Think its a bad time to start a business? Think again. The list of companies created during financial downturns reads like a hit parade of some of the most admired brands: Fedex, Microsoft, Slack, Airbnb, Uber, Hewlett-Packard, even Trader Joes! The advantage these founders had was obvious—there was nowhere to go but up.
Financial crises and economic downturns force founders to be resourceful, efficient, and nimble. And once a fledgling business emerges from that downturn, it becomes more resilient to future setbacks.
This current crisis is a strange one on many levels. On the one hand, it has devastated parts of the economy (travel, leisure, entertainment, restaurants, to name a few) At the same time, it is estimated that there may be as much as trillion dollars in uninvested cash held by venture and private equity firms. Cash that is looking for opportunites. And the competition among investors to find attractive opportunities is fiercer than ever.
What it means for an entrepreneur with a promising idea is that—in some ways—it is easier to find “professional” money to fund your business than at any other time in recent history. But with that money comes strings and sometimes, it’s better to think long and hard about whether those strings are worth the trouble.
Below is an excerpt from my book How I Built This: The Unexpected Paths to Success from the World’s Most Inspiring Entrepreneurs (Houghton Mifflin), available September 15.
Not every founder can build a unicorn. Nor should they need to. There’s nothing wrong, for example, with running a small business with a few employees that you bootstrap until you retire and either hand down or sell out. Not only is it not wrong, it’s actually the norm.
The vast majority of American small businesses have fewer than twenty employees (if they have any employees at all) and generate annual revenues somewhere between $300,000 and $2 million. Indeed, most of the entrepreneurs I’ve met over the years aimed at just this kind of success. They weren’t particularly focused on all the things that come with scaling a business, such as limitless growth, total market disruption, and raising loads of professional money.
But if scale is your goal and bank loans and cash ow can’t get you
there, you will, at some point, and yourself engaging with the venture capital world. There are only so many ways to get a resource-intensive business off the ground, after all. This can be a daunting prospect for many entrepreneurs, since venture capital has a reputation as being a closed world that operates in small pockets on both coasts (Silicon Valley and Midtown Manhattan) with unwritten rules and unfamiliar terminology that feels impenetrable to anyone accustomed to speaking in plain, clear language.
There are angels and seed rounds; cap tables and exits; Series A, B, and C dilution and preferred shares; burn rate and run rate. There are VCs and PE guys; FINRA and NASD and the SEC. There’s vesting, investing, and just plain vests. So many vests! It’s enough to make a founder’s head spin. And that’s kind of the point. All these fuzzy, poorly defined terms are left deliberately vague in order to create and maintain opacity, lest you discover the one thing about VCs they don’t want you to know: that they’re human, just like the rest of us. And just like you and me, they aren’t seers or superheroes. In fact, the most successful ones are usually the luckiest ones—lucky to have access to promising businesses early on, and lucky to have access to so much money that they can make a lot of bad bets and still and success in the end.
To put it simply, VCs—even the most experienced ones—get it wrong more than they get it right. I mention this not to sow doubt in your mind, not to scare you, but rather to prepare you. Because this chapter isn’t actually about how to raise professional money; it’s about how to think about raising professional money once you’ve determined that you might need it. It’s about understanding the world of professional money and the mind-set of professional investors, from the perspective of those who’ve been through the process, so that you know what to expect when you walk in the room, for better or for worse.
They did not engage with this investor or his firm ever again, but the exchange was the most egregiously arrogant and dismissive example of a whole set of responses they received from the predominantly male venture capital class.
Like Jenn Hyman who, in 2009, went out to raise a $1.75 million seed round for an online designer dress rental business she called Rent the Runway, where women could browse dresses that might cost thousands of dollars to buy, but that they could rent for a fraction of the cost. A dress would then show up at a customer’s home, she’d wear it for whatever occasion had brought her to the site to begin with, and then she’d ship the dress back when she was done with it. It was like Zipcar meets Netflix meets Zappos, with what would eventually become the country’s largest dry-cleaning service on the back end. Today, Rent the Runway has more than 1,200 employees and does more than $100 million in revenue, but in 2009 the responses Jenn and her co-founder, Jennifer Fleiss, got from investors were less than encouraging, sometimes even startling.
