Business funding; What I'd like to talk about today is business funding for startups, and I have some experience in this area. I graduated from college, and like many of you, I majored in math and statistics, thinking I was destined for a career in finance.
A lot of people see sales as having this, you know, mystique around it, and what I've learned is that as a founder, the reality is that you hire the salespeople, and I think this is how many founders I talked to see sales?
As a founder, you have some unique advantages that allow you to be extremely good at sales. Paul Graham often talks about how there are two things you should be doing at any point in time when you're starting your company, and one of them is talking to your users.
One of these is your passion for the product and what you're building, and the other is your industry knowledge of what you're doing and the problem you're solving, and those two things, from what I've seen, completely trump sales experience.
So, this is my cofounder working in sales. This is how sales look in the early stages of a startup. This isn't Don Draper. There are a lot of calls like this. But, even if you've never done it before as a founder, it's very simple, but you must commit yourself.
So, a couple of things I've learned about sales along the way and in trying to figure this out. You know, the first thing everyone knows about sales is that it's a funnel. You have these various funnel stages, and you, of, of the funnel, and you move your customers through it. Categories that are fairly common. There's a prospecting category where you're attempting to determine who is even interested.
Then you have a lot of conversations, which is the funnel's second level. Then you figure out who is truly serious, and you want to close the deal. Then, of course, you arrive in the promised land of revenue.
What I thought would be interesting is to discuss each stage, as well as a couple strategies that we've used at Clever that have worked really well. So that these aren't abstract concepts but rather things that you can hopefully apply to your startup. So that's prospecting.
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What is prospecting in sales process?
Prospecting is the process of determining who will even take your call, and one of the things I realized early on, so there's this guy Everett Rogers who created this technology life cycle adoption curve.
He describes it as a bell curve, with innovators and those willing to try new things, as well as early adopters, mid-stage adopters, late adopters, and laggards.
One of the things that really helped me understand sales in an early startup is that he quantified the tail of this bell curve, and this part over here, the innovators, are your potential customers. It may appear discouraging that only 2.5 percent of potential customers would consider purchasing from a startup with no users and no revenue. But, in fact, I discovered the inverse.
I found it extremely beneficial to have this frame of mind because you realize how much of a numbers game this becomes when only 2.5 percent of companies will even take your call or consider using your product.
So, if you want to reach that 2.5 percent and get some early sales, you've, if you're starting to do the math, you're probably realizing you need to do a lot of calling. You must speak with a large number of people. So, in the first two months of YC, I called over 400 companies and asked them to take a call and talk to us about what we're building.
What are 3 ways of finding sales prospects?
- your personal network.
- Another one is conferences.
- write cold emails.
One of the most effective ways I've found in prospecting and acquiring these people is through your personal network. That is self-evident. I won't be spending any time there.
Another one is conferences, which many people find surprising, and the one that most people are familiar with is cold email, which is what people think of when I say conferences. They think I'm referring to CES or E3 or something.
Actually, the kind of conferences where sales happen look more like this, and we used to go to a lot of these in the early days because you have to go where your users are, and if they're, if you're selling to CIOs and there happens to be a gathering of them at a hotel in Milwaukee, guess what, that's probably where you should be.
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As a result, we attend conferences like these. We get the attendee lists ahead of time. We email every single person ahead of time and try to set up meetings so that when we arrive, every single minute of that trip was well spent, which was critical in Clever's early days.
This is where we met all of our first customers. The second point I made was about cold email. Many people do not know how to send cold emails. It's actually quite simple, and the key is not to write too much. It should be extremely brief.
This is an email template that I used early on, and you are welcome to use it; however, it is quite short. Here's who I am and what I'm working on; I'd love to talk to you about it. Could we make it tomorrow?
It's really simple, and you can customize it to find out who the best person to send it to for each business you want to sell to, and you can send out a lot of these. So, that's prospecting, and the reason it's so important is that you need to build that first layer of the funnel. Then you get them to answer the phone.
