This is an old chat I had with Hiten Shah, someone everyone knows in the Valley and someone who is genuinely the most helpful of folks around this place. In this conversation, Hiten is remarkably candid and direct about how to cut through the noise and PR and BS surrounding startups, and it’s refreshing to look back on this conversation and see how clear his thinking is. I hope you like the transcript.
@semil: You’ve been around the Valley for a long time. You’ve built a couple of businesses. Some have been bootstrapped, some have been venture-backed. You’ve built up a great credibility with entrepreneurs and are so helpful in the community.
It was interesting that you accepted an invitation to come in and talk about the fundraising environment today. You’ve seen a lot, now being an investor yourself, and coaching and helping a lot of entrepreneurs through the fundraising process or with their business.
Share with us, briefly, what your path has been, the companies you’ve started and whether you’ve gone bootstrapped or venture.
Hiten: Sure, absolutely. First of all, thanks for having me. I’m always happy to talk about anything entrepreneurship.
My first two companies were bootstrapped. One was a consulting company. Another was a software company called Crazy Egg. That still exists. That was bootstrapped one hundred percent. My latest company is KISSmetrics, which is venture-funded.
@semil: What are your takeaways from doing a software company that was bootstrapped, Crazy Egg, to one that’s venture-backed, KISSmetrics? What were the key differences, in your experience?
Hiten: I’ll start with the commonalities. The commonalities are, both businesses, because they’re B2B, exist to make money, and make money as soon as possible. We’re not necessarily measured on our growth rate, or anything like that, beyond how much revenue we’re making, and how we’re serving customer needs. Those are the commonalities.
From there, I’d say a lot of things are way different. The primary thing being, the market you’re always trying to hit when you’re venture-backed has to be larger. That’s inherently what the stakes at the table are when you’re venture-backed.
With Crazy Egg, we were able to grow much slower. It didn’t have any kind of outside pressure, or anything like that, putting any kind of emphasis on us growing faster, or building the business faster, or figuring out ways to grow it by spending more money, or anything like that.
@semil: How did you and your co-founder make the decision with KISSmetrics to say, “Hey, we need VC backing for this,” having already done the bootstrap model, and succeeded at that?
Hiten: For us, the difference was that we’re entrepreneurs that want to learn about everything. We knew very well about bootstrapping, whether with a consulting business or a software business. We wanted to learn what venture capital felt like, as an entrepreneur. That’s the main, core reason we did it.
Beyond that, it’s always that allure of having money and thinking it’s going to do something wonderful for you. I can’t say that it wasn’t part that.
@semil: That’s where fundraising becomes part of the goal.
Hiten: Exactly. That is a piece of the puzzle.
@semil: With that background, and with all the advice and counseling you’ve given to scores of entrepreneurs in the Valley, what are you seeing as trends around fundraising today for early-stage, where people are thinking about bootstrapping or going after venture capital with a business plan? What do you see in the market today?
Hiten: There are, obviously, different maturity levels of entrepreneurs. Overall, as a whole, people are much more bullish on their ability to raise money, regardless of what stage they’re at, or where they’re at in their business. I think that that’s a little bit of a misconception that they have in their heads.
@semil: Where does the bullishness come from?
Hiten: I’ve always had this theory where it actually starts with “The Social Network,” the movie. That made entrepreneurship look a lot more sexy and made it very related to raising money, versus just building a business.
A lot of the emphasis was on how sexy it is, or how awesome it is, to raise money. The people you’ll meet, the things you’ll do as a result of that, versus… In a lot of ways, it’s just as fun and just as interesting if you bootstrap and just try to build a business.
@semil: What are some common mistakes or misconceptions you’re seeing when, let’s say, a first-time or second-time founder reaches out to you, and you, in the back of your head, go, “That’s not the right way”?
Hiten: It’s funny. This happens with second-time founders, as well. They might’ve raised money on a napkin, or a business plan, or a couple screenshots, or something like that.
