Top 5 Myths of Working at a Startup: MBA Edition

Guest post from our outgoing and fabulous summer intern, Eugene Song. Great to have your help this summer, Eugene!

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In business school, you become very acquainted with “recruiting” (or what most normal people call “job searching”).  From day one, you’re inundated with corporate presentations, job postings, and panel discussions about the pros and cons of interning at Big Bank X or Consulting Giant Y.  Even if you’re not interested in those fields, you end up going anyway.

But good news, everyone!  In recent years, there’s been a slow but steady migration of interest over to startups.  In fact, I believe the Entrepreneur Exchange is now the largest club at Stern, ahead of even the Finance club.  We’re definitely starting to see more MBAs popping up here and there in the startup world.  But why aren’t there more?

I believe the answer lies in the misconceptions and myths that many MBAs have about startup life.  Having worked at a few since coming to business school (and others prior to), I’ve been able to disprove a few of these misconceptions.  So I’d like to present my findings in the following list:

Top 5 Myths of Working at a Startup: MBA Edition

1) Startups don’t want/need/like MBAs

Sure, some don’t.  I think a lot of them hate the sense of entitlement that comes with the degree—in some cases, they have a right to feel that way.  But many startups do value MBAs.  You just have to go find them and prove to them why they should value you.  When cash is scarce and faulty team dynamics can destroy a company, everyone (not just MBAs) that comes through the door has to prove themselves multiple times over.  Fact.

As a side note, very early-stage companies generally have little need for the MBA skill set.  Two guys working in a basement don’t need someone to tell them about CAPM, Porter’s Five Forces, or the Kanban Method.  They need technical expertise (read: developers) above almost anything else.  But once they raise funding, find a product-market fit, and begin growing, their needs change.  That’s when this degree can make a difference, but it’s still your job to illustrate how. As a wise classmate of mine once said, the key is to get the job before you even interview.  If you want to work in a certain field or for a certain type of company, immerse yourself in that industry, get involved in the community, or even start some side projects of your own.  As cliche as it sounds, you need to make it abundantly clear that you have so much passion for the work that you would quite literally do it for free.

2) The work is ambiguous and unstructured.


Yes, to a certain extent, you will be responsible for structuring your own internship.  Some startups don’t know what they need, so if you talk to them, you might be hearing a lot of “you’ll just need to come in and figure something out.”  And yes, inevitably, you will need to wear multiple hats.  But if you look around, you’ll find there are plenty of startups that have a really solid idea of projects they need completed.  

Profitably certainly did.  When I met with them prior to my start date, I was presented with three distinct, defined projects and asked to choose between them.  Once I started, I was then presented with a rough overview of what my chosen project might look like and asked to expand and extrapolate from there.  For me, it was the best of both worlds.  I was given a solid foundation of work while being allowed to dicate how my work would evolve and grow.

3) They work out of their apartment/Starbucks/parents’ basement.

Have you ever been to General Assembly?  Yeah.  Oh, and they host happy hour every Friday, so it’s like having Beer Blast all summer.  For free.  And GA is certainly not the only one of its kind.  Sure, you might have to share a desk with four teammates.  But let’s face it, you don’t really need most of your cubicle anyway.  And after all, sharing is caring.

Another side note: It’s awesome working around so many other startups and entrepreneurs.  Not only does it foster a sense of camaraderie and motivate you to work harder, I cannot tell you how many times over the last ten weeks this scenario has occurred:

Adam: So how’s the search for [type of developer] coming along?
Francis: Not bad, but we’re still looking.  It’d be great if we could just find someone with [X, Y, Z traits]—
Random GA Member: Hey, I couldn’t help overhearing your conversation.  I just happen to know a [type of developer] with [X, Y, Z traits].  I’ll introduce you guys.

[fin.]

4) The pay is terrible.

Yes and no.  Yes, many startups can’t afford to pay you the salary you’ve probably come to expect, especially after a semester or two at business school (“Dude, I got that internship at HugeBank X! Drinks on me!”.  And yes, you’ll hear horror stories like “I got paid enough to cover my bus fare.”  But more and more schools are instituting fellowships that match the salary/stipends of students working at early-stage companies.  NYU Stern certainly has one and I know they’re not alone.  Programs like these definitely help take some of the sting off.

5) But I’m an MBA… What do I have to learn from someone who’s just starting his own company?

Well… Let’s take a look at the business guys who I worked for at Profitably.  CEO/Founder Adam Neary spent a decade as a hardcore data analyst at large and small firms.  He’s more of a “numbers guy” than most of my classmates. 

VP of Customer Development Graham Siener was most recently COO at a renewable energy consultancy.  Oh, and he opened a $1MM bio-diesel plant.  These guys, as well as the tech and design team, are all incredibly accomplished professionals.  We could all learn a lot from them.

When I started “recruiting”, I was asked over and over again what it is that I want out of my internship.  I came up with a lot of answers.  I want to work at a startup.  I want to “do” business development at a startup.  I want to be engaged in the exploding NYC tech community.  I tried my hardest to define what I want and had a few breakthroughs.  But I kept coming back to the same sentiment: I wanted to sink my teeth into something that has the potential to really change things.  Lucky for me, Profitably gave me the opportunity to do just that.  

