Viewing Valuation as a Discount of Future Future Value

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Why does growth rate matter so much? Why does growth rate influence valuation so much? I was reading a book recently written by a hedge fund manager who discussed valuation frameworks. His explanation was one of the best I’ve come across.

If your business is growing at 100% next year, then 90% the year after, and then about 80% the year after, the business will have grown 6.9x. That’s the way I’ve always looked at company.

But this hedge fund investor said it a different way: 85% of the value of the business will be created in the next 3 years. At 10% growth, the company’s value today is 77% of the value in three years. The value won’t change that much. It’s already the most of the size it will be.

Same cup, same water, just a different perspective.

The chart above shows how this changes with different growth rates. It assumes a company starts growing at the growth rate on the y-axis. This growth rate falls 10% each year. On the x-axis, you can see the fraction of the enterprise value (EV) that will be created in the next 3 years.

Instead of looking at today’s valuations as a multiple of current revenues, we can think about it as a discount to the future value. This math makes that perspective concrete.

State of the cloud 2019


A decade ago there weren’t any private cloud companies valued at $1 billion. Today, there are 55 private cloud unicorns. If we include the additional 44 public cloud companies, there are 99 cloud players valued over $1 billion. What’s truly remarkable about the cloud ecosystem isn’t just the sheer size of the market, but also its interdependence.

When a cloud company scales it often signals the growth of others, but there are a number of other signals to the cloud sector’s velocity. For example, this year, the demand for cloud shares and cloud liquidity hit record highs, outpacing 2015, which was the last record-breaking year.

The demand for cloud shares and cloud liquidity hit record highs, outpacing 2015, which was the last record-breaking year.

With IBM’s purchase of Red Hat ($33B), Microsoft’s acquisition of GitHub ($7.5B), and SendGrid joining forces with Twilio ($2.9B), there was more than $90 billion spent in large mergers and acquisitions. More than $50 billion was also added to the market cap through cloud IPOs, including DocuSign, Dropbox, Elastic, and Carbon Black.

For more than a decade, we’ve had the longest bull run in U.S. history. At $175 billion, the top 100 private cloud companies have never been worth more. At this point, many founders are probably wondering how they can protect their companies from volatility.

The longest bull run in U.S. history.

While uncertain times are still ahead, cloud founders don’t have to thwart their aspirations of growth. Developing a new level of operational rigor by following the G.R.I.T. framework is one way for founders to understand their growth and build an enduring business along the way.

Operate with G.R.I.T.

Operational rigor is what separates early stage companies from the most influential cloud leaders. But take comfort in the fact that it’s possible: Twilio’s Jeff Lawson and Shopify’s Tobias Lütke are just two examples of the many first-time founders who were running cloud businesses during and post-recession.

At Bessemer, we recommend cloud founders operate on G.R.I.T.— a critical set of metrics that resilient, enduring cloud companies use as yardsticks of success.

Growth (ARR)

The first operational metric is annualized recurring revenue (ARR) growth. While companies such as Slack, Twilio, Shopify, and more are all considered successful in their own right, each one had their own path to earning its first $100 million in ARR.

Years from $1 million to $100 million

Here’s a breakdown on how long it took for companies to go from $1 million to $100 million AAR:

Years it took for companies to go from $1 million to $100 million AAR

  • The top 25 percentile of public cloud companies spends 5.3 years on average to reach the $100 million milestone.
  • The median 50 percentile spends 7.3 years to reach $100 million in ARR.
  • The bottom 25 percentile spends 10.6 years to reach $100 million in ARR.

If you want to build the next big cloud company, here’s our Good, Better, Best framework for ARR. A cloud founder should aim for one of these timeframes:

Bessemer Growth Benchmark

  • Good: Cloud companies operating on “good” ARR growth models earn the first $10 million in four years, and reach $100 million ARR in ten years. (e.g. Cornerstone On Demand)
  • Better: Those that are better positioned earn the first $10 million ARR in three years, and reach $100 million ARR in seven years. (e.g. Shopify)
  • Best: The best performing cloud companies reach $10 million ARR in two years and reach $100 million ARR in five years. (e.g. Twilio, ServiceNow)

Enduring companies don’t just have contingency plans for when a recession hits. They set these goals and figure out how to achieve them based on the expectation that there will eventually be changes in the market.

Retention is your best friend

Retention, the amount of revenue accrued over a period of time, including upsells, is one of the most influential levers for cloud and SaaS businesses to pull when growing ARR. Some of the best performing SaaS businesses we’ve seen in the past decade have higher than 100 percent net retention rate because they’ve built a metered business that sells more to a customer as its business scales.

However, retention rates have different meanings depending on customer segments.

Here are the retention benchmarks a cloud company should aim for, by customer segment:

Retention for different customer segments.

  • SMB customers that have an average account contract value less than $12K see a gross retention rate between 70-80 percent and net retention rates between 80-100 percent.
  • Mid-market companies that have an average account contract value between $12-50K should aim for a gross retention rate between 80-90 percent and net retention between 90-120 percent.
  • Enterprise businesses that have an average account contract value $50K+ should aim for more than a 90 percent gross retention rate and more than 100 percent net retention.

Retention is a major driver of valuation.

An additional one percent in net retention can increase valuation by $100 million.

Improving net retention rate has great ROI.

If a company’s retention rate doesn’t fit within these bands, it’s time to investigate the culprit behind the “leaky bucket.” Churn is always a symptom of larger problems. By identifying and addressing the root cause of churn, a company can directly impact top line ARR growth by just retaining its current book of business.

In the bank

For early-stage cloud founders, the cash you have in the bank reigns Queen (or King). Also known as “runway,” cash is the fuel to build your product, acquire new customers, hire employees, and invest in growth opportunities.

Efficiently managing runway is the lifeblood of an early-stage company’s longevity, and it begins with three critical rules:

How to manage your runway.

  • Buffer your budgets for a contingency plan;
  • Target for 18-24 months of runway, at a minimum;
  • Be as judicious as possible when expanding your team.

Hiring is an effective way to grow a business, but it’s also the most expensive. When in doubt, hire slow and release fast when a new team member cannot drive forward the company’s goals. The way cloud founders allocate their runway will ultimately determine their destination.

Targeted spend

Cloud founders must always spend wisely to fuel growth. In 2017, Bessemer created a way to measure wise spending by coining the Bessemer Efficiency Score, which is defined in two ways, depending on the size of the company.

For startups earning less than $30 million ARR, the efficiency score is defined by net new ARR over net burn. In the Good, Better, Best framework when evaluating efficiency, the “best” score for a company at this stage is greater than 1.5x.

Bessemer efficiency score

This metric is different than ARR growth because it measures a company’s spending habits. It’s great if a company grows 3x, but if it’s spending crazy amounts to get there, this rate wouldn’t be considered efficient growth.

In a bull market, startups can get away with less efficient growth by acquiring new customers at a higher cost than necessary. However, this approach reflects a lack of discipline and doesn’t make for resilient companies. The good news is that when you do develop more efficient businesses, they are rewarded in all markets.

How to calculate your score

The G.R.I.T. framework highlights critical metrics when evaluating resiliency. By tracking ARR growth, retention, years of runway, and efficiency, the G.R.I.T. framework also translates into an equation.

Here we illustrate how to turn each metric into a variable and calculate a company’s G.R.I.T. score.

G.R.I.T. framework and equation

Based on Bessemer’s research and the most resilient companies in the industry, we provide another Good, Better, Best benchmark so any cloud founder can see where they fall and how they can improve overtime.

What’s your G.R.I.T. score? Once a cloud founder equates where they land within this framework, they’ll have a clearer idea of where their business can improve, or if it’s time to celebrate (and maintain) a high G.R.I.T. score.

30,000-ft view of The Cloud

Since Bessemer penned the canonical laws of cloud computing more than ten years ago, our investors continue to explore how cloud businesses evolve over time and how these ten laws have aged with time. G.R.I.T. is a new framework for founders to build an enduring cloud business.

A few short years ago, we predicted that the public cloud market would reach $500 billion by 2020. We were happily proven wrong when we hit the mark two years earlier in March of 2018.

Less than a year later, the total cloud market cap sits right around $690 billion. Now, it’s time to set our sights on the next major milestone for the cloud industry, and see how new companies will innovate with emerging technologies.

2019 predictions

Every year at Bessemer, we share our top cloud predictions, which we believe will impact how enduring companies change the way we live, work, and engage with software.

1. Robots to the rescue

State of the cloud prediction: robots to the rescue.