This is another area where I believe many founders simply have a lot of questions about what to do. And the most important thing to remember, in fact, if you only remember one thing from this presentation today, remember to shut up when you get them on the phone, which is very surprising to people.
When I help founders with their first sales pitch, they finally get someone on the phone who wants to talk to them about their product, and they're so proud of what they've been working on for the last three months that all they want to do is talk about every feature and why it's the best thing in the world.
It's just a byproduct of being extremely proud of something. In fact, I've heard calls where the salesperson stated that their goal was to spend only 30% of the call talking and to ask a lot of questions. They'd say things like, "How come you agreed to take my call today?" How do you solve the problem that we're discussing for you today?
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That's what great sales are all about, and it's something I instill in everyone. It's a really important part of sales, and if any of you use Uber Conference, they have this amazing feature where when you hang up a call, it automatically sends you an email telling you how much you talked.
So here are a variety of steps that you might consider taking. You know, emailing someone, not hearing back, and then emailing them back. Calling them, leaving a message, and scheduling a pricing call. You know, there's probably 60 things on this slide that could be steps toward closing a deal.
This isn't just a random collection of events; this is the second deal Clever ever signed. These are the various steps that we had to take in order to complete this task. So many entrepreneurs today have a great call with someone, send an email, and never hear back.
So you really need this unhuman, unreasonable willingness to follow up and drive things to completion. Your time is extremely valuable when starting a business because it is your only resource. Your goal should be to get people to say yes or no as soon as possible.
If you have a thousand maybes, this is where you will die. So, have this superhuman level of persistence and ambition. So you've spoken with someone, or a lot of people. You've received numerous phone calls. You've been ridiculously persistent with them.
To the point where they just know you're not leaving, and they have to sign an agreement. This final step may appear complicated if you haven't done it before, but it's actually quite simple. It's known as redlining. So you'll send an agreement over.
If you're a member of YC, this is extremely simple because YC provides standard template agreements. So you don't have to look for these and can just use them. One of the things I'm most excited about is that YC has agreed to open source their deal documents as part of this presentation.
As a result, the documents that YC founders used to receive will now be available to everyone. So, hopefully, this will never be a barrier to anyone who wants to do sales for their start-up. You have some excellent documents.
Then, another thing I'll say about this, a place where I see so many smart, smart people go wrong, is that you have to remember what your goals are. Quibbling over minor details for the sake of pride, intelligence, or whatever. Make sure the agreement is exactly how you want it, then sign and move on.
Another common closing trap that I see founders fall into is talking to a company and saying, "I will use your product, but I just need one more feature." You know, I'll build that feature, and they'll use my product. But the problem is that it almost never works like that. In fact, someone telling you that they would use your product, that they want to use your product, but it lacks this one feature. In your mind, I'd almost map that to a pass.
That's fantastic, one might say. Let us sign a contract, and we'll make the agreement that we'll build this feature. Alternatively, at Clever, we would wait to see if we heard that demand from more customers, and then once you have a large number of customers requesting it, you should build it regardless.
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You can't really blame them. That is a perfectly reasonable request. But the problem is that when you're starting a business, you need revenue and validation, and free trials provide neither. If you end up with a free trial, you haven't made as much progress as you thought. It's actually quite bad.
Okay, fine. You've had numerous conversations. You've now shut down people. You went through the redline procedure. You figured out how to use the free trials. And you're on your way to making your first sale, hopefully. Early on, you could think of sales as any other aspect of a startup.
You don't have to do things on that scale if that's your goal. In fact, you can purposefully do unscalable things in order to attract early customers. That's part of the fun of it. But the other thing I think is really important to remember is that once you've done this enough times. What you should consider is, "Well, what aspects of this are repeatable?" And, you know, what aspects of this are we going to scale up?
There's also this, Cristoph Janz has a fantastic blog post about the five ways to build a $100 million company. And he claims that he can sell a $100,000 product to a thousand customers. Alternatively, he can have 10,000 customers purchase a $10,000 product.
Or he can have 100,000 customers buy a $1,000 product and you don't need to know which bucket you're going to fall into on day one. Most businesses fall into one of these categories. As a result, as you're doing this, you should start thinking about it.
