Starting a company is a lot of things. It’s a humbling learning curve. It’s long hours. It’s trial-and-error and rejection and triumph. It’s also one curveball after another, especially if you raise outside capital.
To borrow from Donald Rumsfeld — because raising capital can seem like a struggle — there are knowns and unknowns. The known knowns of venture capital fundraising are table stakes — you must have a compelling product, some traction, a great team and buttoned up answers to questions about market size and the competitive landscape. There are also the known unknowns you have to address — how big will you get? How fast will you get there?
But the unknown unknowns — those curveballs you face and didn’t prepare for — are good preparation for actually building a company, however absurd they might seem at the time. My co-founder and I went through it raising our various funding rounds at PolicyGenius, but we knew we weren’t the only ones who had some funny moments in what can be a nerve-wracking process.
That’s why we reached out to some of our founder friends in the startup community and asked them — “What are some curveball questions you got from venture investors that prepared you to run your company?”
These anecdotes have a lot to say about what it’s like to live in the startup world.
Ajay Kori — UrbanStems.
“We’re a vertically integrated flower delivery company, meaning we cut costs and offer longer lasting flowers by growing flowers on the farm and handing them off to bike messengers who make deliveries on demand. Because some of our farms are in Colombia, we’ve been asked by multiple investors ‘what else goes in your shipments?’ And by multiple investors, I mean likely over 50 percent have asked us some variation of that question. To be fair, our flowers are ridiculously affordable, and we get why some people may think there’s something else subsidizing the flower’s journey.”
When you’re pitching a disruptive business, whether it’s in insurance or flower delivery, you’re going to run into a lot of skepticism. Investors are going to wonder what they’re missing and why anyone else isn’t doing this if it’s such a great idea.
In the case of UrbanStems, the cost and time savings that result from vertically integrating the flower business were so significant that it led potential investors to assume there were some more, how do you say this — unsavory aspects to the company. Curveball? Definitely. Offensive? Certainly. But the insight for Kori was that he was on to something so good that it had to be illegal.
For PolicyGenius, one of our skepticism hurdles was the decades-long industry motto that “insurance is not bought, it’s sold.” We needed to prove that people would buy insurance without a personal agent if you make it easy to buy with features like robo-advice, tailored educational content and plain-English self-serve tools.
We also had to address the “what am I missing?” investor skepticism by properly conveying our vision. PolicyGenius isn’t simply an online aggregator that shows insurance rates from different insurers. Those are already out there. We’re an end-to-end solution that lets people research, compare, and apply for the insurance option that’s right for them. We had to show investors how we were different — and better — than other options, and why that made us worth investing in.
And no one’s asked us if our business model includes “something else” — yet.
James Rohrbach — Fluent City.
“We were sitting in the lobby of an investor’s office waiting to start our meeting. He walks in and the first thing he says is, ‘Who are you?’ His associate had set up the meeting, and it turned out the partner didn’t know anything about us. When the meeting did start, the investor spent the first five minutes discussing with his assistant which type of snack bar he should have, and then went on an extended riff on what he thought our customer psychographic really wanted. He didn’t invest.”
Here’s the reality. You have an uphill battle, especially during early seed and Series A funding rounds. Investors likely won’t know you — and, going back to my earlier point, they may not understand what you’re trying to build. And you’re probably just another meeting on their calendar. Similar to Rohrbach’s point, we were flat-out told at a pitch meeting by a venture investor that he was only taking the meeting because he was told to.
That doesn’t do the wonders for your ego that you might think it does. The worst part — or best part if you’d rather think of it as a challenge to tackle instead of a problem — is that it doesn’t get any easier. You have to fight for an investor’s attention and money, and you have to fight just as hard (harder, in some cases) for a customer’s attention and money, every day.
But that’s part of the job. Along with customer acquisition and marketing and payroll and the dozen other hats you wear as a startup founder, you have to sell the idea of your company. To yourself, when you’re deciding whether or not to pursue it; to your employees, when you’re recruiting the best talent; to investors, when they need to decide whether you’re even worth sitting down with; and to the customers you’re trying to serve.
Liz Wessel — WayUp.
“Would you sell for a billion dollars today?”
That’s quite the question, isn’t it? And when the buzzword of Silicon Valley is “unicorn,” the obvious answer could be, “Absolutely. Where’s the check?”
But was Wessel really being asked if she’d sell WayUp for a billion dollars? Or was the investor figuring how dedicated she was to her product — whether she was looking for a quick payout or if she was willing to deal with long hours and rejection and a fickle marketplace for as long as it took?
What’s also being questioned is the ambition of the founder. How big does she think the company can grow? Maybe she has her sights set on a valuation far past a billion dollars. How much a founder is willing to sacrifice for her company, and what she thinks it can grow into, says a lot about its potential. And that can be enticing to someone looking to invest.