So if you made it all the way through this post, thanks and here’s a bonus:

5 Resounding Truths of Working at a Startup

1) You will work hard and feel pressure to succeed
2) Your initiative will be encouraged
3) You will have multiple opportunities to move the needle and make a difference
4) You will talk about “strategy” (MBAs, take note!)
5) You may never want to leave

It’s been a blast.

-Eugene

Fear and Loathing in Customer Development

You worthless coward.

It’s not that you don’t know how to check your work. It’s not even that you’re lazy. You’re just a coward.

I’ve said the above to myself, and I’ve said the same to a dozen junior analysts in my former life as a management consultant. We were building out a team of war-hardened data analysts, running thousands of ad hoc queries daily against some pretty grizzly datasets. Output changed constantly as we added and cleaned data and improved the models, and as if that wasn’t tough enough, the results were typically presented in PowerPoint…via Excel…via SQL Server.

After getting burned—very badly—by myriad silly data errors in your first year (overly restrictive WHERE clauses or improperly joined tables, the list goes on), you learn methods to quickly check your work and to write scripts to batch generate analyses after data updates or to populate well-formatted charts in Excel and then drop image copies of those charts into well-formatted PowerPoint decks.

Nonetheless, in the heat of these early analysts days, the most striking and inexplicable emotion in the throes of a 72-hour bender was Fear. I suppose there’s never enough time, and if every minor error means 2-3 hours of rework, each discovered error can be devastating. That’s why analysts sometimes allude to the legendary Cave of Unreported Exceptions.

Imagine, late in your first year, you’ve learned how to check your work, but sometimes, very late at night, you’re actually terrified of looking. Say you’ve used a complicated set of segmentation gates to break hundreds of millions of records into discrete groups. Under time pressure, you run analyses against each set independently. You know the final profit figures for each group should add up to the total profit figure in your client’s P&L. All you have to do is add those 7 figures in a calculator or Excel to make sure nothing’s gone wrong. 

But it’s 3am. You’re tired. The client needs the output, and if you send it now, you look like you’re hard-working. If you send it in 3 hours, you look incompetent. More importantly, you’ve gotten 4 hours of sleep total thus far in the week. 

Out of fear, you click send, and you get some rest almost certain that you missed something. You martial strength for the next day’s battles, but fear the unknown though reassurance is little more than a click or two away.

Well, those of us that survived those days quickly learned what developers call test-driven development. You actually start building the model with the test it must pass before you write the first line of code. At the heart of this process is Courage. It’s the resolve that no matter how tired you may get and no matter which partner in the firm is screaming for it 2 hours ago, it’s always faster to do it right the first time.

But the transformation is more profound than that. When you finally decide to embrace the fear and start by hitting the toughest questions head on and first, you become a hurricane…all of a sudden it’s like you’re not playing with the same rules as everyone else. You’re Neo from the Matrix.

What? We’re dumping the 2002 data and running everything from scratch with 2003? I hope you brought your umbrella, ‘cause I’m about to hit F5 and it’s gonna be raining data!

Yeah yeah yeah—I thought this post was about Customer Development.

So, I felt a visceral twist in my stomach this morning when I met with a customer, and he told me that he didn’t care about a particular feature that I thought for sure he would love. 

I felt weird about the conversation, and then the big “ah-ha” came when I realized that the visceral twist wasn’t that he didn’t like the feature. It was that I had suspected he might not but had been terrified to ask. I hadn’t felt that flavor of fear in a decade—it took me right back to my early analyst days.

Maybe I’ve been losing so much sleep lately because of a nagging feeling that there are a set of tests we need to run but haven’t been. On the surface, look at everything we’re doing to get meaty feedback—we set up UserVoice, put out surveys, track user behavior in the app, and we talk with customers literally every day. 

But is it possible that when it all comes down to it, we’re actually under too much time pressure (and are too fearful) to make sure—to really make sure—the 7 numbers add up and that our customers really care about what we’re working on?

Make no mistake, this is a hell of a lot tougher than checking your work at 3am for a project with some giant, anonymous corporation at age 22. No, this is your baby, your product vision, your sense of the marketplace. Rejection of a feature is some sort of rejection of me in a way in which SQL scripts just can’t compete.

So maybe you just need to be scientific about it. Maybe you need to be dispassionate and cerebral. And yet, successful entrepreneurs are invariably passionate about what they are doing. Is the magical recipe about somehow being ardently passionate about the problem and yet alarmingly dispassionate about how you solve it?

Perhaps the magical recipe is less about knowing how to ask for feedback…perhaps it has nothing to do with being too lazy to ask for it, but perhaps the recipe is simply about the courage to really want to know the answer.

Today I said to myself, “You worthless coward.” And in that moment, perhaps I caught a glimpse of what real Customer Development feels like.