The reality is, when you go into fundraising, the “when” you’re fundraising, in terms of the environment, matters just as much as who you are, what you’ve done, and even what you have. The reason for that is, you’re measured against everything else these investors are seeing.
These days, the cliche, which is true, actually, in a lot of ways, is, you can get much faster with a lot less. These people, some of them, are coming with not very much, barely screenshots, and things like that, and expecting people to get super excited. Today, it’s so easy to validate whether that idea is right or not, or whether people actually want to use it or buy it.
@semil: I see. What would you say to those entrepreneurs? Let’s say you were an investor today. You turn into Hiten Ventures. What would be your model for looking at enterprise and consumer software products?
Hiten: It’s very simple. With consumer, all you’re really trying to answer is, “Is this team, and this market, and this product, does it have the ability to reach millions of users?” Now, it’s tens of millions of users. That’s the proxy for a consumer startup.
If you know that, then what your goal should be as an entrepreneur, pre-funding, is, show whatever you can that helps de-risk that. The key on consumer would be, can you build a something that’s engaging, where the market for it is pretty obvious, in terms of the size of it. Then, you can figure out how to grow it.
@semil: Let’s say there are a lot of seed-funded companies today, which I think is an understatement, that are looking for a product-market fit. Most of them are just not going to get there. Some of the ones that do get there aren’t going to find that the fit is huge. How does your advice change from C to looking at A?
Hiten: That was B2C. Let me just talk about B2B real quick, and then I’m happy to address that.
With B2B, it’s like, “Is this something people want to buy?” With B2C, you’re just trying to figure out whether it’s something people want to use. With B2B, it’s really, “Is this something people want to buy?” If they don’t buy, you don’t have a business, period.
Between those two, it’s all about de-risking along the way. If you’re at A — again, these aren’t hard, fast rules, so whatever it may be… Let’s say you need 10-plus million users, with 20 to 50 percent of them active on a regular basis for you. That would be, in B2C, what I would be looking for if I were an investor.
Series A, B2B, I’d be looking for somebody who has enough traction where they can pinpoint, or we can pinpoint, where they can put money in, to make it make more money. Usually, it’s going to be marketing, sales and, sometimes, product development, depending on how much more you need to add.
This is how I would look at it, and say that this is an ideal scenario for both those types of businesses.
@semil: Leading into the final question, let’sfocus on B2C and the consumer side. What do you think are the main hang-ups, or what’s fueling these misconceptions? You mentioned the movie. That was a while ago.
Is it still too easy to raise money? People shouldn’t be raising money for software until they hit product-market fit. How do you view the world, that way?
Hiten: I think it’s hard to raise money for photos apps, for example. Just because Instagram sold for a billion dollars, doesn’t mean someone else is going to.
What happens is, in B2C especially, you see categories of product and you see them get funded. Eventually, that category fizzles out, and then a new category emerges. Now, it might be easier if you’re a video app, for example, because all those are popular. These cycles seem to get faster and faster.
With B2C, it seems like people glob on to different categories, “people” meaning investors as well as entrepreneurs. There are three categories right now that people have been excited about, let’s say, for the last 12 months — photos, videos and messaging. Those are the three, and all specifically mobile.
I see a lot of that happening. You saw it happen with social, with different categories, starting with the poke apps. Then, a little more gifting or something like that. Then, it moved on to the gaming that we see today.
You’re not seeing many gaming companies get funded today. What happened? What happens is, the category gets established really fast, money pours in, winners end up emerging, and then it’s done. You just don’t see too much funding in that area.
That’s a very classic pattern that you can see. As an investor, if I were B2C, I’d be thinking about, “What is the next category that’s interesting? Can I find it earlier than anyone else? Can I help find entrepreneurs that are working on those problems?”
@semil: Thanks for coming in and sharing your thoughts.
Hiten: My pleasure. Thank you.