Vijay Rao, CFA, FRMStartup Angel Investor, Finance & Funding Expert
Bio

Ivy League educated Angel Investor and Adviser in 5 startups, including startups with an emphasis in technology, finance, and social investing. Serve on Board of Directors at 2 venture backed start up companies, Pandoodle, Inc., and Alpha Omega Financial Systems, Inc. Chartered Financial Analyst with a background in Fixed Income and Equity Portfolio Management and Trading. Also hold undergrad in Economics from Columbia University and Financial Risk Manager Certificate Currently working as Head of Product Management at Alpha Omega Financial Systems, a company I have worked at since it's founding in 2012.



Recent Answers


Hi! It sounds like you've accomplished the hard part -- which is developing a product and finding the elusive "product-market fit" that many businesses never achieve. I've been involved with several companies that have been in the same position that you ate in now -- the product is ready to go, but the sales process hasn't had a chance to scale properly.

I believe that this requires a team that is solely dedicated to executing on a sales plan for your business to grow your revenues from the current level to something exponentially higher. Though I don't know much about your app right now, I suspect that a commission based sake model is not the right model at this stage -- really any revenue that comes in you will likely want to recycle back into the sales engine to keep the business growing for the next few years.

I'd love to learn more about the opportunity and to discuss over the phone what you have in mind for a potential partner. I would not charge for this call if you request me at https://clarity.fm/vijayrao/freeadvice


Good question. I've worked with many different startups that struggle with this same question and I sat on the advisory board of a (now defunct) social media startup that was focused on sharing photos of high school sports events that sadly never actually solved this exact question properly.

While I think that you have listed all of the relevant metrics that most financial analysts and investors use to analyze social networks like Facebook and Twitter above, I think that you are likely going about this process the wrong way.

You need to define:

1) What is the mission statement and purpose of your company?

and

2) How is your company going to generate revenue?

You need to define these two items on day 1, -- though in many cases they will change over time (Apple used to be a computer company -- now they primarily sell phones!). Once you've got both of these answers crystal clear, you can determine what metrics that you believe you should be measured against and what your definition of success would be. It will be different depending on the specific goals of your company. For example, I suspect that one of the early metrics for Instagram was the number of photos shared on the site per day or per month. The social media site that I was involved with never figured out the answer to #2 above -- and though they went through multiple rounds of funding, they were not able to succeed because they didn't have any real business model except "getting acquired". Ultimately, later stage investors balked at investing in a pre-revenue company that had a high valuation and no real business model.

You should create a "benchmark" of what you think your company's most important metric shouldpitchn 6 months or one year and then manage and measure to try and achieve that goal. Though it is early days, I would also create a financial metric that shows some kind of progress on the revenue front -- this is important because it shows that there is a real value to the service that someone (advertisers, users) is willing to pay for. Ultimately, all companies are valued based on the expectation of future profits, and other metrics, such as MAU, DAU, growth rate, etc. are really indicators that analysts and investors use to try and extrapolate what those future profits will be.

From there, you need to execute, execute, execute. You should be executing against your own plan and your own measure of success. If you do that successfully for a few months and have a good vision and demonstrated traction then you can go share your story with investors. Your last consideration in launching your business should be how it will look to potential investors; you should NOT be executing to merely get funded by a VC, you should be working to build a viable and self sustaining business in the long run. Far too many entrepreneurs brainwash themselves into thinking that "getting funded" is the ultimate goal -- and make "short term smart, long term stupid" decisions because of that thinking.

Finding investors to fund your company is like finding a marriage partner. You'll likely have to pitch to a lot of folks before you find the one that a) understands your vision b) believes you are the right person to execute over the long term and c) agrees with you on the valuation and terms that you are raising money at. If you have a compelling business model and demonstrated traction it makes parts a) and b) easier in your pitch with potential investors.

If you have more questions or want to discuss your specific situation, I'd happy to chat more about this over the phone. Please request a call below.


