All January, I've been talking with experts about various ways to fund your company as you grow. Angels and Venture Capital aren't the only ways you can fund and grow your company, though.
Accelerators are like a "Boot Camp" for Start-Ups. You must apply to an accelerator, and you must meet certain requirements (which vary from accelerator to accelerator) to be considered. Once chosen, you are given resources and guidance to get your company to the next level (the resources also vary, but can include development resources, cash, marketing/PR services, and more.)
Accelerators aren't for everyone. If your Founders are seasoned veterans, or need a pure cash influx, you shouldn't apply. For other companies, like Canada's own ShopLocket, the accelerator is the first step toward future success.
Karen: You're involved in both accelerators and venture capital. Can you explain the best case scenarios where someone would successfully seek each?
Roger: In my experience, accelerators are great for first-time founders that may not have worked together in the past. Typically teams with little experience starting and running a startup can benefit the most from the things that a good accelerator provide -- time to work out chemistry with co-founders, pitch practice and honing, access to investors/mentors/lawyers/accountants, coworking spaces and the presence of other competitive teams around them as motivation. All great entrepreneurs had to start somewhere, and I bet a bunch of them wish accelerators were around to help them in the early days of their own startups.
VC, on the other hand, is the right fit for you when you have evidence of a differentiated product which fits in to a massive market opportunity (at least $1 billion) and/or you have a founder/team that has achieved success with a venture scale business in the past. There are many exceptions, but typically most VCs want to back traction and/or teams that have been there and done that before.
Karen: What's the most important thing a company looking to get into an accelerator should know?
Roger: Like anything else in business, you get out what you put in. Nothing will be handed to you. But if you choose the right accelerator, you will have access to a lot of resources including mentors, the program leaders, other teams in the cohort, sponsors, press etc. It's up to you to call on those resources early and often to shape your product, gain early customers and create meaningful traction for your company. You will need to out-hustle the teams in your cohort and compete for the time/attention of busy mentors, executives and investors.
Karen: Others I have interviewed for this column have described experiences of being on the venture capital hunt for up to 18 months. Is that a typical amount of time? How can a company with a need now enhance their chances to getting a deal?
Roger: The best entrepreneurs know that fundraising never stops. It's cliché, but absolutely true, in my experience. Sure, the amount of time an entrepreneur spends on fundraising will ebb and flow based on the milestones and cash needs of the business, but building relationships with investors is a constant activity. In terms of hunting for capital for 18 months, that feels like a long time to me. If you are developing relationships with investors as you formulate your ideas and communicating with them as you execute, you should be able to get feedback from a good sample of potential investors within weeks, not years. If it is taking that long, you need to take a honest look at yourself, your business and/or your approach to finding capital. The best advice I can give is to start conversations with potential investors early. Long before you really need the capital in the bank. In fact, you may find you have more leverage over investors, and even perhaps attract more interest, if you have the conversations when you don't need the money at all.
Karen: How do you feel about the role of movies (The Social Network) TV, (Dragon's Den and Silicon Valley) and the expectation businesses may have approaching venture capitalists?
Roger: Well, thanks to shows like Dragon's Den, my mom finally understands what I do for a living! Well, kind of. Media, movies and television romanticize entrepreneurship on the whole, and I think that is a net positive. In my opinion, it doesn't matter where potential entrepreneurs get the spark, just that they do get inspired to start something of their own, someway and somehow. Of course the downside is that these romance stories tend to gloss over the true challenges of building a successful business, focusing more on the highs than the inevitable lows. Building a business is tough and raising venture capital is also tough. I find most entrepreneurs do have their expectations in check though when I speak with them, despite what the media highlights.
Karen:How easy or hard do you think it is raising venture capital in Canada today?
Roger: It's certainly easier these days than it was a few years ago. There are a number of us, my firm (Rho Canada Ventures) included, who have recently raised new funds and are actively seeking out great founders to partner with.
Karen: What are the biggest trends you have noticed in the last year as they pertain to which companies have secured funding?
Roger: The most important trend in my opinion is that we are seeing more and more Canadian entrepreneurs who truly have global ambitions. They are thinking bigger than entrepreneurs ever have in the past. There are many examples coast to coast, and I can point to many examples within my own portfolio. For instance, Chris Sukornyk from Chango and Hicham Ratnani and Ethan Song from Frank & Oak, have visions to change the world, not just Canada. They understand that to do this, you need to constantly think strategically and you need to acquire customers, raise from the best investors and take on competitors in the Valley, Beijing and London, not just Toronto, Montreal or Vancouver. Outsmart competitors, outhire them and ultimately outflank them for the attention of the public markets or a premium paying acquirer.
