All posts by Neil Thanedar

Neil Thanedar is the Founder & CEO of LabDoor, which is the trusted way for consumers to choose the best dietary supplements. Learn more about Neil at Google+.

The real value of AngelList

Too many entrepreneurs are using AngelList in the exact wrong way. They decide that they’re going to raise “$1 million” at a “$6 million valuation” on a “Convertible Note”, and then press “Publish” on their account. Then they sit and wait for their first investors to start throwing money at them.

AngelList is not yet a great tool for finding a lead investor (though this may change with their new Syndicates feature). I’ve found that at the beginning, startups have a much greater hit rate with investors in their existing network. This could be friends and family, investors in your startup accelerator, or even early customers. It’s rarely a stranger you met on the internet.

The biggest value of AngelList (besides their awesome talent tool) is the social proof that it can provide your startup once you close key advisors and investors. That green progress bar in the Fundraising section of each startup’s profile page is magical – the more it fills up, the more inbound demand you’ll see. But it can also work against you when it’s empty.

Fundraising feeds off momentum. In chemistry terms, you must overcome the activation energy in order to see the funding reaction occur. Momentum is the catalyst in this reaction. Never start from zero. Skip all the folks who are ‘waiting on a lead investor’ and go find the person willing to go out on a limb to support you. It may require giving the first folks into the round a “valuation discount.” But do whatever it takes to get your fundraising started before approaching the AngelList crowd.

Once you’re in the ‘Second Half’ of your fundraising game, that’s when AngelList really shines. Here are a few quick tips:

  1. Confirm investors and advisors as they commit:
    • If you have a strong verbal commitment, or better yet, signed paperwork, make sure they make it ‘AngelList Official’.
  2. Utilize ‘one-point’ connections to value-add investors
    • Find investors that commonly participate in funding rounds in your industry, or who often co-invest with your existing investors, and use the ‘Message’ tool on their profile to get in touch and introduce your startup. Make sure you have a shared connection that is willing to route your message through them.
  3. Heavily consider the ‘Invest Online’ feature.
    • This is another place where I strongly encourage you to seek legal counsel before proceeding. But I believe that there are few negatives to this feature. The system allows you to cash in on existing momentum, close smaller investors without dealing with paperwork or negotiation over terms, and most importantly, put money in the bank.

Dealing with rejection

It happened again. You walked into a VC partner meeting with a ton of confidence. Your first meeting went great, with the associate gushing over the potential of your startup. Then, you got an introduction to the partner specializing in your industry. Another slam-dunk. But today at the partner meeting, you took some hard shots. There were a couple questions you didn’t handle cleanly. The partner at the far end of the table had her arms crossed defiantly the whole pitch. And by the time you made the drive from Sand Hill Road back to your office, you already had that dreaded email in your inbox:

“Thanks for taking the time to present your company to XX Capital. While we were very impressed with your passion and knowledge of the industry…”

All of a sudden, you’re getting flashbacks to being 17, opening the mailbox, and pulling out that little, standard envelope with your favorite college’s emblem on the top left corner. You know that they can’t fit an entire enrollment packet into that one-page letter.

Even the very best entrepreneurs in the world get rejected over 50% of the time that they pitch an investor. When Mark Suster tells his fundraising story, he makes it very clear that 75% of investors turned him down. And this was when he was pitching two startups that ended up with very successful exits.

So how do you handle the constant pressure of rejection?

The first lesson is to never shy away from it. The only way to successfully run an investment round is to run startup funding as a sales funnel, identifying as many qualified leads as possible, then running through them with passion and intensity. If you get so afraid of rejection that you slow down your process at all, you’re finished. There’s no way to half-ass the funding process.

The second lesson is to just get used to it. Over the course of two startups, I’ve already run through close to 100 pitches. My rejections are definitely over 50%, and likely even higher than Suster’s 75% number. Prepare yourself at the beginning of the process for short-term failure, and know that they’re practically a requirement on the path of startup success.

