Eight key questions from venture investors

Original author: Glenn Kelman
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Visiting author Glenn Kelman ( of Glenn Kelman ) is the CEO of Redfin , which is engaged in the online real estate operations, and the purpose of which is to provide consumers with all the information and services that were previously only owned agents.

He previously co-founded Plumtree Software , an IPO company in 2002, and is now part of Oracle Corporation. Below he shares the important questions that investors asked him during the next round of raising finance.

For startups, Christmas usually comes in November. In September, partners return from vacations, and offers are closed a few months later. In connection with the financial crisis [original article published in 2009 - approx. perev.], the raising of capital had to be suspended until the end of the year, so November 2009 is likely to be especially stressful.

Redfin is one of the companies that have recently successfully completed the next round of investing. This process of [attracting venture financing] has already changed the way we think so much that now we are thinking not about how to survive , but about how to become truly meaningful. Any startup can try its hand at our role, regardless of whether it needs investment or not, if it tries to answer the basic questions that the venture capitalists have asked us.

Venture capitalists are asking good questions. They [investors] are not related to the wrong decisions that you make, they are not affected by the deep meaning of your mission, moreover, they are less worried that in case of a miss you can go bankrupt. Investors consider you in conjunction with other companies that they have already seen. They select everything of value from different companies to create their ideal, profitable business mechanism. And since the stakes are high, in general, such a philosophical approach usually leads to certain actions.

Below is a list of questions asked by venture investors to Redfin representatives that made us look at our business from a different perspective.

1. What is your mortal sin?

Roelof Botha, a venture investor at Sequoia, said he only invests in companies that allow their consumers to indulge in one of the seven deadly sins. He lists them in one go. “You don’t need to create a product that people would like to use, you have to create a product that they can’t stop using,” Rolof says.

2. Where is the real money?

The attention of venture capitalists to the size of the market made us realize that half of our potential revenue is in eight markets that we have already entered. They asked us: “What is the point of rushing to enter the Orlando market if you have not occupied even 1% of the market here in Silicon Valley?”

Good question. A start-up that only earns real income for 18 months looks like Val Kilmer in one of the scenes in the movie Scramble, when his hero had only 80 seconds to get bonds from an armored car. As the detective is struck in the next scene of the film: "They [criminals] did not pay attention to small bills." Here's how to work with the target market: to be not only greedy, but also disciplined. Time is running out.

3. How is your unit economy calculated?

The financial statements for each month cannot show how a small business will look when it grows. Of course, we must take into account all fixed costs, for example, how much we spend on engineers or the implementation of services. But it’s more important to find out if we get more money from the client than we spend on attracting and servicing him. Thus, in order to see if a business works on a large scale, venture capitalists first want to understand how well it works on a small scale.

For us, this meant that we had to explain how much Redfin made this summer from buying one house, taking into account the costs of each transaction: how much we spent on marketing to attract customers ($ 27); to receive local data ($ 153); customer service ($ 2,906) and so on. We also calculated what proportion of annual income falls on each unique (within a month) visitor.

We knew the volumes of our profit before, but had never before analyzed this indicator in the most convenient format for perception. It is important. Numbers do not tell you anything, if they are not clear enough to be able to react somehow; a midfielder with simple tactics can instantly respond as the game progresses: he does not need to think about his actions. When we realized that this was a large number - the amount we spent on building our customer service team, our focus changed. We became more interested in how well we formed this team and how successfully we invested money in its well-being.

4. What is the reason for this situation?

The presentation for investors consists mainly of growing charts of two for each slide (so that the growth looks more impressive). We thought that the only reaction our presentation could cause was admiration. But Rolof asked us for each of the graphs to designate what is called “event-cause” in statistics, which explains the current situation.

What changes in our business have led to an increase in income? We argued that posting reviews from agents caused conversions to increase. But when we analyzed our indicators, it turned out that the event that actually influenced the increase in conversion occurred a month before - it was the appearance on the site of unlimited “virtual excursions” to the houses being sold. Understanding the trends that underlie these or those large-scale changes helps you figure out what actually leads to business development. Without conducting such an analysis, we can assume that you are just lucky.

5. Why can't you grow faster?

The most important question investors ask is what prevents your company from growing faster. At first I thought that it was some kind of demand disguised as a rhetorical question, an attempt to make us promise more than we really can do. But when I got annoyed, David Sze, a spokeswoman for Greylock, said, "We're not asking you to lie." He really just wanted to know what the limiting factor was.

We squeezed out a few uncertain answers: "We put priority on profit, not growth." "We wanted to be realistic." Then Sasha Aickin from Redfin calmly pointed out the line of headcount according to our forecasts and said that our limiting factor is probably how quickly we can hire first-class real estate specialists. We returned from that meeting and began to think about expanding the recruitment of specialists.

