How To Get Into Seed Accelerators And Advice On Seed Stage Fundraising From Aziz Gilani, The Early Stage VC –

Share this post

 

Raising a seed fund is a complicated endeavor. The way I look at it is for a venture capitalist, the goal here is not to be able to spot every unicorn before folks recognise it and make sure that your money goes into it. I know for a fact that I’ve passed on a few unicorns.

Aziz Gilani is a partner at Mercury Fund, a seed stage startup VC firm based in the mid-U.S. Prior to joining with Mercury Fund, Aziz has spent 15 years focused on software and the internet at companies such Infosys Consulting, ABB Performance Services and Lotus Development Corp.

Aziz is a recognised expert on seed accelerators and joined The SaaS Revolution Show Guest hot seat to discuss the topic of seed accelerators and advice on getting seed funding.

You can listen to the podcast now on iTunes, SoundCloud or Stitcher.

Below is a lightly edited transcript of the podcast, which is a must read for SaaS founders and early stage SaaS companies thinking about applying to accelerators or raising VC money.

Can you tell us about Mercury Fund and the SaaS market in the mid-U.S?

Mercury Fund is an early stage venture capital fund. We’re based in the middle of the U.S. We actually have two wings to the fund. We have the wing that I work on which is software, which includes vertically-focused SaaS, dev ops, and internet of things and stuff like that with very much an enterprise flavour attached to it.

We have another side of our fund that focuses on Life Sciences. We actually have guys with PhDs and doctorates who look at drug therapies and stuff like that.

But I’m very focused on and excited about the world we live in with vertically-focused SaaS software companies which has been where I’ve been spending my time for the past few years.

In the middle of the U.S. is maybe not the most intuitive place that people think of when they think of SaaS software, but if you look under the covers it really makes a lot of sense for why we’re here.

If you look at where Fortune 500 headquarters are located, so these are the large public enterprises. If you look at like certain types of core industries, so for example I live in Houston, which is where the energy industry is located. You also have other cities here in the middle of the U.S. Places like Cincinnati where consumer packaged goods are generally produced by companies like Procter & Gamble. You have cities like Chicago that have a long legacy of manufacturing. Places like Detroit.

These are all places where companies actually build things and companies actually need the technology that we can provide through our SaaS companies to help them step up to the next level.

Mercury Fund has been working for 10 years. We were established back in 2005. That kind of work with both these strategics and then also with technology companies to help them advance to the next level and empower what those companies are doing.

I mentioned in the intro that you’ve done a lot of work with seed accelerators and are recognised as an expert within that domain. So I guess my first question around that is I’d like to know when should a SaaS company apply to an accelerator?

So if you think about what a seed accelerator does best, I feel like they are very good, especially the vertically-focused seed accelerators. They’re very good at connecting you with a combination of mentors that can really help you push forward.

These mentors come from a few different buckets. These mentors can be the been-there-done-that previous software operators that can help you figure out internal issues with your company. So that’s Category 1.

Category 2 are folks who really have a lot of insight in the market that you’re trying to sell to. These are folks from basically potential customers and they’re there to give you strong feedback to basically say, hey, you’re theses around what you think your product is going to do for a customer is right or wrong for the following reasons. So those folks are really helpful as well.

The third category of mentor that I think you can kind of get out of these things is folks like me, folks that can invest in your company and then help you guys get to the next level.

Now, those are the three types of mentors. Those mentors match up well when you’ve got enough meat on the bone for your company to get pushed forward.

If I were running a vertically-focused SaaS company today, I’d probably go to a seed accelerator once I had a decent thesis and I had enough development work done where I knew I could solve a core problem for a target market. I don’t even know if you necessarily have to have the product fully up and running but you have to have enough there to actually run some MVP-style tests to take advantage of those mentor networks. That’s when I’d interface with them.

The application acceptance rates for leading accelerators such as Y-Combinator and Techstars, are between 1% and 3%. Have you got any tips for SaaS founders on how to make the cut for the most in demand accelerators?

