Advice from Steve McCann, General Partner at SOSV. SOSV is "The Accelerator VC". They run the world's leading accelerator programs in hardware (HAX), life sciences (IndieBio), cross-border internet/mobile in Asia (Chinaccelerator/MOX), food (Food-X), and blockchain (dlab).
1. Not aligning as founders
Investing at the earliest stage, I see many teams implode due to a lack of founder alignment. Sitting down at the very beginning as a founding team to discuss your vision for the company, everyone’s role within the operation of the company, and the equity split can save a lot of these problems. Put simple things such as share vesting, financial controls, short policies, and procedures in place to ensure that there is clarity, fairness, information sharing, and a shared vision in your company. We recommend teams sign a simple short form founders agreement that details many of these things. It has helped many companies to resolve early disputes amicably and with the best interests of the company to the forefront as opposed to any one founder.
2. Not knowing your finances
The easiest time to begin is when you are starting your company; the numbers and transactions are relatively small and should be easy to track (along with the other million jobs you have to do). Accounting is like a muscle — the more you practice, the stronger it becomes. Start with a very simple spreadsheet or accounting package (e.g. Xero, Quickbooks, etc). At the end of the month assess this versus what actually did happen, and figure out why the two numbers could be different. Use this learning to prepare next month’s projections. Sit down as a team and discuss the numbers, what you didn’t anticipate, what is going to happen next month, what might be delayed, how much cash you’ve got, and how long it will last you. Like it or not, cash is going to be the lifeblood of your business, and understanding it gives you a huge chance of succeeding (or surviving).
3. Not aligning your spending with what you want to achieve
Many years ago we invested in a company that raised significant finance. A few years after our first investment they ran into cash-flow problems. I spent a week in their offices as we considered a further funding round and did some work on their finances with the CEO. What we discovered was that they did not track their spending sufficiently or align any of it with the KPIs of the company. Many of the payments coming from their bank account were historic things that they signed up for that they thought they had stopped, they had no in-house financial person (they paid an accounting firm to produce financials that nobody could read), they never looked at their variance reports or assessed any spending campaign to see it if met the objectives they wanted, and many of their staff were on compensation packages that were not in line with what they wanted them to achieve. At the end of the week they recruited an in-house accountant, they changed staff compensation to align it with their role, and they ceased non-effective spending — so we agreed to fund the company further. Eleven months later they had their first profitable month, and one month after that the company sold for a considerable amount, generating a 4x return for us as well as a great outcome for the founding team and staff.
4. Not doing the math before fundraising
Many times when a startup comes to me looking for funding, they present a pitch deck seeking (for example) $1m in investment. Then as part of the deck or associated materials, they have financial projections that show they are going to be profitable in three months' time, and they only require $100,000 in investment to do so. This type of uncoordinated approach is going to lose your credibility with investors. If you are going to try and raise finance, you need to know how much money you really need. You also need to be able to explain what you are going to do with this money and where it is going to get you. As a founder, you should try to anticipate the lifecycle of your company, including how much funding you need to get to cash flow breakeven, to profitability, and to a potential exit. What valuations do you need to reach to make this work on an economic basis personally at each stage? Work it back from the end and forward from the beginning to see how it could transpire. Work on the financial projections for the business. You have a wealth of information at your fingertips about everything. Find out the cost of materials, how much of them you need, where they will come from, the associated costs, what equipment you will need (from where, how much?), and what staff is required (where will they come from, how much do they want to be paid, can you leverage a stock pool?). Look at information from other companies where available, talk to other founders, talk to your advisors, and have your numbers tested. Your investors will hold you to these numbers, so do your best to make sure they are correct. I have had many awkward conversations with founders seeking further investment as we review their original projections provided a few years prior versus the actual reality of what happened….try to avoid these conversations, as it will test the credibility of the new projections you are providing.
5. Targeting the wrong investors
If you are planning to try and raise investment, then please, do not send cold emails to multiple investors with the same tired pitch deck and their first name and surname possibly spelled incorrectly. You need to spend some time finding investors who invest in someone like you! With platforms like Crunchbase, Pitchbook, Prequin, and others, you can now research many investors online. Be specific with why you are reaching out to the investor. Speak to some of their other portfolio companies, watch videos of the investor speaking, and read their blog posts. Find out why they would be a good fit for you, and tell them this. Target your pitch and materials at the reasons why you are a good fit for them. Spend time working out who invests in companies like you, in the right sector, with the right cheque size, stage, etc. Then spend time deciding how you should meet them. Find a warm introduction and then tell them why they are a good fit for you. Don’t blindly waste time spamming every investor you can find — target the right ones properly.
6. Not educating yourself on investment types, terms, and conditions.
We live in a day of having an infinite amount of information at our fingertips. Founders of companies need to spend time reading up on investment legalese and terms. There are multiple good sources of information on the common deal terms and their effects e.g. askthevc.com, Quora, TechCrunch, etc. At the end of the day, every single economic term in the investment documents will have an impact on your equity holding and final economic outcome (good or bad), so it is worth reading up on the terms. Looking at a standard set of investment documents (seriesseed.com) may seem daunting and complicated, but in reality, there is a lot of repetition and there are only 5–10 actual important terms in there around economics and control. Learn what is standard at your stage (Cooley LLP did a good survey of US investments recently at cooleygo.com/trends), and negotiate with that in mind. Also, make sure you hire an attorney that is experienced at your investment stage and reasonably priced. I hear so often of attorneys that are not experienced at the specific stage of investment who delay deals and overcharge. Find someone with relevant experience; agree to a reasonable fee up front so they will focus on what is important instead of running up the hourly bill. Also, get used to modeling your capitalization table for different scenarios. Include all convertible instruments and different scenarios for conversion. I see some startups stacking convertible debt and then being shocked in an equity round when almost all of their company disappears!