“We had several different very condescending conversations,” Jenn told me, “one in which a partner at a very prestigious firm took my hand into his and said, ‘This is so adorable. You’re going to get to wear such pretty dresses. This must be so fun for you.’”
They did not engage with this investor or his firm ever again, but the exchange was the most egregiously arrogant and dismissive example of a whole set of responses they received from the predominantly male venture capital class.
“Most investors said, ‘Let me talk to my wife,’ ‘Let me talk to my daughter,’ or ‘Let me talk to my admin.’ Those were the three target customers that we would hear about,” Jenn said. On the surface, that sounds like a reasonable response, right? What do a bunch of men in their forties and fifties know about dresses? Probably nothing, but they are supposed to know about business, and they were ignoring that part of the equation in their responses to Jenn and Jennifer, as if the business model or the business plan were irrelevant. As if the business-worthiness of Jenn’s idea had already been foreclosed by the potential investors’ lack of familiarity with the underlying product. Not only that, in deferring to the women in their lives, these investors weren’t even consulting the right demographic cohorts.
“Let me tell you why each [of the ‘target customers’] is problematic,” Jenn said. “Number one, the wife of a venture capitalist is a multimillionaire. She can afford to buy any dress she wants, so she is not my target customer, right? The daughter of a venture capitalist in most cases is about twelve, because most venture capitalists are, when they’re in the prime of their careers, in the forty-five-to-fifty range. So their daughter is not a great target either. And the admins who work in the venture capital industry, because it’s such a prestigious job, are often women who are in their fifties and sixties—again, not women who were in my target demo.”
If an investor didn’t have experience with the product and didn’t know anyone in the target demo, it seemed as if the idea wasn’t for them—or, worse, it wasn’t an idea worth pursuing at all. After enough of these conversations, Jenn and Jennifer began preempting investor responses to their pitch altogether. “We showed them videos and invited them to some of our pop-ups to show them who the customer was so that they really got a sense for who we were catering to,” Jenn said.
The pop-ups were revelatory. They were what convinced Jenn in the early going that this idea had legs, and they were ultimately what got the idea to click with a good number of investors. “You saw the facial expressions of women change,” Jenn said of her experience witnessing pop-up customers try on her dresses. “They threw their shoulders back, they tussled their hair, and they walked with a new sense of confidence.” Seeing this, enough of the know-it-all investors who knew nothing about her customers finally knew enough to engage with Rent the Runway as a business proposition. That’s when capital for the seed round finally started to trickle in.
This didn’t open the floodgates of professional money, however. There was still plenty of skepticism about these two twentysomethings and their repository of “pretty dresses.” It wasn’t until their story ended up in the New York Times business section, with their picture on the front page above the fold, that things changed. A hundred thousand people signed up for the site. They met their first-year sales projections in a matter of weeks. And wouldn’t you know it, they had “a clamoring of venture capital investors coming in to the office pitching us on Series A,” as Jenn described it. “We had gone from a very undesirable investment to people showing up at the elevator in our building to meet with us unannounced because they wanted to pounce on the deal.”
To be clear, while there are frustrating and nauseating elements of sexism and chauvinism in Jenn Hyman’s story, the way professional money came to her is not uncommon. Venture capitalists know money, but they don’t always know your business better than you do, and sometimes they don’t know your industry better than you do either. So many founders have told me that they’ve had to spoon-feed and connect all the dots for potential investors in order to show them the opportunity staring them in the face.
Not every investor is like this, of course, even when they don’t quite “get it.” And not every founder has had to deal with what Jenn Hyman endured, even when they are female and in the apparel space. Take Tyler Haney, for example, the founder of the athleisure company Outdoor Voices, based in Austin, Texas. When she went out to raise an initial seed round in 2014, the scrutiny she faced from (primarily male) investors was not cynical snark about girls playing dress-up, rather it was legitimate skepticism about whether the market had room for a brand like this.