-Adam

Watch Adam in a special edition of Founder Storiesinspired by Paul Graham’s Office Hours onstage at the last Techcrunch Disrupt.  Joining regular host Chris Dixon is Josh Kopelman, managing partner of First Round Capital.  A big thanks to both of them for their time and advice!

(via Founder Office Hours With Chris Dixon And Josh Kopelman: Profitably | TechCrunch)

The Ultimate 6-Week Startup Crash Course

I met another young man today who is en route to a world class MBA program to fill in the gaps in his knowledge prior to starting his life in a startup.  

I gave him the same metaphor I have given droves of others.  If you wanted to be a world-class cyclist and told me you were going to spend the next 2 years rock climbing in Nepal, I would advise that, sure, you would probably return in shape and with stronger lungs, but you would probably be a better cyclist if you spent the next 2 years cycling.

For some reason, many business guys have a Mr. Miyagi-style notion of doing something else full time for the sake of building skills prior to engaging in what you want to do directly. It worked in the Karate Kid, but it’s poor advice for entrepreneurs.

Today’s subject, who seemed quite smart, was at least interested in working at Profitably in an intern capacity for 6 weeks prior to school matriculation, but since he doesn’t write code and doesn’t sell, there wasn’t a lot we could put him on over given our stage in development (and so I told him, and I will be forwarding this post his way, so I am not trying to be rude).

Rather, I recommended he start his own company in 6 weeks instead.

We talked through a concept he was batting around, which was actually quite sound, and I recommended setting specific milestones for no/no-go gate at the end of the 6 weeks. In that period of time, without writing a single line of code, he could:

  1. Launch a splash site
  2. Test out pen-and-paper mockups with real users from his target market
  3. Confirm if they would use or pay for what he was considering launching
  4. Get out in front of the other revenue streams and get letters of intent from key stakeholders in his ecosystem (his idea allowed for that, fortunately)
  5. Use a modest test budget to see if people would click on ads around his key messages

I thought I saw the spark in his eye, so I hope he follows through on this, but I realized that I have emailed a set of resources to a couple dozen bright-eyed folks just like him, so I figured I would consolidate that list once and for all so that I can just send people here.

And here it is: The Ultimate 6 Week Startup Crash Course (including the resources you need to validate a business concept with ridiculously little time and money).

Please note: there are 3 steps, and they need to be followed IN PARALLEL, not in series. Start all 3 steps this afternoon.

Step 1: Get educated 

Everyone’s got their favorite must-read list, but here’s mine:

Just as importantly, you need to go read the key articles within and subscribe to the following blogs:

Don’t just subscribe. Read through the “best of” lists and peruse archives as appropriate. You’ve got a lot to catch up on, so while we’re at it, follow these folks on twitter (and find out who they are talking to), get an iPad, and load up all this content onto the iPad.

The collective knowledge all these folks are sharing is crazy.  Follow their links serendipitously and soak it all up like a sponge. Build your list to share with others (and let me know what I missed!).

Step 2: Learn to write code

I have anecdotally heard business people objecting to the idea of learning to write code, as it’s supposedly a waste of their talent.  Cute. If you’re going to start a software company, learn to write code. You’ll have a CTO who will write all the real code, but you need to know what models, views, and controllers are in the first place.  You need to know the difference between a relational database, an OLAP cube, a document-oriented database, and a key-value store. More awesome than all that, you definitely need to know how open source software works and how source control works, technically, culturally, and from an etiquette standpoint.

The good news is that engineers are better than bankers, consultants, scientists, or any other adults when it comes to sharing and structuring knowledge in a distributed environment, all for free.

Visit http://guides.rubyonrails.org/ and over the next six weeks, go at least through all the “Digging Deeper” sections.  Just follow the instructions.

If you blow through the guides (a clear sign you’re an entrepreneur in reality!), you’ll have plenty of time to build an actual, working prototype of your idea.  

And you should.

Step 3: Validate your idea

We all agree that an idea and $3 buys you a cup of coffee at Starbucks.  You don’t want to be ridiculed as a Winklevoss, so make peace straight away that your idea means nothing, but execution means everything.

You don’t need startup capital, and you don’t need a coder.  You need to find out if anyone cares about what you’re thinking about offering the world.  Hopefully all the reading I recommended above will give you a much more informed idea about how to do that, but since you’re starting each step at the same time (right?) you haven’t read all those books yet.  So here’s a first week worth of to-dos:

 - Buy a domain and launch a splash site using Wordpress
You can find cheap hosting with 1-click non-technical install. Follow the instructions, and then search for a sexy theme that you dig out of the box (e.g. http://www.press75.com). Write some copy. Don’t know where to start? That feeling isn’t going away—it gets profoundly worse.

 - Begin blogging. Don’t know where to start? That feeling isn’t going away—it gets profoundly worse.

 - Begin collecting email addresses on a landing page from people who want to use your service

 - Go to Google, Facebook, and LinkedIn, and create test budgets for ads that point to your landing page. See if people click on the ads and if they give you their email addresses.  This is your first “conversion” data—enjoy the sweet delicious nectar of feedback! 