We see “robots” as the change agents of the world. Machine learning and artificial intelligence will be instrumental technology for all the apps, platforms, and services cloud founders are building, particularly in industries where people deal with massive amounts of data like healthcare and agriculture.

Robots are especially exciting when they free up human time to work on value-based thinking rather than automated tasks. We see this particularly in business areas like fraud, customer support, and accounting, with companies, such as ScaleFactor or Ada Support.

2. Product has purse strings

Prediction #2: Product has pursestrings

Product is foundational to any software company– it’s what you build and sell. However, in the past, product teams were not the traditional, target decision-makers and buyers when businesses evaluated software purchases. They had unlimited budget for headcount, but not software. We think this may have been shortsighted.

If product is the center of the organization and touches all areas of the company (sales, marketing, engineering, and customers), there should be platforms that help people manage, measure, and build the designs, plans, and roadmaps behind products.

We’ve seen entrepreneurs realize this gap and build exciting tools, like Gainsight. There are many more solutions to come since product-centricity gives teams a deeper understanding of every aspect of the software, customer lifecycle, and business.

3. Open source makes money

Prediction #3: Open source makes money

Open source communities have always been beloved in the Valley – they are tight-knit, full of brilliant engineers, and at the cutting edge of innovation. But in the past, finding commercialization or liquidity has been a challenge. In 2018, there were two record-breaking IPOs for the open source community with Elastic and Pivotal.

We also had three of the largest M&As in history with Red Hat at $33 billion, MuleSoft, and GitHub. Private companies like npm, Confluent, and Hashicorp are developing and innovating open source for the enterprise.

4. Deeper verticalization of mobile

Prediction #4: Deeper verticalization of mobile

We thought the mobile channel would manifest across both horizontal and vertical sectors, but on further reflection, mobile development is progressing rapidly in vertical sectors like construction, HVAC, etc.

ServiceTitan, for example, offers software and mobile solutions for businesses in field services, and their technicians.

Just think about people you know and how they work. There will certainly be more deskless workers who are always on the move and need access to technology, so we expect to see significant change in the vertical category.

Technical roles such as product, data science, SREs, QA, and others within an organization are prime, underserved buyers. As every company becomes a software company, these technical roles will have growing budgets and purchasing power to make decisions about what types of software they want to use to help them do their jobs better.

PagerDuty, for instance, makes the lives of IT Ops and SRE teams much simpler by providing a reliable alerting system to guarantee alerts are sent when needed.

Periscope Data empowers data analysts to very quickly visualize their SQL queries and create beautiful dashboards.

5. Low code/no code

Prediction #5: Low code/no code

The Low Code/No Code movement will provide technologies with amazing DX (developer experience) and offload smaller tasks so engineers can focus on more complex problem sets with the help of companies like Twilio and Auth0. No code solutions also give knowledge workers powerful functionality without requiring engineering resources. This includes easy automation, such as Zapier and UiPath, and business apps within the Salesforce and Workday ecosystem.

These are only five of the many trends we’re excited about at Bessemer, and we look forward to seeing how these ideas continue to contribute to the Cloud ecosystem.

In Case You Missed It

By: Cynthia Corzo | May 2018

More than 82,000 small businesses employ 53.3 percent of Miami-Dade County’s workforce, according to a new study commissioned by the Florida SBDC at FIU. This stands in sharp contrast to the rest of the U.S., where large companies employ the majority of workers.

Produced by the FIU Metropolitan Center, Small Business. Big Impact: Report on Small Businesses in Miami-Dade County 2018 also reveals a high concentration of microbusinesses, those with fewer than 10 employees, in the region. Of six comparison counties studied, Miami-Dade had the highest percentage of microbusinesses, representing 81.3 percent of all businesses in the county.

The study, which provides an in-depth look at Miami- Dade County’s small-business establishments, also looks at the wages paid to employees. The average annual wage is $44,803 at a one-employee firm in Miami-Dade and $43,437 in a firm with two to nine employees.

However, the average wages were not typical. When looking at the aggregate median wages – a listing of the average wages paid by firms based on company size – half the one-employee companies paid an average wage of $24,000 or less. For businesses with two to nine employees, half the companies had average wages of $30,667 or less.

While South Florida is adding new businesses at a rapid rate, those companies are not necessarily producing jobs. The report shows that between 2005 and 2015, the number of non-employer establishments in the Miami-Dade area rose 55.9 percent, almost three times the national rate.

“Not all entrepreneurship and not all small businesses contribute to the economy equally,” says Jacqueline Bueno Sousa, regional director of the Florida SBDC at FIU. “This study helps us understand which small businesses and entrepreneurial ventures are having the biggest positive impact.”

Florida SBDC at FIU is the small business development center at the FIU College of Business. The center works with more than 900 entrepreneurs and business owners each year, offering no-cost consulting and guidance on topics including growth acceleration, access to capital and market analysis.

2018 Small Business Profile


• In the third quarter of 2017, Florida grew at an annual rate of 3.0%, which was slower than the overall US growth rate of 3.4%. Florida’s 2016 growth rate of 2.4% was down from the 2015 rate of 3.9%. (Source: BEA)

• In January 2018, the unemployment rate was 3.9%, down from 4.6% in January 2017. This was below the January 2018 national unemployment rate of 4.1%. (Source: CPS)


Figure 1: Florida Employment by Business Size (Employees)

  • Florida small businesses employed 3.3 million people, or 42.2% of the private workforce, in 2015. (Source: SUSB)
  • Firms with fewer than 100 employees have the largest share of small business employment. Figure 1 provides further details on firms with employees. (Source: SUSB)
  • Private-sector employment increased 2.1% during the 12­ month period ending in January 2018. This was below the increase of 3.3% during the prior 12-month period. (Source: CPS)
  • The number of proprietors increased in 2016 by 2.6% rela­tive to the previous year. (Source: BEA)
  • Small businesses created 152,330 net jobs in 2015. Firms employing fewer than 20 employees experienced the largest gains, adding 92,180 net jobs. The smallest gains were in firms employing 100 to 499 employees, which added 22,733 net jobs. (Source: SUSB)

TheSmall Business Profiles are produced by the US Small Business Administration’s Office of Advocacy. Each report incorporates the most up-to-date government data to present a unique snapshot of small businesses. Small businesses are defined for this profile as firms employing fewer than 500 employees. Net small business job change, minority small business ownership, and exporter share statistics are based on the 2015 Statistics of US Businesses (SUSB), 2012 Survey of Business Owners (SBO), and 2015 International Trade Administration (ITA) data, respectively.


• The number of banks decreased by 14 between June 2016 and June 2017 to 138 banks. (Source: FDIC)

• In 2016, 449,537 loans under $100,000 (valued at $5.6 billion) were issued by Florida lending institutions reporting under the Community Reinvestment Act. (Source: FFIEC)

• The median income for individuals self-employed at their own incorporated businesses was $41,226 in 2016. For individuals self-employed at their own unincorporated firms, this figure was $18,986. (Source: ACS)

Median income represents earnings from all sources. Unincorporated self-employment income includes unpaid family workers, a very small percent of the unincorporated self-employed.


Figure 2: Florida Employees per Business by Owner’s Demographic, 2015

Figure 2 shows the average number of employees per employer business by owner’s demographic group according to the Annual Survey of Entrepreneurs (ASE). Unshaded bars display US values; data were withheld because they do not meet Census Bureau publication standards or could disclose information regarding individual businesses.


Figure 3: Florida Quarterly Startups and Exits

• In the third quarter of 2016, 20,880 establishments started up, generating 88,109 new jobs in Florida. Startups are counted when business establishments hire at least one employee for the first time. (Source: BDM)

• In the same period, 18,474 establishments exited resulting in 75,721 jobs lost. Exits occur when establishments go from having at least one employee to having none, and then remain closed for at least one year. (Source: BDM)

• Figure 3 displays quarterly startups and exits from 1992 to 2016. Each series is smoothed across multiple quarters to highlight long-run trends. (Source: BDM)

The BLS data covers only business establishments with employees. BLS refers to startups as births and exits as deaths. These terms are distinct from the BLS openings and closings categories. Openings include sea­sonal re-openings and closings include seasonal shutterings. Quarterly startup and exit values may not align with Figure 3 due to smoothing.


