What we learned raising on AngelList (based in a small market)

Recently Spreedly raised $300K on AngelList from emerge.be Several people have asked me for any specific tips or advice that might help them with their own fundraising - particularly given we’re in a secondary market. 

Spreedly is based in Durham NC. On a personal note, I lived in the Bay Area for 10 years and Boston for 6. I’ve been down here nearly 3. While definitely a secondary market the Triangle area in general and Durham in particular are very very fascinating. The right mix of great schools, funky real estate (both domestic and commercial), fantastic arts/crafts/foods all equates to a sense that we’re at “ground zero” for this startup community. We’re already preparing for the day in 10 - 15 years when we can make obnoxious comments to the new startups about who and where we used to eat, drink or hack with. 

One downside to this location is a lack of “real” angels. We did the rounds locally and it wasn’t very productive. In addition, local CEO’s from well funded startups told me to avoid raising locally from angels if you can. “Hold out for more professional money if you can” I heard time and again. If we did it all again I’m sure we’d focus our efforts on Triangle Startup Factory which is a new, very well resourced accelerator. 

Fundraising is really no different to anything else you’ll experience with a startup. We viewed the fact that local raising didn’t seem appealing as just another challenge we’d have to overcome to become successful. 

AngelList had always fascinated me. We built a profile very early on. Rich White, CEO of uservoice, spent a lot of time helping me in early 2012 explaining the do’s and dont’s of raising on AngelList and reviewing my decks etc. I have to admit at that time I was skeptical. The general consensus was that all AngelList did was facilitate angels and startups meeting in the Bay Area, NY, Boston etc. They would have met anyways; AL just made things easier. 

The other truism from early 2012 was that you just used AngelList to “close” your round. You found investors through other means to get 50 - 75% of your round “soft circled” With that level of subscription you jumped on AngelList to fill it out and complete it. This created a real problem for us. Local angels want valuations and want really low valuations. Angels on AL are more sophisticated and may not even ask for a valuation (vs note) Worse case presenting them with a (to them) low valuation can make the whole deal seem odd and they’ll pass. It was pretty obvious this was a case of freshwater and seawater mixing. I didn’t see how I could combine the two worlds. 

Luckily we had organic revenue so we basically just bailed on the whole process for 6 months. Oh, it hurt, but it at least could be done. We raised a very small seed round in December 2012 from an investor behind a customer on Spreedly and that helped tremendously. 

In March 2013 two things happened around the same time. We were getting ready to launch our pivot. Spreedly had begun life as a subscription management offering that happened to have a credit card vault and connectivity to more than 40+ global gateways. Now we wanted to flip that on it’s head and be a credit card vault in the cloud that worked for any type (one time or recurring) transaction and allowed customers to work with multiple payment gateways over time or simultaneously. 

At the same time we were contacted by AngelList. They wondered if we were interested in being featured on AL. Online payments is a really interesting dynamic space. Being featured means you’re on the site/homepage and in newsletters out to relevant investors. We discussed the newness of our pivot and they (intelligently) deferred. We agreed to give the pivot 100 days or so and then review traction and see if it made sense to feature us. 

One tactical thing anyone can do on AL - especially if you sell to startups - is to ask customers on AL to let you list them as such. Cabify, ChargeBee, PushPay and Pin.net.au That told investors we were for real and probably told the folks at AL too. Secondly, I made a note of all the AL angels who were investing in our customers. Everybody loves to reduce risk when it comes to investing and the ability to ask about us via a portfolio company is simple and powerful.

That’s ultimately what happened. We were pleased with our results after 100 days. I was now hearing and reading that AL was no longer just the “closing” location. You could fund an entire deal end to end. I read Aaron Hall’s “A primer for fundraising on AngelList " and prepared myself mentally for what I assumed would be a draining and exhilarating 30 - 90 days. Before even emailing the guys at AL to ask about being featured I contacted Laurent from Emerge via AL. He was an investor in Cabify and had followed me directly (If I have one pet peeve with AL it’s that you can only message someone who follows you. I understand why but there probably needs to be some variation on this to facilitate better communication) 

Emerge was in Belgium so there was no geographical bias like you’ll get from Angel’s in the US. They had had a lot of success in payments and were focused there. Cabify gave us two thumbs up behind the scenes. Emerge took our entire round and we wrapped everything up in 10 days from intro to wire. 