 - Draw out full paper mockups of everything you have in your head, and put those drawings in front of people who will use your product. Ask if they would pay for the product. How often could they see themselves using it? Why WOULDN’T they use it? What would it have to do to get their attention? Don’t ask your friends. Ask your enemies. Presume they are being nice to you because they don’t want to hurt your feelings. Of course they want what you’re offering, but no, they don’t want to sign up for your mailing list or alpha?! Bullshit. They hate your idea. Go to a meetup related to your space and practice trying to convince a stranger to sign up for your email list with a couple mockups and a smile.

Note: If you feel like getting cute, use Balsamiq. Or don’t.

 - If someone ELSE is going to pay you other than your users—and this is key—go talk to them.  If you can’t get meetings with them in the next 6 weeks, what does that say? If you can, show them the mockups. Best case scenario, get letters of intent around pricing for whatever you’re planning to do.  There’s nothing better when you need to explain to your mom and your girlfriend and your priest and your butcher that you’re not going to business school.

 - Once you know (on a preliminary basis) what people will pay, do some honest market sizing.  If you’ve got something people will pay for, how many of them are there?  If you multiply those two numbers and you’re north of $1B, you’ve got a fundable startup. Find other ways to qualify that number and calibrate it. Use Census Bureau data. Find other MBAs who have access to Hoovers, Capital IQ, Forrester, and Gartner, etc. You might even find a future intern. ;-)

 - Two weeks in, sign up for 4-week trials to a dozen some-odd tools that help you kick ass all over the place. Steve Blank has a pretty good list, but definitely include KissMetrics and KissInsights, Google Analytics (free) and Apps (not as free), Tout and/or Mailchimp, SurveyMonkey, Dropbox, and whatever else applies to your space. (But don’t waste time on project management, planning, budgeting software or anything related to “scale.” Please refer to “I’m Going to Scale My Foot Up Your Ass" for more details. You’re validating your idea, not building a business yet.)

 - Learn by doing. I’m serious. Learn by doing. Then repeat.

Bottom line

At the end of the 6 weeks, if you have read until your eyes crossed, learned to write code, and validated that there is in fact a business there…and you still want to go to business school, you’re not an entrepreneur. At least you found out quickly and can spend your two years gearing up for a role at Amex, Bain, or JP Morgan rather than tilting at windmills.

And this is ok, by the way. My wife is a Harvard MBA and a successful consultant, and she’s amazing. The guy who introduced us is a Harvard MBA and a banker, and he’s ok anyway (wink). Amex, Bain, and JP Morgan are awesome. They just aren’t for entrepreneurs.

It’s possible, though, at the end of the 6 weeks you’re going to feel the way most entrepreneurs feel, that there isn’t anywhere near enough time in the week to get done everything you need to get done, and you can’t imagine wasting another minute screwing around.  You’ve got 25 meetings already set up for next week, 10 meetups to check out, a dozen revisions to mockups you need to test out, Google Reader with a 1000+ article backlog, and an enormous market full of customers who are dying for what you’re going to bring them, god damn it.

Once you’re hooked, it’s over.

And once you’re there, let’s meet for coffee again, and we can talk about who I can introduce you to so that you’re spending the following six weeks even better.

-Adam

The actionable/revealing quadrant

All consultants and former consultants (of which I am one) tend to look at situations as two-by-two matrices.  When I think about the types of insights an analytical tool can generate, tend to think of two spectrums straight away: Actionable vs Vanity metrics and Revealing vs Obvious insights.

Actionable vs Revealing

One of the toughest things we need to do at Profitably in order to create a massive customer pull (as opposed to trying to push our app to customers) will be to really push the actionable/revealing quadrant.

The other quadrants are not rare when you look at what’s out there.  

Table stakes are what I call the obvious vanity metrics, things that our customers know going in and which don’t drive action at all. Though as a product person, the instinct is to kill off these metrics/insights entirely in favor of better uses of screen real estate…we realized that often times new customers are looking for something familiar with which to calibrate their expectations and find a good footing.  

So early on, these table stakes metrics are great for onboarding, but you need to know that’s what you’re doing, because they don’t add a ton of value.

Meh-trics are the actionable but obvious metrics, and they make the user sigh, “meh…” As with table stakes, there’s no place in a mature product for these metrics beyond calibration, and these tend to be the types of metrics that get positioned as something the user should prioritize. 

In reality, the meh-trics cause the user to think, “why am I bothering with this tool? I know all this stuff already.” You can rapidly end up burning through a user’s patience, so these should be avoided.

Pie-in-the-sky insights are actually revealing, but they may frustrate a customer if an insight is revealed that doesn’t have a clear path to action.

Profitably is currently surfacing a number of these pie-in-the-sky moments within its app, and we are working hard to resolve that.  If we tell a customer that one of her customers is unprofitable but don’t provide a clear path to resolution, that can be a sour user experience. A clear path to execution is critical, and we don’t always provide that.