If you want to be in the $100,000 product category, that's fantastic. And you'll have a very high touch sales cycle, which is fine. That's sales force for you. That's a fantastic work day. But if you think you're going to be a rabbit and sell $1,000 products to businesses.
Your sales process entails flying out three times to see them, eight demos, and three months of redlining. Then you should reconsider something. So I see a lot of startups who want to be the rabbits and sell a low-cost product to businesses without thinking about how to do it in a scalable way, and that's one area where you can sink. Or it simply forces you to raise your prices. So this is how I consider various businesses. And it'll be useful for you once you've started, and once you've done enough sales to say, okay. What am I doing here?
What is a reasonable profit margin for a small business?
So those are some of the things I learned along the way while building, building sales now at a few, at a few different companies, and particularly on this very narrow scale of zero to one million.
When you reach 1 million, you'll notice that there are a million blog posts about how to get from 5 million to 50 million. Alternatively, 10 million to 100 million. But I wanted to ded, focus the presentation on this zero to one step today. Because there isn't as much written about it, and I believe it is very enigmatic to many founders.
I figured it out by doing it, and I'm confident that if you're starting a business, you can as well. If, for whatever reason, you want to do what I did and join a startup that has figured it out and hone your skills and craft.
How do startups get funding?
According to YC's Michael Seibel, the best way to improve your pitch is to improve your company. YC does not devote much time to figuring out how to raise funds. These conversations are like, the investors want to see you succeed if you have traction and your product is doing well.
We'll spend the time before the meeting in the three types of sections, which Michael will focus on. We'll do a sort of role play of what the meeting will actually look like. We'll do Q&A at the end, which will save us about five minutes.
The other was SocialCam, which was acquired by Auto Desk, and what I really wanted to do was break down and demystify the process of developing a pitch. So, let us go over four points. The first is your 30-second pitch. This is essentially how you talk about your business.
You're speaking with your parents. This is the place to go. The second is your two-minute elevator pitch. Many people practice 10, 30, and hour pitches, which I believe is all nonsense. I believe you can complete all of your tasks in two minutes. The more you talk, the more chances you have of saying something that people don't like.
So, this is a three-sentence pitch in 30 seconds. You can take your time, breathe, and you don't have to get that much information out. The first is a one-sentence description of what your company does. Everyone I meet for the first time messes up on this.
You must be able to do it in a simple and straightforward manner that requires no prior knowledge on my part. You must assume I know absolutely nothing about anything. This is how you keep it simple. So, you know, we usually tell people to use the mom test.
If you can't tell your mother what you do in one sentence, rephrase it. There is a one-sentence explanation that your mother or father will understand.
So, really, really begin there, and it's fine if you use very basic language. It's fine if you say, "Hey, we're Air B and B, and we let you rent out the spare room in your house." Isn't that simple?
You don't have to say we're Air B&B and a space marketplace. I'm not sure what that is, and it will take more time. As a result, use simple language. Extremely important. The second question is, how big is your market?
It makes sense to spend a couple of hours researching. Determine the general industry in which your product operates. Determine its dimensions. Investors enjoy hearing that you are operating in a multibillion-dollar market. This is a fairly simple process.
How big is the hotel market, Air B and B might ask? What is the size of the vacation rental market? What is the size of the online hotel booking market?
These are simple numbers to look up on Google, and they help an investor realize, oh wait, if we're big, if we really blow this company up, it could be worth billions of dollars. Please do not skip this step. Second, how large is your market? How much traction do you have in the third sentence?
This sentence should ideally say something along the lines of, "We launched in January and we're growing 30% month over month." We have this many sales, this much revenue, and this many users. Very straightforward. If you can't speak to pre-launch traction, you'll need to persuade the investor that you're moving at breakneck speed.
So the team began working in January, and by March, we had launched a beta, and by April, we had launched our product. Right? Persuade the investors that you are moving quickly.
That this isn't some long slog, and that you're not approaching it as a large collaboration. You're thinking of it as a startup, where you can move quickly and make mistakes. That's all there is to it in 30 seconds.