The third lesson is to celebrate the wins. All those rejections become worth it when you finally get an investor to say yes. Really savor those wins. Drink a six-pack with your team. Accept the pats on the back from your friends. Don’t let anyone tell you that it’s not a big deal to raise money for a startup. Fundraising is hard work, and is often a vital part of growing a rapidly growing, scalable startup.

The fourth, and most important, lesson is to learn the ‘why’ of the rejection. Sometimes the investor doesn’t feel comfortable with the industry. Other times, they’ve been burned in this space before, and are hesitant to jump back in. There are times where investors are simply distracted by external causes, from an upcoming trip to a pending divorce. These are all things that you are not expected to control.

However, if the investor was confused by your pitch, missed the key value of your startup, or disliked the delivery of your presentation, there are lessons to be learned. I wince when I think back at some of my very first pitches. The slides were poorly organized, I stumbled through my words, and the business model was practically incomprehensible. It is no wonder so many investors turned me down in the early days. But after nearly every meeting, I opened up this laptop, and performed a brain dump of all the lessons I learned in that pitch. Where had I connected with the investor? Which parts piqued her interest? Why did I get the ‘confused puppy’ look during the monetization slide?

After every few pitches, I would tweak slides to make them clearer. Then, we would bring the team together and form a fake VC meeting, where everyone was allowed to interrupt me, grill me on specific details of my pitch, and generally force me to hit as many curveballs as possible. Afterwards, I still continued to face rejections, but now they were a little less common.

At the end of the day, that’s the lesson. Fundraising is hard. You’re asking someone to give you thousands or millions of dollars to spend on an extremely high-risk venture in an industry where most investors lose money. Treat fundraising season like you do the rest of your business, with extreme energy and passion, and you’ll survive the rash of rejections just long enough to put money in the bank.

“I’m raising ‘X’ at a ‘Y’ valuation”

X: How much should I raise?

How expensive are your experiments?

In any startup, there are huge risks in your future. Your job as a seed-stage company is to identify the biggest risks and tackle them first. Money doesn’t buy you a ticket around these risks. Instead, fundraising allows your team to build experiments that attempt to solve these challenges.

At LabDoor, the most expensive part of our early operations were literally experiments – analytical chemistry assays that we used to reverse-engineer dietary supplements and energy drinks. In our pre-seed stage, we raised $250,000 from local angels, friends & family, and me. That had allowed us to build out our proof of concept – 100 simple LabDoor reports viewable on a web application.

At this point, we had seen 20K+ people use our product, were preparing to launch our first mobile application out of beta, and had clear customer metrics to guide our short-term product roadmap. We just didn’t have the cash or manpower to analyze new products or build applications faster, let alone spare a dollar for a marketing campaign.

The biggest risk for startups like ours is proving that consumers would actually use our products to successfully manage their health and safety. Our hypothesis was that if our applications could cover over 80% of product sales in the supplement market and actively engage users at scale to add their products to a ‘LabDoor Cabinet’, then we could quantitatively prove consumer demand for LabDoor.

We worked backwards from there. I calculated the expected cost of the analytical testing, weighed the value of potential hires, and worked with my team to estimate our annual marketing spend. Then I added the cost of one additional startup experiment in each category (never go all-in on the first shot), and settled at a $750K seed round.

Y: How much is my company worth?

Wrong question. Seed-stage valuation has very little to do with the actual liquid value of your company.

It has everything to do with the market value of the convertible note or equity document that you’re selling. Can you demonstrate scarcity in the market, led by respected investors? Who is begging for participation in the round, you or your investors? And what are market conditions in your startup community?

I would suggest finding a valuation that efficiently clears the market for your target raise. If you’re raising $1,000,000, review recent successful fundraises on sites like AngelList, and honestly assess your startup relative to these companies. Startups with built-in networks, like recent YCombinator graduates, will likely raise at a higher valuation. If you have no clear path to a lead investor, consider dropping valuation below the expected average. Remember, your number one objective here is simply to put money in the bank, so don’t stress too much over 0.5%.

