Thursday, November 17, 2011

How To Reply to Angel Investor Intro Emails

I have had a lot of entrepreneurs ask me for introductions to various investors.  In some cases the entrepreneurs use their reply to the intro email as a mechanism to gain social proof, emphasize urgency, and to reduce the friction to meeting the investor and closing their round (see e.g. VentureHacks for great tips).

Unfortunately, a lot of otherwise savvy entrepreneurs don't follow up with investors well.  You have to remember that every thing you do can signal to an investor a lack of urgency/interest in your company, the fact that you are taking your startup casually,  desperation, or a lack of ability to follow through.  Also, if you don't create urgency or a sense that the investor may miss out on something interesting, then the angel may drag their feet in meeting with you, extending the time of your fundraise.

This post is focused on the small tactics that go a long way upon receiving an introduction.

Example Of a Bad Reply To An Investor Intro 
"Thanks Ivan Introducer for the intro! 
Hiya Angela Angel,
It is great to meet you!  Love to connect!  Let me know what works!
Elizabeth Entrepreneur"

Example of a Good Reply (tailored to an angel round with a lead)

"[moving the person who made the intro to BCC][1]
Hi Angela Angel, 
It is great to meet you.  As introducer said, we are in the midst of a round led by well-known investor and other well known angel is also investing[2].  We have seen really solid traction with user growth of X up Y%. [3]  See below for team bios/key stats [7] 
Our round is coming together quickly so the sooner we can talk the better[4].  Are you free to chat at one of the following times?[5] 
Monday 2pm-3pm;  5pm
Tuesday 1:30pm-3pm, 6:30pm 
We can also try to move things around to accommodate you - we have heard great things about you as a social media investor (in particular your investments in Tumblr and Pinterest)[6] so would love to connect before we close the round. 
Elizabeth Entrepreneur
Team bios [7]
Elizabeth Entrepreneur
-2008-2010 Tech lead at Facebook for newsfeed
-CS, MS degrees from Berkeley
-Side project getting 100,000 visits a month 
Carl Co-founder

What Is The Difference?
I added numbers to footnote the important parts of the email.
1. Move the introducer to BCC.  They don't want to be on the 15 emails it takes to schedule the meeting.
2. Put social proof up front.  All these great investors are part of the round!  Angela angel will want to be part of the club and invest too.  It also means you are more legit than the other random companies trying to talk with the same investor.
3. If you have good traction or a key stat, explain it in 1-2 lines.  This is additional proof that they need to rush to talk to you.
4. Put polite pressure to chat very soon.  You need to emphasize things are on a fast track for you.  If things are moving slowly it suggests no one is interested in your round, which means this investor won't be interested either.
5. Add specific times.  This reduces the friction to scheduling as if you leave it open ended it (a) does not convey urgency and sets up the timeframe within which you will meet and (b) makes the investor work harder to figure things out.  Don't put the burden on them to suggest a time
6. Explain why the investor is relevant.  This helps them understand why they are a good fit for the company.  It also extends the the timeframe you can wait to meet with them if needed without looking desperate (e.g. if the can only meet in two weeks, their experience justifies you waiting for them as they are uniquely awesome for your company, rather then because you dont have other options).  
7. Add team bios (2-3 lines, bulleted per team) + any key stats (if no good stats, just included bios).  People will want to know who you are and why to meet with you.  In some cases, even if the idea is bad they will still want to meet with you if you have a strong background.  This will give you a chance in person to convince them to invest.

Hopefully, the person who introduced you already covered items 2 through 5 or 6 in either their intro, or in the email asking if the investor will talk to you.  If the intro explicitly included 2-3, you can skip mentioning it yourself, but you should keep the other elements in.

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Other fundraising posts:

Friday, November 11, 2011

Holy Crap! The NY Startup Scene

Every few months I take a weekend to step back and make myself a list of startups doing impressive things.

One of the things that struck me was the extent that startups coming out of NYC were included on the list for the first time.  It used to be that NY mainly about AdTech and SEO-farm focused "new media" startups.  These companies were often pretty underwhelming.   Nowadays, NYC is definitely undergoing a web renaissance with clusters in social media and commerce.