Therefore, I can’t give a lot of detail about the process within AL. We only pitched once to one investor. I can tell you the following:

- If you’re in a smaller market it’s now viable to raise your entire amount on AL

- If you also have local investor involvement make clear that you’re using AL too and that AL will *culturally* drive the raise. Local investors all over tend to be less founder friendly than AL and that could cause you real headaches at some point (It was the main reason we pulled back from an earlier round)

- Build your profile early and often. Make sure you ask people and customers to follow you and endorse you.

- Use the public nature of AL to understand who’s really investing in your customers or like minded services. Look for factors like their frequency and geography

Ours was ultimately a 10 days story that took months (years?) to put together. I am a believer though that AL will do to startup capital what youth and airplanes does to labor. 

I’ll check and answer any questions that you might have here:


Hiring for your startup = = building a tribe.

Hiring well for startups is critical. It’s also hard. Steve Jobs once said you can tell whether a startup will be successful based on the first 10 people. There’s a LOT of advice around hiring for startups. I find a lot of it redundant to the point of not being helpful at all. “Only hire A players. B players hire C players” Ok. I’ll just hire A players. 

There’s a great book called Tribal Leadership by Dave Logan, John King and Halee Fischer-Wright. The legendary basketball coach Phil Jackson mentions that basketball teams are similar to tribes and develop along the same lines. I think startups are a great example as well and so I’m going to lift from both sources to talk about startups. 

Per the authors there are 5 stages to tribe building. The further along in the stage you are the more likely your tribe is to thrive and absorb weaker tribes.

Stage 1 and 2 don’t (or at least shouldn’t) apply to a startup. Stage 1 is like a street gang. Bound together simply by a collective belief that the world is out to get you unless you get it first. Stage 2 are tribes filled with apathetic participants. They’re the passive aggressive types that you often find working in large organizations where individual contributions matter little. “That’s not my job”

Stage 3 is where it gets interesting. It’s focused primarily on individual achievements and “I’m great and better than you!” These individuals are driven to succeed and winning is personal. They join the tribe only because they see something in the tribe that increases their chances of individual success. This tribe is a group of “lone warriors” banded together. 

Stage 4 is where allegiance switches from the “me” to the “team” Now you want your team to win and be better than the competition. The move from Stage 3 to Stage 4 typically requires a strong adversary. In fact, the bigger the foe the bigger the bond between lone warriors becomes. 

Most tribes/sports teams are very lucky to make it to Stage 4. A rare few go on to Stage 5. Here is where you realize the completeness of your tribe and the bonds that you’ve created. You’ve climbed that mountain and your competitors are 3000 feet below gasping for air. You realized what you’ve done and you enjoy your time as a group working as a single entity. You no longer need the threat of competition to motivate you. Historical greatness is what you aim for. 

Stage 3 is where I see most net new startups. At the beginning, lone warriors band together. You know you’re lone warriors because you’re thinking about yourself. What’s my equity share? Is it fair? Am I more valuable than another co-founder? What are my alternatives vs banding together with these co-founders? Maybe I’ll strike it out and do my own startup and not have to share control or rewards with anyone? 

Stage 3 is also where new hires come in. They too are lone warriors. Why would I join this tribe vs others? Will this really advance my chances of success either at my next startup or if I start my own? How will my friends and family view me taking this job? So there’s a lot of negotiation around options and compensation. 

One way startups are unique vs say a sporting team is they can get to Stage 4 more easily. Startups are usually disrupting an existing market. That means there are larger incumbents. That makes conditions perfect to move to Stage 4.  Startups tackle daunting competition that has more resources, a head start and existing customers. The lone warriors are outnumbered. Only by working together as a single team can they out think and out maneuver a much larger competitor.

As founders you know you’ve moved to Stage 4 when you do things like hire in people making more money than you. Or happily give up equity to an option pool. Or worse case go without a salary for 3 months or more but keep working full time to get traction to raise funding. Things that you never imagined agreeing to when you started are now simple (even in painful) decisions. It’s the best thing for the survival of the tribe. 

The second way startups are unique, vs say a basketball team or a real tribe, is the influx of new members. This can create tremendous friction when hiring and jeopardize the overall chances of success. As a founder/leader you have to realize that your startup can move back and forth between stages. The early team of 2 - 6 people might all move from Stage 3 to Stage 4 together. Then you close funding or win a big deal and are ready to hire 2 - 6 more people quickly. Those new hires are lone wolves. They are looking at your tribe vs others. They’re optimizing their share. They push hard on equity and salary. 