“Pretty consistently, I’d get an email back or in the session it’d be like, ‘But we have Under Armour and we have Nike. Why do we need another activewear brand?” Tyler told me. “What I started to piece together was that I was in offices with men, and these traditional activewear brands had been built by men and really catered to the competitive athlete. And what I started to recognize was, me, over here pitching this activewear brand around play and freeing fitness from performance, didn’t make sense to these folks that had grown up as competitive athletes.”
She couldn’t keep going into these male-dominated offices and having the same conversations. They weren’t going to get her anywhere. So what Tyler did was get out ahead of being shunted to secretaries and daughters by confused investors, the way Jenn Hyman had. She went directly to their female support staff and to their girlfriends and wives before she even came in for her meetings.
“I started sending product to the women in the offices, and the wives of some of these investors,” Tyler described. “And I started to and that by getting the product onto the women in the offices and the wives, I started to [encounter investors] that were willing to hear me out and understood that this could be something real. I started to get more time with them.”
The first investor to bite was Peter Boyce, from a big VC firm headquartered in Cambridge, Massachusetts, called General Catalyst. “He saw the product, saw the pitch,” Tyler said. “I had gotten product on his girlfriend, Natalia. She loved it, and he said, ‘I love this concept. I want to back it.’ ” General Catalyst ended up leading the $1.1 million seed round, which Tyler then used to hire three additional employees, open an office, and, of course, make more product.
Jenn Hyman’s and Tyler Haney’s experiences raising their first chunks of professional money occurred five years apart and were widely different in style as well as in substance, but they were very similar to the extent to which the professional investors they encountered had an outsized influence on their funding prospects, regardless of their subject matter expertise or their business experience. Some of that influence, while frustrating to live through, ultimately turned out to be incredibly helpful. Sometimes, though, for some people, it isn’t.
He laid out the market for them: ‘Folks of color spend more money on every single category of health and beauty than anyone else.’ He laid out the opportunity: ‘Folks of color, especially black folks, are the most culturally influential group on the planet.’
This came into sharp relief for me when I interviewed Tristan Walker onstage in Washington, DC, in September 2019. Tristan is the founder of the eponymously named Walker & Company, which makes health and beauty products for people of color. Much as Lisa Price recognized an unmet need in the skin care market for African American women in the early 1990s when she created Carol’s Daughter, Tristan recognized, in 2013, that men of color, especially African American men, were similarly underserved when it came to their shaving needs. There were no products in the market that addressed their unique problems—in particular, razor bumps—that were not also old, tired, and segmented out into the “ethnic beauty” aisle, which in fact was nothing more than a dusty, disregarded shelf in most stores.
Tristan’s idea was to create a suite of beautifully designed and packaged products that bundled everything a man of color would need for the ideal shaving experience: a safety razor, a packet of blades, a brush, shaving cream, and pre- and post-shave oils. He called his product line Bevel and figured he needed to raise $2.4 million of professional money to get it o the ground, since this was not something—what with the manufacturing costs for both the hard and soft goods—he could reasonably bootstrap or go to friends and family for help with, without it becoming an unwieldy mess.
Unlike Jenn Hyman, though, Tristan knew what to expect. He knew the VC world intimately, from the inside. He’d spent the previous few years in Silicon Valley, attending the Stanford Graduate School of Business, interning at Twitter, working in business development as one of the first employees at the location check-in app Foursquare, and then leaving to join the venture capital firm Andreessen Horowitz as an entrepreneur in residence, where his en- tire job was to develop and evaluate new ideas. “This was around the time that a lot of the e-commerce companies started to pop up,” he said. “I was listening to their pitches. I understood the kind of companies that got funded, the types that didn’t. It was just great timing to start something like this.” Tristan even had the blessing and guidance of Ben Horowitz himself, who’d given him two important pieces of advice during his time at the firm: First, Horowitz told him, “what usually look like good ideas are bad ideas, and what look like bad ideas are good ideas, because the problem with good ideas is that everyone tries to do them, and as a result, there’s no value to be created there.” Second, he said, “you need to do the thing that you believe you are the best person in the world to do, where you have a unique proposition, given your story, to solve a problem.” Accordingly, Horowitz encouraged Tristan to abandon a few of his earliest ideas—one to revolutionize freight, another tackling childhood obesity with play—and instead to pursue this thing he was uniquely experienced to execute.
