Since I first joined Mercury Fund in 2008, I’ve seen the ups (now) and downs (2009) of venture capital in just six years. Despite the wildly different environments, I’ve noticed that the types of pitches we get, and our responses to them, haven’t changed much. Although we have seen small changes to some of the structures we use—capped notes anyone?—pitching entrepreneurs are still, by and large, falling into two categories and receiving two levels of investment from Mercury.
Raising $100,000 versus $2 million.
I recently spent time with my friends Jason Seats and Andy Aguiluz at Techstars Austin mentoring the current class, which is gearing up for its demo day September 3. The teams are first rate and making a lot of progress and, as is typical with the early-stage entrepereneurs I meet and mentor, these Techstars pitches can be designated as “Vision” pitches and “Plan” pitches. I react to both categories differently because they indicate different types of maturity amongst the companies, which results in two contrasting levels of investment and involvement from the Mercury Fund investment team.
I’ve got a vision!
The first category describes companies that spent their time explaining their customers’ needs and their solutions. The best version of these pitches also included educated guesses about their total addressable market, or TAM, and maybe even the unit economics around an individual customer. These are the vision pitches. I walk away from these pitches with an understanding of the product and market, but without much information about a team’s ability to execute their vision.
At Mercury Fund, we look at these opportunities as seed investments for which we typically invest a few hundred thousand dollars into these companies in the form of convertible notes. Immediately after investing, we work with the entrepreneur to define and execute against a set of milestones that demonstrate the team’s ability to fulfill their vision while validating their TAM.
I’ve got a plan!
The second category describes companies that are showing signs of market traction and, more importantly, the ability to execute. These companies don’t spend a lot of time describing their customer needs and solution because they already have real facts supporting their TAM. Instead, we spend the bulk of our time discussing customer acquisition, marketing strategies, and their future product roadmap as it relates to improving their customer revenue footprint. These pitches are data-driven affairs. The ask for funding is fact-based, with a clear plan for scaling up engineering and business development resources around a specific strategy.
At Mercury Fund we look at these companies as Series A candidates with aggregate round sizes ranging from $1.5 million to $3 million investment rounds. We take board seats in these companies, in addition to suggesting other independent board members who have industry experience. For these companies, we focus our efforts on three major objectives: Recruiting the best talent possible to scale the business, intelligently adding and removing features from the product to expand revenue possibilities, and rapidly growing their customer base.
We track progress against these goals with a combination of metrics including monthly recurring revenue, or MRR, revenue per customer, and customer churn.
If anything has changed during the past few years, it’s the speed with which companies can progress from the first category to the second. A host of platforms such as Amazon Web Services have made it a lot easier and faster for companies to turn their plans into reality. Because of the lower time and capital required to mature, we see more plan than vision pitches these days. Some funds have gone so far as to say that they consider $1 million of annual revenue as the table stakes required for their early stage investments.
I love both types of companies. GameSalad, a popular mobile game development tool, was a vision company when we first invested, and has now fully blossomed into a plan company. Trendkite, developer of PR measurement and optimization tools, is a company for which we last month led a $3.2 million round. It is clearly a plan company.
Either way, let’s win.
Making that transition from vision to plan is difficult without the correct underlying facts and data. You need to know your customer acquisition cost (CAC) and your TAM based on real transactions.
Knowing the categories—and where your startup fits in—can help you understand how VCs look at your business and how much we are willing to invest. There is an exception to every rule, of course, but I generally find that the plan versus vision categorization holds true the vast majority of the time.
In either case the goal for both of us is the same: Taking your business to the next level.