The GOLD MINE is the actionable and revealing quadrant, and this is where 80% of the product value has to come from. With our product hats on, running the revealing/actionable test on new features has really helped us prioritize what we plan to surface within the app. In addition, we have started to apply the General vs. Specific test, which I suppose turns our 2x2 matrix into a cube, but I will leave that for another post.

In the meantime, the more specific, actionable, and revealing insights we can surface for our clients, the faster the path to value for them and for us.

Let your customers help your Customer Development

You hear it again and again — stories that extoll the virtues of understanding what your customers need.  Zappos has built their whole business around the idea that happy customers are the key to success (see Delivering Happiness for more).  Pair that with the enthusiasm for the Lean Startup Movement and everyone points to customer development as critical to traveling down the road towards product/market fit.

At Profitably, we’ve generated such a backlog of ideas and tweaks that we could keep building in perpetuity.  Some of these concepts come from scratching our own itches, some come from experts in the finance space, and others come from business owners that never want to hear the words “general journal.”  So how do you effectively capture and act on those ideas?  How do you cut through the noise to develop the car and not a faster horse?

I don’t have the answer, but since we’ve gone through a number of iterations on this I’ll share what we’ve arrived at so far.

First off, there are many ways to get feedback from people and you should plan on using as many as you can.  There are many types of learners — some like to read the manual first while others rip open the box and start playing.  Before people even sign up for Profitably, we give them lots of resources.  We keep updating our FAQ to handle common questions, are constantly publishing relevant content on our brochure site (app specific and agnostic) and even give people the chance to jump into a demo.  We put an email address and phone number on every page, you can submit a question through the Zendesk tab on the side, and I’ve even hooked up live chat on the pricing page.  This alone generates a good volume of feedback and food for thought.  Remember — this is all coming from people who haven’t even signed up.

Now, let’s assume that all of this great content is able to convert some of these visitors into leads and trial signups. (You are tracking all of this and reading Lincoln Murphy’s great advice on SaaS marketing, right?).  Even signing up for a free trial is a commitment.  There’s an opportunity cost associated with the time you’ll devote to getting started, so bear that in mind.  In our app we offer the same communication channels from the brochure site, and I’ve also created Kiss Insights prompts based on specific triggers (e.g., someone has returned x number of times and has been using the app for more than x minutes).  I’m conscious of the fact that people are using the app to answer a business need, not take a survey, so the questions are quick and hopefully in context (and easy to ignore!).  I also follow up with every person that signs up to get a sense of their business and what problems they’re hoping we can solve.

Sounds great, now how do we turn all of those emails and calls and text snippets into stories/features?  We’re still rolling it out, but I love what I’ve seen so far with User Voice (believe it or not we use yawa — yet another web app).  We capture requests, questions, suggestions from all of these channels and figure out how to cram them into a sensible product development model.

The set up includes epochs (or “epics” as we call them) for the high level blocks of functionality that are still in the distance, along with more granular ideas or tweaks for what’s already out there.  We considered keeping the longer roadmap ideas internal but ultimately decided it’s more important to get your ideas out there and get feedback.

Product development is about figuring out the single most important problem that exists right now and doing that and only that (source)

This is important to remember, and tracking feedback through User Voice helps us be measured in our decision making.  When it’s time for us to start our next sprint we have a weighted backlog to pull from.  Even better, anyone that voted for an idea is updated on progress, from review all the way to completed.  Maybe some day we’ll let people add stories right into Pivotal Tracker! (ed. note from Francis: false).

What stinks: UV doesn’t allow me to attribute ideas to someone else, even as an admin.  Instead, I’ll do the adding and then send the link back to the requester.  If they vote or comment the link is still there, but I’d much rather see ideas linked to other people than me.

Overall I’m really happy with how our experiment’s progressing.  Want to hear more? Know how we could be even more awesome at capturing this feedback?  Leave a comment below!

If you can get your target market so succinct that you can name your ideal client and know everything about that individual, you are on your way to really honing in on the business that you are the expert in.
Welcome to Eric

Eric Richmond

There’s a new face in the office!  The Profitably team officially grew this week with the addition of Eric Richmond.  Eric originally hails from outside Boston and spent the last four years working on a competitor to what is now Google Voice and staying on the edge of rails development.

Eric adds even more firepower to our engineering team along with a wealth of startup experience and iPad envy.  You can find him on github here.

Welcome Eric, we’re glad to have you!

Interested in what it looks like from Francis’ desk?  This video is a great start.

The Play-by-Play series asks a bunch of Ruby experts to solve specific problems while being screen-casted and encouraged to talk with really fine-grained detail about how to be productive. It’s less about specific tools and theories, and more about how to incorporate everything into a specific flow that works well for you.
It was a lot of fun to sit with Geoff and talk about how I get code done. And who knows, maybe it’s of use to other people too.

(via Francis Hwang: Play-by-Play)

Interested in what it looks like from Francis’ desk?  This video is a great start.