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There are three sentences. You should be able to start a conversation about your company on that basis. Pitch time is two minutes. You now have someone you need to persuade of something. Perhaps even someone you need to ask for money.
So I like to add four more components, which also go by quickly. The first is one-of-a-kind insight. VCs frequently ask startup founders what their secret sauce is, but the answers are all the same.
This is your chance to tell me something that the biggest players in the market you're attempting to enter don't understand or do poorly. This is the lightbulb moment.
You should be able to summarize it in two sentences. When you say it, you can see if it's happening. So put that one-of-a-kind insight to use. You only have two sentences to get that out there in your two-minute pitch, so it can't be complicated. The next question is, how do you make money?
You are aware of your business model. Many entrepreneurs avoid this question because they believe that if they mention advertising, people will think, "Oh, that's stupid."
Don't try to flee. If it's advertising, call it that. Facebook is a massive advertising platform. Google is as well. It's fine if you're selling in-app in-app add-ons. Simply say it.
You've now admitted that you have no idea how you're going to make money from this. I just wanted to write, oh, they've figured out how to monetize, on this checkmark. Instead, I'll use a large question mark.
So, to monetize, do what everyone else in your industry does 95% of the time. Say it, then get on with your life.
It's perfectly fine; no one is going to hold your feet to the fire and say you didn't monetize this way three years later.
However, being clear and concise is far preferable to spouting off every single way your company can make money.
The following one is team. I believe you're attempting two things. If your team has done something particularly impressive, you should recognize it.
So you want to say something if you've done something that has made investors money. If not, please refrain from discussing the awards. What we want to know is how many founders there are.
What we want to know is how many of them are technically oriented. How many engineers are there in comparison to business people? Hopefully, there are 50-50 or more engineers.
We want to see that all of you are working full-time. It's extremely beneficial; we're all committed to this venture. You can easily slip in and out of those two sentences.
If you don't have that statistic on your resume, don't try to inflate yourself; instead, move on. The more you talk about something bad, the worse it appears. You must understand how much money you are raising and the minimum check size.
These are the kinds of things that, if you don't know them, will make investors think, "Oh, these guys aren't serious, or they haven't done their homework." So, unlike the rest of this article, you should avoid using jargon. Now it's time to actually use some of that jargon; just Google it, it's really simple.
Investors prefer to make investments based on traction. It is always preferable to raise funds when you have more traction than when you have less. However, you'll frequently be in a situation where you're just getting started. Or maybe you just started. What you need to consider is how to flip the equation.
That could be an excellent time to begin fundraising. If you're telling people about your startup and spreading the word, that's a good way to start feeding it. 95 percent of the startups I meet can bring a product to market with very little money.
As a result, never place the investor in the ultimate position of power. We won't be able to do anything until you give us money. You always want it to be, this moving, we all quit our jobs, we're all working full-time. And it's moving, so if you want to jump on, go ahead. There are numerous angel investors.
If you can demonstrate to the investor that you haven't yet launched, but you've completed eight months of work in one month or two months. That you have a fantastic team who have all quit their jobs and are completely committed. You regain some of that advantage. However, you will not benefit fully unless you are launched and growing.
If someone who has passed on your company as an investor offers to make introductions for you, that's your kryptonite. Don't even think about it. So first, a friendly greeting.
Simply put, you don't want to cold call these people, you don't want to rush these people, and the person, the credibility of the person who's introducing you to an investor, plays a big role in whether the investor will take that meeting.
Second, consider thinking in parallel. So many people I meet will run the fundraising process in such a slow manner; we met with one guy this week, we're going to meet with another guy next week, and another guy three weeks from now. You're on when you're fundraising.
It's not a marathon; it's a sprint. So you want to keep all of your meetings in the same week. It's extremely difficult, but here's one trick I like. When you email investors and get those warm introductions, the investors email you back.
You say, "Hey, we'd love to set up a meeting, but we're going to be busy building for the next two weeks." So, can we schedule it for the third week? Right? So you've, I've e-mailed everyone about it, right?
