For the next few weeks, we’ll be featuring a profile on one of our Founder Dating advisors each week. This will be a chance to learn a little about the career paths of some successful entrepreneurs, as well as hear some words of wisdom. This wek, our featured advisor is Tom Patterson.
Tom Patterson is a seasoned CEO, investor and founder of Wize.com (acquired by Nextag) and Heighten, and has advised Dale Carnegie, Fixya, KIXEYE, IDG Ventures, GreatNonprofits, Threadsy, iCurrent. He has spent many years learning from real experience, training others in leadership, and and giving advice to budding entrepreneurs. This week, Tom shared with us some wisdom about fundraising:
How many times have you been directly involved with raising funds for a company?
I’ve done multiple rounds in three companies, so I’ve been involved in about 7-10 rounds of funding as well as investing in my own.
How has your experience changed from your first time fundraising?
Things have changed from when I first raised funds (2006) . The first time it was about going into VCs because they were the access to capital. It was tougher to raise angel funding because it just cost more to start companies. But as things have changed over the last 10+ years or so, it costs less to get your company moving, and there are more channels of funding, and more individuals that are now more open to being involved in companies very early on because they’ve matured. Does it get easier? Yes, it gets easier. But the nature of funding continues to be pretty dynamic so you have to be keeping up.
Has the fundraising process become more or less personal for you over time?
I’m even more emotionally invested in the process now. I think it’s just the nature of my personality and being an entrepreneur, and approaching someone with the excitement over the product and the idea that you’re building. It’s always fun to get to the end of the funding round and feel like you’ve achieved something. It’s not really what you want to be doing but it’s always gratifying to have someone decide to put their money into your idea. I think that adds to the complexity and the fun of the whole thing. It’s an experiment every time. It’s not something like where you just apply for a loan; there’s a psychology to the whole thing. Are you the hot deal? Have you talked to the right people along the way? Are there other competing companies trying to raise the same money on your same idea? It’s a chess match every time. I think it’s definitely something where there are some people who don’t get as personal about it—I’m not one of them though.
How do you choose which investors are right for your company?
We use this adage as entrepreneurs that accepting money, especially post-angel, that first moment where you’ll actually be adding a board member—we consider that moment getting married. That means someone has invested their money, time and reputation in the governance of your company. Some entrepreneurs like to be more left alone, others like more involved investors to help and advise them. Rather than there being good or bad board members, I think about it like who you’re getting married to—it’s about compatibility. Not all money is created equal when it comes to its value for your company.
What’s the biggest fundraising mistake you’ve made as an entrepreneur?
I think one issue is choosing your angel investors wisely and having them understand that angel investing early is different from being an institutional investor. Occasionally if you’re in need of it or think it’s a good idea, you could accept money from someone who’s not a mature investor and their expectations are wildly different from what normally is there. They don’t realize they won’t have the same legal rights as institutional investors, and they get upset because they’re not part of the board or don’t have the say they thought they would. By doing that you create extra work for yourself, and make things really hard for yourself. I have made that mistake before. Avoid immature investors.
Have you come out of a round before wishing you’d done some things differently?
Sure, I mean, how could you not? Particularly as you go through these things for the first time, your presentations could always be better, you could get to the point faster—about how it relates to the big vision of the company so you’ve given them tangibility immediately as well as potential for how big this thing could really be. But we wind up getting associated with good legal advice or other entrepreneurs that can help us go through the process. Unless you deviate greatly from the way things are done, the mistakes are generally in things like you could have done a better job presenting yourself, et cetera.
Do you think the current funding environment is due for a correction or is frothy (e.g. bubble)?
I think the answer is that it’s definitely frothy, there are definitely a lot of companies that are going to be not around in a year or so, and that’s going to continue to happen. I think that’s the darwinism that exists here. But I don’t compare it to the dot-com bubble because [these investments] are very performance-set, it’s more mature, the capital being invested isn’t as huge, and these companies are more profitable. And lots of investors and entrepreneurs are seeking advice and help from people like myself who have been around for longer. The big companies that are really getting funded, they really have cash flow. They’re grabbing market share and their engagement level is really high. That’s really different from the dot-com boom when people were buying their metrics. We have this incredible wind behind our back that is pushing the use of technology up. So there will be winners. We’re reaching our kind of sustainability capacity, but I wouldn’t compare it to the dot-com boom.
What do you wish investors were better at?
I think a hot market is a great and a bad thing. There are incredible investors out there, but the best ones are oversought and they’re constantly working to get involved in the best deals. It’s like salmon moving upstream in the river and an investor is a bear. The problem for the salmon is we might not get as much time and attention because they’re so busy. Sometimes they’re too scattered over a number of different companies. One thing we’d always wish is get to your sustainable ratio of entrepreneurs to investments where you’re in your sweet spot and not overtaxed.
And the second thing would be spend as much time as you can thinking about what type of psychology the CEO is and working on that relationship with them. Ben Horowitz wrote this great article about how the greatest skill any CEO can have is being able to manage his or her own psychology. A board member’s primary job is getting the most out of the CEO, and becoming more in tune with the coaching and partnership can help make that happen.
What are the 3 things you’d tell entrepreneurs are “must knows” or “must dos” about the fundraising process?
- I think the number one thing is don’t over optimize on valuation alone, because that will lead you down paths that don’t feel good with your investors. Ninety-nine percent of all startups have a bunch of uncertainty about what’s going to happen in the future. If you start with the mentality of trying to win that deal, just going after the money, it probably won’t serve you as well. If you think about building a great product, you’ll build a great product. But if you just think about getting rich, you might be focused on the wrong thing.
- View investor relationships like marriage, particularly in an institutional round. Think about that person’s vision and values and how they align with yours. And get our of your comfort zone a little bit. Don’t pick somebody just based on how well you get along; look for someone who will push you a little bit.
- Use rounds as a way to make your product better by getting incredible feedback from so many folks. You may think someone won’t invest in you, but go work hard to get that meeting because it might be incredible value in terms of getting you feedback or helping you in later rounds. We have entrepreneurs now that are starting companies at 22. The likelihood that they have the next Google is probably really low. But see that first round as a great career opportunity, whether you get funding or not.
It [fundraising] does get easier. But it does continue to change so you have to have to be keeping up.