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VIDEO: Three things you need to know to raise money in Silicon Valley

 

Raising money is hard. And it’s even harder if you’re an entrepreneur from outside the Bay Area.

Entrepreneurs from outside of Silicon Valley often struggle to raise money here. There’s issues with culture and style, differences in expectations, as well as our emphasis on growth over monetization. I’m reminded of this every time I travel and meet startups. Earlier this year in Paris, my girlfriend Brianne (at Zendesk!) and I gave a talk that touched on many of these issues. We recorded the session and wanted to share it with you.

The video has a variety of topics, including:

  • How the startup ecosystems are different in SF and in Sydney (and Paris!) (2:30)
  • An alternative to influencer marketing, for startups (5:09)
  • A different way to think about your competition (7:02)
  • Customer service as a competitive advantage (9:25)
  • Why ecosystem matters, and why the Bay Area is cushier than most people think (12:50)
  • Why you should look for failed experiences if you’re hiring or interviewing (14:56)
  • Insights on Uber’s “give / get” program (18:17)
  • Breaking into VC as a teenager (19:02)
  • Advice for starting your own blog or thought platform (26:27)
  • Biggest fiascos working in growth and the downsides to being “too good” at acquisition (29:20)
  • The 4 -5 stages to building a great growth team, and what profiles to look for (33:13)
  • Does the rise of “growth” mean that “marketing” is dying, and should we expect to see the end of the CMO? (36:18)
  • Why you need “growth” when you work in a company with a million-dollar acquisition budget? (39:39)

Here’s a direct link to the video.

For those who are too busy/lazy to watch the video, I want to deep dive on a particular topic: The challenges of entrepreneurs from outside the Bay Area who are pitching investors here.

1. Your company right now doesn’t matter as much as your company’s trajectory.
I’m going to generalize a bit from startups I’ve met from Australia/Europe. One common anti-pattern is for startups to pitch what they have right now, to their detriment. Bay Area investors seek to understand the trajectory of a company. They want to know what it could be in the coming years, and so it’s not good when a pitch is literal and descriptive to the present state of the company. “This is exactly what I’m doing today, and these are the current numbers.” And so on. While this is concrete and feels real, it’s also not the right approach to create a strong vision and narrative that’s exciting.

If you’re a SaaS company, you don’t talk about this last month’s MRR with X% monthly growth rate. You should also talk about how this is the beginning of a platform/suite of products. And why it’s strategic, and sticky, and will be hard for companies to rip/replace in the future. If you’re a consumer startup, then it’s not about how many installs your app has today. Instead, you want to talk about the network you’re building when hundreds of millions of users are actively engaged in your product. And what this will enable you to do that’s unique in the market.

Where the startup is now is just a supporting bullet point to that story about where things are headed.

2. Investor motivations are different. Large outcomes matter more than high probability of success.
The second observation is that Bay Area VCs often have different motivations than investors elsewhereFor traditional Series A venture capital firms, their biggest limitation is not high quality dealflow. There’s a ton of great startups here. Instead, it’s that a partner can only be on the boards of about ten active startups at a given time. Thus, what they care most about is maximizing those ten startups. They want to make sure that those ten are the ten biggest possible companies they could be investing in, with the best possible outcomes.

They care less about whether or not your startup is profitable because that’s sometimes irrelevant to the size of the future outcome. In fact, profitability can be interpreted as reducing the potential scale of the business when the company isn’t growing fast enough. When you can only invest in ten startups and have a billion dollar fund behind you, then it’s all about opportunity cost. I’ve heard a VC say that they’d rather inject more risk into a business to avert a small/medium size outcome ($100M) to have a smaller percentage chance they can get a multi-billion dollar outcome. This can be a disorienting point of view until you understand the economics of a large professional investment fund.

3. At the startup stage, scale and velocity matter more than depth of monetization.
Finally, the third observation is also related to the emphasis on monetization from investors I’ve met in Sydney, Sweden, and France. There’s exceptions of course, but speaking in generalities, investors will naturally have a different investment strategy when they can’t assume that there’s a ton of follow-on funding behind every check. As a result, there’s a focus on getting to profitability so that the company can be self-sufficient.

This also means that there tends to be more B2B and even enterprise startups than we typically see in the US. This is because there certainly are major advantages to that model — you’re able to book revenue faster and show initial traction. But, the key problem that this approach introduces is that it limits the scale and velocity of growth because it’s just much harder to scale an enterprise business than it is to scale a consumerized SaaS or a purely consumer business.

Wrapping up
There’s a ton more content in the video, but ultimately, a lot of the differences in startup cultures for the Bay Area versus other regions comes from these varying investor and entrepreneur motivations. I’ve seen it directly from my meetings with startups from various communities.

It’s often tempting to think that there’s so much investor money here that they’re giving out checks at SFO – and as soon as you land, you’ll get funded. But it’s not quite that easy. For a new entrepreneur to come to SF and succeed, one has to often rethink the style, content, and even growth strategy of their pitch to adjust to a very different ecosystem and set of perspectives.

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