Seed round advice, Why you need to 10x, Invite loops - Tactician #0017

07/12/2023

FUNDRAISING

Masha Bucher, Founder and General Partner at Day One Ventures, advises seed-stage startup founders on the factors to consider before partnering with multistage funds in ”Seed founders should consider these factors before partnering with multistage funds”

• Lack of Hands-On Support from Multistage Funds:

  • "One primary consideration is the level of hands-on involvement a founder can expect from a multistage investor... You’d either be competing for the partners’ attention with companies where they put eight- to nine-figure checks or end up working with a more junior investor who’s likely less experienced than GPs of seed firms."

• Better Mentorship from Seed-Focused Funds and Angels:

  • "Seed-stage companies will much better benefit from the close collaboration and mentorship that pre-seed and seed-focused funds and angels can provide... Individual angels on your cap table with operational experience can help you navigate the challenges of early-stage growth and avoid common pitfalls."

• Signaling Risks in Future Fundraising Rounds:

  • "Another significant concern is signaling risk... If the multistage VC does not lead the Series A round, it may signal to other potential investors that the initial backer isn’t fully committed and make them wonder why. Even if the company is performing well, signaling risk can impact the perception of future investors and hinder fundraising."

• Advice for Seed-Stage Founders on Dilution and Round Composition:

  • "Push for 15% dilution for a seed round. Have the lead(s) take 50% to 60% of the round. Leave the rest for follow-on investors. While significant capital and brand may be tempting, founders should consider the potential risks."

STRATEGY

Lance Cottrell, CEO at FeelTheBoot, explains why startups need their solutions to be ten times better, faster, or cheaper, and not just marginally better to succeed in “99. The 10x rule 🌟 Why better is not enough”

• Necessity of Being Ten Times Better:

  • "Being 10% cheaper, faster, or better won't win you any sales. You need to be a tremendous improvement over them in some way."

• Challenge of Switching Costs:

  • "Your first problem is switching costs."

  • "It takes time and effort to switch between solutions. Often, a great deal of effort."

  • "Your customer knows that, if your solution does not work out, they will need to do all that again."

  • "Most businesses are hesitant to switch to new solutions unless the benefit far exceeds the direct and indirect switching costs."

• Risk of Startup Failure:

  • "It's a sad reality that most startups fail within a few years. Who wants to adopt a solution that has an 80% chance of disappearing when the startup pivots or folds?"

  • "The only reason is that the upside of taking the risk far exceeds the cost of failure."

  • "This is where the 10x better, faster, cheaper comes in."

• Meeting the 10x Better Criteria:

  • "Your solution needs to be so amazing that, even if you collapse in eighteen months, nobody will question the decision to buy from you."

  • "The purchaser can look everyone in the eye and say, 'Considering the massive advantages we gained from adopting this solution, it was obviously worth it, even if we only used it for a short time.'"

GROWTH

Adam Fishman, Product and Growth advisor, provides a detailed analysis of the invite loop as a growth mechanism, explaining its different forms and effectiveness in driving acquisition, retention, and monetization in “A Few of My Favorite Acquisition Loops - Invites”

• Different Forms of Invite Loops:

  • "The invite loop [...] a user is sharing the platform with another user. You can think of inviting a friend to a social network”

  • “User Generated / User Distributed content loop [...]  where collaboration on a particular document, board, or spreadsheet is core to the usefulness of the product [...]  sharing a file with someone in Dropbox. "

  • “When a user in the above content loop shares an invite to a piece of content with someone who already has an account in the product then this loop becomes a retention driver”

• Two core psychological principles:

  • “Social recognition - the act of inviting someone signals that you are “in the know” about a product or service. When you invite someone new you can bask in the glow of your insider knowledge.”

  • “Financial benefit - is [...] a lot less effective now [...] This still works somewhat well but the novelty of getting “stuff” has worn off”

• Considerations:

  • "There have been some more creative uses of invites – leveraged to unlock access to new features, like at Robinhood or jump the waitlist like Clubhouse."

  • "Just as psychological principles around the rewards of social status and financial gain can help the invite loop so too can social stigma harm it... There are plenty of products that people love but don’t want to proactively share. Know if you have this type of product by talking to your users."

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