Know your numbers.
That was the advice Whitney Sales, a general partner at Acceleprise Ventures, offered to founders and entrepreneurs at the Sup-X Startup Expo #Women4Women Forum Thursday in Fort Lauderdale.
Sales and Sally Outlaw, founder and CEO of personal finance company Worthy Financial, talked about the secrets of Sand Hill Road — often considered the Main Street of Silicon Valley – during a panel discussion moderated by local entrepreneur Joy Randels, founder and chairman at Applied G2 and New Market Partners.
Randels asked the panelists what venture capitalists look for in founders. Acceleprise, a business-to-business, software-as-a-service accelerator based in San Francisco, grills its founders to make sure they know their numbers, Sales said.
“It’s the numbers of your business, the numbers of your market, and the numbers of your competition,” Sales said. “The math really matters. Knowing what has to go right for you to do well and what are the potentials for going wrong and being able to answer those questions, and understanding those scenarios and how they would play out mathematically is actually a really important piece for investors to understand about a business.”
It’s vital to think early on about the end game to understand how much money a company needs to raise, said Randels, who herself has raised $357 million over her career.
Worthy Financial, a three-year-old West Palm Beach company with a digital investment app, initially turned to equity crowdfunding, then got a $600,000 investment from an angel investor, followed by a $5 million investment through the JumpFund, which focuses on women entrepreneurs in the southeast United States.
“I didn’t try to raise a penny until we had traction. We self-funded an MVP [minimum viable product]. I went out there and did some customer discovery, got some customers, had some traction … I didn’t want to go out with an idea on a napkin so to speak,” Outlaw said.
Worthy Financial could grow to a $1 billion business, but that’s not what Outlaw wants right now. She wants to grow organically, using cash flow and retaining equity.
Capital to start a business is different than capital to scale a business, Randels said.
When a founder takes on capital, they need to know how they will use it, Sales said.
“When you raise capital, you are expected to deploy that capital. Venture capitalists’ game is to own as much of your company as humanly possible,” Sales said. “If you don’t deploy the capital in the right way, or you run out, or you don’t hit your targets or meet expectations, and they don’t reinvest, that’s a very strong negative market signal.”
It generally takes 40 to 60 meetings with investors in Silicon Valley and a minimum of six weeks, and more often three months, to attract venture capital, she said.
“Those are meetings you could be having with customers and if you were to do those 40 to 60 meetings with customers, where would your traction be at that point,” she said.
More customers could boost valuations for fledgling companies, Sales said. So could taking the steps needed to make the company less risky or less likely to involve a financial loss.
“What you need to look at when you go talk to an investor is how much of your business have you de-risked? Which is why it’s important to do customer discovery, to have beta customers in place, to understand the market, to have a big vision, to understand the size of the market you are going after and the time it’s going to take to go after that market,” Sales said. “It’s important to understand de-risking your business for an investor and that will increase your valuation significantly.”
Market, founders and product also are key for determining valuations.
Product. “One of the things we’re looking at is, are you deep tech? If you are deep tech with a tool that’s going to take time to get to market, the amount of money they need to raise is going to be higher because it won’t be in market very quickly, but once it gets in market ideally it goes quickly.”
Founders, including their background and market fit. “Is the founder a serial entrepreneur? Have they been to bat before and made their mistakes so they’re coming up with a lot more lessons learned?”
Market. “Has there been someone in the market, in your specific space, who’s gone out to raise and done very well, where a lot of VC’s feel like they’ve missed out. That will pump up your valuation significantly. FOMO is a wonderful factor in venture.”
A direct approach is vital, she said
“The culture is generally a male culture. Men have a tendency to be more direct and declarative in how they talk, women have a tendency to be more collaborative, so they’re trying to come up with solutions with the other person. When you are going out for the fundraising process you can’t do that,” Sales said. “One of our female founders told me, ‘It’s pounding on the table and saying this is going to be a f***ing amazing business.’”
What happens if a company makes a pitch to an investor who says no?
“Every time someone said no I wanted to know why. Is it timing, is it the competition, is it the team? I always ask and get that feedback,” Outlaw said.
There’s information in every objection you receive, Sales said. Incorporate that into the pitch process. “You need to look at what’s not being conveyed, and how can I do a better job of conveying that and pulling that into my pitch before that question comes up … It shows you know your stuff.”