• A total of 59,617 companies exported goods from Florida in 2015. Of these, 56,664, or 95.0%, were small firms; they generated 58.9% of Florida’s $49.5 billion in total exports. (Source: ITA)


Table 1: Florida Employment by Industry, 2015


Figure 4: Florida Small Business Employment by County, 2015


Table 2: Florida Small Businesses by Industry and Firm Size, 2015

Figure 4 and Tables 1 and 2 display data from the 2015 SUSB. Table 2 includes additional data from the 2015 Nonemployer Statistics (NES).


How much runway should you target between financing rounds?

Entrepreneurs have limited access to hard data that could help them make sound decisions when trying to build a successful new company. This is generally due to a fundamental lack of information about the materialized events of previously successful companies.

Consider that there are a few hundred thousand companies founded each calendar year in the United States (Bureau of Labor Statistics, 2016), but only ~ four thousand venture capital deals are reported in any given year. Each year between five and six hundred VC-backed entities are acquired, and a few hundred become publicly traded companies (WilmerHale, 2017). That’s honestly not a lot of data, and unless an entrepreneur has access to any of this historical data — or has the time to do the research — they’re pretty much driving blind when making critical decisions.

There are numerous questions that entrepreneurs need to answer with incomplete, or worse, false information. One example is—

How many months of runway should I target between rounds when pursuing venture capital financing?

According to CBInsights, running out of cash is the second leading cause of startup failure. Needless to say—it’s an important question to get right. If an entrepreneur tries to answer this question by triangulating from Google results, they’ll find a few sources that tell them the conventional wisdom is anywhere between 12-to-18 months.

CBInsights estimates the median time lapse between funding rounds for Tech companies to be somewhere in the neighborhood of 12 months for Seed to Series A and 15 months for Series A to Series B. On Quora you’ll find peers, who with no doubt good intentions, also confirm the 12-to-18 month conventional wisdom. Some experienced VCs however, such as Fred Wilson, recommend planning for about 18 months of runway between rounds. Steve McDermid, Corporate Development Partner at A16Z, also suggests being prepared for the process to take longer than one might expect, and to give yourself “plenty of cushion when assessing your cash runway”. So what’s an entrepreneur to do?

Is it possible that the startup failure rate is so high partially because conventional wisdom tells founders to prepare for 12-to-18 months between financing events when in reality they should be preparing for longer like the experienced VCs suggest? We ingested all of Crunchbase to find out.


To answer this question, I looked at all startups that raised a k round and subsequently raised the following k+1 round in the traditional venture capital sequence. In layman’s terms, that means I segmented by all companies that successfully raised a Seed round, and subsequently raised a Series A. Then I took all companies that raised a Series A and subsequently raised a Series B— independent of whether or not they had previously raised a Seed stage round, or ever raised a Series C in the future—and so on—until the Series E stage.

The methodology described above gives us five distinct samples of materialized financing events from the traditional venture capital sequence, which allows us to estimate the average time it takes from one financing round to the next. In statistical terms, that means we’re approximating the population parameter (length of time) which characterizes venture capital financing sequences, by relying on the Law of Large Numbers and sample statistics. In total, we evaluated 13,916 materialized financing sequence events. Given the nature of the venture capital funnel and the number of companies that are actually able to raise their next round, this is a more than sufficient sample size for parameter estimation.

(Top) Kernel density estimates for 5 distinct funding sequences, with vertical lines indicating the average value for each sequence. (Bottom) Kernel density estimates for 5 distinct funding sequences, with vertical lines indicating the median value for each sequence. Sample sizes — Seed to Series A (n=2623), Series A to Series B (n=5558), Series B to Series C (n=3422), Series C to Series D (n=1644), Series D to Series E (n=669).

The general shape of the distributions suggests that the bulk of k+1 financing events take between 5 and 35 months from the prior event (plus/minus one standard deviation from the mean), and the long tails suggest that outliers exist which have taken considerably longer to go from one round to another (as long as 115 months, or 9.6 years!). The presence of outliers also tells us that the average values on the left plot (dashed vertical lines) are misleading, since averages are highly susceptible to outliers. The median is a much more robust measure of central tendency in the presence of outliers, so we should put more emphasis on the medians on the right plot.

As perhaps expected, the median time lapse between Seed to Series A is less than the median time lapse between A to B, B to C, C to D, and D to E. Interestingly, the average and median time lapse seems to reach a maximum at the B to C stage, and decreases thereafter. The Series D to Series E distribution is also notably more spread out, which to us suggests that later funding stages are likely more dependent on individual company characteristics.

Depending on the financing sequence, the medians indicate an expected value range of 15 to 19 months, while the averages suggest a range from 18 to 22 months. Blending the samples together creates the average density distribution in the plot below, with overall mean and median sample statistics.

n = 13,916, mean = 20.6, median = 18, s.d = 14.6

So, is it possible that the conventional wisdom of 12 to 18 months between financing events is an influential factor leading to high startup failure rates? Yes, because the hard data says entrepreneurs should plan for at least 18–21 months of runway, and as much as ~35 months if they want to play it safe and stay within one standard deviation from the mean.

Building a product takes time. Finding the right talent takes time. And it turns out that fundraising takes time, too. If it takes you less than 18 months to raise another round then great—keep going—but don’t reduce your probability of success by planning for less than 18–21 months of runway between your financing events.

Now that we have a good grasp on the time it takes for one round to the next, the question remains: What’s the probability of successfully raising the next round in the sequence? We answer this question in Dissecting startup failure rates by financing stage.

What to Look for When Investing in Startups


If you want a safe bet with little risk, investing your money is easy. Just buy Treasury bonds. They carry practically no risk and are guaranteed by the full faith of the United States Government. However, in exchange for that safety, Treasury bonds return a small percentage of the investment that varies based on the Federal Reserve policy.

However, to have much higher returns, sometimes a multiple of the money you invested in the first place, there’s only one possible way to achieve those returns. That path is investing in more speculative vehicles, such as privately-held companies, also known as private equity.

The problem is this: unless you have a disciplined portfolio strategy, your one or two private equity bets may not work. The companies you invested in may fail. Statistically, this is likely to happen. Investing in private business is very risky, but you are rewarded when a company succeeds.

I am going to try to identify the key principles in deciding how to invest your money when it comes to private companies. In my career, I have done probably over 80 investments, and these principles have worked for me.

I wished I would have taken more risk and invested in more companies, but I was a little too conservative and thus passed on some very interesting companies who later grew into very successful businesses. Without further ado, here are my five things to look for when investing in startups:

#1: The Founders

When it comes to building a successful business, people come first. This means you want to evaluate how focused and passionate a founder or a group of founders are.

It is true that having a strong educational degree from a competitive school is important, but it is not as valuable when it comes to building a business from scratch. What you need to build a business is grit, the intersection of passion and resilience.

When the founders of a company quit, the business has little chance of success. Founders that demonstrate the right amount of passion for the mission are a huge advantage. They are not working for money. The right founders are on a campaign to change the world, to improve people’s lives or make an industry more efficient.

When the right founder talks about their company, it feels very personal, and listening to them speak will inspire anyone they get into contact with. I have heard many times that founders “John Smith and Jane Doe” are crazy because they are not willing to listen or take any advice from experienced professionals. I have also heard founders whose company was bankrupt every 6 months, and yet they never gave up. All of these traits are what you should expect from a very risky investment that becomes a success.

#2: The Team

Besides the founders, you want to see a team of people who complement the skills of the founder. Some founders are visionaries but terrible at managing people. Others are excellent managers but lack technical expertise to build the product they’re overseeing.

You should look for a team with expertise in the areas that the founders lack. Look into key areas of a business, such as product development, marketing and sales. Make sure that the team is well-balanced and has the right tool sets for growth and for building out the product they sold in their pitch.

Founders steer the ship, but the team provides the manpower. Without a dedicated, a startup won’t succeed.

#3: The Idea

When reading business plans, it’s common to see a great idea or innovation, but is it going to be commercially viable? Is the technology or solution going to work once it’s actually deployed? Is the business scalable? A successful business is far more than just an idea; it’s about execution and market-fit.

I like to see patents or proprietary technology which demonstrate the depth of knowledge and creativity from the founders or their technical team. For non-technical companies, I look for a strong sense of the customers and their needs. Sometimes the founders are themselves are the market they are trying to target.

#4: The Competition

It is important to understand the landscape of the competition. Is this idea being pursued by a number of companies? Is there a large business like Amazon poised to enter, or pivot to, the same space and destroy every startup innovator in sight?

Competition is actually important and should not be taken as an outright negative when considering a startup investment. In a way, competition serves as a proof of concept and demonstrates a marketplace and its viability.

