Dharmesh Shah


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Startup Founders: Don't Freak Out

By Dharmesh Shah on April 26, 2012

When I was working on building my first startup, Really Bad Things(TM) happened on an alarmingly regular basis. I was in my early 20s and living in Birmingham, Alabama (where there was no startup ecosystem at the time). So, when something happened that we thought would quite possibly kill the company, one of us (I had a co-founder) would freak out. Sometimes, both of us would freak out. Sometimes, we would freak each other out. Then, we would ultimately decide to take the Scarlett O'Hara (Gone With The Wind) approach — “I'll think about that tomorrow” and get back to work. After all was said and done, things worked out quite well. But, there were so many “near fatal” events, that we lost count.calm woman

I've since done two more startups and spent time with many, many entrepreneurs — often in some of their darkest days. I have one piece of advice that's going to sound trite (because it is):

Don't Freak Out.

The reason I advocate not freaking out is that it doesn't help —and often hurts. What you want to focus on during these trying times is ensuring you don't go into a tailspin (often, when you panic after something bad happens, you cause more bad things to happen). More on this later.

Before we continue, just to set some context, here are some of the kinds of things entrepreneurs freak out about. See if some of them sound familiar.

1. Your lead investor in a funding round backs out in the final stages. (By the way, when this happens, you're almost never going to hear what the real reason is).

2. You get a certified letter in the mail from some big law firm you've never heard of (nobody's heard of law firms, until they they do). The envelope the letter came in is the nice, creamy, heavy-stock kind. It's more expensive-looking than the one you used for your wedding invitations. The letter uses a lot of words to basically say “you're being sued”.

3. Your lead developer leaves. This is about half way into a project to rewrite your product in Scala, which he convinced you to do.

4. A very big customer deal you were just about to close falls through. Normally, this wouldn't be a big deal, except that you spent a bunch of time and money trying to get this deal done. Time and money you couldn't really afford to waste.

5. You were about to be acquired, and now the acquirer has “gone dark”. Despite your best intentions, the team and you have been making decisions based on the impending acquisition. “It would be silly to do X, Y and Z when we're going to be acquired next month…”

6. The production system that hosts all your customers came crashing down. And that live backup system you thought you had isn't all that live.

7. One of your competitors just went and raised a ton of money. They're blanketing the industry with PR, marketing, fancy new booths at tradeshows, local events involving a winnebago and taking out ads, seemingly all over the Internet. Potential customers, investors, friends and even your mom ask you about this big, bad competitor. You get tired of saying: “But their product sucks!”

8. Co-founder takes a job somewhere. Feels really badly about it. Promises to help out nights and weekends. You don't have the heart to say: “Yeah, but it's the emotional support I'm going to miss the most…”

Remember, if the pain doesn't kill you, it only hurts a lot. A lot of the time, near-fatal events are often just that — near-fatal. They don't quite kill you. Startups are vulnerable, but generally resilient.

Your natural reaction when something really bad happens is to think about the worst-case scenario.  But, that's usually counter productive.  Think about the most likely scenario and solve based on that.

Try and make a realistic determination of how important it is to respond quickly.  Often, when something really bad happens, entrepreneurs make the mistake of assuming they have to respond immediately.  In many cases, that's both unnecessary -- and risky.  For example, if someone threatens legal action, resist the temptation to respond immediately

What you don't want to do is start compounding a bad event with panic-induced mistakes. It's important to remain calm and give yourself time (and sometimes distance) to make plan a thoughtful response.  I know, that's easier said than done.  If it makes you feel any better (it should), know that most entrepreneurs (even the successful ones) have near-fatal events happen.

What do you think?  Have you had a near-fatal event recently?  

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Don't Make Raising Angel Funding Your Plan B

By Dharmesh Shah on April 16, 2012

The following is a guest post by Chris Sheehan. Chris is a seed stage VC and angel investor at CommonAngels. You can follow him on Twitter at @c_sheehan and his blog Early Stage Adventures.

plan b

I wear two hats one as a general partner of a couple of seed stage VC funds, the other as an occasional angel investor. Wearing my angel-investing hat, I wanted to highlight an issue that I encourage founders to be careful about when pitching. There are variations on the theme, but essentially it's a line that goes something like:

“…we've talked to some VCs who are really interested, but they tell us we are too early for them to finance our round. So we are raising a small seed round now to hit the milestones they want and then will raise our A round. Its often followed by, we just need $[insert here, but typically $100k - $500k] for [6] months to hit our milestones…”

So what's the problem with this pitch to an experienced angel investor? When I hear this, I'm thinking:

1. The way you have pitched it to me says you struck out with VCs so now are turning to angels as a backup strategy.

2. From your voice, tone, body language, it feels like you really want the VC money and angels are just a stepping-stone to get the VC round.

3. You are probably new to the process of raising money from VCs. You miss reading the buying signals, and are possibly confusing interest with a genuine desire to finance your startup. It's the job of a VC not to miss out on a potentially good deal, so the process can be full of we're interested signals rather than an outright no.

4. The likelihood of raising money from any of the VCs you are talking to is probably very low. Not impossible, just unlikely.

5. So not only is there high seed stage risk (product, market, team), there is very high financing risk on the deal. It's unlikely you will hit the milestones in the time frame you're thinking and the most likely outcome is that you need to approach your angel investors around the table for more money, which will set up a potentially challenging discussion and negotiation.

6. Even if the scenario plays out that short money leads to solid metrics, which then leads to a VC funding the next round, the way this has been pitched, it doesn't feel like there is the basis for a strong partnership.

Ok, so what can you do? Its perfectly fine to test your concept with VCs with large funds to get a range of feedback on various elements of the business like “is it fundable?”, “where are the key risks?” “what other analogs have they seen?” And if you're not getting them to bite on the seed round now, recalibrate your funding strategy for angel investors. But when you do that I'd suggest:

1. Pitch to angels as partners not just a means to get the VC round. This will comes across in your slides, voice, body language and how you frame your overall financing and de-risking strategy.

2. Consider if there a better financing approach. Is it possible to operate on a small amount of money for say 12 18 months, which will give you enough time to experiment, learn, adjust, and de-risk the opportunity? This seems like a more attractive proposition to an angel investor and if it works out, there is a good probability that a larger VC raise will be done at a decent up round valuation.

3. If angel financing is not available for 12–18 months, is it possible to work with the angel investors to do a small seed with agreed testing/learning/milestones that will lead to them funding another round?

Approaching experienced angel investors in this way will hopefully result in them leaning forward instead of backward, and being much more enthusiastic about finding a way to work together. What do you think?  Any lessons learend from navigating the angel and VC funding?

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