GROUND CONTROL

This is Major Tom to Ground Control

In the last guide we explored how to evaluate potential co-founders for your Expedition Team. Before you blast off into orbit, it is important to establish a Ground Control. Your Ground Control is made up of all the people who may not be involved in the day to day operations of your venture, but can still provide invaluable resources to succeed. This includes capital, advice, mentorship, mental support and networking. Let’s break down the essential stakeholders who should be considered for your Ground Control.

Investors

An investor is someone who believes in your ability to pull off your mission. They are willing to invest their own or their partner’s capital. Perhaps when you hear the word “investor” you immediately think of a shark. Investors often get a reputation for taking the biggest bite of your pie. Don’t let this stereotype scare you from raising capital. Investors play just as vital role in the startup ecosystem as sharks play in the ocean’s ecosystem. There are many different kinds of investors, who will be interested in investing depending on the stage of your venture. 

Family and Friends

Let’s first start with the friendliest investors. Typically, the first people we turn to for support and start up capital is our friends and family. Family and friends know you the most relative to any other group of investors, and therefore there is a great deal of trust. However, that does not necessarily mean they are about to hand over their life savings for a risky venture. Additionally, you may not feel comfortable with the potential of creating any kind of stress, tension or conflict with friends and family by asking them to contribute towards your risky venture. Friends and family are typically the most supportive group of people we turn to when dealing with hardship and challenges, so even if they are not investing their capital, they provide invaluable investment through their support. While friends and family may contribute the smallest amount of capital relative to the other groups of investors, they may not require any formal agreement. Often these agreements are based on the trust, but it still may be wise to make written agreements. 

Debt

Banks typically don’t offer loans to early stage companies that are pre-revenue or without assets to collateralize. However, many banks offer credit cards which could offer a line of credit for early stage businesses. While debt may not seem like the conventional capital for early stage startups, it should be on your radar as an option as you grow cashflows and the value of your assets. The more your valuation grows, the more you will want to raise capital via debt in order to preserve your equity. Additionally, there may be tax advantages to the interest you are paying on debt.

Crowdfunding

While platforms like Wefunder, Kickstarter and IndieGoGo may allow you to raise funding online, they also require a lot of more operational overhead that can be distracting. The resources and opportunity cost to make a well produced video and market your campaign could end up being detrimental towards making progress towards getting your venture to market. There are however some projects that make more sense for these platforms, so it is best to use your judgement as to whether you feel these platforms make sense for your project. Kickstarter and IndieGoGo are better used when your product is a physical good that requires capital and validation upfront in order to cashflow your initial production line. Additionally, there are other crowdfunding models that have proven to be beneficial for securing early stage funding that do not require as much overhead. For example, AngelList is a way to crowdfund capital using a syndicate of angel investors.

Angels

Angel investors are wealthy individuals who invest their own capital or syndicate a group of other angel investors to invest in early stage ventures. They take on the most risk in exchange for getting in at the earliest stage which comes with the best price. They therefore have a lot of skin in the game and are incentivized to be active in order to make their investments come to fruition. Thus, they play a vital role as guardian angels for entrepreneurs. It is best to find angel investors who have experience and a network relevant to the industry or space your venture is in. Angel investors will then be able to open doors and act as advisors to help you make progress towards your mission. Angel investors can write checks for any size, but typically want to limit their risk by investing small amounts in many startups they actively help and believe in. Angel investors typically invest in You, thus your experience and experience of your team can be what gives them comfort and confidence.

Seed

Seed stage investors are generally the first institutional investors who get involved in your fundraising. These institutions invest raised capital from limited partners (LPs). They therefore look for early stage investments to deploy this capital in hopes for getting the best deal in terms of a lower valuation. They generally write much larger checks than angel investors, but also typically require your product to be generating traction. Both Angel investors and Seed funds invest through a signed term sheet, which is typically a convertible note or SAFE. We will cover these term sheets next.