At Rho, we've also noticed an increasing trend towards VC's funding first-time entrepreneurs. In fact, some of the best tech companies of our generation were founded by first-time entrepreneurs (e.g. Facebook, Google, Apple). This is true for our portfolio also. First-time founders run some of the best companies we are partnered with. I think if you want to invest in fast-changing sectors such as mobile, consumer services and next generation enterprise software you have no choice but to bet on fresh faces who have fresh ideas. There is so much disruption happening in those markets that existing skill sets and those with track records are disadvantaged in many cases, particularly at the earliest stages of building a startup.
Karen: Once a company is accepted into an accelerator, the 'real work' happens. What, in your experience are companies surprised by when they start at an accelerator?
Roger: Most of the teams I've mentored or worked with at accelerators are first-time teams, meaning they have never founded a startup before and/or they have never worked with their co-founder(s) before. The biggest surprise is usually centered on the need to develop positive founder team chemistry and dynamics. Many founders take for granted that they can work with their partner or that they can navigate daily highs and lows with someone, but that's a tough mandate in any scenario. On top of searching for product/market fit and gaining traction, founders have to deal with working with, and finding a way to succeed with, each other.
Karen: What do companies who have secured their first round need to know?
Roger: Entrepreneurs are pretty sophisticated theses days and that is a great thing. They know a lot about raising venture and what goes along with it. They know what they are getting into. One thing I might emphasize is that no matter how big or small the first round you raise, you need to involve your VCs in your business and communicate both good, indifferent and bad news on a regular schedule. Good VCs know there are ups and downs in a startup. Based on the information you share good VCs will help in situations where they feel they can be helpful and stay the heck out of the situations where they cannot be helpful in. So hopefully you've chosen the right VC partner. Once you have, keep them informed. It will help you build your business and will help you, if and when, it comes time to raise more money.
Karen: How does a funded company keep their investors and advisors happy, even when they hit bumps in the road?
Roger: Simple to say but harder to do in practice -- again I will emphasize to communicate and collaborate in both good times and bad. It's paramount for entrepreneurs to consistently share all types of opportunities, news and challenges with their advisors and board members. Entrepreneurs who only share selective and/or filtered information are destined to quickly lose the support of their partners.
Karen: How does a funded company broach the subject of a secondary round?
Roger: I am a big fan of secondary rounds in order to align everyone's interest in a big exit outcome for a company. First of, I would say it's important to recognize whether your company is a good candidate for a secondary round where founders or early management and investors "take some money off the table." There are exceptions, particularly in frothy markets and when a company has a lot of potential suitors (investors or acquirors), but typically a secondary round is right for companies who are at least at the Series B stage, and more typically, those who are beyond this stage.
The company needs to be significantly de-risked, executing well and everyone needs to feel there is the right makeup of product/team/market opportunity to have a billion-dollar-plus outcome for the company within a few years. From there, like any other major decision in a company it's important to be transparent about your desires with your current investors. If you intend to raise a round with a new investor leading the round, get your current investors on board with the idea first and make sure you target new investors who are comfortable with the idea and have a history of doing secondary rounds. Your existing investors may also be open to a secondary round without having a new lead investor, so that they can increase their ownership position in a company they believe strongly in. Again, communication and openness is the key.
Karen: How important are pitch decks, videos, and other collateral to selling an idea? Can you actually sell an idea from the back of a napkin in this climate in Canada?
Roger: The napkin is dead. In Canada. In New York. And in the Valley. Instead, smart entrepreneurs are building prototypes to take to investor meetings. Show, don't tell. Words to live by for both entrepreneurs and investors.
As for pitch decks, videos etc. -- they are important supporting materials and they have their place. But, ultimately, the team needs to sell their vision verbally and in person over a series of meetings with potential investors. There is no substitute for that.
Karen: Any advice for companies just starting out now about what they can do to increase their chances of getting funding for their business?
Roger: In terms of increasing your chances of getting funded, I would say, first off, make sure you are targeting the right investors for your stage of company. Don't pitch a later stage VC on a seed stage opportunity. Also, make sure to do your homework on the firm and individual you are meeting beforehand. And, tailor your pitch based on this information. You wouldn't walk into a customer meeting without having done your homework and tailoring your pitch to the needs of that individual customer. Personally, I look at meetings with entrepreneurs as a proxy for how they will act in front of customers, partners and when recruiting potential employees. Information is easily available these days and information is power. Use it to your advantage.
Extreme Startups is currently accepting applications for its third cohort. The deadline to apply is February 14, 2012