Founders, make sure your story stands out.

02242020: Interview by Email: @dscheinm

Greetings!

Continuing our special month of February, here is the SECOND of TWO “Interviews by Email“ this month on this newsletter.

For our 5th “Interview by Email” We are delighted to have @dscheinm - A long time Operator at Cisco (14 years across Legal, Corp Dev and New Initiatives) and renowned Angel Investor in Enterprise SaaS.

Dan is a classical Angel - He writes checks early, with great conviction, has a narrow focus on Enterprise SAAS and is extremely humble about his “Zone of Effectiveness” - He is extremely well respected in VC and Founder circles and has rolled up his sleeves for many a founder starting or growing their business.

This tweet is a great indicator of how he evaluates people. He is instinctively able to gauge a great founder:

I hope you enjoy this edition of “Interview by Email”

From: Dan Scheinman
To: BUGGER OAF <buggeroaf@gmail.com>

What describes you?

1/ What describes you best?

I am an early founder-operator empathetic early stage angel investor (usually pre-revenue) in enterprise, security and infrastructure companies.

2/ Where are you based? 

I am based on the San Francisco Peninsula.  My successful investments have been based between SF and San Jose (of course with exceptions).  My network is local to the Bay Area, so that does limit my ambition and ability to assist founders.

3/ How long have you been associated with startups?

To some extent, almost my entire career.  I have been solely an angel investor for the last 9 years.  To date (and depending on public market stock prices), I have been affiliated with startups that have produced in excess of $38 billion in market value.

3 lessons learnt investing in startups?

1) Technical founders who can sell are rare.  If you find one, double down. 
Conversely, when a technical founder does not understand the sales channel, the risk is that you have to raise multiple highly dilutive early rounds to find channel market fit.

Two quick stories here: 

When I sat down with Andy (Bechtolsheim) and Jayshree (Ullal) at Arista Networks, they impressed me from the start because they knew their early customer. 
Arista had built a product for high frequency trading (a $300M TAM) because it required one feature, low latency.  They were able to prove the company and move to bigger markets. 

At Zoom, there was similar focus.  In the beginning we sold to education and SMB (emphasis on the S) because we had product market fit there.  The company did not sell to enterprise until it had built the features required by enterprise customers. 

2) Founders who put a premium on capital efficiency early can dramatically de-risk their company .
Founders who understand capital efficiency early (getting up front payments from customers, building good margin early), realize that the economic side of the business can be run with a view towards raising less money and reduces the overall risk of the business.

I had one founding team who recognized the value of capital efficiency and began to require 1 year contracts paid up front (or three years with a small discount).  In this case, the size of the contracts was high enough, it allowed us to dramatically pause the need for a round of capital.

Eventually the lack of capital efficiency is one of the main reasons Founders end up agreeing to “dirty” term sheets that cascade if the startup goes sideways or if a recap occurs - Bill Gurley also wrote about this (He invests a bit later than I do but the effective result is the same)

As an angel investor, no matter what form the round takes (note, priced round), if the company does anything of value at all, I am going to be very quickly at the bottom of the preference stack.  Essentially this means that my preferred stock is effectively at par with the founders’ common stock (I generally do not do pro rata).  This means that my economic interests almost always align with the founders.

3) Angels who do not accurately assess their own risk profile end up losing money.

This always sounds nuts when I verbalize this to sophisticated market participants, but, to be successful as an angel, you have to understand your risk profile. 

So how do you understand risk profile when all you have is a set of slides? 

For me, I want to work with a small cohort of companies (1-2 per year) and really help the company.  My belief is that I mitigate risk by company selection. 

An equally valid strategy is perhaps to work with a large cohort of companies and perhaps lessen the effects of a sorting bias.  Either makes sense to me. 

I often find that folks splitting the difference struggle a bit, and folks without a coherent investing strategy end up chase things with often minor validation.

Pick a topic you'd like to discuss in detail:

Getting a firm to do a Series A in a company is always a multi-threaded exercise on both sides.