I am currently running my second startup and we have just received our first round of seed funding from an external investor. Though I'm based in the SF Bay Area, I found the hard way that most investors invest in what they know -- which is great because you can target your investment pitch to a much narrower and more informed audience.

I would focus less on "getting funded" and focus more on building and operating a successful business. The question you should be answering is "What do I have a core competency in and what is the market opportunity in that core competency?" That could be anything from an internet social media startup to a fast food franchise location. Plenty of businesses exist in the world, and a very good number of them have had some kind of external funding. Once you've found your core competency, put a business plan together, determine how much (if any) external funding you will need to get the business off the ground and start searching from there. Your first round of funding is overwhelmingly likely to come from a) you b)friends and family c) a business partner or d) someone who is from the industry of the business that you are trying to start. Even firms that are funded by VCs are typically funded by VCs who have operating experience in the subject area of their own business.

As for the Andrew Chen article above, I suspect that dating sites don't get a lot of funding because they are commoditized, members have a lot of customer churn, don't have a sticky brand, and are extremely price sensitive businesses. That said, I would not let that deter you if you want to start a dating app ***IF*** you have particular expertise or experience in the field and understand the opportunities and challenges in the space.

For example, Thomas Petterfy started Interactive Brokers, an online stock broker, much later than Schwab and Etrade and took zero external funding. By executing on his business plan, he was able to build it into a $25 Billion company. He still owns 80% of the company because he never took external funding.

I'd be happy to discuss further or see hat is needed in order to get you going. Please feel free to contact me for a call to ask further questions. Thanks!


I've worked as the Head of Product at my current startup for the past 4 years and have consulted as a product manager to several other startups. Your question leads me to believe that you don't have a dedicated product manager or someone who's job it is to envision, design, and build out your product.

The technology team itself should be measured upon "story points", or points assigned to each task that they are assigned to work on. If you are using the agile software development philosophy, you can measure the story points per sprint to see how much work is getting done. After 2-3 sprints, you should have a really good idea of a) who the most productive members of your team are b) where most of the technology bottlenecks are occurring and c) what skills you have on board and what skill sets you will need to hire for. There are very powerful product management tools that can help you for very little cost.

However, the product management team should be the team that is responsible for envisioning and specifying "user-focused" software and "10X innovative projects". The product manager should be a subject matter expert and should be in contact with clients, prospects, and developers to gather requirements and solicit ideas on how to improve your product. From there, the product manager should create detailed requirements (I personally like agile stories, but there are many ways of doing this) and prioritize each task for the development. The product manager is ultimately responsible for the product, how responsive users are to the product and how innovative and revolutionary it really is in the marketplace.

If you want help setting up your product management team or on additional metrics that you can use to improve your business, I'd be happy to discuss.


I am an early investor in a company that was lucky enough to be selected to Y-Combinator back in summer 2015.

First of all, the process is very competitive, so you should a) expect that despite following all of my advice, you will more than likely not get accepted into the program b) have a solid and robust plan for your company to succeed without Y Combinator (plenty of startups are able to hit the big time without going through Y Combinator).

What impressed me the most about Y Combinator was that they looked at -- and accepted -- a company that was completely outside what I would've guessed to be their "sweet spot". The company I was invested with was not a technology company (they were in the retail space) and they were not based in the SF Bay Area (or even in the US).

What became apparent to me from speaking with the CEO is that Y Combinator looks for startups that a) show a demonstrated track record of "exceptional" traction b) have the potential to satisfy an existing need better/ cheaper/ faster and c) have a large market that can be satisfied.

So what does this mean in practice?

The company I invested in was able to show "exceptional" traction through a few proof points:
- They had received a grant from P@SHA Social Innovation Fund.
- They had been recognized as "Innovation Heros" by Google.
- They were Acumen Fund Fellows
- They launched a Kickstater campaign to raise $15,000. They reached $28,000 in less than 48 hours and were able to raise over $100,000 over the course of their entire Kickstarter campaign.
- They were informally asked to apply to the YC program from a YC alum, but even then they were put through the wringer during the interview process. Apparently several other firms which had been informally asked to apply did not get selected to join the program.

