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“What details should we use for the final closing documents” is something that every entrepreneur wants to hear. I’d been working on a new idea for over 6 months, had a great team lined up and was on the eve of closing a $1.5M seed round with some of the best investors in the world including Brad Feld (Foundry Group) and a small collection of amazing angels. And then I killed the idea. Below is the note I sent to my would-be investors.
I take my responsibility as a CEO very seriously and would only accept your capital when I had a damn good, defensible plan on the best ways to spend it to achieve success and at this point, I do not. After careful consideration, the original idea of our “personal health record (PHR)” has too many issues/risks for me to proceed with the adequate levels of confidence. Therefore, I am postponing fundraising until I have more clarity and conviction around an idea worth funding. I spoke with Brad Feld yesterday and he was predictably thoughtful and supportive, which is how I have come to know him and a main reason why I want to work with him (and Foundry) in the future.
I’m happy to connect with anyone who wants to discuss in more detail, but the combination of incentives (most providers don’t want you/us to have the data), patient apathy (most people would rather focus on other things than their health), potential costs that could be imposed during records collection, lack of a “I need that” feature, the significant amount of coding needed to do to get a viable solution and the fact that several competitors (Gliimpse, Prime, Picnic) have a significant lead on us, all total out to the wrong foundation to build around. Startups are hard enough without all of these factors stacked against you.
I hope you can appreciate the level of frustration and disappointment I feel right now. I am an optimist, pragmatist and enthusiastic competitor and I fully expect to do a new company, hopefully in the healthcare space, and I hope you will consider investing in me (and my team) in the future.
Thanks again for your belief in me, the idea and the future of health.
Obviously this decision and email are pretty hard to write. But, it was the right thing to do and the right time to do it. But, how did I get there, what could I have done to prevent this outcome and what do I plan to do differently as I look for an idea worth funding?
As a collegiate athlete (I went to Purdue on a swimming scholarship) and then a professional sailor doing long, offshore events, I’ve always dreamed about systems that could collect data about me, learn and suggest ways to optimize my performance. Then my mother was diagnosed with colon cancer, my father had a stroke and my brother and I struggled to help them understand their conditions, coordinate their care and look for the best solutions (specialists, clinical trials…). This was frustrating, time-consuming and not very “smart” and it seemed like a software solution could really help in both cases, a “platform for personalized health”. Ideas percolated for several years, while I built and sold Gist (where Brad was an investor) and started Rival IQ. At some point along the way, Brad asked me, “what’s standing in the way of you building the health platform and doing it with us as investors?” I didn’t have a good answer, so I got to work.
My first steps were a blend of customer development and MVP creation. I set up this survey to learn about potential customers (would be great to have your input too) and started having conversations with users in my target personas (“self-advocates” — people with critical or chronic health conditions looking to take control of their own health and “optimizers” – people who wanted to use data and experimentation to get more from their bodies and minds). I was lucky as I have experienced both of these states so I was scratching my own itch, which is a good thing to do as an entrepreneur. Then, as I’ve done in the past, I got together a team of “night-time hackers” to build a rough MVP of our core idea. This team met on Wednesday nights and included 3 developers, 1 designer and me. All of us were interested in the problem space, working with each other and brought complimentary skills. We grabbed hours when we could on evenings, nights and weekends and focused our sessions on learning, data sharing and trying to get something working. The goal was to make a mobile app that worked something like; install, find your doctor, take a photo of your drivers license, “sign” on the phone (to validate identity) and then magically (after a few days time) you have copies of all your past health records, accessible on your phone. Obviously, we had many ideas of what you could do next (visualize your health history, find correlations and causation, compare with norms, share with others, enhance with other data…) but we wanted to make it fast, easy and free to get your records. After a few months, we had this working (with lots of issues) and it was really cool!
Starting a company requires some blend of imperfect data, reasonable assumptions and a collection of smart people who think the problem can be solved, but is ultimately some leap of faith. With a bunch of customer input, tons of research and a MVP, I decided to quit my day job and go for it. I went back to Brad, further articulated my plans, solutions to some of the issues we found, built a rough model with users, growth, team, revenue…and decided I needed 1.5M to get going at the pace I think the idea deserved. Brad was thoughtful in his questions and we agreed to fund the new company. I was on cloud nine and it was hard to contain my excitement!