No competition is actually very rare when you consider that every startup is disrupting something: Amazon disrupted book stores and then all of retail, Uber taxis, Airbnb hotels. When I was the founder of Acclaim, we built online video games to disrupt the existing video game industry from the 1990s. If a company doesn’t have direct competition in the form of another company trying to do the same thing, there is still the competition of whatever company has the attention of the consumers the startup wants to target.

However, while competition can be a healthy sign, in some circumstances it is negative. If the competition is against a large company that is also disrupting the same market, I become wary of the investment — though it’s not enough for me to discount the investment altogether.

Large companies simply have more resources to put into solving the problem, building the product and marketing it to consumers. These resources reduce the time it takes for a large company to get control over a segment of the market, which means the startup has less time to launch. In this scenario, companies who are not careful can be easily “Amazoned,” swallowed, and taken out of the market.

#5: The Money

I also look for founders who invest some of their own savings into their company, even if it is a small amount (though it is often a big financial commitment from them). Sometimes, the founders are not paying themselves until the business reaches some scale. This is a great sign of personal sacrifice and proof of “skin in the game.”

Good founders are also resourceful when it comes to securing capital. Some will go the traditional routes of VCs and banks. However, this route is hard for most founders because Venture Capitalists are only interested in a narrow segment of founders and ideas. They follow recent trends and require founders to have a high level education or strong expertise in the field they are pursuing as they are looking for the next unicorn valuation in order to deliver promised returns to their limited partners. However, only 5% of VCs provide returns to their investors, so whatever formula they use to predict the winners isn’t necessarily right.

Other founders will target angel investor networks or leverage their friends and family. Others will go to Kickstarter to test out their idea, and after they complete a successful campaign, the business has some capital as well as lots of eager customers. Still others will try equity crowdfunding, which in the 3 years of its existence in the US has helped over 1,500 companies raise capital.

Founders who are ready to explore new avenues for capital demonstrate a strong will to do whatever it takes to win.


Investing money is not easy and requires research and vetting, and there is no way to guarantee success. However, only those who risk can benefit from the next explosive company.

Our country has hundreds of examples of entrepreneurs who were bold enough to believe they could change the world, and they did. Your role as an investor is to back those dreamers, be part of the journey to success, and fund the future.

If I had to do it all over again, I would double down and pursued more entrepreneurs even after their first venture failed. It is never too late. This may be the best time to become an active investor when equity crowdfunding has opened up the gates for everyone to be a Venture Capitalist.

This Type Of Store May Actually Survive The Amazon Era


On a recent Thursday evening, hours after closing, Francine Delarosa pulled up a moving box in the dismantled office of her 4,000-square-foot boutique. She sat down on the makeshift chair for a moment and cried. Then she got up, and continued packing.

“I had a little crying moment about the fear of change,” Delarosa told HuffPost over the phone from her store in North Miami Beach, Florida.

When Delarosa first opened her capacious children’s boutique store, Give Wink, in the early 2000s, the veteran retailer was optimistic about her success ― so much so that she signed a 15-year lease on the space. Like most other store owners at the time, she couldn’t have anticipated how the internet, and Amazon in particular, would upend the entire retail industry.

Today, Delarosa, must scrap and fight for every sale she makes. And just like other small retailers, she’s had to reinvent her brand to keep a steady stream of customers coming through her door and not just online shopping from the couch.

Francine Delarosa, owner of children's store Give Wink, is evolving her business to combat new challenges in the retail space

Francine Delarosa, owner of children’s store Give Wink, is evolving her business to combat new challenges in the retail space. Delarosa is downsizing her store and focusing more on her concierge efforts, which include personal shopping and nursery design.

Delarosa is in the process of downsizing to a 1,000-square-foot space and cutting her staff from 10 people to three. She’ll continue to personally curate every item in the store and on the site, and will soon design and manufacture her own private labels. She’ll also be focusing more of her attention on the concierge piece of her business – nursery design, personal shopping and baby registries, because in the end, her deep-seated knowledge of the industry and hands-on approach is what distinguishes her from other dot-coms that sell children’s products.

“In 2018, the success of the retail brand … isn’t the physical space or even the product selection,” Delarosa told HuffPost. “The reality is, all of that is replicable. What’s not replicable is the relationships and the knowledge, and the way you put all of that together.”

To survive today, retailers have to carve out a niche that makes them indispensable. But what Delarosa’s store and other children’s boutiques may have working in their favor compared to other stores is that parents, especially new ones, are so anxious about getting the big-ticket items right.

Whether shopping for a stroller, car seat, crib or mattress, they’ll make more of an effort to walk into a physical store and talk to a retailer who can field multiple questions and direct them to the products that best suit their needs.

Because new parents are eager to get the best and safest products for their kids, they may be more likely to visit an actual

Because new parents are eager to get the best and safest products for their kids, they may be more likely to visit an actual store to get advice from retailers. 

“For a new baby, safety is a big concern,” said Peter Roberge, store manager of Albee Baby, a New York City-based children’s boutique that’s been around since 1933. “They want to make sure they touch and feel something; they want to make sure they know how to operate the products they’re purchasing and get the product that operates best for them.”

Boutiques, in general, are having something of a moment right now, particularly among young people. According to Forrester, a research and advisory firm, 43 percent of millennials, those who are 25 to 34, say they would rather shop at small local stores, as opposed to big national chains.

Overall, the stores that have the best chance of surviving today are either big, maximum tax-paying and low-leverage retailers ― like Macy’s, Marshalls and Target ― or specialized, experiential and small-scale stores, said Jan Kniffen, a former retail executive who now consults for investors in retail properties.

“People like shopping in these sweet little stores because they like the feeling and the experience,” Kniffen said. “Retail is becoming extraordinarily experiential. Even the big stores are trying to be much more experience-oriented. They’re trying to feel like the little stores.”

It’s one potential bright spot in a very grim period for brick-and-mortar stores.

Retail is becoming extraordinarily experiential. Even the big stores are trying to be much more experience-oriented. They’re trying to feel like the little stores.Jan Kniffen, former retail executive

More retailers closed last year than during the height of the Great Recession. That was due to a number of factors, including growing online sales and consumers’ preference for inexpensive, fast fashion. E-commerce sales accounted for 13 percent of all retail sales last year. A decade ago, that figure was just 5.1 percent.

Parents, however, may be defying some of those trends, which could be good news for owners of children’s stores. According to Cassandra, a trend forecasting, research and brand strategy firm, 78 percent of parents in the United States would rather shop in stores than online.

But they’re not going to shop just anywhere.

Millennials are parents to half of today’s children and make a “significant” contribution to the $1 trillion parents spend yearly on stuff for their kids, according to the National Retail Federation. This demographic also prioritizes good service over convenience, according to NRF. And 44 percent of millennials say they only support brands that align with their political and social views.

For many mom and pop children’s stores, it’s about getting that customer in the door once and showing them what they can gain from shopping in person.

Jessica Rone, 35, a resident of Manhattan and mom to a 1-year-old, told HuffPost that she does most of her research for products and shopping online. At any given time, she’ll have “1,000 tabs open” on her computer, investigating the best items to buy for her son.

On a Friday afternoon earlier this month, Rone ventured into Albee Baby on the Upper West Side for the first time because she had a gift certificate that was expiring. She said she was surprised by what she was able to learn there.

“I’m shocked by how much stuff they have,” she said. “There are so many things here I didn’t know existed.”

For others, there are elements of nostalgia and doing the right thing. On that same day, Bart and Joan Auerbach were also shopping in Albee Baby for bath toys and other knickknacks for their granddaughter. The last time they were in the store was 40 years earlier when they were shopping for their own son.

“It’s a famous store,” Joan Auerbach said. “A lot of stores are closing in our neighborhood. It’s really a loss for the neighborhood.”

But while many parents and grandparents may appreciate picking the brains of veteran retailers, that doesn’t necessarily translate into sales, which is one of the most frustrating challenges retailers face.

Francine Delarosa, owner of children's boutique Give Wink, said at the root of her business, are the close relationships she

Francine Delarosa, owner of children’s boutique Give Wink, said at the root of her business, are the close relationships she developments with customers. According to Cassandra, a trend forecasting, research and brand strategy firm, 78 percent of parents in the United States would rather shop in stores than online.

“We get customers who use our knowledge, allow us the opportunity to show them aspects of various different products,” Roberge said. “But when they’re ready to pull the trigger, that may happen while they’re sitting at their desk at work or at 3 a.m. while they’re on their laptop.”

Some customers may have no intention of ever buying from the store and just lap up all the information they can get. Then, once they decide on a product, they’ll hunt down the best price on the internet.

We get customers who use our knowledge … but when they’re ready to pull the trigger, that may happen while they’re sitting at their desk at work or at 3 a.m. while they’re on their laptop.Peter Roberge, store manager of Albee Baby in New York City

One way Albee Baby has tried to solve this problem is by building up its web presence, considered a venerable force in the industry. The company offers competitive pricing and has enough inventory in its warehouse to “fill a stadium,” Roberge said.

The store itself also offers a warm, welcoming feel that a website can’t. Staff members dole out treats to pets who come through. Breastfeeding moms stretch out on the comfortable gliders in the back of the store and feed their babies.

Delarosa faces the very same problem and said she’s moving toward only housing products in her store that “support” her business ― those that strictly enforce “map pricing,” for example. (That’s a minimum price resellers agree they won’t sell below.)

While children’s stores may have a slight advantage over other retailers, they’re not necessarily safer. Gymboree, a major children’s clothing brand, filed for bankruptcy in 2017 due to growing competition, mounting debt and the demand for cheaper prices, CNBC reported. The company underwent a rebranding and relaunched in July. Children’s Place, another mainstream retailer, will close 300 stores by 2020 and will also expand its presence on Amazon.

In 2017, Gymboree, a major children's retailer, filed for bankruptcy. The company rebranded and relaunched in July. 

In 2017, Gymboree, a major children’s retailer, filed for bankruptcy. The company rebranded and relaunched in July. 

Smaller-scale children’s stores are not immune to the risks, either. Giggle, a specialty children’s boutique that had stores in San Francisco, New York City and Denver, was considered a leader in the industry and one that Delarosa looked up to, she said. Without much warning, the stores suddenly closed in 2017.

“If Giggle, who was the most solid specialty store name in our industry, went under, any of us can go under,” Delarosa said. “If we don’t change, none of us will survive.”

The children’s stores that will make it, according to Kniffen, are those that assiduously listen to customers and cater to and respond to their needs.

“The children’s stores that have survived a long time, they have treated every customer like their kid is the most important person in the world,” Kniffen said. “As the times changed, they walked right alongside that customer, they figured out what was important to that customer, and they altered their store to reflect that. The ones that don’t, they go broke.”

This is part of our six-story series spotlighting the current state of retail in America.

The real reasons why a VC passed on your startup


You’re more likely hear about the companies that venture capitalists said “yes” to — the big funding rounds, the success stories, and the unicorns. But the day-to-day reality of being a VC is that we spend ~99% of our time saying “no.” It’s a core competency of any VC. Or at least it should be.

Receiving that “no” as a startup founder is often hard. It’s not fun for us either, though. We’re empathic to how difficult it is to build a business and the effort and belief it takes. It can be painful to tell the human being you’ve just spent time with why something they’re building is not a fit for you or your firm.

Most of the time VCs have one or more discrete reasons for saying “no.” Although it would be ideal if we relayed them to founders clearly and openly, we sometimes feel pressure to take the less confrontational path and say vague things “this is too early for us” when the truth is more difficult to hear. VCs have a code around rejection language that often leaves founders scratching their heads to interpret, but candor is usually better for both parties long-term. Truthfully, the reason for the “no” often has little to do with the founder or the details of the business, but lots to do with that VC’s personal interests, portfolio, or history.

Below I’ve listed the most common “no’s” I’ve seen. I describe them through the lens of early-stage technology venture because that’s what I do. “Early stage” for this purpose means pre-seed, seed, and Series A. If you’re a founder and you’ve gotten one of these reasons, my aim is to expand on what motivations or thoughts may underlie each. And if you’ve heard one that I’ve missed, I’m curious to know.

There’s one caveat to almost all of these reasons for passing, though: VCs will make exceptions to every one of them when we think the founders are absolutely incredible. This bar is extremely high and is based on our personal experience with them, their track record, or both.

Market-related reasons

“The opportunity’s not big enough”

VCs want to invest in companies that can grow to become massive. We strive for 10x, 100x, even 1000x returns. You’re building something that might be a great, sustainable business, but we don’t see it being venture-scale. E.g., you make software for US-based entertainment lawyers who focus on celebrity endorsements, and you’re charging a SaaS subscription of $100/month. There might be a thousand of those lawyers in the US, and even if you got all of them to sign up and had zero marketing and 100% margins (which you won’t), you’re making $1.2M per year. That’s too small for venture capital.

“You’re too early to market”

The investor may like your idea but thinks it’ll take significant time for the market to come around and recognize its value. Funding the company now means that it’ll take a few checks to keep it alive until the world realizes it needs to pay for the product or wants to use it. Imagine fundraising for a mobile gaming startup in 2004 when the iPhone didn’t launch until 2007: even if the founders are visionary and know that mobile gaming will be big, how will they cover expenses for the 3+ years it’ll take for that to happen?

“No (or weak) competitive differentiator”

Someone else could come along and build this exact thing easily. Even if you’re the first to market, competition could cut down your position and your ability to command a high price whenever they choose to. We often say this about startups that don’t have a strong technical element to them. The less technical an idea is, the simpler it is to copy. Having a unique brand may feel like a competitive differentiator — and some of the most successful companies have built themselves up on brand — but a bad PR scandal or well-executed knockoffs can derail that fast.

“Unfavorable macroeconomic or regulatory trends”

It feels like the wrong time to start this business, whether because of shifts in technology, behavior, or regulation. For example, Apple announcing they were dropping the headphone jack was bad news for companies making non-Bluetooth headphones, whereas Apple switching to USB-C charging cables was great for companies who had already embraced that standard. A regulation that bans facial recognition scanning in retail stores would be tough on a company selling those systems to malls.

“An existing, more established company could do it easily”

Big companies with tons of product lines, employees, and resources can quickly release products that encompass a startup’s entire concept. Building something that falls in the realm of one of these companies’ roadmaps — think Amazon, Google, and Facebook — can instill fear in VCs. Sure, it makes you a potential acquisition target, but most investors want you to aim to create a large, sustainable, standalone business first. They’re more valuable. For example, if I meet a startup that creates animated avatars for augmented reality, I’m wondering whether Snap is going to roll out the same capability next week.

“This is a crowded space”

The VC thinks there are too many competitors already working on this problem. Break it down further, though, and it could suggest a few nuances. Maybe the investor is worried about your sales and marketing abilities to stand out from the crowd. Maybe they think you’re not the one to bet on in this group. In any case, competition is fierce and the thought of having to battle for visibility, users, ad space, and market share is making the investor wary. Instead of joining a competitive space, VCs would rather you start a new industry from scratch or heavily disrupt an existing one.


“Founder or team dynamics”

This reason can be uncomfortable to explain to a founder, but it’s a frequent one for VCs. These negative dynamics can take many forms, but at their core, they signal that the team either isn’t meshing well today or won’t in the future. Examples include:

  • A dominant founder who belittles and speaks over the others, who appear frustrated
  • Too many co-founders (usually more than three), whose job titles and expertise appear to intrude on each others’; e.g., a COO, CEO, CSO, and CFO is far too many non-technical founding members at an early stage startup
  • Having both a CEO and a President, which suggests that there are two egos and neither wants to look “lesser” than the other
  • A married or dating founding team (not always a red flag, but many VCs consider it to be one)
  • Multiple co-founders from academia who aren’t involved in the business day-to-day
  • A very seasoned founding team from big corporations or consultancies that doesn’t have any startup experience
  • Any other palpable tension, awkwardness, or discomfort between the founders that seems abnormal

“Missing a key person”

This is a chicken-and-egg problem: founders raise money to hire great people for their teams, but having great people on their teams is what enables them to fundraise, especially at the very early stages when they don’t have much product or traction. Sometimes we see a founding team that’s missing a skillset that’s so key to that business that we have to pass. E.g., you have an autonomous vehicle startup with a business model that requires you to integrate your system with car manufacturers, and your team is all technical and doesn’t have any business development ability. Not having a business-focused founder, especially one who’s worked with auto OEMs, is problematic.

“Founders aren’t mission-driven”

This is another way of saying that the founders just don’t seem that into the idea. They should care deeply about the problem they’re building the company to solve, and ideally have experienced it themselves. They may reference the draw of making money, which is never the right reason to found a company; not even an absurdly high salary will keep people fighting during the inevitable dark periods that startups have to face. Or they refer to doing something else in a few years and don’t see this company as long-term. E.g., the past few months VCs have been seeing a lot of “blockchain for X” pitches where the founders don’t seem to have a great reason for including blockchain, other than other people’s hype.

“Lack of focus”

The VC thinks you’re trying to do too many things at once. This could apply to several spots in the business, including product (you’re trying to build too many things), go-to-market (you’re trying to sell to an array of customers without understanding which one’s truly best), business model (e.g., you have freemium, paid with multiple pricing tiers, and enterprise sales, but you haven’t sold anything yet), team (multiple part-time people who should be full time, including founders who haven’t quit their day jobs yet) or operations (e.g., you have a time-consuming services studio in addition to the startup business).

“Personality/behavioral red flags”

This is another one that VCs may not tell you directly unless you press them on the reason why they passed. It’s uncomfortable. But there are cases when a founder comes in and displays sexist, racist, rude, or otherwise negative behavior that makes us write off backing that person. Things I’ve seen: men only engaging with male investors and not with female investors present in the same meeting (that includes speaking, hand-shaking, and eye contact); people who are obnoxious to office support staff or waiters; narcissistic people taking 45 minutes of an hour-long meeting rambling about their bios; and spouting off sexist or racist opinions. VCs are gauging whether you’re the right person to lead a team and provide those people with a safe workplace that’ll act as a second home. We don’t want to entrust that to you — at least not with our capital — if you’re an asshole.


An investment means a relationship that spans years, even decades. Honest, open communication is critical. If VCs think that founders are lying to us, we’re out. There’s intellectual dishonesty, where founders aren’t honest with themselves or investors about how things are going; they will minimize problems and play up successes, making it difficult for investors to help them and shocking when the true status of the company becomes clear. Then there’s run-of-the-mill dishonesty where founders lie outright about facts. Examples I’ve seen include inflated metrics (“we’re growing 50% month over month” when they’re not), manufactured advisors (saying that high-profile Silicon Valley CEOs are advisors when they aren’t), and exaggeration of product readiness (claiming that a platform is fully automated artificial intelligence when it’s really just humans on the backend).

“Distributed team”

Most VCs view a distributed founding team where people don’t work out of the same physical location as a negative. It can work, but typically only after the company started in one place and then expanded to multiple offices as it grew. Exceptions include crypto investments where a decentralized platform and business model lend themselves to a decentralized team, and very early companies who outsource their development teams to countries with cheaper workers.

“Negative references”

Someone the VC trusts had something bad to say about one or more of the founders or a key person on the team. VCs don’t stick to the list of references you provide; we’ll also look through LinkedIn and talk to people you’ve worked with but didn’t mention to us. There isn’t much you can do in this situation because the VC most likely won’t divulge the person who made the comment. Be thoughtful about the LinkedIn connections you have and delete or don’t accept those with people who you don’t truly know well.

“CEO or founder isn’t compelling”

The founder who will assume the most public-facing role should strike an investor as exceptional and special. There has to be something about them that is moving, a je ne sais quoi that compels people to listen and to care. This same presence will be what allows them to raise money, convince employees to work for them when they have lots of other options, sell customers, build partnerships, give great press interviews, and more. There is not one right way to come off as special; the extroverted salesperson CEO often comes to mind, but the introverted technical genius who breaks down complicated architecture into simple quips fills that role too. “I’m just not that into you” is perhaps the most difficult-to-articulate reason to pass on a startup, but one of the most common.

Individual investor or firm-related

“Not in our geographic area”

Most VCs have geographies in which they do and don’t invest. Pay attention to the VC’s current portfolio: where are those companies located? Where are they relative to the investor’s offices? Most firms will put their preferred geographies on their websites or social media accounts. Don’t waste your time pitching your UK-based company to a US firm that only invests in the US and Canada.

“It’s just not something I can get excited about”

VCs are people with individual tastes and interests. Not every startup idea thrills every VC. And that’s okay — as a founder, your best investor match is with someone who really loves and understands what you’re trying to do. Sometimes VCs do take pitch meetings with companies that don’t interest us on paper, but we’re hoping the founder’s enthusiasm will be contagious. That can happen, but it’s more likely that a VC who’s already excited about a certain industry will get it, as opposed to converting one into a believer who isn’t.

“Too capital-intensive for us”

In non-VC jargon, this means that we think it’s going to take a ton of money to get this business to work. Different firms have different comfort thresholds with capital-intensive startups; bigger funds are often better suited for them. If you’re starting a virtual reality headset company — a complicated hardware play — don’t expect a $50M pre-seed fund to be a great match. Certain industries, like cybersecurity and hardware, tend to need more funding to reach product-market fit than others, like consumer mobile apps or SaaS platforms. They’ll need a VC who understands that it’ll take a few checks (and years) to get it off the ground.

“Too early for us” / “too late”

All VCs have a stage or range in which they invest. That stage considers how far along the product is, who and how many people are on the team, how much funding they’ve raised, what amount they’re seeking to raise and at what valuation, their industry, and more. If a firm mainly invests in Seed and Series A companies, one that’s just at the idea stage with nothing built and that’s seeking $50k in funding is too early. One that has 200 people and is seeking a $50M Series C round is too late. Not aligning within a VC’s investment stage(s) is one of the most common reasons for a pass. Some VCs make personal angel investments in companies that are too early for their firm but that they love and want to stay close to as they grow.

“Too small a round” / “too big a round”

Like with company stage, VCs have round sizes in which they prefer to participate. Many VCs are conscious of ownership and seek to buy a certain percentage of a company when they invest. For example, Accomplice looks to put in $1M-$2.5M first checks for between 10 and 20% of a company. If a founder is raising a $15M round, our investment won’t make up a significant enough piece of it to hit our desired ownership. But as with stage (too early or too late), VCs will sometimes make exceptions to their model to have a small ownership percentage of a company that they think has huge potential.

“I couldn’t convince my partnership”

The individual investor you’ve been working with loves you and the idea, but either one of their influential partners or the partnership as a whole vetoed it. If you’ve been talking to an associate who can’t write a check without a senior partner’s approval, it’s probably the senior partner that they work most closely with who’s saying “no.” If you’ve been talking to a senior partner, it’s probably that person’s equal at the firm (like one general partner talking to another). Another possibility is that the VCs are knowingly using each other as scapegoats to avoid giving a real reason for passing and preserve standing with you (“it’s not me; it’s that other person”). One of the benefits of a partnership is absorbing the fall for each other in situations like these.

“I’ve seen a similar company try this and fail”

VCs have scar tissue from the companies we’ve backed that haven’t worked out. Even indirect knowledge of a startup’s failure can dissuade a VC from investing in a similar company. This pass reason is more about the VC’s personal baggage than the founder to whom they’re saying it.

“Unreasonable expectations around the VC’s role”

Some founders (wrongly) expect VCs to help the company where it’s weak, but far beyond what’s normal or useful for an investor. I’ve seen founders who have a company with a very minor tech component built to date ask tech VCs to join “so you can help us build the software.” That is not our job. If you want a tech VC to back you, the tech should exist or come from you in the future. We’ll help where we can, but you shouldn’t want us involved in the minutiae of the business because it’s not the best use of our time for either of us. Of course, good VCs help with a wide range of things across a company’s lifecycle: recruiting, product testing, conflict resolution, marketing launches, strategic vision, equity and compensation, etc. But we aren’t employees, and we aren’t your crutch for essential parts of the company that need to come from you.

“Competitive with a portfolio company”

If you’re a founder in a certain industry, it’s smart to pitch VCs who have already made investments in that industry as long as it’s broadly defined. If you get too specific with the similarities, though, you risk the VC telling you that your company is competitive with one of their existing investments. E.g., if I’m on the board of Niantic, which made Pokemon Go, I would pass if you pitched me a new company’s idea for “Pokemon Go but for kittens” (even though someone should make that). But a mobile gaming company in general may be a good fit.


“Problematic cap table”

VCs will ask to see your cap table, especially as they get more serious about the investment. Short for “capitalization table,” it’s a spreadsheet showing which people and firms have ownership in the company and its financing rounds. Problematic cap tables may have format issues (like being out of date, not reflecting recent funding rounds or equity grants, broken models, or mispriced option grants), ownership issues (like angels who got way too much of the company for a small amount of money, not having employees on a vesting schedule, advisors who think they have equity but aren’t on the cap table, or confusing agreements like warrants or verbal promises that don’t show up in the document), or both.