The Play-by-Play series asks a bunch of Ruby experts to solve specific problems while being screen-casted and encouraged to talk with really fine-grained detail about how to be productive. It’s less about specific tools and theories, and more about how to incorporate everything into a specific flow that works well for you.

It was a lot of fun to sit with Geoff and talk about how I get code done. And who knows, maybe it’s of use to other people too.

(via Francis Hwang: Play-by-Play)

A Tale of Two Financings

Boom.

Profitably just closed $1.1M, and I think I am feeling every emotion at once.  While the rest of the team is ready to go out and celebrate (and has earned it!), I feel like I could use a nap, a hug, a good cry, and then perhaps a Manhattan or two.  

In July, we tried to raise $500k and barely eked out $300k.  A few milestones later, we went out again to raise $500k and closed $1.1M, literally turning away eager investors at our door…but even that came after 6 long months of grizzly fundraising grind.  So what switch was flipped where suddenly investors were clawing to get into the deal?  Nothing, actually, though I think there’s an important lesson in that, and it has to do with luck.  

I’ve read many blog posts by entrepreneurs who have raised money successfully, and honestly, I can’t relate to most of their experiences.  Maybe our situation was grossly different, or maybe folks are glossing over their struggles and mistakes.  Either way, I thought I would do my best to recount an honest and complete review of 2 very grueling rounds of startup financing.  If anything, I hope others going through the process can take heart (yes, it’s supposed to feel this way!) and learn from my many mistakes.  

The post is broken up chronologically, so feel free to jump to the end if you like.  

Mar - July 2010: $0k from Founder Institute and their introductions  

Before I quit my day job in the name of entrepreneurship, I joined up with an incubator called the Founder Institute, which takes 3.5% of your company after you eventually close an equity round in exchange for mentorship and promises of assistance during fundraising.  

I will leave the broader cost/benefit analysis of the Founder Institute to a separate post, but in short, I found them quite helpful with early-stage advice and not helpful at all during fund-raising.  When I graduated in March of 2010, I took a lot of introductions through the Founder Institute, but these intros proved weak in terms of efficacy to produce much-needed cash.  Even after we won a competition and secured the bulk of our round, not a single investor came through FI introductions, and I was pretty disappointed.  

From where I sit, Y Combinator and TechStars seem to be driving grossly different results for their graduates, particularly their strong performers.  I was awarded “Magna Cum Laude” status with FI, but that didn’t translate into anything tangible.  

Or, quite honestly, it’s possible we were just unlucky.  

June 2010: $50k from North Bridge Venture Partners Seed Competition   

By June, prototype in hand, Francis and I applied to a handful of business plan competitions to try to drive early awareness and maybe even some cash.  Though we made the finals in 3-4 competitions, we typically found ourselves going head-to-head with venture-backed startups or companies that had launched up to 18 months prior.  The old “PowerPoint and a smile” play was massively outgunned and was periodically met with laughter, which was particularly tough for me early on.  

Fortunately, this was not the case with the inaugural seed competition put on by North Bridge Venture Partners.  We were at the same stage as the other teams, which required that the competition be judged largely on concept, energy, and enthusiasm, plus perhaps basic PowerPoint professionalism and pitch fundamentals.  I had a natural leg up, and we won alongside an education startup called Magoosh.  I remember the feeling very well—our first outside funding!  It still smells sweet.  

June - July 2010: $250k more from other angels  

Armed with a $50k convertible note from NBVP and a refreshed sense of confidence, we decided to close a proper round while the going was good.  North Bridge was very gracious in allowing us to “open up” the note to other investors, and we shopped the opportunity with North Bridge ostensibly as our lead investor.  

Plunging into darkness, the 7 weeks that followed were some of the darkest days of Profitably’s short life to date.  We pounded the pavement, talking to everyone, but no one was interested.  We didn’t have enough progress at the time to get North Bridge beyond their initial $50k, and most investors with whom we spoke took that signal to be the kiss of death.  Worse, our deal was a convertible note, and a number of excellent investors find that format to be a nonstarter.  

We pushed on, but just as we were finding our rhythm, tragedy struck as we discovered the magnitude of the angel investor herd mentality.  In our particular case, we pitched Eric Paley of the Founder Collective, and he was respectful enough to pass with specific feedback right in our first in-person meeting.  Believe me, this is a better approach than a smile, handshake, and a non-response over email.  In fact, despite Eric’s passing on Profitably, I continue to have tremendous respect for him and for the Founder Collective crew.  They are the real deal, they’re respectful, and we would be very lucky to work with them in the future.   

Nonetheless, quite literally the day after Eric passed, 10-12 undecided investors emailed us a “thanks but no thanks,” and 2 committed investors flipped to “no” (can you believe that?!).  It would seem I am not the only one who respects Eric’s judgment, and this took an incredible amount of wind out of our sails.  That day that we licked our wounds and revised down our target of $500k to $350k.  

All in all, we ended up scraping together $300k by the skin of our teeth, including the $50k from North Bridge.  We had 2 investors putting in $5k.  We had folks at $10k and $15k.  Not a single angel investor was over $30k.  It was hard, it was emotional, and it was lonely.  

