The billion-dollar investor's guide to getting startup cash in Ireland
Published 01/10/2015 | 02:30
Our technology editor speaks to Ethan Kurzweil about how to raise start-up money successfully.
ADRIAN WECKLER: What's the overall best tip for raising money?
ETHAN KURZWEIL: The general tip I give is never listened to. But it's to figure out how you can do more with less. There's this constant trap these days of taking easy money because it's available. And it absolutely kills companies. Yes, running out of money can kill a company. But having too much money can kill a company too. And the reason is very simple.
If you haven't proved the product in the beginning or built the product that people want, if you haven't gotten the go-to-market strategy right at a small scale and then scaled it up incrementally, you've missed a crucial part. Sure, you can do these things fast now. But you can't skip them. And I've seen a lot of cases of companies getting money where it's assumed that more has been figured out than has actually been figured out. And then companies stumble because they hadn't done it with less money.
AW: So how would you pitch a startup to an investor like yourself?
EK: If I was getting started now, I would build as lean a product as I could. I would do what Intercom did - have as lean a product and as lean a research and development team as I could. So I would get something substantial and prove that there's something there before I raised a lot of money. And only then, once there's something there, would I go ahead and raise the amount that I needed to prove that it can be brought to market. Once that was proven that, I could go again to raise the amount of money needed to scale it up. So the biggest advice is not to go chasing the headlines of capital consumption. Instead, keep that scrappiness around as long as possible.
AW: Tactically, how should a startup go about raising finance?
EK: The best way is to take a little bit of money from someone who believes in you. Find that angel who actually believes in you, get a group of angels and then just overdo it on the product side so that people come to you. I'm looking for amazing products every day to go and invest in. So overdo that element of it and things will tend to work themselves out. Stripe is an example. You might say they've had an easy time with capital, but they've also been scrappy. They've kept that culture even as they've had money thrown at them.
AW: You think Stripe has handled its success well?
EK: Yes. With some companies, you go in and their office is amazing and they have bartenders and stuff. With Stripe, they have a nice office but it's a grounded company. They have an elegant vision, but they're frugal and very dynamic. They also want to win so badly. They are going to do whatever is humanly necessary to make ethat a winner. I remember meeting Patrick early on and it was clear that he was going to do this. I wish I'd invested in Stripe.
AW: In general, is it easy to raise money at the moment?
EK: No, it's never easy. Building a product or something of value is hard. If it wasn't, everyone would do it. It's especially hard in the beginning, when you're trying to convince someone that what you're building is interesting and also, at the same time, convince them that you can do it. Getting both those things inherently right and then convincing someone of those things is hard and has always been hard.
AW: Some venture investors say that if a pitching company talks openly about seeking an exit, it puts them off investing. What's your view?
EK: I don't have a hard-and-fast rule. But I probably veer away from the folks that are thinking overtly about exits. This is because it's probably preferable to think about how to build an interesting company. It's not a no-no to talk about it but, as an investor, it gives you some insight into the relative prioritisation of the entrepreneur. If they are optimising for a small exit, it may be less interesting for certain investors.
There are definitely those who court exit opportunities all along the way. And there'll be entrepreneurs who don't think about it at all how just think about building an amazing product and company. I was involved in Twitch which was acquired last year. And they didn't think about an exit, they just thought about how to build a huge community and, in doing so, lots of companies took notice of it. So that's generally my approach.
AW: How did Intercom pitch its business idea to you?
EK: The pitch really started with the basic idea that business communication is broken and it should work better. They showed me how they could get it to work. Another big part was that that they showed they were able to attract the best people in Dublin, bar none. The talent here is from Amazon, Google, Facebook, all the top companies. It is the top notch type of calibre. Intercom goes to the Google employee and says, hey you're not working on the biggest problems in Google but you're going to work on the biggest problems at Intercom. So if you forget the geography, if you just put the pedigree of the people here on a piece of paper, anyone would be excited about it.
AW: You're a San Francisco based investor with a lot of money in a Dublin-based firm. What's that like?
EK: It's an advantage. Dublin is a good place to do it because it's not subject to the frothiness of the Bay Area right now. San Francisco has a very frothy climate and it's very hard to scale an engineering team to the size and breadth that we would want. There's less loyalty there, generally, as people keep needing to find the next disruption. And so I think it's been a big advantage to have the company here in Dublin, I don't see any downside. They have a big presence in San Francisco, anyway. And if it ever got to the point where they weren't able to find the right talent, then it might be an issue. But they've never said that and they don't predict they're ever going to say that.
