[Editor's note: This is an Op-Ed piece by Tim Westergren, founder of the popular music service, Pandora]
In November of 2003, on my 348th try, I finally got a ‘yes’ from an investor for Pandora when Walden VC pledged the first piece of what would become an $8M Series B financing.
Larry Marcus (and shortly thereafter Larry Kubal of Labrador Ventures) took a huge gamble on a struggling startup – a gamble that looks more and more promising every day. The success we’re having now though, was far from apparent back then and I’ve had some time to reflect on why the Larrys stepped outside of what might be called standard investment practice to back us.
Pandora (then called Savage Beast Technologies) was bankrupt and weary. We were operating in an industry that was in chaos, and a host of spectacular startup failures dotted the landscape. We sagged under the weight of deferred salary, overdue bridge loans, and impatient creditors and were surrounded by dozens of small companies who had dragged millions of dollars down the drain with a promise that on the surface looked much like the one we were making. We had failed to deliver on a long series of ever-changing economic forecasts (Larry M. had already seen a number of these forecasts in the preceding years), and were struggling to find a winning business model.
As I reflect back on this most unlikely turn, I have come to a belief about what motivates an investor to say ‘yes.’ Or perhaps more accurately, what causes an investor to shift from looking for ways to say ‘no’ to looking for ways to say ‘yes’. For, in my mind, this is the key to raising money. Venture investments by their very nature require a leap of faith (none more than ours) that only comes when an investor becomes aspirational – when he or she wants the investment to make sense (even though statistically deals never do make sense). I believe that shift happens when three things come together for the investor: They personally believe in the entrepreneur; they have a sense (and it’s often just a gut feeling) that the idea could be very big; and finally they have a personal interest or background in the industry that gives them a leg up the diligence curve. Put these together and an investor will start bending their investment criteria.
Larry M. was a musician (or at least a drummer J) and an avid student of digital media. In the Music Genome Project he saw an idea that could be big, and as an expert in the sector he had the confidence to trust his own ability to spot potential, even if it was buried in mud. We also got along very well personally. So we had the three ingredients that tipped him into the aspirational mode. He wanted to make the investment and we started working together to make it happen – convincing his colleagues and other investors.
So my advice, if you’re an entrepreneur trying to raise money, is focus on these three levers. If you’re not the evangelist, ‘people person’ type, find someone who is and make them your front person. Figure out how to convincingly convey a sense that yours is a big idea then go looking for investors who love the stuff you do. Avoid the trap of pitching anyone who will listen. It’s exhausting and demoralizing. Pick your targets carefully from among those with an expressed affinity for your sector – they’ll be the ones with a tendency towards the aspirational.
Investors are like you – they want to create important companies, in businesses they are passionate about, with people they enjoy being around.
17 Comments
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Jon said:
Tim, thanks for the article. It comes at a great timing for us.
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Chris Schultz said:
Hi Tim -
This is a fantastic personal insight into the challenges and emotions involved in raising funding. Thanks for sharing it.
Chris
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Ramon said:
I think the best tip is: “Pick your targets carefully from among those with an expressed affinity for your sector – they’ll be the ones with a tendency towards the aspirational.”
That has really turned into results with not only investors but products, etc.
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Jay Parkhill said:
I’ll add to what Ramon said- another key is to start building the investor-community relationships long before you start trying to raise money.
Find out who invests in your sector and get on their radar so that when you ask for cash they already know who you are.
Easier said than done, of course, but if a VC investment is like a marriage, you need to start the courtship long before you’re standing at the altar.
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Don Jones said:
Venture capital firms and people are a never-ending fascination. Tim’s take is good input on the human side of the business.
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mathew johnson said:
Mentioning investors “bending their investment criteria” is a good point - all startup investments are quite different, and my personal feeling is that you are in trouble already if “investment criteria” come up.
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embed said:
Its always great to see an entrepreneur speaking from the heart. Thanks. My own experiences have been very similar.
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Anthony Kuhn said:
Tim:
Always good to have a real world peek at what really works, and what doesn’t. From your piece, I would guess that it’s all about who you know, and not what you know, that counts, as is often the case in life. I also think that your road to success illustrates the role “art” has in making it, as science doesn’t always take into account what makes a venture click. Your story is just the type of thing I look for when researching stories for my target audience. I cross-posted on your piece, along with some comments, at http://blog.innovators-network.org The Innovators Network is a non-profit dedicated to bringing technology to startups, small businesses, non-profits, venture capitalists and intellectual property experts. Please visit us and help grown our community!
Best wishes for continued success,
Anthony Kuhn
Innovators Network -
David Aslin said:
Tim, a very perceptive and insightful article on that subtle emotional shift that every investor goes through as they move from ‘this looks interesting’ to ‘this one I have to do’. I think of it as ‘right brain’ or ‘emotional diligence’ versus ‘left brain’ or ‘analytical diligence’. As ever, it’s the soft skills of getting the investor to invest emotionally in your deal that are least understood and most often missed. As I’ve learned as both a VC and an entrepreneur, you have to pass the logical, analytical gate at some level, but only getting the investor emotionally involved will get you the $$$. And as a VC I learned to listen carefully to what my gut/emotions were telling me, since deal decisions, as you eloquently point out, involve bending the espoused criteria a little, or a lot.
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Tim Westergren said:
David, I am indeed a believer in the ‘emotion’ theory of investment. I now hear many new business ideas, and find that I have visceral reactions to ideas. These reactions are decidedly personal - and reflect my own biases/background. For most of these ideas I can’t imagine having enough time to get smart enough to make the call purely on the financial merits - it’s very instinctive. Next to instinct, i’d probably say that an endorsement from someone I really trust in the space would be the next most powerful driver.
I’d also add that my experience has taught me just how important the personal chemistry is with the investors. I’ll bet a majority of small companies fail because of interpersonal issues. So it’s perfectly valid to treat that part of your diligence as a material criteria.
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Tim Westergren said:
mathew - I chuckled when I read your comment. I completely agree - if someone starts talking about their ‘guidelines’, pack your bags. Any rule can be broken with the right deal. It’s just a gentle way of saying now. Speaking of, one advice to VCs, be gentle. No reason to be short/rude. Remember how hard it is to be an entrepreneur.
Of all the VCs I pitched to, the ones I thought were the most insightful, and that impressed me the most (virtually all of whom said ‘no’), were those who had been entrepreneurs. And to a person, they were also the most respectful. Even if they thought your idea was ridiculous, they treated you well. That really means a lot.
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Mike said:
Hey Tim,
Thanks a lot for the insight. Just wanted to say how much I am using Pandora currently. I just rediscovered it a week ago and I’m so impressed with the music that it plays/suggests.
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Manish said:
Excellent article Tim! It obviously helps if the partner that’s been convinced by the entrepreneur has enough clout in the firm since majority of VC firms operate on a consensus basis.
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Noah said:
Thanks for the article, Tim. I use Pandora every day. Just a quick question — is 348 a literal number, or an exaggeration?
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Noah said:
That’s some perseverance. How many months did it take?
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Tim Westergren said:
Took about 2 years…. Felt like dog years…