The day of our close, one investor called to bail suddenly and in a way that threatened the entire deal, since we had worked hard to convince our investors that we could get it done on $300k and not $350k.  Fortunately, Adam Dinow—our attorney and one of our most consistent and reliable sources of useful support—called the investor and helped talk him down off the ledge.  

A few days after our target close date, $250k was wired over and we were done.  Adding in the $50k from North Bridge, we put out a press release about $300k raised and literally forgot to celebrate as we got back to work.  I don’t remember feeling very lucky at the time.  

Sep 2010: Launch at DEMO  

We cobbled together a “minimum viable product,” which we chose to launch at DEMO (a world class platform for new technology).  The DEMO team gives discounts to early stage startups, and the reception was great.  VentureBeat picked us as one of the their 5 favorite companies, and I think we were approached by associates from every VC in the universe.  

While DEMO and their team are great, it probably wasn’t the right move for us in retrospect, particularly given our stage in development.  The best part was getting Francis and Chad out of the building and interacting with the critics.  We got hard feedback, and that’s critical.  

But there weren’t a lot of media there representing our space, and frankly, I started to feel like a carnival mountebank, drumming up excitement about the product vision rather than focusing on delivering that promise.  Ultimately, we could have benefited from less exposure and more time/effort on our product (I hear you, faithful reader, saying, “obviously,” but we’ve made worse mistakes than that).   

Either way, we left DEMO with a packed schedule of meetings set up with eager VCs, and that felt like momentum (another rookie mistake on my part—VC cold calls and first meetings aren’t momentum.  I promise.).  

Sep - Feb 2010: $0k from institutional Venture Capital firms  

I have mixed feelings about venture associates and have been advised by many to turn down their cold email requests to meet.  The rumor is that if you don’t start with the partners, you aren’t going anywhere.  Well, we didn’t go anywhere, so perhaps it’s true.  However, though we didn’t source any seed funding through these associate meetings, we did get A LOT of great feedback, and we got the chance to build some genuinely valuable relationships, particularly with a few teams.  Given the situation again, I would still take all (or some) of those meetings without hesitation, though I probably wouldn’t log them in a financing pipeline.  

Often enough, we actually found partner meetings to be much worse.  Garden variety interaction?  A partner emails asking to meet and that I send all my files over in advance.  The day of the meeting, he shows up 15 minutes late (at least) and calls me Neil.  He hasn’t read a thing I sent.  Then, as I describe my life’s work, he checks his emails on his iPad and asks questions as if he hadn’t heard a word  (“Well, we’re not really a location-based technology, actually,” I reply bleakly, or “No, we don’t integrate with foursquare yet.”)  After 60-90 minutes, I pack up my laptop and am almost relieved when there’s no follow-up.  And I have been told I am really good at pitching!  

But don’t click away!  For every dozen of those meetings I stomached, I had a meeting with someone truly impressive like Devdutt from CRV.  I learned more in my hour with Devdutt than I learned in any hour all year, and though he—like Eric Paley—passed verbally on our very first meeting, I knew why and walked away from the meeting smarter.  Hopefully we will be able to attract this rare breed of VC for our next round once we are at their stage and have the proof points.  

In the meantime, as an entrepreneur searching for a lead investor, I began to feel like an actress in LA trying to “get found.”  September through December I had my chin up and took the rejections in stride.  By late January, I started to grow tired of the process and resent the disrespect I kept encountering.  I am not sure if I got cranky around the office—you would have to ask Francis.  ;-)  

Nov 2010 - Jan 2011: $0 from our “lead,” New York Angels  

Rewinding to November, I was convinced that I needed a lead investor for this round and that the problem with our July round was the absence of a lead.  So in addition to meetings with VCs for seeds, I submitted my company for consideration to a syndicate called the New York Angels.  NYA has a pretty spotty reputation among entrepreneurs, but we were leaving no stone unturned.  

All in all, the process was in some respects successful, but the process itself was grueling, lasting nearly 13 weeks (!):

  • Week 1: Online application submitted
  • Week 2: Screening committee with ~8 investors
  • Week 4: Large group monthly meeting with 30-40 investors and 3 other entrepreneurs
  • Week 4: “Due diligence” meeting with 12 investors
  • Weeks 4-11: “Due diligence” lead assigned (1 investor) to “begin” due diligence
  • Week 11: Green light that New York Angels will lead the deal (Boom!)
    • No commitment yet wrt amount (uncertain interest across individuals in their network)
  • Week 12: I offered to produce a term sheet based on agreed terms to speed the process
  • Week 13: Our due diligence lead committed personally to $25k

We were lucky to have someone strong do our due diligence.  He was a technical guy, and it was clear that he “got it.”  So as of early January, it seemed like we had a very strong lead on the deal who understood our space, spoke with a customer, spoke with Intuit, met the team, ran a former business through our model, and committed to the deal.  We thought we were all set and began showing our NYA term sheet to other investors to get them into the deal.   

