Funding & Exits — Chapter 1: The Fundable Entrepreneur
By: Tom Mohr
Tags: Funding, CEO, Startup, Venture Capital, Tech

Now available in ebook + paperback

“Funding & Exits is the definitive guide that I recommend every one of my portfolio companies’ management teams read and internalize” — Bruce Cleveland, Partner, Wildcat Venture Partners

Entrepreneurship is woven into the fabric of America. 30 million small businesses operate in the US.¹ Each year, about 800,000 startups join their ranks.² Every month, 300 of every 100,000 adults start a new business.³ For the past forty years, this small business activity has been the growth engine of the US economy, responsible for almost all net new job creation.⁴

And yet, almost as many businesses fail every year as are started. Of all new businesses, only 1% employ fifty or more people after ten years in operation.⁵ This percentage has declined fairly steadily since 1990. Less than 0.1% of all US businesses employ more than 500 people.⁶ The number of public companies in the US was down to 4,333 by mid-2016 — a 46% drop from twenty years ago.⁷ And in 2017, just 160 companies went IPO — down 42% from three years ago.⁸

IPOs since 1999

Why have so many new businesses stayed small or failed? What factors have constricted their growth? Why have so few scaled into large companies, and even fewer gone public?

Company building is a science. As CEO, the people you hire, the markets you choose, the products you build, the systems you design, the revenue generation practices you pursue and the funding path you follow all contribute to your growth trajectory. Not every company will go IPO, but armed with knowledge of the science of company building, a disciplined CEO can build a company that achieves greater success at every stage. The best CEOs will lead their companies towards impressive exits. A select few will break through and take their companies public.

Technology companies have a unique path to scale. Because of their potential for outsized growth, tech companies have access to capital not available to other types of companies. In this book, our focus is on tech companies. As tech CEOs scale their companies and introduce their technologies to more and more customers, they disrupt and change the world. But achieving success is hard. If you are a tech company CEO, you know well that the scaling of your company is a ragged jog through a vicious gauntlet. The marketplace is unforgiving. Failure nips at your heels. Only the strongest get funded; only the strongest survive.

Before an investor takes a deep look at your company, she will first take a deep look into your background (and into your soul). What makes you, the tech company CEO, fundable?

When I started Digital Air Strike, my cofounder and I each put in $100K of our own money. Five months later, just before that money ran out, I raised a $900K seed round. Then, as our bank balance fell perilously low, we raised an $8M A round. After that, there were a couple more funding events — one of which powered an acquisition. One thing was common across every one of these funding events: they were all really hard. Investors were hard to reach. Once reached, most wouldn’t take a meeting. Once we met, all were skeptical. After the meetings, most said no. Only a few — the bare minimum, actually — said yes. Even after wereceived a term sheet, every step until the close of funding was difficult. Every time.

Was I fundable? Yes, I was — by the skin of my teeth. We had enough of a story and a strong enough team to convince just enough investors that our company was worthy of investment. I have no doubt each investor in Digital Air Strike took a close, critical look at me, the CEO. Each had to make a judgment: would I be able to lead this company to an exciting exit?

Investment is about confidence. An entrepreneur is fundable when she can create confidence in the hearts and minds of investors. At every company stage, domain expertise is important. But that’s just the beginning.

In the early stage, the company’s choice of market, product vision and go-to-market plan are all just theories. Nothing has been proven yet. You have a concept and a category. You might have an initial product release, or even a Minimum Viable Product, but you have not yet proven a repeatable sales model. At this stage, it’s all about the team, especially the CEO. The investor knows that your initial choice of market, your initial vision for the product, and your planned scaling path will all change radically, so she can’t invest in that. All she can invest in is you.

What exactly does the early stage investor look for in you, the entrepreneur?

Grit, determination and persistence matter. Ben Horowitz, in his book The Hard Thing About Hard Things, said:

“Great CEOs face the pain. They deal with the sleepless nights, the cold sweats, and what my friend the great Alfred Chuang (the legendary cofounder and CEO of BEA Systems) calls ‘the torture’. Whenever I meet a successful CEO, I ask them how they did it…. The great CEOs tend to be remarkably consistent in their answers. They all say, ‘I didn’t quit.’” ⁹

Vision, confidence and passion matter. Jeffrey Bussgang, author of the book Mastering the VC Game: A Venture Capital Insider Reveals How to Get From Start-up to IPO On Your Own Terms, observed:

“As I listened to pitch after pitch and watched as some venture-backed startups took off and others didn’t, I became much more aware that the successful entrepreneur is built, in fact has to be built, in ways that are fundamentally different from other business people… The most important of these [characteristics of the successful entrepreneur] are a certain kind of visionary optimism; tremendous confidence in oneself that can inspire confidence in others; huge passion for an idea or phenomenon that drives them forward; and a desire to change the game, so much so that it changes the world.” ¹⁰

Adaptability matters. Jessica Livingston, in her book Founders at Work, said:

“…founders need to be adaptable… People think startups grow out of some brilliant initial idea like a plant from a seed. But almost all the founders I interviewed changed their ideas as they developed them. PayPal started out writing encryption software, Excite started as a database search company, and Flickr grew out of an online game….” ¹¹

Intelligence, toughness, capacity to convince, task relevant fit, and special superpowers matter. In February, 2014, Rob Go, Partner at Nextview Ventures, wrote a blog identifying four attributes of a successful founder:

“1. Smart and Tough…Not all awesome founders are necessarily genius-level smart. Nor are all founders UFC-level tough. But there is a baseline that is certainly well above the top 5% of humans on both… 2. Convincing…. Not all founders are evangelistic, charismatic or the greatest salespeople. But almost all are able to be convincing in their own way. 3. Superlative. I’ve found that awesome founders tend to be really really great at something. No one can be amazing at everything, but I’ve seen the most success with founders that show superlative traits. I’m always excited when I hear the word ‘best’ in reference calls… 4. Fitting for the task at hand…. Many founders have multiple strong attributes, but great founders are great in the context of the task at hand.” ¹²

As the testimony noted above underscores, early stage investors want to see intelligence, vision, passion, confidence, never-quit perseverance, good fit with the task at hand, and adaptability.

The perspectives of Horowitz, Bussgang, Livingston and Go anecdotally affirm the prevailing research. In the late nineties, Saras Sarasvathy, associate professor at the University of Virginia, published her first research into the reasoning of expert entrepreneurs. Since then, a large body of academic research has built up in the area now known as effectuation research (check out effectuation.org). In her wide-ranging interviews with founders of companies valued from $200M — $6.5B, Sarasvathy found that expert entrepreneurs exhibited a distinctive approach to decision making. Specifically, these entrepreneurs exhibit five key reasoning attributes:

Start with Means

Who we are

What we know

Who we know

What we have

Manage Within Affordable Loss

Primary focus on limiting risk

Manage investment based on amount that can be affordably lost

Less focus on potential upside

Build Partnerships

Attract partners early and often

Co-create the future with every partner

Partners bring new knowledge, contacts and money to the enterprise

Leverage Contingencies

What can we learn from everything we do

How do failures inform us

Build / Measure / Learn

Control, don’t Predict

Don’t spend time trying to predict the future

Control the accessible levers

Learn and adjust

These attributes are exhibited through a decision flow that continuously iterates as an opportunity is identified, refined and built into a company. It works like this: