My two [million] cents (pt. 2): If founder time is worth 5-figures per hour, here’s how to act accordingly
This is part two of a two-part post on the value of founder time. In part one, I posited “in the best businesses, founder time is worth >$10K in equity value per hour.” You can read that post and the underlying assumptions here.
Now, I’d like to discuss what that value per hour means for investors and founders alike, especially in the context of Fundraising.
Sanity check: I realize that founders can’t actually exchange their time for $10K an hour, nor is founder time likely worth 5-figures per hour in most businesses. But I do feel this is a useful logic exercise for our ecosystem, because, ex-ante, every venture-backed business should target reaching massive scale.
Pain point for fundraising
In a seed round of <$5M raised, I think most founders will find fundraising a full-time job for multiple weeks (if not months), which is easily >100 hours of founder time * $10K per hour = >$1M of founder equity value cost to raise a round. This is a really dangerous ratio of the amount of overhead to raise a seed round.
FundersClub’s software-first solution
Some shameless self-promotion to founders*:
At FundersClub, we use our online platform to present investment in your business to our network of >14,000 accredited investors, without having to keep your mouth moving in >14,000 meetings.
It’s why I track founder time interacted with FundersClub, and my KPI is to keep our full fundraising process <5 hours of founder time start to finish (with a “no” ideally coming even faster).
Some other things we do to save you time:
We make it easy for you to create your company’s online profile with a goal of keeping profile creation for your company to ~1.5 hours of your time
When you answer an investor question from the platform during fundraising, you have the option to post the question to the entire platform so other investors can see the Q+A—thus reducing redundant questions
We take up just one line on the cap table and act as just one institutional investor, yet you can still browse your entire network of investors from the platform and receive/vet offers to help (we have 100’s of examples of our network assisting founders)
We are proud of what we’ve built to date, but we still have a long way to go before fundraising is a delightful experience.
If this sounds of interest, we’d love to hear from you! You can apply here: https://fundersclub.com/founders/apply/. We will get back to you with a response within 2 weeks. Or, you can ask a founder in our portfolio or an investor on our platform for a direct introduction if you know them.
*We built our product off of the back of mistakes that we’ve made along the way and feedback received from the founders that we’ve interacted with. If you’ve worked with FundersClub in the past, thanks for helping us continue to refine our product.
What does this mean for founders?
Some tips and thoughts for founders at various stages in your process:
1. During fundraising
- “Don’t spend much time with prospective investors in between fundraising. Your startup is young. You need to focus. As an operator, it’s hard enough to build one thing well. Apply that to fundraising. It’s okay to casually engage with interested investors in between fundraising, but be aware of your time investment and be clear that you are not fundraising.
- Your key metrics & product-market fit matter more than raising money. The currency of success in startups is growth of your key metrics, not amount of raised capital. In fact, 2/3 of companies that IPO never raise outside VC capital.”
I’ll add on a couple of my own thoughts:
- Aggressively triage investors. You should think of your fundraising as an enterprise sales funnel, and at top of funnel it’s a numbers game. Push investors for their interest level early and understand what gating items are outstanding in their process. Don’t fall in love with any one investor until you have strong signals you are a promising candidate for them, too.
- Get in-front of decision makers at firms as fast as possible. That’s not to say you shouldn’t take intros with junior people at firms (as Peter Thiel says “Junior people will give you a fair shake, because they need good deals to their name.”). But you do need to get accelerated into to “partner-level” conversations in order to progress at most firms.
- You are allowed to ask “why?” for diligence requests. A thoughtful investor will tell you what they need to prove, and not be prescriptive on the actual diligence request (investors: see “what does this mean for investors?” below). Once you understand the “why”, not just the request, wherever possible, try to use “off-the-shelf” reporting from your data tracking to answer investor diligence. Some investors will simply send a “diligence request list” that is standard for them for every deal. My opinion is that this level of diligence is only applicable at later stages and you can push investors for just the requests that are applicable to your company.
- Use market standard legal documentation whenever possible. I recommend these two sources: https://www.ycombinator.com/documents/, http://nvca.org/resources/model-legal-documents/ and 500.co/kiss). Legal document negotiation is a silent killer which can take a lot of time, especially during equity rounds. Before you try to do something idiosyncratic / off-market, just know that (1) investors have negotiated more of these than you, often by orders of magnitude, and (2) lawyers are not incentivized to run a brief legal process. Lawyers have exactly the opposite incentive than you (on short run, at least—on long run find a great lawyer who respects your time and their expense to your business).
2. Outside of fundraising
And outside the context of Fundraising, I think using the this heuristic of time value results in some interesting ideas, too. Thoughts from Jason Cohen from A Smart Bear
- “It means you don’t have time for projects that have the potential only for small, incremental results.
- It means a personal or virtual assistant is worth the money.
- It means you spend the money on a bookkeeper and CPA instead of messing with receipts, Quickbooks, and taxes.
- It means you can’t afford to not work harder than is healthy.
- It means you should obsess about doubling your productivity.”
What does this mean for VCs / investors?
It means every single time you ask for a meeting or diligence request, you should think of charging the company $10k in equity value.
Here are some specific points of feedback I have—I’ve made every one of these mistakes multiple times, and I apologize if you were one of the founders I was working with when I made these mistakes.
1. Before fundraising
- Be careful “just checking in” or asking for meetings with companies before they are fundraising. Many founders will say yes to the meeting, but, as “Yo” taught us, you don’t need an hour of face-to-face contact to let someone know you are thinking about them.
2. During fundraising
- Get to a decision fast and with minimal founder time. Specifically, try to answer the question “what fact(s) would have to be true in order to make an investment?”, and follow-up ONLY on open items to that thesis VS. asking general or “off the shelf” diligence requests. If there are no set of facts that would lead to investment, even with “perfect” answers to diligence, then pass on investing immediately.
- When you do ask for the diligence requests, don’t be prescriptive in what format the diligence is received. Tell the founder what underlying thesis you need to answer, and ask them what they have off the shelf to help you get comfort.
- Try to meet with just the CEO, unless there is a specific reason you need multiple founders involved (for example: technical diligence with the CTO if CEO is not the technical co-founder).
- Make sure your “value-add” is actually net valuable. Vinod Khosla said that “I would bet that 70-80 percent [of investors] add negative value to a startup in their advising” I find that a little cynical, but his point is fair. If you are going to offer to help a business and it takes an hour of founder time, it better be >$10K of value to the business. Even a chorus of offers to help can turn into a cacophony faster than you think.
- If you have reporting / auditing requirements for your portfolio, make it as streamlined as possible. You may need it for your LPs, but it’s a real cost to your founders, as this is often founder-level work for a young company