Twitch (acquired by Amazon for $970m), Pubmatic, Vizu (acq’d by Nielsen), and Yield Software (acq'd by Autonomy). Ravi formerly worked in product management at two Kleiner Perkins enterprise startups, and as a consultant in McKinsey and Company's San Francisco office. Ravi is a Phi Beta Kappa and Tau Beta Pi graduate of Stanford University, holding a BS with Distinction and MS in Industrial Engineering. Ravi also holds an MBA from Harvard Business School.

About the Alchemist Accelerator

Alchemist is a venture-backed initiative focused on accelerating the development of seed-stage ventures that monetize from enterprises (not consumers). The accelerator’s primary screening criteria is on teams, with primacy placed on having distinctive technical co-founders. We give companies around $36K, and run them through a structured 6-month program heavily focused on sales, customer development, and fundraising. Our backers include many of the top corporate and VC funds in the Valley -- including Khosla Ventures, DFJ, Cisco, and Salesforce, among others. CB Insights has rated Alchemist the top program based on median funding rates of its grads (YC was #2), and Alchemist is perennially in the top of various Accelerator rankings. The accelerator seeds around 75 enterprise-monetizing ventures / year. Learn more about applying today.

This blog is the third in a financing series with topics designed to help entrepreneurs be better prepared for venture capital conversations.