Funding Data-Driven Startups
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With the onslaught of a pandemic, startups are pitching investors these days via Zoom. COVID accelerated digital transformation, and that's not necessarily a bad thing.
At least not for Blair Silverberg, CEO and co-founder of Capital, which uses a proprietary analytics platform to identify startups worth funding, and accelerates the fundraising process in stride.
Blair started investing young. He turned $5,000 in Bar Mitzvah money into $100K by value investing on the stock market. An impressive feat.
His grandmother gave him Beanie Babies when he was about 6. He sold them online for a modest profit. By the time he was 10 years old, he was reading John Burr Williams and Philip Fisher.
“Back then I think I was fascinated with business examples of the economy at work. So I thought every time I learned about a new business, I was learning about how the economy actually works.”
He’d go home after school and would order the physical annual reports in the investor relations sections of company websites. He still had these reports stacked up in giant boxes at his parents’ home.
Blair likes value investing.
Standing Out to Win the Game
“Pause. Take a breath. Think about things with first principles. Don’t follow the crowd instinctively.”
The biggest lesson Blair learned as a young investor stays with him today is monitoring performance. Monitor daily and respond instinctively.
Don't get swayed just by what others are doing. With this kind of thinking, you lose sight of your goals. You have to avoid distractions and focus on what you need to do and where you need to be.
There are great investors who think conservatively. But no matter how great they are, they miss opportunities. They get scared of financial bubbles and avoid tech investments as Warren Buffet did.
Yet the times have changed. Buffet took the risk of investing in technology stocks. Now he’s winning the game.
Are We in a Financial Bubble?
We live in unprecedented times battling a global pandemic. Despite the crisis, the stock market is still high. Is this something that we have to be worried about?
The global stock market is worth $350 trillion and continues to rise. Every year, wealth continues to pile up. Asset prices are inflated. Not even a global pandemic can deflate these prices.
But there's a real tension between the US and China right now. And what could burst the bubble is the transition from the US to China the global financial leadership.
One day, we’re going to look back at how a Chinese company dominated the IPO list before making its debut on the New York Stock Exchange. Alibaba Group’s record-breaking initial public offering of $25 billion is a testament to this.
The three largest IPOs in history are Chinese-owned companies with zero involvement from the global financial superpower. These events have been to catalyze the shift of global financial power.
How the Pandemic Changed the Business Landscape
The pandemic took its toll on many businesses. But it has not killed the economy.
Some businesses are actually doing better because of the crisis. With the ongoing secular changes, they've benefitted tremendously from the shift to the new normal. Zoom and Slack are good examples.
Food delivery services are all rage. It's just some businesses that thrive on in-person activities are negatively affected. The healthcare industry, where a lot of in-person activity is still ongoing, remains strong.
Some SaaS companies are doing well too. Meanwhile, wealth continues to accumulate and grow in size and intensity.
The volume of pitches at Capital has not declined. There was a blip in early April but by the second week, the numbers rose 3x.
Pitching Investors in the New Normal
The absence of conventions and trade shows on the companies in Capital’s portfolio has been negligible. Blair attends virtual events these days, and in many ways, prefers them to real-world events.
He likes connecting virtually, listening to talks online and jumping between virtual breakout rooms.
Blair says the setup feels like a replica of the real thing, and that it is much more efficient. You didn’t even have to leave the house. That's disruptive innovation.
What's Makes for Winning Investor Pitch?
Pre pandemic, charisma and height went a lot further. On Zoom, none of that matters.
“A real pitch gives you an idea of what is going on in the business,” Blair remarked.
This is what a good pitch is, which is in stark contrast to the pitches in Shark Tank that Blair describes as “salacious”.
A good pitch goes into detail about the metrics. Why is the startup’s mission exciting? How can it change the world?
Capital is looking for businesses that can articulate what their metrics look like and what’s fundamentally working in their business. A good pitch for Blair is where a business shows how $1 spent gets a $3 return.
What Makes a Great Startup Company?
Can you grow a business? Startups with good PR nail this question .
To assess if a startup is a potential investment candidate, Capital looks at post-metrics and pre-metrics. Companies use Capital’s analytic system to analyze financial data. At the same time, Capital funds businesses based on the data reflected in the tool.
“The way Capital works is a little different. We have an analytics system that sits at the core of what we do.”
The quantitative side of the equation is post-metrics.
A company that spends $1 and earns 70 cents back can show a lot of potential in terms of growing enormously.
However, that’s not a business he would invest in. Capital doesn’t invest in growth marketing plays that buy market share at a loss.
Startups need to show substantial growth in revenue and how quickly they do it. The process is pretty much straightforward.
The quantitative side is pre-metrics.
This is where you assess a combination of team, product, and market. You try to get a picture of how a company is going to achieve its goals in building a business. Once you know your market, the product you want to create, and the team you need to assemble, you;re ready to start pitching. Having these three areas covered is what makes you stand out even with zero results and metrics.
For startups, Blair emphasized that the funds in the early stages need to go to the team at a hundred percent. As a business owner, you need to build a team that stays motivated and works well together for the first year of the business. This is what Blair found to be the hardest part of getting the business done. Early on, your team members should clearly understand what their roles are.
The seed round in the funding life cycle is where a startup needs to show how things are being accomplished. What are the early results? It can be conceptual. You may talk to a hundred customers when in fact you can just categorize them into three types. You need to show how clear your product vision is.
PR and Marketing for Profitability
A short-term business can be built in two ways whereas a long-term business can only use one. For short-term businesses, it can either be steak sizzle or a combination of both. PR for startups can get a business off the ground even with no strong fundamentals.
Steak is what matters in a long-term business. Blair used Amazon as an example, where all the nuts and bolts are already in place. PR is a complementary tool that can be used alongside businesses like Amazon already have the fundamentals nailed.
On hiring a good PR consultant, Blair believes that “the Socratic method is your friend.” A good public relations or online marketing consultant is someone who does not just listen and understand, but also someone who can clearly repeat what the business does.
“You can just ask people, what do you think the business does? Where do you think this business is going in the next 12 months? And how do you do what you do?”
According to Blair, a good public relations consultant must be able to do these 3 things:
- Demonstrate a strong understanding of the business you’re trying to build.
- Bring media relations experience and know how to get press coverage.
- Implement a smart digital public relations strategy for amplifying your message.
At Capital, fundraising is an innovative process that leverages a proprietary platform to identify opportunities based on a startup’s financials.
The algorithm neutralizes a founder’s charm and charisma and focuses on value.
Even after the global pandemic subsides, expect many of the innovative processes that grew out of the necessity for social distancing to endure.
For more on how Capital makes uses of financial analytics to spot the best and brightest investment opportunities, subscribe to the B2B Lead Gen Podcast.