The bad news was that we didn’t have a lot of transparency into who was in charge of beating the drum and driving participation within NYA.  This is when we came to learn that they don’t invest en mass and that individuals can participate however they like.  I figured once a deal passed diligence and NYA gave it a thumbs up, someone was going to pass a hat around or that I would at least get a $250k slug from the group.   

In the end, our lead ended up missing our closing deadline, so despite having a term sheet from the New York Angels, we had $0 participation in the round.    

No doubt, there are a handful of credibly amazing investors who attend their meetings, but from my perspective, clearly the New York Angels process is broken.  If you’re going to have a lengthy and involved process, it should be pass/fail at >=$250k.  If you’re just going to screen opportunities and let individuals make their own call, it should take a week or less total, as with AngelList.  

Either way, in all seriousness, it’s possible we were just unlucky.  

Jan 2011: $75k from AngelList (2 investors)  

AngelList, in contrast, rules.  Their curated list of angel investors is available for free and has been massively powerful for many.  We dropped our opportunity out to AngelList and got 17 introductions over the next week or so (22 by the end).  These introductions were far more qualified than those I had been taking, and I thought we would have 10 investors and $400k from that crop without a doubt.  We had social proof, initial traction, a lead, a term sheet in hand from NY Angels…  

Of those introductions, 2 investors ended up committing for $75k total, which was a little underwhelming, but I am still quite bullish about AngelList.  They have been taking some flack online lately, and I don’t think that’s warranted.  It’s a great channel, but like all channels, it works for some and not for others.  In our case, I think we were unlucky.  

Jan 2011: $0 from the Founder Institute or Open Angel Forum  

For the second time around, we had no luck with the Founder Institute as a channel for investors.  Adeo selected us as 1 of 4 startups nationally for a blast email that returned literally 0 introductions, let alone investment.  Worse, by this point investors I found through other channels began objecting strongly to the 3.5% (post-money on the Series A!) earmarked for a resource of which most investors either hadn’t heard or had a negative view.  In our case (and others may have had a different experience), FI became a major scarlet letter to be overcome during funding, and that’s regrettable.  It was my decision and I own it.  Again, they were helpful with early-stage advice, but ultimately much more of a liability than an asset during fundraising.   

We also pitched at the Open Angel Forum in NY, which has a great reputation and rightly.  Unfortunately, we found OAF in NY to be a bit VC-heavy for our immediate needs.  2 of the 3 angel investors in the room were already invested in Profitably, and the rest of the room was all VC, so despite opening up a beer per custom and staying demo-driven as requested, there wasn’t really anyone in the room we were targeting.  No hard feelings at all—we had fun—but it wasn’t a viable channel for funding for us.  

By mid-January, morale was eroding and it began to seem like all our channels were exhausted, and we weren’t sure if we were going to make it to our $500k minimum for the round.  If you’re exhausted/discouraged by this point in this blog post, imagine how I felt!  

[…breathe…]  

Jan - Feb 2011: $750k from introductions through General Assembly  

Aaron Sorkin—through his character Jed Bartlett—said that “Decisions are made by those who show up.”  Or maybe it was Harry S. Truman, or Woody Allen.  Either way, it’s just as true in entrepreneurship, that “showing up” is what makes the difference.  

Recently, we moved to a newly launched space in Manhattan called General Assembly, as one of their inaugural companies.  Since the move, we have been surrounding by killer teams, incredible energy, and inspiring aesthetics.    

Talk about lucky. The difference for the team has been night and day, but it also means we’re “there” when investors are walking around, talking to different teams.  We’re there when potential partners are looking to collaborate.  We’re there when Dave McClure rolls into town and wants to have dinner or when the NY Times is talking tech.

Add to that, the GA team is well-connected.  We were introduced to a ton of investors during our search, and they proved to be orders of magnitude more credible than the introductions we were fielding from other sources.  These investors were walking around the space, talking with the other startups (many of whom were already portfolio companies in many cases).  No matter how bleak the raise looked out in the cold January streets, things were moving—and quickly—at the office, and it felt like we were “showing up.”  

One of these investors was a gentleman named David Mars, who ended up offering a competing (and compelling) term sheet that ended up being the foundation of the round we just closed.  I will leave an introduction to David for another post, but for the sake of this one, it was the community that the GA team put together that ended up making all the difference for us.  

Bottom line

So what’s the lesson after all this?  Get good office space?!  

No.  Droves of entrepreneurs (including me 6 months ago) scour the blogs for advice on how to avoid pitfalls in raising money, and they’re asking “how do you do it?”  They want to know what matters most.  

I am quite comfortable saying that luck and perseverance were two of the top factors for us. It wasn’t really the team, the product, the almighty traction, or the social proof.  It’s a crazy crap shoot out there, and people are raising money and people are failing all around us.  Teams with no traction are raising at huge valuations, and teams with tons of traction are crashing.  It’s relationships.  It’s community.  It’s showing up every day, working your product as hard as you can, listening to customers and solving real pain points, being there when the right people are around…and getting a little lucky.