I feel like, at least here in the U.S, the analogy that I like to use a lot is applying to a seed accelerator is almost like applying to college. What I mean by that is there’s a right accelerator for your stage and for the industry that you’re probably trying to apply to.

I live here in Houston. Houston is the home of an accelerator called SURGE that’s focused only on energy software companies. If you’re a consumer facing startup, if you apply to SURGE you’re not going to get in. Whereas if you’re an energy company then you’re really lined up for a really, really great fit.

I think that when you start looking more and more at the higher tier accelerators, I think that understanding what they specialise in, where their mentors fit, and whether your company is in a position to take advantage of those mentors really makes a lot of sense. I think it really shines through when they look at your applications.

For Y-Combinator, I think there’s no better place for like a consumer facing app company to kind of apply to than Y-Combinator. I’d probably spend a lot of time kind of stressing where your previous experience was in that space and why you think your ideas are going to get traction and which of their mentors from their network can help you get to the next level in that space.

With Techstars, I think it’s a little bit more complicated but I think it’s a little bit easier on the applicant just because they have so many different types of classes spread across the U.S. and certain classes are specialised in different verticals. So just the trick there is finding out which one of those classes is going to be geared for the type of startup you have and explaining why you think that you are in a position to accelerate.

Because the motivation for these guys is they want to make sure that they’re funding the next Airbnb. They’re trying to make sure they’re funding the next unicorn or decacorn or whatever we’re calling them these days. From their standpoint, they’ve only got so many bullets that they have to use and you need to convince them that you’re worth one of their bullets.

Talking of unicorns, should you only raise a seed fund/VC money if you’re planning on building a unicorn?

Raising a seed fund is a complicated endeavor. The way I look at it is for a venture capitalist, the goal here is not to be able to spot every unicorn before folks recognise it and make sure that your money goes into it. I know for a fact that I’ve passed on a few unicorns.

The trick is I feel like for those of us in our business, is to look at what our strengths are and what our past experiences are and figure out which companies we can help the most with those experiences.

The unicorn I know I passed on was a consumer facing company. They came, they pitched me, I looked at it and I was like, wow. I’m a guy who worked in enterprise software for a decade. I know how to build these enterprise software companies. I just don’t know how I can even begin to help you with what you’re trying to do. For me it was an easy pass and it’s something that I haven’t lost any sleep over because it just didn’t match up with what I knew how to do.

I think that’s a piece of advice that kind of works both ways. If you’re trying to start a fund, make sure you’re starting a fund for companies that you can actually help. And vice versa, if you’re a startup and you’re going to funds looking for funding, make sure that you’re lining up with the experience set of the partners that you’re pitching to. Because no one wants to be involved in something they don’t understand.

What should a founder look for in a seed stage investor? And what should a seed stage investor look for in a founder?

For both, it is very much like a marriage. The way I think about investing in founders is we are going to be going to war together. We are going to be going after a very amorphous marketplace that we kind of understand, that we know some friends in and that we have some early leads on.

But we’re now going to go and try to figure out how to crack this market together and we’re going to… and a lot of the stuff we try is frankly just not going to work. Hopefully, some of it will and hopefully some of it is going to be wildly successful but there are going to be a lot of failures, a lot of mistakes, and a lot of miscues along the way.

The trick here is making sure that we are establishing a partnership together where we can be very frank and open with each other about what’s working, we can be frank and open with each other about what’s not working, and we can work together to get the business into the position it needs to get into.

You need to have the right rapport. You need to make sure that both of you come from the right experience sets where you can iterate productively, and you have to check your ego at the door with each other. If you can do those three things then I think you have the beginning of great investment founder relationship with each other.

But sometimes this is difficult and sometimes it doesn’t work out as well as you’d like. It’s just important to try to do your diligence on each other ahead of time to make sure that you’re set up for success.

What is the Aziz Gilani Seed Fundraising 101? 

For me, what I like a lot are companies that have, at their core, solved a really hard, technical problem that folks haven’t figured out before. It’s a technical problem that ties really closely to a very large market that has a defined beneficiary and a defined buyer.