Venture

Venture funds (venture capitalists) are sometimes one and the same as Seed stage investors. They have raised capital from LPs looking for a high yield return. Venture capitalists are therefore hoping they can find the next “unicorn” as referred to as having a valuation of $1Billion or more. These unicorn opportunities are hard to find so they take on a great amount of risk to bet on multiple horses hoping a few unicorns in their portfolio pay for any losses and then return a profit to their LPs. When venture capitalists make an investment, they often want to be the lead investor. Having a lead investor will then signal confidence to other investors. The lead venture investor hopes their risk of being the first and largest check pays off when the venture sells shares to the public (IPO) or sells to an acquiring company for a hefty premium in valuation. Lead venture investors typically take on a very hands on approach to the companies they invest in. Many times, venture investors take a seat as a Board member (director). 

Valuations and agreements to venture funds are a bit different than convertible notes or debt obligations, as there is typically enough traction of customer growth, cash generation and usage to value the company more objectively. Therefore, venture investments write a check for a priced round. This means that there is an agreed amount per share that is calculated. This is referred to the pre-money valuation (the valuation before the round is diluted with subsequent investment). Priced rounds start at Series A and follow up with as many alphabetical rounds as it takes to get towards a liquidation event. 

Terms and conditions may apply

A term sheet is a written agreement that investors use to express interest in your venture. It represents the terms of their investment, which typically expresses a nominal check amount they are willing to write in exchange for a convertible debt obligation. This debt can convert into a nominal amount of shares in the future based on the terms agreed on. The reason convertible notes are used for early stage investing is because there is generally not enough data available with regards to how to accurately value the company. Therefore, it is difficult to calculate a fair number of shares up front to give out in exchange for capital. Rather than receiving principal and interest like a conventional loan, investors are hoping to receive more shares in the future in the form of equity upon securing additional financing in the future once there is enough traction to price in the valuation. The main terms of a convertible note are the discount rate, valuation cap (cap), interest rate, and maturity date. 

Discount rate

The earlier investors come in, typically there is more risk. Therefore, they will want to lock in a premium for this risk. A discount rate applies to any future valuation of the shares. The lower the valuation investors receive, the more shares their investment will yield. This is because their shares will convert based on a function of however much they invested over the valuation after their discount is applied. For an example, if an early stage investor with a 10% discount rate invested $100, they would receive 11% of your shares ($100/$900) compared to the future investors who invest at a priced valuation of $1,000. Thus, investors with a discount rate of 10% would receive 1% more shares in this example.

Valuation cap

Another tool to reward early investors a premium for their risk is the valuation “cap”. The Valuation Cap can be based on the post money or pre-money value of the company. Similar to a discount rate, the cap will be what investors convert their investment amount over to calculate how many shares they receive. For an example, assuming the same investment of $100, a $900 cap would provide the same 1% premium assuming a valuation priced at $1,000.

Typically, an investor will prefer to go with the terms which convert more shares, assuming they have either the discount rate or valuation cap to choose from. One nuance to the valuation cap is that it can be calculated based on the pre-money valuation of the company or the post-money. The latter makes the valuation, as you add the total amount of money that has been raised to date. It is important to be aware of the differences the post and pre-money valuation cap. There are many resources which cover this in detail.

Interest rate

As previously mentioned, investors are hoping to receive interest in the form of additional shares to compensate the risk and time value of money. Not all convertible debt vehicles include an interest rate. The Ycombinator SAFE does not include an interest rate. The SAFE stands for Simple Agreement For Future Equity, and has become a standard agreement between founders and investors. Y combinator provides free templates for different terms on their website linked.

Maturity date

Sometimes convertible notes do not convert into equity, as future funding is not raised at a higher valuation, or even at all. Since most startups fail, investors like to hedge their investment with indicating a date for when the company needs to payback the loan.  

Meeting with Investors

Now that we have gone over the different kinds of investors and the terms in which they invest, we can go over best practices for approaching a meeting with them. Getting connected to investors can feel elusive and exclusive. Leveraging your network to get introduced via a warm connection is always going to be more effective than reaching out cold. When you do hear back from investors, here are 3 helpful tips to get a meeting:

1. Ask for their help, not their money

2. Don’t ask investors to sign an NDA

3. Keep your elevator pitch short (don’t write a book)

Pitching investors

Investors may take advantage of first time investors with aggressive terms. Know that you can always negotiate terms. Confidence is key. When you start a pitch, assume the investors are already a yes until you convince them to be a no. Most investors will not write a check during your first meeting, rather they will do some due diligence and ask around their network before committing. Investors want to hear out any and all possible opportunities. Thus, they will likely hear your pitch. Anything but yes is likely a no. Thus, make sure you are ready to pitch an investor as you may only get one shot.