This can create a real shock to a Stage 4 tribe. These new members seem cold blooded and ruthless. “Are they really a good cultural fit!” It’s easy to have Stage 3 amnesia once you move to Stage 4 personally. Yet over time these new members join the tribe and - if the culture is great - move to Stage 4 with you. They stop asking for perks or more money. They’ll move their desk to make way for a new hire. They’ll do the 10pm call or you’ll see them cranking away all Sunday on something new. 

This struggle doesn’t end with startups. In technology companies like Microsoft arguably hit Stage 5 and had that for more than a decade but it faded. I would argue Apple had it and it might be fading right before our eyes. Perhaps sensing that, they single out Google and create a foe to ensure they don’t slip further to Stage 3. The risk when you’re slipping is that you attract lone wolves. If you get out of balance then you slip even further to Stage 3. Stage 3 companies have a very hard time sustaining success.

So when hiring remember these points. Don’t be offended by lone wolves - you were once them. Create a great culture that moves Stage 3 people to Stage 4 as quickly as possible. When rapidly hiring try and make sure you don’t fatally move to a disproportionate number of Stage 3 employees.   And don’t fear a big new competitor entering your space. It’s more dangerous in many ways not to have that factor to build the bonds in your tribe. 

SLA’s - be wary of startups that have them.

I occasionally hear the request for an SLA at Spreedly. Here in general is why an SLA is not useful and should be avoided. Firstly, what are the goals of an SLA? To ensure uptime and to ensure offsetting payments in the case of downtime. So let’s walk that through:

  • Downtime: If you service provider is down they are putting their entire revenue stream at risk. If their transactionally focused they’re losing money every minute they’re down. Even if they’re more like a flat monthly subscription they’re risking losing customers and not signing new customers. My point? They don’t need an SLA to be very focused on the importance of uptime. 
  • Penalties: The penalties for downtime have to be inline with the revenue received for the service. It’s crazy for an organization to put itself out of alignment here. So the penalties offered  - even with major outages - probably fall in the 1 month maximum category. Imagine your payment gateway goes down. They collect 3% of revenue. You sell $1 million per day, they make $30,000. Of that 1% is what they make after interchange etc. So that’s $10,000. If they were down for 3 days and therefore triggered their worst SLA you’d see $3 million in lost sales and they’d offset you with $10,000 
  • Gaming: Companies with SLA’s will make business decisions around uptime vs downtime based on triggering SLA’s. Critical security patch? Can’t implement it this month because we already had some downtime. Any more and we trigger payouts. Don’t set up a system where your service provider is managing their service based on SLA metrics. 
  • Self Fulfilling prophecy: Your business critical service goes down for a day. That’s a huge pain. So imagine if they went away altogether? How is that going to feel? Well after a couple of days down they’ll lose current revenue, lose current customers and lose future customers. What if they also have to pay out cash due to triggered SLA’s? It could be the straw that breaks the camel’s back. 

It’s for that reason I’d say avoid all but the most financially stable companies that offer SLA penalty payouts. It creates the “perfect storm” affect on their finances at the worse possible time. 

Much more powerful incentives are in place for your service provider to ensure uptime than an SLA. Punitive payouts when they don’t create a false sense of security at best and may completely exacerbate the situation at worse. 

The Next LinkedIn

At the risk of showing my age I remember when LinkedIn began. The idea was to build a professional network that had value for all involved. While I admire that LinkedIn gets a monthly fee from me and shows me ads, something neither Twitter nor Facebook has pulled off,  I’m really not sure what it is anymore. I use it frequently as a “resume” on steroids if you will. I research the background of people I’m going to interact with. But there’s really no value in the “Linked” in part of LinkedIn to me. It feeds me articles but there’s nothing there I can’t really find in my twitter feed. 

Spreedly is a full time job for me. So I’d love someone to solve this problem. It strikes me that there’s real value in connecting with people in such a way that you can reach out to their connections directly. You could be trying to solve a challenging technical problem. You could be looking to connect to a new employee. You could be trying to find your first angel or customer. I get that this is a challenging concept - but if you solve it then you have a huge hit on your hands. Maintain a small, excellent, trusted network and you’ll be able to reach fantastic people in a meaningful way. Someone spams you - they get shammed out of the network (you dis-connect to the referrer of the spammer)

The thing that I get stuck on is you really need to limit the size of your network for it to be powerful. If you don’t keep up a connection (somehow - how do you define that?) that connection drops off. If you’re not communicating with me once in the last 6 months we’re probably not really truly connected. That finite number ensures you only stay connected to truly current and dynamic professional relationships. 