The poster child for that was a company I invested in a few years ago called Black Locus. It was started by some students at Carnegie Mellon University here in the United States. They’d solved a really core problem which was they figured out how to do price comparison for consumer goods without having a huge number of false positives.

People have been doing price comparison forever on the internet. Back in the 90s you’ve got mySimon which was trying to do this stuff. But the problem has always been that if you search for “iPhone” in the result set, not only do you get the prices of iPhones but then you also get a ton of iPhone cases, you’ve got a bunch of iPhones with different memory levels, you get a bunch of extra stuff that you weren’t necessarily looking for. And these guys had solved that problem.

That core technical problem got me interested enough that I visited them when they attended a business plan competition here in Houston. I then flew up to Pittsburgh. I sat down and talked to them and then I talked to a bunch of ecommerce guys that I knew. Those were the defined buyers who care a lot about this because they wanted to see what their competitors were charging for pricing.

E-commerce is a huge market. They’re a defined buyer so there were specific people at these e-commerce companies that were constantly monitoring what their competitors were charging for pricing. That was the defined buyer at the large market. And this was a huge technical problem. Those three things together kind of formed overwhelming theses for, man, we really have to invest in this company right away. It made a ton of sense for us.

What is the best way to meet with investors?

It’s true a lot of people are trying to reach us all the time. We have inboxes that are just constantly bombarded. Email addresses are easy to get and folks take advantage of them. But, man, this goes back to the old saying that the best way to get a hold of a venture capitalist is to get one of their CEOs or one of their founders to broker an introduction.

Here’s the thing. Once I invest in a company, my CEOs know that I’m always on call 24/7. If one of my CEOs texts me at 2:00 in the morning, he’ll get a reply before 2:30. If you can get one of our CEOs or one of our founders to do a warm introduction into us, you will always get a response very quickly because that’s the most important relationship in our lives. That’s the way to do it.

Now, if you send me an email, will I reply to it? Man, I’ll do my best. If you try to come in through a friendly seed accelerator or you’re trying to come in through a friendly university relationship that we have then I’ll do my best to get back to you as well.

But if you’re looking for that 100% hit rate, one of our founders or CEOs always gets the response.

Let’s say I, for instance, didn’t have that connection within your founder network and I just send you a cold email with my pitch deck because I figured out your email online. Would you open that pitch deck? 

So it’s Monday morning, I’m looking at my inbox. I’ve got about 40 waiting for me to look at today. I’m going to look at them. I know I’m not going to reply to all of them, but I’ll definitely look at them.

I think the trick is the warm introductions basically guarantee that you’re going to get a reply. But look, if there’s something there and it’s compelling and it grabs my attention, then yeah, I’ll definitely look at it and I’ll definitely reply to it.

The other thing that kind of happens is if you’re going to send it to me, I’m not going to forward it outside of my firm. But we have some analysts here that help us with stuff and it’s not that shocking or surprising that you might get a reply from one of my analysts. Between me and my analysts, you’re going to get something and someone will take a look at what you’re looking at. It’s not impossible.

I’ve found that the same creative bone that makes entrepreneurs so great at problem solving also makes them incredibly effective at getting a hold of me when they haven’t got the reply that they wanted. Folks reach out to me via email, they reach out to me via Twitter, they reach out to us via direct messages on every social media platform that I’ve ever imagined. One very enterprising entrepreneur tried to get at me through my daughter’s teacher at school, which was interesting. But they all find ways.

It’s fine. That’s the way this whole game works. And if I was in their position, I’d probably do the same thing.

 

What are the most common mistakes you see in pitch decks that founders should avoid?

The most common mistake that we see all of the time are founders that don’t do their homework on who they’re pitching. What I mean by that is VCs invest a decent amount of time and effort into building web pages and establishing presences online that do an okay job explaining what we want to invest in and what we don’t want to invest in.