All of that comes into play when a founder is looking to raise money. When an investor makes you an offer, you’re giving up some ownership stake in your company. You’re determining the valuation of your company. If you really believe that it’s important and that it can be huge, you have to decide when to go through a funding round and how much of your company you’re willing to put into another person’s hands.
PolicyGenius faced that question earlier this year. We’d raised our Series A fund in June 2015, and we were in the enviable position of having interested investors. Did we need to raise more money less than a year after our last funding round? What offers were we willing to consider?
Needless to say, our She’s All That-level transformation of going from fighting for appointments to turning people away was a change. When we closed our Series B round led by Revolution Ventures, it was because it was right for us. We needed the resources to continue our growth, and we were going to do it with investors that trusted us to pursue our vision for PolicyGenius.
Phyl Georgiou — Tiggly.
“After two successful phone conversations with a potential investor, I understood that all that was stopping an investment was an in-person meeting. I agreed to meet the Managing Partner of the fund in New York. We met in the lobby of his hotel. I expected we would have breakfast there. Instead he asked “How about breakfast at McDonalds?” We shared a meal at McDonalds on his dime of course (we could hardly afford even a Happy Meal at that point). The next day the fund agreed to place a sizable investment in our company. To this day I wonder if it was a test. How would I react to such an unconventional meeting place? Or did I come across as a scrappy founder?”
If someone tells you you have to be ready for anything during a meeting with a potential investor, you have to believe it. Georgiou may never know whether the investor was testing him, but he proved two things at that meeting — that he could roll with the punches and, as he mentioned, that he’s a scrappy founder.
When you’re starting a company, you need to be ready for some curveballs. You can mitigate a lot of them by following best practices and making data-driven decisions instead of just following your gut, but there will come a point where things don’t go as planned. Sometimes it’ll be hiring someone who’s the wrong fit and having to deal with the consequences of that, and sometimes it’ll be having a pitch meeting relocated to a fast food restaurant.
If you’re taking someone’s money, they want to make sure you’re going to spend it wisely. And really, what says “frugal” quite like McDonald’s? But that’s just the first in a series of humbling tests for a founder when you’re getting the company off the ground. You can order McDonald’s once without a problem, but can you exist on a diet of McGriddles and ramen? Can you work for no salary? Are you ready to be not just the founder and CEO but your company’s first sales rep, accountant, HR manager and janitor?
Could a little thing like opting for a McGriddles instead of a fancy hotel breakfast have swayed an investor toward investing in Tiggly? It’s hard to tell, but it probably didn’t hurt.
Shan-Lyn Ma — Zola.
“When I was pitching Zola, a startup disrupting the wedding registry industry using design and technology, the majority of VC partner meetings were 100 percent male. During one such VC partner meeting, one partner leaned over during my pitch and said, ‘I know I got married quite some time ago, but are you really sure women today want different things to what my wife wanted 20 years ago? She didn’t seem to have a problem with her registry offerings at the time.’ It struck me as ridiculous because that would never be asked of an app addressing a need a man could better understand. Could you imagine saying, ‘Are you sure users today want a different photo sharing/chat/sports app to the one we used 20 years ago?'”
There’s a lot to unpack in Ma’s story, including that gem of an investor not realizing how much tech has changed the way we do everything in just the last five years, never mind 20 years. A lot of it comes down to anchoring bias — relying on one piece of information, usually the first piece of information or experience acquired on a subject, to make a decision.
We got that during our VC meetings more than once. At one point, a 27-year-old, single, affluent venture capital associate asked us, “Does anybody really buy life insurance? I haven’t bought life insurance.” Life insurance is important for people with dependents who wouldn’t be able to afford losing the primary breadwinner — a massive market that he just didn’t happen to be in.
He’s probably never bought tampons, either, but there’s a massive market for those, too.
Then there’s the gender disparity Ma mentions. It isn’t particularly shocking, because the fact that women make up a small number of tech startup founders isn’t exactly a secret. In 2015, 5 percent of startups that raised a Series B round had a female founder or CEO. I also have the luxury of working in insurance, where a 2013 study showed that only 6 percent of women in the industry held a C-level position. Talk about an uphill battle. But there’s something fun – and valuable – in the challenge of going against the odds, and if I didn’t want a challenge I would be on a different career path.
Thousands of people try to start their own businesses every year. The lucky ones will have enough vision, drive, and expertise to get someone — investors and customers — to believe in that business.
Even if a meeting doesn’t end in an investment offer — and sometimes that’s for the best — there’s still a lot you can learn about running your business and preparing to accept the perfect offer when the time comes.