It was under these conditions that Bevel was born and Tristan began his trek up and down Sand Hill Road to raise money. By every metric professional investors use to evaluate opportunities, Tristan’s idea scored highly. “VCs say they want founders who they’ve worked with in the past, who have pedigree and experience, who have a blue ocean opportunity,” Tristan said. “And with this it was check, check, check, check.” He laid out the market for them: “Folks of color spend more money on every single category of health and beauty than anyone else.” He laid out the opportunity: “Folks of color, especially black folks, are the most culturally influential group on the planet.” Then he laid out the vision for how his products would solve this urgent problem that affected 80% of people of color and 30% of the rest of the population. The entire time thinking that Bevel was as sure a thing as one could expect to find in the crowded health and beauty segment. “If you’re a VC who talks about this white space, blue ocean stuff, why wouldn’t you invest in this?” he said.
Tristan met with sixty investors. All but three said no, and it took a long time to find those three. Fifty-seven professional investors turned him down—a Stanford-pedigreed venture capital veteran with experience operating inside two early major tech startups, who knew exactly what kind of rationale these firms used to place their bets. It was the kind of consistent rejection that could have been completely demoralizing. It could have made Tristan question everything he was doing and doubt all of his instincts. But he didn’t, for a few reasons.
“I knew there were 60 more investors right behind those sixty,” he said, “and if they weren’t going to invest in my idea, I knew they weren’t going to fund somebody else’s version of it either.” His point being that the problem wasn’t the idea; the problem was that investors didn’t think there was a problem. “It wasn’t until they started to push back that I realized they just didn’t get it,” he said. “I was trying to explain to these VCs that people are different, and it wasn’t even registering.” Tristan was creating a line of products to address a set of issues they didn’t have or couldn’t see, so therefore they must not be real or at least not big enough to be worth their time and money. Which, paradoxically, was the other reason he never doubted himself. “Silicon Valley, particularly venture capitalists who have never operated before, have this interesting worldview that they’re always right,” he told our bemused audience, “but the job of the venture capital investor is to be wrong 90% of the time. That is literally their job. And I knew this bad idea was good as hell.”
Now, there are probably some things Tristan could have done differently or better when he met with investors to make the process move more smoothly. Maybe his pitch deck could have been better—his first version was in PowerPoint and it did use clip art—or he could have spoken more directly to their self-interests. “I sold the hope and the dream,” he said. But maybe he should have just talked dollars and cents. “My growth chart was up and to the right,” he noted. Maybe he could have talked slower or faster, more or less. Or maybe there was nothing he could have done. Maybe he did everything right. Who knows? I certainly don’t. And like I said, that’s not what this chapter is about. It’s about understanding how to think about venture capital.
The first thing to understand is that raising venture capital is about making a promise. A promise that you have a product or a service that people will pay money for, that you have a plan to reach as many of those people as possible, and that in exchange for lots of money, you will bust your butt to reach them.
The next thing to understand is that good investors know the promise you are making to them is just that—a promise. They know you can’t make any guarantees. You can do everything right, but if the world shifts under your feet, there’s nothing you can do about it. Venture capital is by its nature a gamble—it’s right there in the name—and every gamble comes with the risk of heavy losses. Professional investors know and accept this fact, which is why they also do everything they can to mitigate the risk before writing very large checks.
One of the principal ways they do this, especially if they are unfamiliar with your industry, is to ask lots and lots of questions:
How do you expect to scale this?
Where is the growth going to come from? Who is the customer for this?
Doesn’t something like this already exist? How will you get costs down?
Where will you manufacture?
Where will you be based?
What’s your marketing strategy?
Why does anyone need this?