I’m an enterprise software guy. I invest in enterprise software companies, usually SaaS but dev ops as well. If you’re going to pitch me on a cancer therapy, I’m never going to do that deal. The analogy I say is you could walk into my office and show me a machine that turns water into gold and I’m still not going to invest in it because it’s not what I do.

VCs inevitably want to invest in the markets that they understand best because they think that’s where they can help entrepreneurs the most. So that core piece of homework is everything.

Now, once you get past that obvious thing, the second biggest thing that kind of drives me nuts is I’m very driven to invest in companies that have solved these core technical problems, like that Black Locus example I gave earlier. I cannot tell you how many times I get emails from entrepreneurs who are like, “Hey, are you interested in investing in a company that can give you a 30% Return On Investment within the first 30 days?” Those financial metrics mean nothing to me.

What I mean by that is, look, I know you made them up. You know you made them up. So let’s get beyond that and let’s just actually talk about the real thing that you solved and then we can figure out how lucrative that can be together. Just tell me what you actually did that’s forming the basis of this company and then we can start giving yourself these financial accolades later. That would be the second most obvious problem that I see with the pitches I get.

What has been Mercury Fund’s most recent investment in the seed stage SaaS company and why did you invested in this company? 

We invest in companies all the time here. The most recent one that I was involved in was probably TrendKite based out of Austin, Texas. We led a Series A financing for those guys. We’d actually known the company for a few years before we invested in it. Their seed stage was led by an Austin-based venture capital fund called Silverton who did a great job helping that company get their MVP up and running and establishing their initial traction with like a few enterprise customers.

But what really attracted us to what TrendKite was doing was what I’ve been talking about all along. The first thing is they had a hard technical problem they were trying to solve, which was they were trying to crawl the web and find publicity mentions and PR mentions for their customer bases that filtered out a lot of false positives and kind of gave a beautiful chart. And man, these things are beautiful that they produce kind of showing PR mentions against a variety of different skills that their customers care about. So a huge technical problem there.

They had established who the defined buyers were at their target customers. Their initial customers were folks like BP and Campbell Soup and large brands. They had defined folks in their marketing department that cared a ton about the charts that they were showing.

What we saw was the cross section of customers that they had already established that there was a giant market of people that were hungry for this stuff. They knocked out those three things for us pretty effectively. It was one of those things where we were just tripping over each other just trying to put money in the company.

Now, that company, we ended up leading a Series A in that company probably like summer of 2014. They were so good at showing how their investment and their sales process was translating into follow-on revenue that just the insiders together like less than 4 months later or 5 months later… I have to get my calendar right. But it was just a few months later we all got together and we just put more in the company because we were like, man, this is like a financial return now. So we just did that again.

It’s one of those things where it’s like, hey, once you’re bought into the technology, once you’re bought into the market and it’s just execution, we’ll just do that stuff all day long.

 

What seed stage/SaaS companies outside of Mercury Fund have you recently been excited about?

Generally, we try to invest in them but I think that… this is a thesis that’s not fully baked but it’s something that me and my friends joke about a lot. Which is the traditional enterprise I.T. Department is something that is going to go the way of like in the early 1900’s the Electricity Department at companies in that almost everything is going to go to SaaS in some way, shape, or form. So even the most banal task that you can imagine are all going to go away.

Here at Mercury we eat our own dog food. We all use Slack for our interoffice communication. We use outsource applications for talking to each other. We use SaaS applications for managing our deal flow and for communicating with our investors and stuff like that. So there’s a huge pile of these things that we’re using all the time.

I’m fans of all of them. I’m not an investor in a ton of them but I think Zenefits is a fantastic, fabulous company. I think Slack is a fantastic company and they are definitely making people more productive and they’re adding a lot more transparency to the marketplaces they operate in.

I’m a big fan of anyone that’s solving problems for businesses and helping I.T. departments go the same way as electrical and plumbing departments.

Aziz Gilani Spoke with Alex Theuma on The SaaS Revolution Show podcast which you can subscribe to now on iTunes

In this article