These are obviously very high hurdles to jump over and even more remarkably they were done with capital from only one other angel investor (luckily, me!).

If you want more details, I'd be happy to discuss. If you are fortunate enough to be selected to the YC program, I certainly salute you, as it is something that I will likely not achieve in my lifetime. However, please recognize that YC should not be the end goal of your startup dreams.

You should have a plan to build a product, market it, serve your customer base, and generate revenue without YC or any other incubator. If you need help in that space or with one particular area of your business, I'd be glad to help.


Since you are in the early stage, I am going to assume that you will be looking for multiple fund raising rounds.

I would say that non-dilutive stock is almost never a good deal for either the grantor or the receiver. From the company's perspective, it makes VC funding much more complicated, especially if you have many parties funding you in future rounds. The math is complicated, but there is also much uncertainty (from all sides -- your side, the partners side, and an investors side) about who will have the largest share of the company in an extreme upside scenario.

From the receiver's side, non-dilutive shares can be quite troublesome if there is an IPO or other liquidity or sale in the future. They are tougher to value and can cause future deals to fall apart. I don't know your individual situation, but the 25% of common stock sounds like a better deal to me, as you and your partner will at least be in the same boat together (even if you own more of the company).


The previous answers given here are great, but I've copied a trick from legendary investor Monish Pabrai that I've used in previous startups that seems to work wonders -- especially if your company does direct B2B sales.

Many Founders/ CEOs are hung up on having the Founder/ CEO/ President title. As others have mentioned, those titles have become somewhat devalued in today's world -- especially if you are in a sales meeting with a large organization. Many purchasing agents at large organizations are bombarded by Founders/ CEOs/ Presidents visiting them all day.

This conveys the image that a) your company is relatively small (the CEO of GM never personally sells you a car) and b) you are probably the most knowledgeable person in the organization about your product, but once you land the account the client company will mostly be dealing with newly hired second level staff.

Monish recommends that Founder/ CEOs hand out a business card that has the title "Head of Sales" or "VP of Sales". By working in the Head of Sales role, and by your ability to speak knowledgeably about the product, you will convey the message that a) every person in the organization is very knowledgeable about the ins and outs of the product (even the sales guys) and b) you will personally be available to answer the client's questions over the long run.

I've used this effectively many times myself.


Hi,
I've hired and negotiated several top level execs at startups. On both sides, this is one of the trickiest negotiations that will have to be made at any stage of a company's life, since the value of the equity is highly uncertain.

This is tough to answer without knowing your background and without knowing how much the current company might be worth. As a rule of thumb a non-founder CEO joining an early stage startup (that has been running less than a year) would receive 7-10% equity. Other C-level execs would receive 1-5% equity that vests over time (usually 4 years).

I would adjust these numbers up somewhat if you have significant experience in the space or a track record of building and monetizing a brand.

I would adjust these numbers down somewhat if the company is generating significant revenue (>$1M) or can fairly valued (by a third party, such as a VC) at over USD $10M.

I would also adjust the numbers down if the company has received professional investment from a venture capital firm or a strategic partner. Also remember that salary and equity are both exchangeable and negotiable -- you may be able to get more equity for less salary and vice versa.

A couple of anecdotal examples I can give you may help out:

- I helped recruit a very seasoned (20+ years experience) CMO at a 4 year old venture backed firm for $180K base salary and 9% equity vesting over 4 years. This person was previously a CMO at a Fortune 500 company.

- A firm that I was involved in founding hired our Head of Business Development with 25+ years experience for $100K salary plus 2.5% equity.

- A personal friend of mine with 10+ years in the Sales and Marketing space just got hired (last week) as the Head of Sales & Marketing at a Series A venture backed Financial Technology firm for $100K salary and 1.5% equity.

Hope this helps -- I'd be happy to discuss further on a call to discuss your personal situation or answer any questions that you may have.

Vijay


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