4 Reasons The NYC Startup Scene Changed
1. Access to Capital.
There is a lot more capital available in NYC today than there has been historically, and it is now provided on "West Coast Terms".

It used to be that NY and Boston was known for ex-Banker VCs who wore ties and penny loafers and asked entrepreneurs to go on a 5 year vest.  NYC has seen an influx of capital in terms of both thoughtful local VCs (such as First Round and Union Square) and angel funds (e.g. Founders Collective, Lerer Ventures), but also a larger number of traditionally West Coast focused VCs have been increasingly willing to fund NYC based companies.  This includes everyone from Accel (*, BirchBox, Bauble Bar), Andreessen Horowitz (Foursquare, Canvas), to Sequoia (Tumblr, etc.) and more recently Greylock (Tumblr).

Almost every NYC startup I know of now makes a trip out west to fundraise, and West Coast angels and VCs have become increasingly comfortable investing across the country.  In parallel, some West Coast VCs are moving to the East Coast . For example, Accel recently opened a NYC office, and one of the sharpest investors I know - Alex Kinnier, recently joined NEA on the East Coast.

Capital is now chasing the best companies no matter where they are (as long as they are in the Bay Area or NY :)

2. Anchor Companies.
In 2002 I somehow ended up with almost an hour 1:1 meeting with Don Valentine, the founder of Sequoia Capital, and the VC who personally funded Apple, Cisco, EA, Oracle and other titans of tech.  Valentine and I spoke about the difference between Boston (which I had just moved from) and Silicon Valley.  

He pointed out that one advantage Silicon Valley had over the East Coast was its preponderance of "anchor companies".  These companies are large tech companies that recruit and import a large number of highly talented people from all over the world.  These talented people then either go on to found their own companies, or to poach management or other talent from the existing anchor companies.  In other words, the fact that Google and VMWare and Intel and Cisco have tens of thousands of engineers each enables the creation and *scaling* of amazing startups with high talent density themselves nearby (e.g. I have seen one estimate that about 1/3 of Facebook's engineers are from Google - which means hundreds of people have switched from Google to Facebook in a short time span).  

In contrast, the number of "anchor companies" on the East Coast has traditional been pretty low (I don't consider IT departments of big investment banks as "anchors" as these organizations are not product focused).  This started to change as companies such as Google built large engineering/product offices in NYC, and has allowed companies to find talent more quickly.  For example, a pretty big chunk of the early Foursquare engineering team is ex-Google, while the COO  of Etsy is also from Google.  This increase in web product/engineering talent density in NYC helps change the dynamic and allows East Coast companies to scale to a larger size without the need to open a West Coast engineering office.

In parallel, NYC has started to get some smaller anchor companies for competencies such as commerce and more recently, social media.

3. Increased Ease of Development.
The cost and speed of development has dropped dramatically.  From AWS to Django and Ruby to all the various APIs and platforms (Twilio, Stripe, etc.) a single engineer can build an enormous amount.  This means a small team can wholesale execute a great product (see e.g. the early days of Tumblr, or stand-alone 1 person teams such as Instapaper.)

This lower bar to development means that despite its sparser engineering and product talent pool, NY startups can get up and running with fewer people and still pull off amazing things.

4. A Social, Design Commerce Focused Environment
People who chose to live in NYC are in an environment that is more art, design, and media influenced than SF, which jives well with the webs shift to social media.  It is not a surprise that companies such as Tumblr and Foursquare have thrived in NY.  Similarly, many big brands and traditional commerce companies are based in NY, which has been a boon to companies such as Gilt Group.

List of Some NYC Startups
Here are some of the startups I think are doing some of the more interesting things based in NYC:

A. Social Media

B. Commerce

Hopefully, some of these startups will get large enough to act as anchor companies and reinforce the cycle of startup creation.  If these companies end up with early exits, they will never hit the scale and talent competencies that will allow them to contribute to the next entrepreneurial startups.

You can follow me on Twitter here.

