31 May I only invest in Unicorns
I’ve been involved with investors most of my career, I’ve raised money from friends and family, angels, VCs, PE firms, done a bit of venture debt and had pension funds pile in. I’ve started three companies, floated one on the London Stock Exchange, and built the other two up into decently shaped firms. In the process you learn quite a bit of stuff. So here is a Bluffer’s Guide to responding to investors and their amusing questions, roughly in order of irritation:
- I only invest in unicorns.
- You have pivoted twice, why?
- You seem to be reliant on one or two large contracts.
- Your contracts are not long enough.
- You’re very sector specific.
- You are not ambitious enough.
- Are you sure this is enough?
Unicorns: This one is a breathtakingly stupid thing to say. My advice is to simply say ‘I’m sorry I think this is the wrong meeting’ and leave. Why stupid? Well the first thing is it defies logic. I wrote about the unlikelihood of reaching $10m ARR in a blog a while back, and it really is madness – by some measures it’s less than a 1% chance for tech companies, even VC-backed businesses fail to return at a surprisingly high rate (75%)1. So, saying you only invest in unicorns either means you are nuts or you only invest really late.
Pivots: I like this one. ContactEngine pivoted twice. First we tried a social media audio play, competing with the likes of SoundCloud. They won. We retreated. Fast. At the time we didn’t even have the straps for the boots – so nothing ventured, nothing gained. It taught us to listen to a community though and some of the social users became corporate clients. The second pivot was from the internal communication service (made some money, but no simple RoI) to direct customer comms (bingo). Now I am a great believer in stopping when you know it’s not working – failing fast, if you like. That’s what a pivot should be. In my dotcom days I wanted to pivot the next day after we IPO’d (spring 2000, just as Nasdaq bombed, that was fun [not]) ‘cause it was obvious that market sentiment had shifted (I mean seismically shifted). Oddly, my advisors (see 1. above) said I had to carry on, a fail slowly mentality……
Big contracts: I was asked this only last week and I have a lovely one liner to deal with it: ‘Look, the thing is, if a client wants to spend millions with my company I just say yes. I mean I could ask them to spend a little less so they don’t stand out too much on my P&L, but then I realised that would be mad. Next?’ There is a serious side to this one actually – Venture Capitalists like risk but hate risk. They like companies to have a decent spread of hundreds or thousands of customers. Trouble is, revolutions tend to start with big riots, and I love a riot.
Contract length: Harder to defend but an interesting question – at the beginning you tend to agree to any terms with a client – then as you mature you negotiate longer contracts. It’s just how it works. Sometimes those legacy deals can hurt as investors love long contracts with no termination clauses – but they can be mythical creatures like Unicorns.
Sector specific: This is a fair question and does not irritate me – if you have a technology that could be used in any ‘vertical’ then you should go out of your way to prove it can be. It’s an evolutionary thing though, as your first foray into a new sector can take ages, with second and third customers in the same sector speeding up, as your newbie client develops a successful use case(s). So make sure you set aside resource to crack new verticals (we were/are very strong in the Telco space – but have jumped into utilities, retail and most recently into banking and insurance).
Ambition: As a large bloke with confidence overload and a decent dose of megalomania, I have to take a deep breath before I answer this one. It is very common from US investors – ‘why are you not taking over the world my boy’? Well it is a fair question but there has always been something of a difference between the more hubristic west coast megalomaniacs and the more parochial British sorts. And sometimes it’s just a maths thing – an investment dilutes you – the more you take the more you lose (mostly – though there are tricks to swerve this but they are my secret ones so not for publishing, or you might all have a go!).
Not enough: This relates to ambition very closely but it is a valid question. The efforts and costs for an investor to place $1m is much the same as it is to place $10m, so they are eager for bigger cheque sizes. One of the defences for this is to acquire a ‘strategic investor’ which means various things but the key one for the entrepreneur is that they will follow on with more money as KPIs are reached – and mostly that will be at a higher price so less dilution. Nice.
Any final advice when raising money? Just keep going, exude confidence, have plenty of hockey stick graphs and listen to the questions and make better answers. Investors tend to be smart people, have more experience than you and mostly want to do the right thing. Though, that said, everyone who said no to me was wrong, obvs.