If forced to pin down absolute values for 2013 Silicon Valley pre-money prices, I’d label $2-3MM valuations for weak seed rounds, $4-5MM for average seed rounds, $6-7MM for ‘hot’ seed rounds, $8-10MM+ for all-star seed rounds, $20MM for Jack Dorsey (Twitter edition), and $40MM for Jack Dorsey (Square edition). And expect 50%-100% discounts for any round raised outside the SF Bay Area.

Note: One of the biggest mistakes entrepreneurs ever make is to raise a round of funding at a valuation where they would be comfortable selling the company. At this point, your incentives will be horribly mis-aligned with your early investors, who are counting on you to bring them a 10x-20x return on their investment. If you’re trying to make a $5-10MM company, don’t choose investors who are looking for $100MM+ companies. In many cases, you’ll be better off bootstrapping to profitability with a simple product or service, and building out the company on revenues. (There is absolutely no shame in this – an exit at this range will instantly put you in the top 10% of entrepreneurs.)

On being ‘first’

As entrepreneurs, we’ve all experienced the rush of excitement that accompanies the arrival of a bright new startup idea. There’s something magical about the belief that you are the very first person in history to figure out this secret. It’s hard not to start counting the billions of dollars in your future bank account.

The next time this happens to you, remember this: You are definitely not the first person to conceive of this idea. You are likely not the first startup to enter this market. In fact, the space is likely littered with companies that have already seen real successes and/or dramatic failures.

Too often, a naïve entrepreneur will carefully approach an investor with their unique, precious idea. They’ll pitch it as the next billion-dollar concept. Worst-case scenario, they may even demand an NDA. And then they’ll be crushed when the investor asks them how they compare to an existing, similar product on the market.

I almost experienced this exact fate. Before starting work on LabDoor in early 2012, I had never considered launching a technology startup. As an analytical chemist running a small laboratory in Michigan, I was far away from the hype and excitement of Silicon Valley. Coding tutorials were a fun diversion, but didn’t seem like a business opportunity.

A chance encounter with a business mentor sparked my obsession with product safety ratings. Consumers needed an easy way to understand the safety, efficacy, and price of products like pharmaceuticals, supplements, and cosmetics. Equipped with this vision, along with my knowledge of regulatory chemistry, I spent my nights and weekends for months testing products, building wireframes, and dreaming up strategies to bring my solution to market. Eventually, I exited from my laboratory business, and began full-time work on LabDoor.

Then, I stumbled upon the website for GoodGuide, another application that rated the quality of consumer products. This discovery crushed me. Not only had GoodGuide launched years before me, but they were also backed by huge venture capitalists, and had recently been named one of the most innovative companies in the world. It felt like all of my work on this new startup was a total waste, and I sat and drank a few drams of whiskey while contemplating my failure.

I shouldn’t have reacted this way. To be fair, the idea of product quality certifications has been around for nearly a century, with companies like Underwriters Laboratories, Consumer Reports, and Good Housekeeping originally leading the charge. GoodGuide was just the latest to take a shot at fighting marketing hype with consumer-focused data.

After my literal and figurative hangover wore off, I reevaluated my startup idea in the light of my new discovery. As I dug deeper into the fundamentals behind GoodGuide, I quickly learned about the huge challenges that face applications like ours, from customer acquisition and engagement to business models and monetization. One month later, GoodGuide quietly sold their product and assets to Underwriters Laboratories, having struggled to surmount these obstacles.

With this knowledge, our team regrouped and redoubled our efforts to build LabDoor into a sustainable, profitable company. We interviewed every target user we could find, and became obsessed with providing value to our early customer segments. We purposely took meetings with investors who had previously backed GoodGuide, knowing that they would ask us the toughest questions. We raised a smaller amount of money, and carefully built monetization into our go-to-market strategy. The result is our current product, constantly evolving, rapidly improving.