So everyone schedules the meeting three weeks in advance. It's better for them because their schedule is clear. What exactly did you do? Hey, you hinted, I'm not desperate for money. We're constructing. It's like it's sending all the right signals. So that's the best option. One team member should devote their entire time to fundraising.
It should not take over the entire company because it is extremely distracting. So, with that, let's move on to the next section of this. Whom am I giving it to? Dalton, the big one. Oh, how lovely. Okay, fine. Hello, my name is Dalton Caldwell, and I am one of the.
That is something we can demonstrate. In terms of my professional experience, I've raised $85 million across several companies, so I've attended a lot of investor meetings. As a result, I'm going to pull as many things as I can.
So, once again, we're just going to try to show you something to talk to and use it as a learning session, and you did your introduction earlier, right Caspar? Yes, I've, I mean, I've done a couple of startups. Cool.
So we're developing a communication platform that will allow businesses and consumers to collaborate on a single platform rather than the fragmented state that they're currently in. and. I'm not sure, I'm not following.
So, for example, consider what WhatsApp or Snapchat are for consumers. That is what we want to do for businesses. So, what's the deal?
I have to keep a straight face here. What that means is that we want to enable consumers to communicate with businesses, and that is really, really the goal of our business, of our startup business.
I still don't, so who uses it, and what does it do? So, you know, it, it. A messaging product for both consumers and businesses. a, it enables customers to send.
Why, would a customer want to buy your product?
Because they want to send a message to a company. Okay, so what can you tell me about the market or the opportunity, and what the size of this is? How is everything coming together?
That is, I mean. Messaging companies are massive. Obviously, Whatsapp sold for around $19 billion, and Snap Chat is also rapidly growing, so we believe the opportunity is significant.
So, could you tell me a little bit about your traction and numbers? Have you, have you given this to anyone yet? Yeah, I mean, we don't want to open the Komodo and get into all the specifics.
I'm sort of at a high level. We've gone live. In the Bay Area, we undoubtedly have thousands of users. You know, hundreds of businesses have kind of. Can you tell me about some of those companies? You've been to some of them.
We don't want to get too far into the details because, well, it's still early. Consumers are sending messages to these businesses, which we think is fantastic.
So, and these companies are reacting to the messages. That is not something I would expect to happen. So, tell me about your business model and how it works.
So we charge businesses on a monthly basis. We haven't figured out exactly what that is, but we're free for the few hundred companies we're in right now.
But we're thinking about doing something monthly. How much do you believe a company will be willing to pay?
We have one who has a bio PhD but has really gotten into coding. I'm a Python developer who learned the language from the ground up.
Take a look at your watch. It's been a pleasure to meet you. Please keep me informed. They become nervous and begin to speak very quickly, and there's no way you'll ever persuade anyone of anything if they don't even know what your app is.
If you are extremely vague or evasive, such as not having the meeting at all, Try to have insights, to persuade me that there is something new I can learn about the market from talking to you, rather than just what everyone knows about the market.
That's right, I learned nothing during that pitch. Also, the team is asking why you are working on this and why you are qualified for it.
Finally, he didn't move the conversation forward. Obviously, that didn't go well, and he just let the conversation flail around until I cut the medium because we were running out of time as quickly as I could. So, in any case, that was not a good pitch.
So let's give it another shot. So, I understand you have a business; could you please tell me a little bit about what you do? Yes. So we're a messaging service.
We allow, I mean, that sounds a little vague, but what we allow you to do is message a location.
So, if you walk into a Crate and Barrel, you can send a message to the manager saying, "Hey, there's puke in the hallway." Or, if you're at the airport, I'm trying to find this specific gate because I'm not at this airport, where is the Virgin terminal? Or, if you're at Target, what aisle are you in?
So, is this a mobile app, and how do I use it? Yes, we have iOS and Android apps for consumers, but getting consumers to download apps is obviously difficult. Yeah. I don't think so. In. Normally, I do not just download apps. Yeah.