6. What are the factors accelerating progress?

Easily grow by 300% in the first year or two of your work, when you start from scratch and people only learn about your service. But the real giant differs from other companies in that it continues to grow at the same pace in the fourth, fifth year of its work and beyond. When Reid Hoffman looked at Redfin, his first question was whether our business has “accelerating factors” in which growth creates even more growth. For Amazon, the second stage of growth was accelerated by product reviews and an analysis of the personalized purchase history of the first users. For Facebook and Twitter, the growth factor is that the community itself is constantly attracting new users. For companies like Zappos and, hopefully, Redfin, personal recommendations and stories about our customer service will work.

7. What is the recipe for your "secret sauce"?

One of the godfathers of venture capital, we were told, is obsessed with "secret sauce." The man, obviously, had not put mayonnaise on his sandwich for about 20 years. Therefore, in preparation for the meeting with him, we thought about all the technologies that we could only implement. I used to always think that this is not a problem. Botanists like me believe that “the main thing in lunch is meat, not sauce for it”; we just try to focus on the main problems and run faster than our competitors. From this position, even Google would have lost its market share to competitors if it had stopped creating new services for a couple of years. But while Redfin continues to grow steadily, allowing users to filter the search for real estate by the presence of a pool or parking, the pressure on us to create something special helped us reconsider our priorities, Changing the rules of the game, which in the past we did not pay attention. We hope to come up with something really grand in 2010.

8. How do you win?

Constant thoughts of world domination may ultimately lead to dizziness. Usually I live my day, limiting my train of thought to how to serve the next few customers or increase revenue in the next few months. This means that although I must know the history of our victory by heart, more and more often an obsessive idea appears in my subconscious mind that I am going the wrong way.

But the essence of the work of the CEO is to tell this story to everyone who will listen, each time making it better. If you attract venture capital, your story can sound very implausible and include things so illogical that it’s even embarrassing to talk about them out loud. A rehearsal of the whole story will certainly reveal gaps in the plot.

Just try, for example, to say with equanimity how Redfin is going to succeed: we get the most accurate data and create the best real estate website (possibly). We hire our own agents and pay them in order to focus not on sales, but on customer satisfaction (this is a bit strange, but why not?). Clients value this difference and massively dismiss their traditional agents, who sent them a bottle of wine every Christmas for 10 years, and thanks to this we process 20% of all valuable real estate transactions (it cannot be!).

Can. It is hard to express how strongly resolving all these issues has helped Redfin defeat all our hidden fears. Of course, we had previously guessed about these problems, but we existed in an experimental state, not recognizing this. We spent weeks thinking about what we need to do in order to achieve our intended success: choose a red pill , hide from the cold with a TonTon skin (as Han Solo from Star Wars came up with), hack Kobayashi Maru . There are only a few moments in the history of a company when it has so deliberately paved its way. Like a recovering patient who has survived everything that a disease could do with him, we also intend to make the most of our rebirth.

We askedDmitry Kalayev , director of accelerated programs of the IIDF, comment on the material from the point of view of the Russian realities of investing in venture projects:

In my opinion, at different stages of investing, different issues are priority. For example, at the stage when there is no turnover and the product is in the process of development, important questions are: who is in the team, what motivates them, why exactly this team will “tear” the market. At all stages, the question of how big is the market is important.

In fact, if the market is small, then there is no chance of building a large company. For example, for the IIDF, the minimum acceptable level is a company with an income of 300 million rubles, which means that the market should be more than 1 billion rubles. At each stage, it is important to clarify the size of the market. competitors appear, there is an understanding that someone is “not our client”. According to the experience of the IIDF Accelerator, after the first sales, the real market size, which is not based on the size estimate from Gartner, but on the basis of the ratio “average check to the number of available customers”, decreases in 99% of cases - it is important to constantly update this size!

At the stage at which the IIDF Accelerator works, one of the important issues is “unit economics”. Indeed, it is usually not possible to get profit for a startup in the early years, because all money is reinvested in development. BUT! It is very important that the company makes money on each transaction: attracting a client costs 5 thousand, servicing 3 thousand, and the client pays 10 thousand, and we earn 2 thousand on each transaction. In most cases, the picture when the client costs 10 thousand, and pays - 3, will never be interesting for the investor.

Well, at the stage of scaling up the company, the question “why can't you grow faster” becomes really relevant - it is very important to find the limitations of rapid growth and come up with tools for multiple growth.


On July 16, our seminar will be held on the launch of new information security products with the participation of experts from Group IB, the Office "K" of the Ministry of Internal Affairs of the Russian Federation, CIB FSB, Kaspersky Lab, Microsoft, Softline, Jet Infosystems and Acronis.

Beginning at 18:00. Participation is free, registration is required .

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