About a year later, I actually met the original founder and current CEO of GoodGuide. I’m sure they took my meeting with a mix of curiosity and skepticism. While they were very interested to see another company take a shot at their space, I definitely sensed in them a cynicism about the market. After nearly five years from great data scientists and over $10 million from leading VCs, GoodGuide was unable to effectively alter consumer purchasing decisions from bad products to good ones. How would we be any different?

A smart investor once told me: “Identify the biggest risks in your startup, and attack them first.” Instead of being the biggest impediment in our path, GoodGuide actually helped to highlight some of the largest roadblocks to our success.

In the months since, I’ve identified other companies in the space, and even a couple startups that have launched behind us. Now, when I hear about a potential competitor, I take a little time to study their story, and then get back to work at LabDoor. There will be a winner in this space, and I know we won’t be first or last, but I can guarantee we’ll diligently pursue our grand vision with a clear knowledge our market’s ecosystem.

There was commerce before Amazon, search before Google, social media before Twitter and Facebook, and computers before Apple. As cliché as it sounds, startups truly are about execution. When you find a company who got there first, calmly take note, learn from their mistakes, and most importantly, keep building.

Take as many entrepreneur meetings as possible

If there’s one idea from this blog series that I hope sticks with the most startup folks, it’s that entrepreneurs should go out of their way during the fundraising process to meet as many fellow entrepreneurs as possible.

This may seem counter-intuitive. Fundraising is supposed to be a ‘full-time job’. No time for ‘having coffee’ with a ‘random entrepreneur’; just “put money in the bank”. That’s the advice I always got.

However, fundraising is a very exhausting process. We pour endless energy into an investor and hope that something sparks in their minds.

Conversely, in meetings with entrepreneurs, energy flows back and forth, as each party fills with excitement while discussing their vision and goals. Worst-case, a meeting with a fellow entrepreneur turns into an impromptu counseling/commiseration session, with both sides bitching about a disrespectful investor or sharing the constant fear of missing payroll.

I’ve found that these meetings are a great way to recharge along the fundraising path. They are also often great sources for investor introductions and references, which can actually make the journey significantly shorter.

For me, this was one of the most important features of joining a startup accelerator. Having thirteen other CEOs available for support and feedback was incredible.

Remember: Never startup alone!

Playing poker with investors

Poker Short Stack

“This round is closing in two weeks. Are you in or out?” vs. “This term sheet self-destructs in two weeks.”

Take it or leave it. Investors are particularly good at this. Here’s why:

  1. They are way more experienced than you. Let’s say you’re pitching First Round Capital. They have invested in 185 companies and participated in 297 rounds (at time of publication). I consider myself a somewhat experienced entrepreneur, and this is my second company and third round.
  2. They have a way bigger stack of chips.

You’re never going to win a staring contest with a VC. In six months, they’re still going to be collecting their management fees while you start making plans to move back into your parents’ basement.

But entrepreneurs have three great things going for them:

  1. Carried interest. VCs often make 2% management fees on the fund and 20% carried interest on the fund’s profits. Nothing kills an investor more than that fund-maker that slipped through their fingers (See Bessemer’s Anti-Portfolio).
  2. The rest of the table. VCs try to get you to focus on a one-on-one battle. But you can engage with hundreds of investors at once. Don’t let a few rejections get you down.
  3. Your cards. Your startup is your gamble. But you get to pick the team, build the product, and target the market. Do it right, and your odds skyrocket.

I walked into every negotiation with a great hand and a tiny stack of chips. Be supremely confident that you’re holding a future billion-dollar company, and then go all-in.

Investor: “I’m interested but I don’t want to lead”

Whenever a potential investor tells me that they are ‘waiting on a lead’, this indicates that they are not capable/confident enough to make an investment right now.

Here’s the dilemma – once you have a lead investor, it will be way way easier to get investors to follow. So these ‘follow-only’ investors who hang around you early in the process are actually not that valuable.

Even though it’s tempting to keep around people that seem like they may want to give you money, I would be extremely wary of these folks. At best, they’re time-wasters. And at worst, they’re trying to earn an ‘option’ to buy your stock at a future date when someone else has taken the first (and biggest) risk on you.

