Phoebe's motto is “trust is built in drops, and lost in buckets.” Her optimism about the future of tech, innovation and investing is contagious - so with that glass half-full mindset, here’s Phoebe’s guide for founders on the hunt for venture capital:
As a VC, pre-seed and seed stage investing involves looking at the people in front of you and deciding, “can they build something out of nothing?” VCs gather up qualitative evidence to evaluate how well each startup team, technology, and market opportunity fits that criteria. Phoebe says the best companies in the world are founder-led.
“I want to understand why this person is dedicated to building something out of nothing. What is the problem that they've landed on, which they're so obsessed with, that they will do the unreasonable thing, which is to start a company off their own bat and get on the rollercoaster that is startups, in order to solve.”
“Have they done a lot with a little? Are they someone who is incredibly resourceful and a learn-it-all, not a know-it-all. Are they someone who other people will want to work for? Can they tell a great story about what they're doing? Because that's going to be so important as they raise money, as they attract new hires.”
If you’re reading this thinking, “if I am a first time founder, how can I prove I can build something from nothing, if I haven’t got funding yet?” Here’s a few things Phoebe wants to see:
Almost every guest on The Raise has said the same thing - get intimate with your customer problem. Founders may deeply understand their customer problem, but if they can’t tell a compelling narrative about it, from a cultural, market, technology, and execution standpoint, then investors won’t be convinced you can convince others.
Compared to conventional SaaS founders, deep tech founders have an almost sisyphean task, because they have to sell a belief for so much longer.
“Something that separates the best deep tech founders from the rest is an ability early on to really think about the product they're building, not just the technology. And vice versa, there are a lot of incredible technical founders who never make that leap. And so that's something I really look for early on in founders.”
“On the deep tech side, you could go five or seven years with no revenue and you have to get there and continue to meet the technical milestones, you have to raise sometimes hundreds of millions of dollars. And so the bar on storytelling to employees, and to investors, is so high.”
Feeling insecure about your storytelling mastery? Get a coach, work with a communications strategist, or take inspiration from other deeptech founders who keep getting funding despite being pre-revenue after many years into their journey.
Deeptech startups require an incredible level of investment before they hit revenue, so the problem they solve must be disproportionately big compared to a typical SaaS venture.
“On the deep tech side, I wouldn't expect you necessarily to have a working prototype or any money at all, but they are much more focused on is the thing you're building solving a really big problem? Is it a painful problem for someone who will pay a lot once it's a reality? Can you talk about not just the technical issues of what you're solving today, but why the product, how the product will exist in the future, how the unit economics will work at scale and why it makes sense to be on a venture journey that might last 10 years for that idea.”
For a SaaS company, especially now with the ability to build products relatively quickly, at relatively low cost, there’s no reason not to have user traction.
“I'm definitely excited to see traction in the sense of “we have users using our MVP. We're getting really good feedback. We're listening to customers' feedback, and we've developed a really technicolor roadmap around that feedback.”
Before raising any money, one of Blackbird’s portfolio companies, CarePatron, had done 700 user interviews and they had a working product that users were starting to use and give feedback on.
“That's a fantastic moment to raise a pre-seed round where you've done that deep customer research. You really know the shape of what you want to build. You've got a team in place who can deliver an MVP and start iterating on it and making the product better.”
Another example is ThroughLine –
“[ThroughLine] had a really clear idea for what they wanted to build and had kind of built a version of this in the past, which was a helpline product for any internet user in distress. If they were searching the terms that suggested they were in distress or posting content that suggested they were in distress, then a pop -up could appear to point them towards a crisis helpline.”
On founder Elliot Taylor, Phoebe says, “I was so compelled by his connection to the problem, his depth of understanding of the helpline industry, and his personal charisma that I felt he would be able to attract a technical co-founder very quickly. And so I made a pre-seed investment in that company on the basis that they said, ‘we think the big internet companies really need this.’ And now two years later, that company is selling to Roblox, Google, Grammarly and other big internet names.”
It’s possible to sell a product based on wireframes and a slide deck. That’s exactly what Tracksuit did, another Blackbird portfolio company. Using their sales deck as an in-road, they engaged potential customers saying “We're going to go build this, would you pay for it? And how much would you pay? And can you sign up now? And then we'll go do it.”
“They've done that at the very earliest stages. They've built the product. They had a million dollars in ARR. That's a great time to raise a seed round.”
While not everyone gets that start in life, Phoebe says what you want at seed is to have a refined idea of:
At seed, you need to show that there's value in the product. Either you have paying customers, or they need to be using your product a lot if they are beta testers or on a free trial.
At Series A, you must have happy paying customers - and your data shows they’re not churning. Happy customers give you a high net promoter score (NPS), they expand, they engage - and your model must already have a track record of data around that.
Marketplaces need to find ways to get over the “cold start problem”, having transactions happening that show the initial signs of network effects or a viral coefficient.
“I'd be much more focused on adoption than I would on monetization. So it does depend a little bit, not on the model that the company's building, but that you're starting to see signs that the thing you built, people want, and they are referring their friends.”
Marketplace apps should also show a downward trend of acquisition costs - demonstrating network effects at play.
For a hardware company raising at Series A, you most likely have a working prototype that a customer can look at, touch, feel, see, and wants to buy.
“You need to have a pretty good idea on how to make the next 10 or the next 100, where you're going to do it, what they're going to cost. You will have a rationale case for bringing costs of production from relatively high when you first start off, to a much lower cost, plus some healthy gross margins once you reach scale.”
“The depth of thinking about the cost side of the equation is definitely something that's important around the Series A.”
By the time you raise money, you should have customers who are paying or a pilot group at the very minimum. Crowdfunding converts fans into investors and beta-users, allowing you to test ideas with an engaged user cohort. Traction could be any of “people using something, they love it, they may be paying for it, or they really want it to exist and will prepay for it in your crowd round. That's the kind of thing I'd be looking for in a consumer model.”
Phoebe notes however, that Blackbird New Zealand doesn't do much investing in consumer models, but those they do invest in have a strong brand. “It's hard to build a really big business in a market where differentiation comes predominantly through brand and marketing rather than a 10X better product.”
Phoebe says the movie of your company is a long and continuous feature film. And for the investor, they get to see 30 second clips at random intervals through the film.
“You have to fill in the gaps and your first job is to share the context so that you can get really good input and your investors are not left wondering about what's going on. That's part of the trust building.”
Every time you send a structured update, every time you have a conversation that you're well prepared for, you have an opportunity to get something out of them. In exchange for giving that context, you get hopefully really useful help back. Investor relations is one of those things where the more you put in, the more you will get out.
However, there is a limit to how much time you sacrifice in other parts of your business for investor relations. Phoebe says it shouldn’t come at a cost to time spent with your customers.
Strong relationships take time and must be reciprocal. Phoebe says, if you're not getting good input from your investors, even though you're giving them a lot to work with, then change who your advisors are, change your board composition, get some different perspectives on there.
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