Investors want to to add fuel to a fire that has already been started. They do not want to be the kindle that is required to start the fire. Thus, it is important to show them via your pitch deck that you have either started a fire, or that you have validated a fire can be started but you don’t have the capital to start such. The following elements should be included in a Pitch Deck:

Problem

How painful is this problem and why is there a clear need?

Solution

Why is your solution working now and could not before?

Business Model

How do you make money now or how will you make money in the future?

Financial Projections

If possible, show them the money and numbers.

Addressable Market

Break this down into the total overall market, which includes both the total market that can be served in the future and the market you are targeting now.

Competition

Who else is going after this problem? What is your secrete sauce or edge over competition?

Traction

Show this in the form of a timeline, which shows all the progress milestones accomplished and where you are planning to go or do next.

Team

Break down the co-founders and explain why your team is the best team to go after this problem.

Ask

This is the amount you are raising. You want to be prepared to explain how the capital being raised will be used.

Updating Investors

Even if investors do not invest, it is wise to keep them updated with your progress. Perhaps they will be impressed with the traction you have made and come back into the picture in a future round. Updates to share with investors should include

• High level updates

• Finance updates (burn and runway)

• Customer and usage funnel updates (AAARRR). We will cover this in depth in the Rocket Science guide.

• Biggest priorities and challenges (how investors can help with roadblocks)

• Product updates

• Headcount updates

• Next steps or milestones to look forward to

advisors

Every hero’s journey involves a mentor. While you may not have a bearded wizard around to consult for your venture, it is important to find advisors and mentors who you can lean on for wisdom. Advisors come in all kinds of forms from mentors and coaches to super connectors, industry experts, serial entrepreneurs, and executives. All of these forms of advisors have one thing in common; they can and will provide their opinion on how you should go about doing what you need in order to succeed. While all advisors will have their opinion, a good advisor will walk the walk with you and not just talk about what you should do. 

While all advisors should provide guidance, the role of an advisor can range from one-off advice over a coffee to weekly or monthly meetings. Advisors typically open up their network to you, provide strategic advice, and sometimes even invest in your venture. Additionally, great advisors typically help you see beyond the forest and get into the weeds to tactically help you with your biggest day-to-day challenges. Thus, advisors can be crucial to getting your venture off the ground. However, just like adding a co-founder to your team, there are important expectations to set when formalizing a relationship with an advisor. 

While many advisors may offer to help you in any way they can, if they are to become invested in your venture and codify a relationship, they will likely want some equity at some point. Establishing how much equity to give advisors is a personal decision and will ultimately depend on how much value you believe they can add. The FAST agreement that was established by the Founders Institute has become a standard framework to determine how much equity to give advisors based on their commitment level and the maturity stage you are at. Here is how to evaluate the potential value an advisor can provide and therefore whether they should be considered as part of your Ground Control:

Strategic vs Tactical

An advisor could be considered strategic if they can open their network and it can result in investment, partnership, customers and employees. Additionally, an advisor may be strategic if they have knowledge or experience to help you think and see in a different way. Whereas, a tactical advisor may help you understand legalities and terms that you would not otherwise understand and therefore would result in being taken advantage of. Therefore, an advisor can be invaluable. The more tactical an advisor can be, the more equity you may want to consider as they are likely giving you more time compared to just attending a monthly meeting and making introductions to their network.

Approachability and Availability

There is a bit of a paradox with advisors as the more connected and experienced, the more likely they are to be hard to reach and busy with other opportunities. You may not want to feel like you have to spend all of your social capital each time you want a favor or ask for an advisor’s time. A great advisor should be approachable and make themselves available to you on the regular assuming they are receiving equity and are vested in your venture. 