Split them into two groups:

  1. Investors that are money-only: I would play hard-ball with these folks. Their value is limited anyways, so try to pressure them to commit money early, with the implicit (or explicit) understanding that it’s now or never for them to get into this round. Worst-case, you lose a weak investor. Best-case, you close easy money.
  2. Investors that are money + value: If they are truly interested and valuable, keep them on your list at an early part of your investor ‘funnel’. These are people that should get update emails when you convert investor commitments, sign pilots, or get positive press, but not people who you need to spend time meeting and pitching. Prepare to close them quickly once your lead investor signs.

‘Sprint and Follow’ Leadership

“Lead by example.”

This cliché, constantly provided to new entrepreneurs and first-time CEOs, is often terrible advice for the heads of large organizations (or founders of startups that aspire to be large). What entrepreneurs usually gather from this recommendation is that they simply need to work their asses off, and their team will follow them.

This kind of ‘sprint and follow’ leadership works great for short-term objectives and small companies, where the passion and charisma of a leader can will a team to a win. The original ‘sprint and follow’ leaders were Braveheart-style warriors, where the objective was victory in a single battle and the alternative was near-certain death. But on a scale of leadership, these people would be categorized as Level 3 or Level 4 leaders.They achieve significant performance standards from their teams, but find their gains unscalable to larger projects or longer durations.

One of the hardest parts of being a product-oriented CEO is learning to lead the team from the sidelines, instead of trying to make every play themselves. Mark Zuckerberg once famously operated in the latter fashion, continuing to work in the bullpen and driving Facebook’s heads-down, developer-centric culture from the front.

In this structure, motivation is often extrinsic and reinforcement is often negative. Bill Gates, the top product CEO of his generation, spent much of the first five years of his Microsoft career directly leading the technical development, often jumping into action to redo work when his employees did not perform up to his standards (and then openly berating them for the errors).

“At various stages of the company I’ve had to learn new things. In the first five years I didn’t let any line of code get out of the company that I hadn’t reviewed, and most people’s code I didn’t like as well as mine, so I’d mostly just rewrite it.” — Bill Gates, October 13, 2005

Confession time: I am not a Level 5 leader. But I come to work at LabDoor every day focusing on the skills and will necessary to earn that title.

In my early days at LabDoor, and at Avomeen before it, I was a ‘Sprint and Follow’ leader. My key metrics were hours worked and tasks completed. I reviewed every report and sat in every meeting. It was truly painful for me to watch a project get delegated and then completed less-than-perfectly. At Avomeen, if the output on a Scanning Electron Microscope reading looked a little blurry, I’d jump into the seat and spend thirty minutes developing a better image myself. During LabDoor’s time at Rock Health, it was a matter of pride for me to be the last person out the door each night, not just from our company, but amongst the entire accelerator class.

After about 30 straight months of this between the two startups, things started fraying at the seams. I found myself constantly exhausted, permanent bags under my eyes and increasingly losing my battle with the snooze button each morning. My team, which had loyally sprinted with me every step of the way, began to show signs of slowing down as well. We were a powerful force at the edge of our limits. I was building a lean startup in all the wrong ways.

LabDoor has since done a ton of things right. Starting at the top, I’ve trained myself to recognize and highlight my own shortcomings, especially to my own team. It’s given me the courage to ‘quit’ on projects and tasks that weren’t positively impacting our company. My two co-founders owned their departments, and led without being told to lead.

We had fewer team meetings. The press stopped hearing from us. Our perpetual ‘seed round’ quietly closed. And through it all, we had the most productive four months of our company’s existence.

Now, we’re lining up a series of huge milestones ready to launch in rapid fire over the next few months. We’re all working towards the same key metric — the amount of actionable scientific data delivered to our users.

I’m not delegating more or working harder. The real lesson is much, much simpler. I simply acknowledged my numerous weaknesses, eliminated them from my ‘job description’, and focused my one true strength — intense, unbridled passion — towards the stuff that was left. I’m still not a Level 5 leader, but I’m getting closer.