I’m a big believer in creating a “big tent” of smart people who can help an idea succeed and while Brad was happy to take the whole 1.5M, I wanted room for angels who could help the company grow and/or add unique value. We agreed to carve out 250K, for up to 10 angels (@25K each) in the round. I articulated that I wanted 2-3 people in 4 categories;
- Quantified-self geeks – people who used data to gain an advantage, often in sports
- Medical disruptors – had experience changing the healthcare space with software, data and a focus on the patient/consumer
- Platform innovators – companies that aggregate data and provide new value and/or had similarities to our approach around personal storage (e.g. Mint.com, Tripit.com, Dropbox, Evernote)
- Company builders – CEOs who could help me be better, grow a big company…there is always more to learn
For each category, I made a list of my top prospects. With Brad’s support as a foundation, I leveraged my network, found connections and followed much of the advice I’ve given before in these posts. For each investor, I articulated the vision, our progress and why I wanted them specifically to be part of the company. Within 30 days, I had an awesome group lined up with several people I only dreamed of getting when I started the process. Time marched forward, we hired an awesome legal team with great experience in the space, drafted documents to form the company, raise the round and get started. I made my first offer to a full-time employee, who could add necessary medical expertise to the team. She chose us over an existing offer and gave notice to her current employer. I started talking about the idea more broadly and made plans for an impending public disclosure around the financing. All systems go with a plan to close in mid October!
While I was raising the money, we were also working on enhancing the prototype, diving deep into policies and regulations, talking to medical providers and continuing our customer research. As my enthusiasm for working with the team and the investors was increasing, we starting finding serious structural issues in the overall business, mostly outlined in my note to investors. We looked hard at incentives (who wanted us to succeed and who might want us to fail) and I will do this much more deeply in the future. We considered many, many options on ways to incentivize the consumer more and solve the structural issues that seemed entrenched on the provider side (very hard to do). I was optimistic that we could find good solutions but as the days marched forward toward the financing timeline I had communicated, the negatives mounted and my confidence decreased.
During every startup, you reach points of critical inflection; when to narrow to a specific focus (vs. idle chit-chat about ideas), when to start coding an MVP, when to commit full-time and quit your day job, when to raise money, hire your first employees… Obviously there are many more points in the future, but these early points are some of the most critical. As an entrepreneur, each of these points presents an opportunity to take stock, weigh the risks/rewards, make a plan and then re-commit to the next major milestone/inflection point. Knowing Foundry and the investors I’d lined up and the team I’d recruited, I knew that we were all committing to at least 3-10 years of our lives to work on this idea. I wrestled with the idea, brainstormed with the team, talked with other CEO’s I respected and discussed with my wife who has seen me succeed and fail in the past. The process of discussion and communicating my decision-making criteria helped it crystallize my opinions and in the end, the calculus was not right.
I was in Boulder for a Full Contact board meeting and I’d aligned our schedule around this date. It was planned to be a celebration of the financing, a new company and a new adventure. Brad and I first met during a run along the river in Denver way back in 2008. While building Gist, we talked about many challenging issues while running or walking. On this day, we walked to Boulder creek trail and I explained my logic and decision. He seemed to know this was coming, which is likely just good investor intuition. I was sad, frustrated and even a little embarrassed. He was conciliatory, thoughtful and supportive. The next day, I sent my note to the other investors and the other partners at Foundry. Some were surprised, many appreciative and this made me feel even better about my decision.
I remain sad, frustrated by the systems and incentives at play in healthcare. As for healthcare innovation, I do plan to keep working toward an idea worth funding. I hope the other players in the space succeed and I am inspired by people like Eric Topol, Jonathan Bush, Peter Diamandis and Atul Gawande to find solutions that deliver better results and a life of “optimal health and peak performance”.Read More
I was recently asked to talk to a bunch of budding entrepreneurs about how to use Twitter to grow their own personal brands and therefore additional value to their companies. The presentation talks about the “why” and the “how” to achieve this and includes some very cool stats from other “social CEOs”.Read More
Understanding social media is critical and grocking the trends is a good start. Our team at Rival IQ just put together some good data to get you started. For more like this, check out our blog – blog.rivaliq.com or download the whole report with data from our massive survey here http://blog.rivaliq.com/social-media-trends-2015/
I went to Purdue and studied mechanical engineering. It was an amazing education and prepared me in many ways for the work I do now as a software entrepreneur. (technology, software development, critical thinking, data>>opinion, math…).
Recently, I was contacted by a student looking for an internship. A few emails and an “audition” later, we hired Spencer Brown for the summer. I applaud his networking (reached out to me directly on LinkedIn), willingness to work at a startup who might/might not be able to hire him back (risky internship) and openness to work through our process or lack of one. We were specifically impressed with his hacking/building things and proven entrepreneurial interest vs. just school work. We @rivaliq are looking forward to seeing him this summer and building cool stuff for our customers!
Then I was contacted by Grant Gumina, the managing director of www.theanvil.us, a co-working space at Purdue. He asked me to help out some of the teams who were going through http://theanvil.us/boiler/ (accelerator) and I happily agreed. Prior to the talk, I asked him for some frequently asked questions, and while I answered them during a recent Skype call, I wanted to share for the benefit of others. Here goes;
What’s a recurring mistake have you made that took you a while to figure out?