*I believe is actually HQ'd in Jersey

Friday, November 4, 2011

Series A Crunch: Why Fewer Companies Are Successfully Raising Series A Rounds

Update:  Data from TechCrunch supports the post below.  CrunchBase has seen a 33% increase in the number of seeds reported and a 9.6% drop in the number of series A's reported.   In 2008 the ratio of seeds/series A reported were 1:1, in 2011 the ratio was ~2:1
One big shift in the startup scene over the last 18 months is the sheer volume of startups getting started and seed funded.  If we use Y-Combinator as a proxy for the broader ecosystem (which is probably directionally correct, although YC growth may be overall higher due to increased branding as well as e.g. Start Fund and other activities) then we see the following:


At the same time, the percentage of startups closing seed rounds seems reasonably static to me (it may even be up).  This means there are many more companies getting founded and then funded at the seed round.  However, the number of legitimate VCs doing series A rounds has not increased.

This has led to a crunch at the series A level, where more and more startups are unable to successfully raise a series A.

Reasons for the Series A Crunch
1. The bar has gone up significantly for what constitutes a company that can raise series A.  This is due in part to valuations going up (so series A are now often $5-10 million raises instead of $3-7 million) but I think it is largely due to the large supply of startups.

2. More startups means that there are more startups doing "merely OK" all competing for the same dollars.  It also means there may be slightly more startups with high traction (e.g. if 1 in 100 get lots of traction, and there are 2X more startups, there are 2X more startups with high traction), which means the high traction startups will soak up most of the investment dollars.

All the VCs I know tell me times are getting more and more busy for them.  They are seeing way more series A deals coming through their doors, but they are funding the same number of deals.  This means fewer startups are successfully closing A rounds.  Those startups that do close round are often further along then the average series A company was 2-3 years ago.

Return of the Bridge Rounds
So what do all these startups do that can not raise a series A?  A subset sell as a team buy, a few go out of business, but an increasing number are going out for a bridge round.  Basically, instead of raising $5 million, I am seeing post-seed startups raise anywhere from $500K to $1.5 millon, at a valuation somewhere between a series A and a seed valuation, with the hope that the additional capital will give them time to gain more traction or scale their business.

Q1 and Q2 of 2012 Will Likely Be Very Competitive For Series A
Many companies who raised a bridge round plan to go raise a series A sometime next year.  Unfortunately, the environment may get even more competitive at that time.  Given the ramp in new startups in early to mid 2011, Q1 and Q2 of 2012 may be even more competitive.  You will not only have the startups seed funded in 2011 raising a round, but also all the startups from 2010 who raised bridge rounds - all competing for the same dollars.

If you add in the risk of a European financial crisis, then early next year may be a tough time indeed to raise a round if you are in the "middling" zone of traction (versus those that will flame out or be team buys).  In contrast, companies with great traction, or a well connected celebrity entrepreneur, will still get chased by all the various VCs as usual.

Some Tips For Raising a Bridge Round
Given the likely high competition for series A dollars in early 2012, if you plan to raise a bridge round I would suggest:
1. Raise enough money to buy you real runway.  Make sure you have the runway to hit the milestones needed to raise a series A.  It will be harder to raise another bridge, and it is always easiest to raise money all at once then have to go out fundraising again 6 months later.  If you think you need $500K, think about raising $750K or $1 million to have extra runway in case it is needed.

2. Diversify your investors.
Adding new investors to the mix may both up the valuation you get for the bridge, as well as expand your network for the series A.

3. Include some insiders from your first round if you can (and if they have been useful).
Having 1-2 existing investors re-up into your bridge will convince new investors to participate at a higher valuation.  However, if you can not get existing investors in a bridge at a good valuation, or you do not think they have been helpful, feel free to exclude them from the bridge round and focus only on new investors.

You can follow me on Twitter here.

Other fundraising related blogs:
Questions VCs Will Ask You
How To Raise A Successful VC Round
Differences Between Funding Rounds: Series Seed, A, B, C...
Financing Approaches Most Likely To Kill Your Company
Put Your Investors To Work For You
Party Rounds: How to Get A High Valuation For Your Seed Startup
20 Questions To Ask Yourself Before Raising Money
VC Economics: Why VCs Could Care Less About Your $50 Million Exit 
The 7 Types Of Angel Investors

*Update: this graph has been updated with data from Harj Taggar, one of the partners from YC.  Many thanks to Harj for the info.