Notes on "What Makes Startups Succeed" Discussion

4 VCs, a moderator, and a roomful of people. Here’s the gist.

Now that we’ve publicly launched Cloudvox, and anyone can use it (and buy it!), I finally get to see the outdoors again. I went to this panel on 10/14/2009 and took as many notes as I could. I missed some things, and tried not to take any comments out of context.


Moderated by Dave McShea of Perkins Coie in Seattle. Notes are chronological over 1 hour. Bold is mine.

How do you evaluate a company as an investor?

Sack: “Accelerating on the downhill” (recession) as much more more important than speeding uphill

Higgins: With right customers, recession means prospects are reevaluating costs, chance to stand out. Cheaper inputs (staff).

What mistakes do you see often?


  1. Business plans hard to understand. Entrepreneur unwilling to synthesize down to the real bet they’re making — might mean they don’t know it.

  2. “We don’t have any” competition. Generally that’s “meeting over.” Too narrow def of competition.

  3. Under-rating domain expertise when they have it/have been the customer

  4. Not realizing VCs treat a meeting like an interview or date. Can you work with together deeply? Listen! Don’t pitch/sell. Testing reactions, pushing buttons.


Describe investment as series of risks – then help investors calculate market price for your risks.

Not getting 2nd meeting probably means risk higher than you think.

80% * 80% * 80% (series of risks) is worse odds than a coin flip. How can you extract the risks?


Team reduces risk – have these people worked together? Experience is risk mitigation

What constitutes differentiation?


“In the eye of the beholder.”

At Housevalues there wasn’t a patentable one.

Likes technical barriers. Stuff that’s hard to do. Doesn’t have to be patentable.

Marketing barrier “not as confident that it’s sustainable especially on a national basis.”

Barriers are truly lower with SaaS: domain/customer expertise must be strong differentiator “because it’s just software”

At Amazon, Bezos ranked 25 things to sell before choosing books. How do you sell?


Book market incredibly fragmented, easy purchase.

Contrast with selling infrastructure to mobile where 5 guys decide your success. Consider: Do customers tend to buy new stuff?

Who are adjacent players? Often best to find industry with lots of established players who just haven’t picked up on changes. Like unmanned airplanes (Insitu).

Had tailwinds: Gov’t wanted it, incumbents culturally unable to do small cheap product. But run when big player decides it’s strategic. Elephants will step on you.


With BetterBills, Seattle City Light finance group loved new bill format, but 6 months of customer delay.

Competitor emerged who realized that motivated customer was conservation group, not accounting.

Ask who’s truly motivated to buy

Cash is king. How do you evaluate capital requirements and manage cash?


Cash matters first, then changes to cashflow (they merge).

You hear all this advice: banks will only give you money when you need it, raise more than you need.

All Star started with $200k. Got profitable in 3 months, went into 2nd market.

From cashflow positive to losing $50k/mo. Wife caught on.

2 changes fixed: 1) marketing must break even on performance 2) tie customer price to your performance.

Cashflow doesn’t go away 5 years in, profitable, new controller made many millions worth of payments on same day. Balance –$200k.

Use prepay and annual subscriptions. Biggest customer prepaid quarterly and cut need for outside capital


Yeah cash management matters, but so does time: wasting a year of founding team!

No bank balance to measure this. Certain period to see evidence that dream can be reality (~3 years).

“Like cash, time is a resource that goes away”

One company: had epiphany 8 months in, changed directions, 18 months in.

Not exactly where they wanted to be. Should we change again?

No! Won’t have made any progress before losing confidence.

What VC trends do you see?


Critical how you get money. VCs running out of money – so much budgeted for existing investments.

A year behind and all need 1 more round. Not all portfolio cos are covered.

Non-participating VCs will get crushed. Reduced to common, 10:1 reverse not uncommon

Also 1 person stuck writing $5mm check is way higher bar than 3 sharing.

Finding new outside VC is hard when tainted by non-participating existing VC

I’m probably going to be here long after you’re gone (longer than founders).

No escape for us: 7-8 years

What habits should entrepreneurs use or avoid?


Recurring rituals. Write out and book on calendar.

Daily: blog, tweet, the 1 thing that must get done today.

Weekly: Sun night look at week ahead and pick 1 priority for week.

Quarterly: take time off. Have a weekend.


Know yourself.

What types of stuff do you just have to grind through? Know what’s missing in you and patch holes

Had demo of alpha-stage niche site. Missing: had no idea of was whether anyone would pay – a must fix.

Told entrepreneur “When you leave you’re going to go home and say ‘I should talk with customers to see whether they’ll pay, but first I have to fix this bug and add these features…’”.

Not bad thing as long as you know and fill.


After 3 people, entrepreneurs under-manage.

Board emails: at least 1 a week.


1 page “plan of record” so when staff overhears stuff, have reference that plan is not changing. A little formal.

What’s the 1 big mistake that comes to mind?


“I’m good at this” when it’s clear you’re not.

Either mis-representing, or poor self-awareness.

Also not asking what customers actually think. Too much trust where a technology appears to fit w/o asking


It’s not a pitch, it’s a conversation.

Engage. What is investor truly interested in? Ask them stuff!

If I leave without having talked, I’m not engaged.

Revenue forecasts are a shot in the dark. What should I do?


Agree. Somebody told entrepreneurs that 3rd year should be profitable.

How much does it cost to learn/get to the point where you have some confidence?


Forecast is to get comfortable playing with model and levers.

See/tweak unit economics.


Most businesses have an analog.

Sniff test, ie if you’re a distribution company and are 10x more profitable than other distributors.

What are VCs looking for an in exit strategy?


Least successful slide – phrase “IPO or M&A” useless.

Generally look elsewhere when VCs gets particular about exit strategy.


Might disagree a bit. Security industry has many exits but small – $10-20mm, bought out in year 2.

Should inform your raise, plans. We look at P/E and P/S. Ethanol P/S <1, learn from it.

What’s the weakest point of a recent deal you actually did? How did you address it?


2 guys from Microsoft. Missing marketing. That was big risk – need to find someone who works well with them.

Solved with a (one!) person.


Not sure it’s working yet, but: invested in “3 guys and dog at UW.”

Research risk. New ideas every day but maybe not towards product.

“Boring engineering management” stuff – runs an eng mtg every week. Dates, task list.

Really early seed-stage capital seems broken. What’s the new model?


Disagree that there’s not seed money for good ideas. I’m willing.

Symform was 2 guys. Met 7 months before.

More peer review from ideas in Silicon Valley: 95% of bad ideas there get killed by peers.


Seed has gotten harder compared to 18 months ago.

“Deal that doesn’t get done” is often the best deal: No (or much less) VC relaxes the pressure on revenue.