Doing customer development AFTER I made a product vs. before. Now, I spend lots of time, focused talking to potential customers using only a hypothesis on what solution I might build to frame the conversation. It’s about asking questions vs. telling them what I made (marketing) and why they need it (sales). I want to understand as much as I can (problems, existing solutions, buying behavior, influencers, pricing options, keywords…) about a customer segment, as early as I can, and this informs many downstream decisions.
Not understanding the funding sources early in the process. Talking to investors early, is a useful part of understanding a market as well as when/if I can raise money for a specific idea and the metrics/progress I might need to achieve to get the best investors. Here is how I think about it now; http://www.tamccann.com/the-start-up-fundraising-cookbook-8-steps-to-raising-a-solid-round/
Not understanding similar or competitive solutions, again, early in the formation of the idea. It’s hard to change user behavior so understanding the best solutions in the market today and how ours could be 10X better (enough to dramatically change behavior) is important. I now do this as soon as I start working on a new idea, often using tools like Rival IQ to understand the existing companies, then triangulating with discussions with customers and investors to get a full picture of the landscape.
What would you do if you were in college again?
I was at Purdue for 5 years, 4 of which I was swimming full-time (on scholarship) as well as being a mechanical engineering student, so I was pretty busy. For my 5th year, I won a scholarship (Red Mackey Award) and was able to spend more time really digging-in and learning vs. just getting by. For engineers and other technical majors, I’m sure you are equally busy so there is not much time to do “more”. But, I wish I had spent more time with people who were out in the world doing what I thought I wanted to do. This could have taken the form of projects or internships but more importantly, trying to understand what people DO on a day to day basis via coffee/short conversations. In retrospect and looking at my career path, this would have been much more time pure entrepreneurs vs. more corporate roles.
Secondly, I was a proficient programmer, but I would have have spent more actually get “good” in a way that I could have landed a job in that area as well as mechanical engineering.
Finally, more time with designers. This could have been in graphic design, product design… with a focus on understanding how they think, their processes, how they make decisions….
If your question was about my major, I think ME was a really good foundation.
How do you start to charge users if you’re already giving them the product for free?
This is always a tricky thing, but I would think about it in a few ways.
One, just start charging and let the chips fall where they may. End users should understand that you need to make money too and that they’ve received your “value” for free. Be honest with your users and just communicate openly. The best ones will want to pay you so you keep bringing them value vs. quitting to go work on something else.
Another idea is to pick a set of features which are highly requested, from your best targets (not all users are created equal) and then only charge for these new features leaving the base product alone and remaining free (lead gen).
Another angle is volume based, which means you get to X of something for free and if you want more of X, you need to pay. See Full Contact Card Reader as an example. https://www.fullcontact.com/pricing/
What’s the best way to engage beta testers/early adopters throughout the development process?
I have a longer blog post about this here http://www.tamccann.com/finding-the-right-beta-users/, but the simple answer is;
know who you want and overly focus on a smaller set of highly engaged users. These will be people who “really, really” want their problem solved and ones who are “experi-mental” meaning they are used to using products early in their lifespan and when they usually suck.
blend online means of interacting (email, chat, twitter…) with physical interactions (have real people come to your space and use your product)
Build in customer development and feedback into your sprint/development process so you are always meeting new potential users (at least 2-3/week)
Give public credit to people who give you ideas, e.g. “thanks to GrantG for the idea for X” – Put this in release notes, blog posts, tweets…
As you get a basis working product, consider some “community” support solutions like https://www.zendesk.com/ or https://www.uservoice.com/ or even a hacky google doc where users can report bugs, suggest features…
Focus on “customer success” vs. sales – this means knowing about lots of other solutions in a space, that solve problems for your users in your narrow domain (e.g. Syncing your contacts (www.fullcontact.com) or understanding your competitors (www.rivaliq.com)) as well as the broader domain (business productivity) or (digital marketing). Share suggestions, posts, ideas, solutions widely. Be a useful resource, even when your product is not the right fit.
Suggest content and connections – “you should really read X, follow Y or try Z and if the user is valuable or influential, make connections.
What things have you really wasted time on early in the company’s life?
Focusing too much time trying to convince users that they had the problem I was trying to solve vs. focusing my effort on solving for the people who self- identified and were really wanting a solution.
What strategies or tools do you use to stay productive?
At work, I am a major user of software tools and utilities. Much more detail and specific tools are here – tamccann.com/tools
I am also still very active and try to exercise for at least 60 minutes/day, usually longer. I also make sure to get at least 8 hours of sleep on one or more nights each weekend. Usually only sleep 6-7 during the week. I also eat largely vegetarian (sometimes fish, but no meat) and have done for over 25 years. Spend at least a few hours each week helping other people, giving advice, sharing what you know…mentor others even when you think you might not have that much to offer. Just “help-share”.