Willingness to invest

The more willing an advisor is to invest in your venture, the more equity they will have and ultimately the more incentivized they will be to help you. Note that while advisors typically make monetary investment and participate in investment rounds, they can also invest in their time. Having skin in the game will motivate an advisor to leverage their network and resources to help your venture take off. 

If you have found someone who you believe is strategic, tactical, approachable, available, and willing to invest, equity may make sense. Again, how much is going to come down to what makes sense for your team. If not, perhaps it does not make sense to entertain equity at the moment. The best thing to do is to maintain your relationship and see where things go. Additionally, there are other ways to gain free insights and advice through relationships with your peers and community. Let’s explore why a community is essential for your Ground Control.  

Community

Having a community as part of your Ground Control is critical to the launch and success of a startup. A community is where you will find peers going through the same journey. If nothing else, it is always good to connect with a friend or peer for the emotional support. All entrepreneurs are going through similar challenges or have faced a similar challenge in the past as you. It will be beneficial to you anytime you can meet with fellow entrepreneurs and share knowledge. These meetings can take place in co-working spaces, coffee shops, startup labs, accelerators or incubators. While you don’t need to be a part of a prestigious program, it is important to connect and build relationships with other entrepreneurs. Your community of peers will ultimately act as a vital resource to learn tips and tricks, get feedback, be inspired from and get needed emotional support to boost morale.

In addition to the physical relationships with peers and fellow entrepreneurs, there are many other communal resources that can be leveraged to help you launch. Online communities may be a great way to connect with others to learn new information. These online communities can be found on Slack groups, Product Hunt, StackOverflow, Reddit, HackerNews and many other Q&A forums. You can join the L,L.L! Community to connect with other entrepreneurs and investors. It is in the works and you can sign up here.

Case in Point

While building HackHands, we all worked out of a WeWork in Manhattan’s financial district. What was unique about this particular WeWork was that it served as the WeWork HQ and team’s office. I did not realize this at the time, but this epicenter of entrepreneurs, technologists, and advisors would become an invaluable community for me.

We all worked at desks in an open fish bowl layout. Additionally, we all shared a communal kitchen where the proverbial hallway water cooler conversations were had. The only difference was that it was a keg full of cold beer on tap instead of a water cooler. Thus, the culture was very social. Often we would all go out for lunch together.

This WeWork acted as a nexus for founders, bringing everyone together to collectively share their challenges. This collection of startup minds could help you with technical solutions, offer advice on anything strategic or tactical. The We in Work really did live up to the brand. WeWork even facilitated formal events where founders could meet each other, get feedback and learn about all the ways to navigate the startup space.

As we made progress building out our product, we met many great entrepreneurs. We were inspired by their stories of success. Our product and business was shaped by their seasoned suggestions. Our networks were expanded by their connections. Before we knew it, we had been connected to super connectors who opened doors and introduced us to several seed and venture funds.

When we were ready to launch HackHands, we went to the community manager at WeWork and asked if they would be so kind to let us use their space for a launch party. Not only did they let us use their event space for free, they helped us market our launch event for the entire NYC tech community. The event was a success, and became an example for other startups. Read more about how we bootstrapped a launch party here.

WeWork served a critical part for our and many other founder’s community. Without this serendipitous community, it is hard to imagine whether we would have been able to establish the ground control that led to our successful launch.

Ground Control Checklist

Have you decided which kind of investment is best for you?

Have you understood and agreed on terms for a note? 

Have you sent investors updates whether you have taken investment or not?

Have you found approachable and available advisors?

Have you found advisors who are strategic and tactical?

Have you found an advisor who will invest their time or money in the venture?

Have you connected with other entrepreneurs and established a community? 

Countdown to Launch

In the LAUNCH part of the Founder’s Guide to Startups, we have taken a pragmatic approach to launching your idea. Hopefully, you have been able to frame and evaluate the problem your idea solves, form an Expedition Team made up of co-founders and a Ground Control made of investors, advisors and community to ensure a successful launch. It’s now time to enter orbit where we explore tools, processes and methodologies to discover what product to build. I hope you have enjoyed the journey so far, but know that it is only the beginning to what will be a rewarding and adventurous ride ahead. Countdown to launch in 10, 9, 8, 7, 6, 5, 4, 3, 2, 1!