“Bad presentation materials”

This is another pass reason that is awkward for VCs to say, so just because you don’t hear it doesn’t mean it doesn’t apply to you. Ask someone you trust to be straightforward with you about your pitch deck. It doesn’t have to be a design marvel, but egregiously ugly decks are distracting and make VCs worry that you don’t prioritize aesthetics now and won’t in your product later. The same goes for spelling, grammar, and legibility: be precise and clear. Communication matters. If you make these kinds of mistakes in your pitch deck where you’re aiming to put your best foot forward, it suggests you’ll be even more negligent about the rest of your business.

“Valuation issues”

Usually this means that the VCs think your valuation is too high. A high valuation means that the VC will get a smaller ownership piece for the same amount of funding, plus you’ll have to raise your next round on an even higher valuation. That’s tough: you’ll have to hit lots of milestones and execute flawlessly, and that’s never guaranteed. Depending on how much higher your desired valuation is than what the VC thinks is reasonable, you may also risk appearing overconfident and out of touch with reality. Too low a valuation is also a negative signal: it suggests a lack of sophistication around fundraising, the market, and the value of what you’ve built.

“Undesirable terms”

There’s a long list of possible issues that could go wrong in negotiating a term sheet — it’s outside the scope of this article — so you should push a VC to give you specifics. Some of the most contentious areas include classes of stock, pro rata rights, liquidation preferences, founder vesting, the board makeup, employee stock options, drag along rights, information rights, and voting rights.

“Co-investor dynamics”

The VC doesn’t like the investors you already have, those you want in the current round, or both. Strategic investors, those associated with corporations, can be especially problematic because they have more complicated incentives beyond just making a return on their investment. They might invest to get a view into a product that they want to build themselves, or to get more information about your company to see if they want to buy it later. They often move slowly, ask for unusual terms stemming from their unique interests, and can create conflicts of interest with their competitors (like if your robotics company takes money from Panasonic, and then Samsung won’t partner with you because they’re worried you’re too close to their competitor). Taking funding from a strategic investors can also signal that you didn’t have interest from “regular” institutional investors. But “regular” VCs can be the problem, too: you never know which individual VCs have feuds with others, or which firms dislike working together. VC firms and individual investors can have long, dramatic histories that founders won’t be aware of. Although co-investor dynamics are largely out of your hands as a founder, you can sometimes get the inside scoop by asking other founders who the VCs you’re meeting with have backed before.

“Fundraising tactics”

The way that founders run their fundraising process reflects a lot about them. There’s a fine line between invoking psychological and sales tactics that keep VCs interested and being unethical. Saying you have multiple term sheets in hand will inflame VCs’ competitive natures, but don’t say it if you don’t. Trying to force scarcity or create a rush to get an offer when there isn’t one is usually obvious and can backfire.

“You need to find a lead”

Some firms do not lead investment rounds or only do in rare cases. If they tell you they want you to find a lead, that lead will not only put in the largest check in that round, but they’ll set the terms that the rest of the syndicate will follow. However, some VCs who don’t have enough conviction around your company will ask you to find a lead as a pretext because they want to hang back and see if you can convince a quality firm or person to join. That removes some of the risk that they’re struggling with.

“Unpersonalized cold pitch”

Sending a cold pitch over email is a bad way to get investors’ attention. I only know of one founder out of hundreds we’ve backed at Accomplice that came in through a cold email (nice work, Mikael from Unsplash). You want the VC to invest in you, so you should invest the time in personalizing your email to them. Taking the extra few minutes to get a warm intro from someone the VC knows well, ideally a founder they’ve backed, is well worth it. If you must do a cold pitch over email, at least make it rise above the crowd. Cold email pitches should:

  • be personalized, explaining why this firm and these partners are a good fit for you and your idea; don’t just copy and paste the same thing to every VC
  • be very brief, with just a high-level idea, who you are, and maybe a link to a slide deck for more info
  • have a reasonable ask for a first meeting (like “do you have 15 minutes for a call?” not “we would like to pitch your entire partnership this Friday”)

Product or tech-related

“Not enough tech”

This “no” is specific to technology investors. What defines “technology” is super broad these days — almost every business has a website or an app — but most tech VC firms have a baseline amount that they need to see. What isn’t technology? Life sciences, medical devices and biotechnologies, simple e-commerce, capital-intensive businesses, pure gaming companies (because success is too dependent on how individual titles perform), editorial content/media, consumer packaged goods, or heavily offline businesses. E.g., “we sell this physical widget online” is not enough if the widget itself doesn’t involve any tech.

“Not enough product”

Some VCs, usually pre-seed or micro VCs, will back startups that are nothing more than an idea. Others require a finished product that’s been researched, tested, and launched.

“Feature, not a product”

The VC may like the idea, but it doesn’t feel significant enough to be a standalone business. This “no” is related to market size: the VC doesn’t think the concept can hook a lot of people, or inspire them to pay or use it frequently. One way to counter this assumption, if you believe it isn’t correct, is that the feature may be the focus today but it’s the first step in a larger product plan.

“Product dysfunction”

Not having any product built is bad if you’re fundraising at a point where an investor expects to see it. But having bad product to show is also, well…bad. If you have a tech demo, make sure it works. Prepare for demoing on different devices and in different settings, from coffee shops to conference rooms. If you’re claiming the product does X, make sure it really does X. It’s better to under-promise and over-deliver than to hype up an investor on everything your product can do and have it flake out. Exaggerating your product capabilities can come off as disingenuous or naive.

“Licensing or IP issues”

Many founders, especially those who are highly technical or academic, seem to think that securing patents is important to VCs. Actually, VCs don’t care much about patent portfolios; they’re expensive, time-consuming, and can distract you from all the other things you need to do to build the business. Instead, intellectual property issues in fundraising usually have more to do with a startup’s questionable use of existing IP. A few examples:

  • The founders spun the technology out of a university but haven’t negotiated rights to use it yet or got a bad deal
  • The founders used a development studio to build an app and now owe the studio a high percentage in royalties forever
  • The founders came from a previous company that has patents protecting a certain thing, and whatever the new startup is building looks dangerously similar to the previous company’s tech; there may be an infringement lawsuit ahead

Business model or progress-related

“Not enough traction”

VCs have a bar for the amount of traction that they’re comfortable with. Depending on the type of company, that could mean users, downloads, paying customers, revenue, partnerships, etc.

“Dislike the business model”

Something about the business model is a red flag. Maybe the VC thinks you’re targeting the wrong customer, or that you don’t understand which customer is the most valuable. Maybe your pricing seems off. Maybe that VC doesn’t have confidence or enthusiasm about that type of business model. Some investors just don’t like e-commerce; others love it and do only that. Maybe the model requires working with many different stakeholders and seems confusing and time-consuming. Ideally the VC tells you exactly what put her off about your model. If not, it’s okay to ask.

“Dislike the go-to-market”

Usually this pass reason means that the VC thinks your go-to-market (GTM) plan is non-existent, not well thought-out (e.g., “we’ll do a launch, and then users will just…find us”), or they don’t think tactics mentioned will work. I’ve seen really high-tech products with ill-fitting, old-school GTMs, like trade shows and direct mailings for a big data company. Or simply saying “we’ll do Facebook ads” for a consumer product doesn’t cut it because they’re competitive and expensive; plus you should have an organic strategy for users to find you without paying for them.

“Supply chain concerns”

Many VCs have horror stories about hardware startups: they tend to be a lot more expensive and take much more time to get to market than anyone expects. Many of these issues relate back to problems with the supply chain. If you’re pitching a hardware business, you or an expert on your team should know exactly how and where you’ll manufacture every component and what it’ll cost.

“Not a scalable model”

Venture-backed companies should be scalable, meaning that they can multiply revenue with minimal incremental cost as they grow. Studio or high-touch service models that need more people to do their work aren’t scalable. Software scales; people do not. Many models start out with heavy reliance on people or slow processes, but they should move to scalability as they evolve.

“Unclear value proposition”

In the investor’s opinion, you’re solving a problem that the world doesn’t have. The solution that the company provides should be essential, not nice-to-have; it’s a painkiller, not a vitamin. Maybe the value proposition is strong, but it’s not coming across because of complicated or confusing messaging.