If anyone else wants to support the cool work they are doing at Purdue, connect and share;Read More
For a startup, raising a seed round is a daunting endeavor. Techstars Seattle Demo Day is looming and I recently finished mentoring the teams at the Kaplan EdTech Accelerator so advice on fundraising is top of mind. I’ve written about fundraising before here and here, but I recently saw Brad Feld (who is awesome and was an investor in my last company) give a great talk that added a few great words to the lexicon – Leads, Followers and Random investors. So, borrowing from Brad and adding my own ideas, here are a few things to consider when putting together that perfect seed round.
First some definitions;
Leads – Usually professional investors, who write > 5 checks/year at $100-500K/deal to fund startups. They are experienced in the dance, the terms, know lots of other investors…and know how it all works. They negotiate with the entrepreneur and help set the terms for a round.
Followers – These are majority of the investors you will meet. They either don’t have the time, money, expertise or fortitude to lead a round. These people usually have a day job and are investing as a hobby, a way to engage with startups or to support the startup community. If they are “active” they usually do at least 4-5 deals/year. I am a follower and am very clear about it with companies but many other investors are not so clear.
The overall fundraising process should be planned (e.g. I hope to close by the end of the year), with a solid understanding of how much you want to raise (e.g 750K-1M), with what vehicle (e.g. convertible note) and under what terms (e.g. 4M cap, 18-month term and 20% discount). Much more on terms here and in Brad’s book Venture Deals. The clearer you are, the faster the round will likely come together.
With this plan, you have a sense of the amount you need from a Lead investor, usually >25% of the total raise. You also have a starting point for negotiation when you get the lead investor in the room. Now your job is to go find the LEAD!
In a best case, you will also have some idea of the domain expertise (e.g. “marketing tools”) and/or functional experience (e.g. content marketing, channel sales, product development…) of your desired investors and you can ultimately create a “tapestry” of people with complementary skills and backgrounds to add to your company.
When you start talking to investors, spend time asking questions to determine a good fit. Ask them directly;
How much do you normally invest/company?
How many deals/year?
What thematic areas are you most interested in?
When you invest, how do you like to engage with the company?
- When you have invested in the past, were you a lead or a follower?
In addition to the money, how else do you like to help your companies?
An experienced investor (the kind you want) will be totally comfortable with these kinds of questions. They too are about expediency, getting to a YES or NO as quickly as they can and not wasting their or your time. Depending on their answers, you will get a pretty good sense of the kind of investor they are and in the best case, how likely they are to invest in your space and whether you think they can really help the company.
Assuming you think there is a good fit, continue the discussion about the business, opportunity, specifics…to get to a “yes, I think I would like to invest”. If they are a Lead, you can start working a term sheet, if they are a Follow, “collect” them for later and communicate this to them, something to the effect of “Hey T.A., I am really excited to work with you and I think you could add real value to our company. Right now, I am focused on finding our lead investor to get to solid terms, but I would love to pencil you in for (X, depending on their answer to normal check size) for the round, how does that sound?” At this point, consider them “soft-circled” and get back to finding the lead.
Followers are not likely to become leaders, no matter how much you try to convince them. Too many entrepreneurs spend way too much time trying to make this conversion happen. If someone, who has not lead before, wants to step up, probe on experience, skills, desire… and plan to invest more time with them and your lawyers to get to a solid term sheet, but this is not the desired path. You really want an experienced Lead.
After many meetings, you are likely to end up with a collection of Followers and finally, a LEAD! Woot! Get to a term sheet, get the Lead committed and then start closing the Followers. Depending on where in the process you found the Lead, you may have a long or short list of potential Followers. Part of the job of the lead, is to bring more people to the table and in most cases they have many people who they’ve co-invested with before. Ask for introductions and use their leadership to close other people. Assuming the lead has 25-50% of the round, Followers might close out the round or at least get to 75% before you need to go back to the well and look for new investors.
But wait, there’s more. As you you diligently move through your known prospects, getting people to commit, “random” people will show up and express interest. These are likely people who have heard about you from some other investor, another entrepreneur, a press article…but they feel random. As these investors are coming late in the round, you should have momentum with lots of others signed up, closing these Random investors much more quickly. Otherwise, rinse and repeat the process above, but be OK with Random happening.
Finally, fundraising is a sales process so you need to keep momentum going with lots of prospects, closing when you can and continuing the conversation with others being clear, consistent and regular with your communications. Focus on the right things, the right people, the right process and you will close those Leads, Follows and Random investors to fund your own next big thing!