But having a small network seems counter-intuitive. It doesn’t seem to have helped Path. 

Could you utilize App.Net as a foundation? I don’t know. AngelList could have been the answer but they have pretty strict rules around communicating with folks. 

I’m still looking for a service to help me use a trusted professional network to connect to quality people. If it’s already out there let me know!

Any comments may be here: https://news.ycombinator.com/item?id=5542041

Fear of a remote worker planet

Yahoo’s recent decision changing how they tackle remote work has garnered a lot of attention. I won’t be spending any time on that specific decision - mostly because I believe Yahoo to be in a very unique place. Rather, it was a recent comment I saw from an influential startup personality that got me putting fingers to keyboard. It went something like “No professional sports team ever won it all using a remote team”.

Full disclosure. My startup, Spreedly, is based in Durham/Raleigh NC. We are a secondary tech market in the US. I can never build the team I want entirely from local people if our ambitions remain uncapped. It’s too restricting a set of assumptions for my startup. So when I say “I’m for building a company where remote workers will play a critical role in our success” you could easily answer “What choice does he have?!” And you’d be right. But only partially. I’ve spent 10 years in the Bay Area and 6 years in Boston. I’d be more inclined to take this approach if we were there for reasons that will become apparent.

The argument for having the entire team in one location is pretty well known. Any startup is facing a huge challenge to be successful. It requires long hours and the entire team pulling in one direction at the same time. Even the most “successful” early startups lurch from emotional highs to emotional lows in the space of hours. The strength of the bonds built by the close work and play environment help weather the lowest points. Nothing replaces the ability to all quickly huddle together in response to an immediate opportunity or threat to the business. 

You can accept/agree with all of these points. I do. The real question is - is this the best model to achieve success or simply a good model. There are three reasons why I think, on the balance of things, the remote worker model will win out:

1) Labor Pool: No labor market, even one as large as the Bay Area, can win out against selecting from the global market. Think about it. The company that truly nails the remote model can select their employees from anywhere. That has very powerful implications for talent and cost. Drawing from such a large pool of talent has huge implications for product direction. You’ve got “feet on the street” in markets all over the world. You don’t have to scour Twitter or blogs to understand the very latest mobile trends in Beijing or Vienna. Your team tells you. 

2) Loyalty: “If you sneeze in the Bay Area your developers get the flu” Every startup has good periods and bad periods. It’s much tougher to keep the team together when your developers have 5 - 10 new opportunities within an hour radius of their home. A loyal team might stick with you through 2 or 3 bad quarters. A non loyal team might leave after 60 - 90 bad days. Your downward lurch turns into a terminal nose dive. 

3) Fear/Control: Startups are by definition chaotic. They have very little control over much of what happens to them. Losing a key customer might be a blip for a larger competitor - it might mean the end of the road for a startup. With so little control of their external environment the startup looks to control the few pieces it can. People. VC’s tend to be the most honest about this. “We’ll write you a big check but you have to move to the Bay Area so we can keep a close eye on you” Again, I understand the reasons why but in general I don’t think a fear driven model wins out over the alternatives - not in the long run. 

There’s a precedence for this. Great dispersed sales teams close to their customers always outperform sales teams stuck at HQ. It’s harder to manage those teams but if you manage them well the performance of that team is superior. 

So what would the characteristics of the first real company to nail this model look like? How would we really know it was here? It would have to be a net new company less than five years old. It would be developer focused as developers are the most comfortable online group today. The labor force would be skewered young. People under 23 have an entirely different perspective on communication. To them digital is the norm - F2F is the unusual exception. They would have avoided taking VC money early so that they could establish this new model without the early pressure to crowd together.

To know it’s working you’d want them to have scaled to at least 100 employees and feel like they can scale it out to 1000+ in the same way. Oh, and you’d know it was working if not a single person quit. 

Getting everyone together in one geographical location is still a very viable model and not going away anytime soon. The very things being built by these startups will continue to reduce the value add of this model. And the economic horsepower of those companies that unleash the functional remote model is much more compelling than the geographically constrained one. 

Why healthcare in the US should be thought of as warfare (politically speaking)

Obamacare created an incredibly strong negative reaction from a very vocal group of Americans. Most seemed to equate the increased role of government in healthcare as indicative of a broader slide into a “European” like country marked by high taxes and more dependence on the state for goods and services. So the chances seemed good for a major Republican win and a dismantling of Obama’s policies. 