“Weak metrics/unit economics”

One or more aspects of your unit economics were concerning. Maybe you calculated something wrong (like you report your burn rate as much lower than it really is, or you’re claiming 50% month-over-month user growth but your user numbers don’t support that), you’re presenting something that seems low (e.g., the ratio of your customer acquisition cost to your customer lifetime value is one or below, or your margins only 15% in a software business), or the investor is calculating something additional using the metrics you provided and doesn’t like the result (like using acquisition cost and lifetime to determine that payback period is extremely lengthy). Weak metrics hurt your viability; false metrics hurt your credibility.

I’ve talked about the stated reasons VCs give for passing: those that have to do with the market, founders, individual VC or firm, fundraising process, product or technology, and business model or go-to-market. But sometimes actions (or inactions) speak louder than words. If a VC goes silent on you at any point in the fundraising process, they’re not that interested. It’s poor form and you deserve a reason, but overflowing inboxes, portfolio company emergencies, and unwieldy and unpredictable schedules are the norm in our jobs. VCs will lose interest. Speed kills in venture, so as a founder you should work to create and maintain momentum.

In the spirit of transparency, the two most common reasons why I pass are first, not feeling strongly about the founders, and second, a lack of personal interest in or conviction about in the space. I’ve seen how hard it is to build a successful venture-scale company. It’s riddled with adversity. Pivots and crises are the norm. If I don’t have a real connection with the founders in a space that they are mission-driven to care about immensely, it’s a pass. Success takes a rare combination of exceptional people, timing, and technology. It’s a long, drawn-out battle, and VCs will crawl over broken glass for the founders we’ve chosen to back.

Having conviction in either of these two components (or ideally both) will overcome almost any other reason for passing. VCs make exceptions for people and ideas that we think are truly exceptional.

What’s Really Disrupting Business? It’s Not Technology


If women wanted to shake up their makeup regimen 10 years ago, Sephora was the place to go. Beauty product junkies loved Sephora’s candy store-like display of sample-size face creams, glittery lip glosses, and eyeshadows in every shade imaginable, allowing them to test out new products at non-committal prices.

That is, until Birchbox came along in 2010 with an innovative offer: Pay a monthly fee and receive a curated box of beauty samples by mail.

“They said, ‘We’re going to start off doing this one part of the customer value chain, which is helping you identify the better products, and we’re going to do it more conveniently,’” says Thales S. Teixeira, author of the new book Unlocking the Customer Value Chain: How Decoupling Drives Consumer Disruption, which debuts tomorrow.


Many established companies lament the disruption they’re facing at the hand of technologically savvy startups. But Teixeira, the Lumry Family Associate Professor of Business Administration, argues that these newcomers simply spotted and served an emerging customer need faster, taking market share from established companies that didn’t see them coming.

Are companies looking at disruption the wrong way?

Danielle Kost: In your book, you argue that technology isn’t the main force hobbling many companies today—it’s changing customer needs and behavior. How did you come to this conclusion?

Thales Teixeira: When I started eight years ago looking into what was going on in certain industries, what came out initially was this idea that it was technology, right? We all talked about Google, Amazon, Facebook, and Apple. But in many industries, both the disrupter and the disrupted had similar technologies and similar amounts of technology.

The common pattern was that the majority of customers in those markets had changing needs and wants, and their behavior was changing.

Kost: Many of the companies you’ve studied gained a foothold in the market by capturing one piece of the customer value chain, or by following the steps a customer takes to select, buy, and consume a product or service. You call these situations “decoupling.” Could you give an example?

Teixeira: A great example of decoupling is an insurance startup called Trov. It’s an app that allows you to quickly insure expensive belongings for short periods of time. If you’re traveling to Rio de Janeiro next week and you just bought a $700 camera that you fear you’ll lose, you can upload some information about the camera to the Trov app, swipe right, and insure it from the moment you embark. One week later, when you come back, you can swipe left and it will stop insuring it.

You don’t have to do all the activities you normally would do with a traditional insurance company. You don’t have to talk to an agent, look at the policies, list the things you own, pay for the policy, use it, and then cancel it.

[Most] insurance companies don’t want to sell you one week of insurance for one product. They have thousands of employees, big budgets, and huge infrastructures, so that they can offer more or all of the activities in the customer value chain.

Kost: Incumbents that survive disruption often embrace it and change their business models to forge new sales channels, revenue streams, and customer segments. Could you give an example?

Teixeira: Incumbents tend to respond to decoupling by gluing back the part of the value chain that was broken. The other alternative is you just live with the fact that it’s broken. That’s called “preemptively decoupling.” Instead of waiting to be disrupted, you just break it.

When Amazon started selling electronics online, it created apps that encouraged customers to go to a store and check out the prices and products, but order them at Amazon. This is called showrooming.

Best Buy initially tried to prevent customers from showrooming. They considered changing the barcodes on products to make them hard to search for online. The company even tried to use signal jammers, like the ones they use to keep prison inmates from using cell phones.

Eventually Best Buy executives realized that Amazon and showrooming are not going away. They decided to charge manufacturers for putting those items on the shelf. When a company like Samsung puts TVs on display at Best Buy, Samsung is benefiting whether you buy it from Best Buy or Amazon. So Best Buy decided to charge for that value they create.

Kost: Many companies obsess about their direct competitors—how to undercut their prices, outpace them in R&D, or steal their talent. You argue that companies should focus on customers and meeting their needs. Why is that so hard?

Teixeira: You have few competitors, so it’s easy to look at what they’re doing and emulate or respond. When Coca-Cola launches a new product or reduces prices, it’s easy for Pepsi to identify that. It’s easy to go to the board or to your boss and say, “Our competitor is doing this. We should respond.”

It’s very hard to understand your customers because you might have millions of them scattered around the world. It’s hard to see what they’re doing and to understand why they are doing what they’re doing.


Kost: So many executives are trying to predict the next wave of disruption. You recommend that executives look for early signs of behavior change in seven consumer categories. Why?

Teixeira: When I started doing this research, I realized that 90 to 97 percent of consumer spending is concentrated in seven categories. I call them the categories that better consumers, from their point of view: where they live, what they eat, what they wear, how they move, how they heal themselves, how they educate themselves, and how they entertain themselves.

When consumers change their behavior, the first signs can be seen in one of these seven industries, and it quickly multiplies.

Kost: What lessons do you hope executives will take from your book?

Teixeira: That the game has changed. In the past, there were a few big companies competing with each other. Coke versus Pepsi. Airbus versus Boeing. GE and Siemens. Now there are thousands of startups in any market, and they’re competing with the big companies without having the resources.

But in most cases, consumers are disrupting markets, not startups and not technology. Your way out as a business executive requires adapting and evolving your business model.

Danielle Kost is senior editor of Harvard Business School Working Knowledge.

All Things Sales! 16 Mini-Lessons for Startup Founders


As a former CEO and software engineer (Citrix, XenSource, VERITAS, etc.), board member of GitHub (recently acquired by Microsoft), and lecturer in management at the Stanford Graduate School of Busines, a16z general partner Peter Levine is constantly asked “Why sales?” by entrepreneurs and technical founders. He himself used to hold the “engineer-centric” view that if you build a great product, customers will come. But the fact is, all world-class companies must have a strong sales force. So — how do they get there? How does a technical founder begin to build a top tier sales motion?

In this series of snack-sized videos — which you can watch all together, or mix-and-match for your particular questions and needs — Levine distills the fundamentals that every founder should know about sales. The 16 lessons in this “mini-MOOC” offer everything from definitions to concrete guidance for the following:

1. All Things Sales! 16 Mini-Lessons for Startup Founders [Introduction]

2. Understanding and Defining Sales Channels

3. Engaging Sales: How Much to Spend on Marketing vs. Sales?

4. Segmenting Markets for Go-to-Market

5. Why Build a Sales Organization?

6. Building a Sales Org: Who, When, How

7. Setting the Sales Number

8. A Short Coda on (Sales) Quotas

9. Mapping Go-to-Market to Customers: ‘The Coverage Matrix’

10. Managing a Sales Org: Forecasting

11. Managing a Sales Org: Revenue Composition

12. How to Compensate Sales Reps

13. Simplifying Sales Compensation

14. Sales Force Productivity: How Do You Know?

15. Predicting Your Pipeline

16. Takeaways for Technical Founders: How to Think about Sales [conclusion]

Acknowledgements: With thanks to Mark Leslie and Jim Lattin for their contributions to the concepts — including the “sales learning curve” (see this 2006 Harvard Business Review article by Leslie and Charles Holloway) — in this series. Many of these concepts are developed and discussed in an MBA elective course we teach at the Stanford Graduate School of Business, “Building and Managing Professional Sales Organizations”.