Why would anyone do this?
Melanie Perkins, the co-founder of the Australian online graphic design platform Canva, encountered countless of these types of questions from the more than 100 investors she pitched over a three-month period in 2012. She traveled from Perth to San Francisco, then to Maui (for a kitesurfing excursion masquerading as a tech conference run by the investor Bill Tai, whom Melanie had met at another conference in Perth), then to any number of places in between. Anywhere there was an event with investors present, Melanie found her way there.
For almost the entire time Melanie was in the United States trying to raise money to build out and launch Canva, her efforts were fruitless, at least as far as getting anyone to write a check was concerned. They were not without merit, though, because with each rejection she learned a little more.
“It was really beneficial because we got so many different questions and comments,” Melanie said, “and it meant that we really had to know what we were doing and really refine our strategy.” Every single day, after she’d pitch an investor who would invariably pass, she’d go back and revise the pitch deck to reflect what she’d learned from the questions that had been asked of her.
“Every time we got a really hard question, that would go right to the front of the pitch deck,” Melanie recalled. “So the hardest questions were answered right at the front.”
Eventually, investors ran out of questions whose answers didn’t already appear in the front of Melanie’s pitch. Before long, those answers were able to allay the doubts and concerns of investors who maybe didn’t fully understand Canva’s business, but who recognized the opportunity that was beginning to emerge with design and publishing tools moving online. By the time Melanie’s tourist visa expired and she had to return to Australia, she’d raised $750,000 and would eventually oversubscribe her $1.5 million seed round. All, I think Melanie would say, because she was able to come up with an answer to every question a skeptical, risk-sensitive investor might have.
As an entrepreneur, you have to expect these questions. You have to know that you are going to face them. Jenn Hyman did. Tristan Walker did, too. And you have to be prepared to manage the fact that when you are faced with what feels like an inquisition with no right answers, it is only natural that the doubt pouring out of investors will begin to creep into your brain and make you start to wonder, “Am I the crazy one here? Maybe this idea really is silly. Maybe there is no way it can work.”
This is a daily fight when you’re raising money. And if your goal is to scale your business, as I talked about at the beginning of this chapter, then you need to fight extra hard to reject each of these nagging, self-doubting thoughts. If, however, you find that you aren’t all that concerned with becoming the biggest you can possibly be, then the resolution of this fight could very well be walking away altogether.
It’s Tristan’s greatest regret in the building of Walker & Company that he took professional money at all. The things he had to endure in the seed stage were tough enough—comparisons to the Chris Rock movie Good Hair, confident assertions that the problem he thought he was solving wasn’t really a problem at all—but when he went back to Sand Hill Road to scale the company a couple years later and really take it big, that’s where the real frustration occurred. He could not, no matter what he said or did, raise more than $30 million. That sounds like a lot, but at a time when VCs were throwing hundreds of millions of dollars at far less worthy companies—as well as at competitors like Harry’s, which started the same year as Walker & Company—$30 million felt like the ultimate vote of no confidence. Without more money, Tristan wouldn’t be able to invest in marketing, product development, research, and, of course, production. He would have to find another way to grow his company.
All Tristan could do was remember that “if there was anyone qualified to do this idea, [it was] me”; that he had the best “bad” idea in the space; that he was uniquely positioned to execute it; and that he knew more about his business and his market than the VCs did. They knew money, but he knew his business. Fortunately, there was one other thing he could do in support of his long-term vision for the company. In December 2018, he sold Walker & Company to Procter & Gamble for much less money than he might have gotten on the open market.
As part of the deal, Tristan moved the company to Atlanta, became the first African American CEO of a Procter & Gamble portfolio company in its 180-year history, and in the process severely limited the return the VC firms that had invested in his Series A got on their money. This was Tristan’s attempt to grow the company on his terms, to take a step back in order to move forward with more confidence down the road, and to show future entrepreneurs—especially those of color—that while VCs might have all the power over the money, that doesn’t mean they are necessarily wiser than you or that they are always right. You can be right, too, whether you choose to take their money or not.
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