Yet the last elections showed we appear to have reached a tipping point on healthcare. When it comes to healthcare, more and more American’s are ignoring their general preference for smaller government and slowly, but steadily, embracing a larger role for government. What created that tipping point and what does its existence mean for both sides?

Very few argue that we should privatize our national defenses. In general both sides of the political spectrum - at least until you get close to the extreme ends of each side - believe the government should control our military services. Inefficiency and cost don’t appear to have a real role at the policy table either. Ask yourself this question. If you were running the military and I told you “Your budget can be X times greater than our nearest spending rival (in this case China)” What number would you choose for your budget? Twice as big? Four times as big? Well it’s actually close to 17 times as large as China’s. That doesn’t seem rational nor horribly efficient. Yet it exists and is never seriously challenged by either side. 

Why then does our military spend largely enjoy broad political support across nearly all groups? Fear - spread equally amongst all groups. The idea of a foreign invasion and occupation is equally scary to young and old, rich and poor alike. A foreign invasion results in a loss of liberty, property and life. It can and does tear families apart. Wealthy people value all four of these as much or more so than poor people. And having a large degree of wealth is unlikely to protect you in the case of a foreign occupation. On the contrary it may draw additional attention to you. So this is one reason there is rarely a debate around privatizing our national defenses. (You won’t hear too many mayors winning on privatizing their police force either btw)

What else has the potential to impact your life like warfare? If you have poor or no health insurance illness. A severe illness or accident can turn a family upside down in a very short period of time. In the worse case it can cause premature death. A major illness can see a family lose their property, income, liberty and be separated and living apart.

This was always the case for the poorest of the poor. What’s new is how many more American’s have been recently confronted with this reality. What caught people off guard was the two tier system in the US based upon the fact that many people receive insurance via their employer. 

In the US, many people receive their health benefits via their employer. Those with employee based health care are largely immune to the rising costs of healthcare. They’re having a completely different interaction with healthcare than their non employer insured neighbor. If they were in the market procuring individual coverage and watched their premiums rise by 10-20% per year, as their employer does, there would be less of a delta between the two sides on this debate. It was largely this group that thought the threat to US principles around small government was more important than government led healthcare reform.  

The deep, long, recession caused many in the US to come face to face with the reality of healthcare. They were now 10 years older than when the last paid for a plan. They had a family. When they were young and single they were paying $150 a month. Now they were looking at $1200 - $1500 a month just to stay in COBRA. It’s like losing the war and then having to pay repatriations at a time when you’re economically weakest. 

Again, the combination of the extent of the recession and the increased amount of healthcare costs created a tipping point. For some, healthcare costs, once hidden, were now equivalent to 30% to 50% of their mortgage. They understood that the healthcare system now forced people to make decisions that involved trading off their health with their ability to keep a roof over their head or their family together. They knew more and more people who simply went without. 

A majority of the electorate now had direct, or indirect, experience with the current state of healthcare. They understood that a major illness could now destroy people’s lives, cause a loss of property, and/or tear families apart. They were scared - the same way people fear a foreign invasion. And it happened quickly too. It caught those opposing Obamacare off guard. It’s not even clear that they prefer having government run healthcare. It’s just clear that the felt the current system broken and the only new proposal was more government involvement. 

If you’re deciding policy it’s important to understand this new mentality. It’s that lack of understanding that shocked the very vocal anti Obamacare. We’ll probably continue to have this problem until all individuals operate within the same marketplace. While a large portion continue to enjoy the “nuclear umbrella” of employer insurance while others face imminent warfare we’ll continue to have a very bi-polar electorate. 

As the CEO of a small startup (Spreedly) I know we waste too much time and energy worrying about healthcare as individuals and healthcare as a company. I don’t like tying our employees to us to their healthcare. I would like this to be a government service that’s largely detached from our status. Or I’d like it to be something all individuals procure in the marketplace so that the marketplace feels the impact of all those consumers (vs being muted through an employer) 

Either way, it’s important that policy makers and advocates realize that employer based benefits have created two super distinct class of users. 

Spreedly and Pin Payments

Great post from Grant Bisset at Pin Payments. How we work together as they attempt to change the way online payments happen in Australia. 

Post is over at Spreedly’s blog

101 for Angel Investing

A nice succinct overview on how the Angel Investor thinks - http://leoexplor.es/angel-investing/2013/03/13/what-do-angel-investors-actually-do-part-1/