A simple way to think about series A is that you want to have a big market target, with current ARR of perhaps $500,000-1,000,000 and repeatable sales.

A random (meaning little commonality between customers and how you reached them) $1,000,000 in ARR is worth less than a repeatable $500,000. 

Repeatable sales means that you know your customer journey and you have a clear path to your bigger market.

Making the jump from Seed-rounds that are often cobbled together convertible notes, SAFEs, priced rounds with some board, chasing product market fit to a true Institutional Series A led by a top VC firm is one of the biggest and most complex dances in the whole startup journey. And here’s why:

Right now, at top tier firms, each VC Partner is limited to perhaps 1-2 new investments per year. That means, For the VC, the core skill is to be able to say no to hundreds of founders a year, and to search for that one or two gems. This allows them time to manage their existing portfolio as well as to keep a high bar for new investments. 

Also, in a world where VCs are starved of time, expect decisions to be made in the first 5 minutes when presenting.

For founders, the consequence is that most great VC partners these days, get 1-2 warm intros a day! This means that presentation, story telling, business metrics and connection with the VC are critical.  So many founder pitches are all over the place - Simple is better. Find people who will tell you the truth and who can give you honest feedback on the story. Start with a summary of the story you are going to tell, tell it, and then close again with the summary. 

For founders, the first and most important thing is to make sure your story stands out.

Finally, you need to understand what the VC is looking for.   All money is of course green, but not all relationships are great. Know what you are looking for in a VC. Know in advance, look for it in the room, and then reference check. Do not just rely on brand. 

There is of course pages more on this. 

Pro Tip: Ask your early investors which firms followed on in their other deals and which firms are you prepared to recommend the company if it hits its targets.

2 big trends you're seeing around you.

The rise of seed venture funds. 
9 years ago when I started, many smart people were predicting the complete consolidation of venture funds.  Well, that did not happen, and today we have 1000 funds and LPs lining up to support first time managers.  I do worry that this is the most impactful event in our ecosystem since the rise of the venture fund.

The death of the medium size return
I am really surprised at how many people are not thrilled with $500M outcomes. The rush for larger outcomes will drive a lot of investment (and the pressure at all funding levels for big outcomes) in companies that perhaps would have sold 9 years ago. I have been very surprised that public companies have not been more aggressive buyers given these high multiples. 

3 founders you’d work with outside your portfolio?

Allison Barr Allen (@abarrallen) and Domm Holland (@domm) of Fast - Allison (and Domm, from a distance) are someone I respect a great deal and root for!  Not really my space, but massive respect.
Ajeet Singh (@ajeets) of ThoughtSpot - someone I do not know, but respect.  In a very tough market, they have built a differentiated product and done well. 

3 twitter accounts you recommend we follow

@OperatorCollect: I really like what Mallun is doing at Operator’s Collective.I learn from them.
@zarizahra and @melfellay: I’m a hugely biased fan of what Zari and Melanie are building at Spekit (proud investor!!)
@theinformation
: Hat tip to The Information as a rare unbiased news source thats also useful and thought provoking

3 people you think *should* have Twitter Accounts:

Jayshree Ullal: The very funny and brilliant Jayshree Ullal at Arista.  She would own the platform as she is naturally concise and insightful. 

Andy Bechtolsheim: does not need to tweet, but man he is brilliant and it would be interesting to see his takes on things.  Genius gets thrown around a lot here, and he is one who qualifies.
(Ed note: For those who don’t know - Andy wrote the first $100k into $GOOG before the company existed)

Jonathan Chadwick who I respect immensely - is on a number of Boards and was former VMware CFO) has a lot of deep wisdom that I believe Twitter would benefit from.

3 people you'd like to see interviewed on this blog.

Mallun Yen - @mallun - Founder, Operator Collective
Melanie Fellay  - @melfellay - Co-Founder and CEO, Spekit
Michael Neril,- @michaelneril - Founder and GP, Spider Capital