Hardware Business Models
Selling to Consumers and Businesses
Selling to Local Governments
Working with Regulators
Your Extended Team
Urban Us Investment Memos
– Bowery Farming
– One Wheel (Future Motion)
“Learning to tell a story is critically important because that’s how the money works. The money flows as a function of the story.” Don Valentine, one of the first investors in Apple, Atari, Cisco, Oracle, and EA
It’s hard to overstate how important storytelling is.
A lot of people can describe what “happily ever after” looks like. And investors happily share their ideal version of it. However, it’s much harder to explain how you get there. What do you need to do in the next 12 months? Why is the time right? It’s so easy to be too early or too late. The best urbantech stories sound like science fiction that is on an inevitable track to becoming science fact.
Try to understand how VCs think about investments. Early-stage VC portfolios aren’t like other investment portfolios you may have seen. They expect most of their investments to perform poorly — maybe they fail completely or return the original investment after a few years. So why would you want to be a VC? Well, just one company in 20 can pay for all of the failures. This is why VCs obsess over how big companies might be and how fast they can grow. Fred Wilson of Union Square Ventures has a great description of fund economics that shows VC math.
It’s important to know who you’re talking to. Some investors (like Urban Us) are interested in public benefits, which they believe help to create valuable companies. Other investors believe that public benefits mean shareholders will get less. They think of public benefits as an unnecessary additional cost to businesses, like a tax, as opposed to something that attracts better talent or builds relationships with regulators.
Investors who are interested in public benefits will also be concerned about the potential size of the business. For example, as we mentioned in the first section of this playbook, we ask how startups might impact 100 cities within five years. Impact might mean reduction in greenhouse gas emissions or it might mean new units of affordable housing etc. Alongside potential annual revenue, we’re looking for impact metrics to give us a sense of what might happen if your company succeeds.
As mentioned earlier, corporate investors are also becoming more important. They care about financial returns and sometimes public benefits as well. But they also have other priorities. They may be looking for prospective customers or partners (like developers to build on an emerging platform). More and more corporate investors are ultimately looking to relationships that have the potential to lead to acquisitions. This has been true for a while at the largest tech firms, but now “non-tech” firms are employing the same strategy to augment their own efforts to develop new products.
Each type of investor can help in different ways, and has different networks. Classic VCs have a deep understanding of how to raise money and access talent to grow. Corporate investors often have access to critical partners, platforms, and customers. Impact investors are often focused on specific issues or ecosystems, so they tend to combine some of the capabilities of both corporate and classic VCs.
An emerging category of investors is “crowds.” The first generation of crowds was popularized via platforms like angel.co, which has allowed investors to easily organize investment syndicates of up to 99 other investors. More recently, initial coin offerings (ICOs), which use cryptocurrencies such as Bitcoin, have appeared to offer another path to quickly and efficiently access large groups of investors. However, as regulators move to clarify how ICOs fit into the current legal framework for selling equity, it is becoming clear that this is not an easy alternative to traditional venture capital. Successful ICOs have a lot in common with successful seed-stage raises, but their communications process is much more public.
It’s important to remember that investors can also do harm. Understand what other investments they’ve made and talk with other founders they’ve worked with. You’ll be tempted to wrap up funding so you can get back to building your business, but working with a bad investor is like a bad hiring decision: It’s not just that you may not get the help you need; you might also be encouraged to do things that are not useful. And this will upset better investors, who may choose to invest their time elsewhere.
There is a lot more to fundraising, including valuations, types of offerings, and decks. Y Combinator has one of the best track records in helping companies raise seed funding; we recommend reading their how-to guide.