Wednesday, January 15, 2020

Reading :: Startup Success

Startup Success: Funding the Early Stages of Your Venture
By Gordon Daugherty

This slim and highly readable book, by the president of Austin-based CapitalFactory, overviews early-stage venture funding. For readers of this blog (mainly academics), this topic may not seem that interesting. But Daugherty makes it interesting with clear and organized discussion, strong illustrations from his deep experience, and clearly drawn lessons. The illustrations, he acknowledges, are mainly from early-stage tech ventures, specifically a software subscription company. But the lessons apply more broadly.

I've been researching early-stage tech pitches for a few years, but this book helped me to put these pitches in greater context. For instance, Daugherty clearly spells out the early stages of startup fundraising (Figure 1.2) and the different types of investors who are pitched in each round (Chapter 3). He also clearly articulates the connection between pivots and fundraising (Figure 1.3). He provides a clear framework for understanding how much you should attempt to raise in each round (Figure 2.1 and following) and how fundraising interacts with valuation (Figure 2.3).

Daugherty also suggests focusing your pitch efforts, saving them for the right investors (ones with reasonable odds of investing) (p.89). And he advises that, at least in the startup phase, the CEO should be the chief fundraiser—which means that an introverted CEO should do some "soul-searching" (p.90) and perhaps find someone else to head the company.

During fundraising, "your most important fundraising tools will be your elevator pitch, pitch deck, and financial projection model" (p.93). Daugherty discusses how to develop each one.

The elevator pitch only has to pique enough interest for the listener to ask a question, any question (p.93). It should answer the questions "What do you do?" and "So what?" (p.95).

The pitch deck serves as a summarized, visual version of the business plan; its most important aspects are (in order) storyline, flow and content (p.102). It should demonstrate that you're building a company, not just a product (p.109). It should cover the following:

  • problem
  • market
  • solution
  • business model
  • traction
  • team
  • call to action (pp.105-113)

And it should have a "backup section," which contains details to answer questions that you anticipate coming up in the Q&A (pp.113-114).

He suggests two versions: "one for 5-minute onstage pitch competitions [8-10 slides] and another that is longer and used for in-person investor meetings [12-15 slides]" (p.117). He adds that a pitch deck for a Series A round will be longer than one for a seed round, since it has more to report (p.117).

Daugherty suggests signing up for multiple pitch competitions, since doing so forces you to tell your pitch story in 3-5 minutes (p.119).

The financial model is important for demonstrating that what you're building is not just a product but a business (p.129).

Beyond these three important tools, Daugherty also mentions monthly updates and one-pagers (p.129).

Daugherty then gives us a couple of chapters on fundraising, which I won't summarize. In Chapter 8, however, he discusses interacting with investors, a process that he says involves "a transfer of enthusiasm from founder to investor" (p.208). To find out how an investor makes decisions, he says, talk to other companies that s/he has invested in, like a reference check (p.211).

Overall, this was a great book—highly readable, clearly organized, full of details without being too weighted down by excessive illustration. I learned a lot. If you're interested in the startup investment process, definitely pick it up.

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