Most businesses have an action that says text the owner directly to send a message. Oh. We've actually tested a lot of copy to see what works best in small print. We have, and because the messages are anonymous, they lower the barrier to entry.
I think the most counterintuitive thing we've learned in the kind of launch that we've had, where we've been doing this in 350 locations in the Bay for about three months, is that we're about 11 percent weekly growth rate in terms of acquiring businesses.
But the most surprising thing we discovered, because we weren't sure, is that people do send messages when they walk into [CROSS-TALK].
What is the most common type of message that people send? So you'd think, so we started this product thinking it was going to be like, in-person feedback. In-person feedback was the premise.
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Take, for example, a Yelp or Google review. They might get five or seven visits in a lifetime. Large customers, we know from retail experience, are 3 to 4 million per year with just regular feedback tools. We tested with SMBs who are willing to pay $50 per month.
This can be a large business, but there are obvious ways to make money. There are two alternatives. One option is to go upmarket, as we originally planned, with Starbucks or Walmarts, or two is to partner with consumer-facing companies such as Yelp, Google, and Facebook.
Essentially, we want a message button to appear every time you search for a business. We want to instill in consumers the knowledge that they can send a text message to any business. This can help us gain widespread distribution. Our true vision is to become that infrastructure, that messaging infrastructure that connects consumers and businesses.
If that doesn't work, imagine Google, Facebook, and Yelp refusing to give up their valuable intellectual property. It's actually an advertisement. We do intend to sell this as a feedback tool to major players. We're running out of time.
We are raising 500,000 in cash and 8.5 million in convertible notes. Mike Mapels, Eli Gill, and Aiden Sinkit are responsible for 250 of the 500. And Floodgate's Mike is willing to fill the round. We believe you and your firm can contribute significantly to the team.
You know, one of the most important points here is to try to tell a story that people can understand. You may have noticed that there were narratives present. He was talking about people and how they use it. We were able to connect it to the real world, which is a good thing.
He was able to demonstrate insights and actually tell me something about the market that I didn't already know, like, there were some tidbits there. It was more of a collaborative meeting that felt more like a conversation than like I was interviewing him about something.
He actually asked for money in my opinion, and the other important thing is that at the end, you saw I could have easily been like, okay, gotta go, but he, he did talk about fundraising as, as Michael mentioned, and he was able to provide all the context and all the questions I would need to actually have a serious conversation with him.
If he was coy or shy about it, and wasn't clear on the numbers, there's a very good chance that I would have just ended the conversation due to time constraints.
It's fascinating, and we spend a lot of time on this side. You can tell when someone is passionate about their business and knows it inside and out, and that is what you must become. okay. So, final thoughts before we go, what do you want to do after the meeting?
So, if they say, "We have to keep talking to partners," I'm assuming it's a no. As a result, you must apply some pressure. You can accomplish this by obtaining deal heat. Deal heat is simply a term that indicates that there is a demand for your, to, to be in your round.
This is the simplest and most important way to increase price, et cetera. The investors' due diligence So, let's say you raised 500,000 for your seed round on the 8.5 million in this example. Investors performing due diligence.
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If you find it, I do due diligence on adults and discover that, hey, he's not a great investor. I can get Elaud, Mike Maples, or whoever else to fill out the rest of the round. It astounds us how many entrepreneurs fail to do this.
You would, like, spend a significant amount of time hiring someone. If you're going to sell a piece of your company, you should know who you're going to sell it to.
To ensure that they are the type of people you believe they are, and finally, to know when to stop. So some founders become so skilled at fundraising that they want to do it all the time because it is far easier than building the company.
You think you can fundraising does not equal success and just because you fund-raise does not mean you succeeded and nobody realizes that and I'm sure everyone will still equate fundraising with success and read about someone's fundraising and assume they're successful.
Well, my intuition is that this is the case because a lot of smart people have spent their entire lives applying to good schools and good jobs.
They just think fundraising is another application they can just kind of check off, whereas building a company is much more ambiguous, but anyway, that's the end of the session. I'm not sure we have time for, oh. The edge is underlining, underlining, and building your company. The goal is not to raise funds.
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