AW: This business is rife with talk of unicorns. How far do you see Intercom going?
EK: Well, the idea of reinventing business communications is massive. I mean, this could be a Salesforce-sized opportunity if they chose to go that far. And I don't think that these are guys that are looking for a quick exit or a flip, having known them now for two years. I think they're just getting started in terms of reinventing all the things that they're trying to reinvent. So they could go for a long time.
The thing about Intercom is that it has a very elegant, simple vision, one that is very tough to get right. The fact that it's difficult is good, because it means there aren't 16 other companies out there getting some element of it right and making the sector noisey. It's a very unique class of company where the product is loved, it spreads itself and people want to use it. But there's a lot more to do. We're maybe 14 percent of the way there. But that's the way they're thinking.
Most companies take exit routes before they get to their full vision. And I can't prove to you that Intercom won't as well. But if I had to bet on it, which I have with 20 million or whatever it is, I'm betting that they're not. Because I can see in them the desire to get there and not sub-optimise. So that's what's cool about them.
The other thing that's cool is that they make this business one that is based in San Francisco but where all research and development happens in Ireland. You don't see that very often. All of the product and engineering decisions are made here. Usually what companies do is they'll outsource some backend thing to somewhere like Ireland or and have customer support or some little thing within the product team. But with this company, the whole product team is here.
AW: Is San Francisco getting overheated as a place to locate a tech business?
EK: San Francisco is a little frothy right now. It can be very hard to attract great talent and retain them through all the ups and downs of building a business. You start to go through inevitable periods where you're hot one minute and you have to continue to stay at a cutting edge at all times. And so while defining a strong culture for yourself is important, it can be very hard to do that in san Francisco. While you've all the noise of the next Uber or the next shiny thing, it can distract you and you can lose your focus sometimes. This is especially so when - how do I phrase this diplomatically - we're in this trend where people are giving a lot of credence to unproven things. Right now, people are assuming that if a company took lots of money, it must have figured everything out. When the reality might be more about shiny veneer and gloss or press highlights talking about hundreds of millions for this and that.
AW: Is that a symptom of a bubble?
EK: I think It's a symptom of an exuberant time. I don't want to say that it's a symptom of a bubble because that would be presupposing a lot more. It's a symptom, to some degree, of a lot of free flowing capital. It's also a symptom that people underestimate the time it will take to fulfill hopes and aspirations in some of these companies.
AW: What do you mean by underestimating the time it takes?
EK: Human nature is to get things right in the long run but to overestimate how quickly we can do it. Look at the first real bubble. We radically underestimated how long it would take for some of the things to move on to the internet. Yet ten years later they've done exactly that. With the benefit of hindsight, I think we got it right. We have business data communications moving to the cloud, far more of our commerce moving to the internet and social products that are replacing aspects of old technologies to keep us more social and engaged. Those things have happened but they took some time to happen. So I think we're in another phase now where to some degree we're underestimating some of these shifts we're predicting.
AW: Looking back at your time with the virtual platform Second Life, what are your thoughts now?
EK: Well that's a great example of a company one where the founder, Philip [Rosedale], had a huge vision and it turned out we were just addressing a narrow portion of it. With the benefit of hindsight, we're now doing a lot of the things in a virtual environment that we thought might happen back then, like Whatsapp and Skype and Hangouts and telepresence. But there was a thought that it could all come together with Second Life. And it turned out that it was just a very immersive game that appealed to some people, not a replacement for fundamental social interaction.
AW: In fairness, there were a lot of flying phalluses.
EK: Yes there were. And those flying phalluses made it much more like a game than a real tool that was going to help us live our lives. Most people didn't want to live their lives being hit in the head with a flying phallus. Like, try that in a business meeting. People would be giving press conferences and things would fly all around them.
AW: There was a real economy going there, though.
EK: There still is. It's still a profitable company based on the Second Life product. The one thing that probably everyone underestimated is just how sticky it is. I haven't worked there in nine years. But there are probably users who are just as sticky, just as loyal and just as highly monetisable as they were back then.
AW: So there's future in that kind of universe, you think?
EK: Yeah, not the way that they implemented it, because it's too hard, too nichey and too geeky. But I do think there'll be a way to engage in a virtual way that is more immersive than what we have now. And maybe it's a VR thing and not a flat world like Second Life had.