Quick thoughts on big valuations from pre rev startups:
There are a lot of folks that don’t understand why Twitter or other startups like them can be valued at such enormous valuations while showing minimal or zero revenues. I respect your skepticism. It’s tough to understand why these early stage start ups have millions of users but aren’t profitable. Please understand that most of them could create revenues if they wanted to, but just turning on the revenue spout isn’t most important. Turning on the revenue spout when all the pieces are connected properly is critical. I’d like to use this analogy to explain this further.
If your connecting a hose to the spout/spigot and you turn on the water prior to ensuring you have the hose connected properly, you’re going to have a mess on your hands, everyone’s getting wet and the process of watering your grass and using the hose is a failure. However, if you ensure a proper connection from spout, to hose, to sprinkler, you’re going to have a great experience, the grass get’s water and growth occurs.
These companies have already proven that they know how to acquire users, the water is running, now it’s a matter of connecting the pieces properly before they turn it on so that the combination of water (users), hose (business model), and sprinkler (team) are all connected properly to maximize their revenue opportunities.
Excuse errors, first post from my iPhone. (Update: added photo)
Recently Mark Suster discussed the topic of VC seed investing and when it can be a bad thing on his blog, Both Sides of the Table. This reminded me of a conversation I had with another experienced entrepreneur offline who said… “First time entrepreneurs shouldn’t be picky. If someone is offering you venture money it’s your lucky day and you’d be a fool not to take it. Don’t argue the terms first time around, once you’ve had a successful exit, then you can have the upper hand.”
So I reached out to Mark on the topic because I think he’s one of the more forward thinking VC’s out there and got his take. Here’s the interaction below. Thanks Mark.
My question to Mark:
There is a school of thought that a first time entrepreneur who hasn’t yet proven herself should basically take any money they can get. Get your company off the ground with anyone who is willing to take a bet on you and be picky with your second startup effort.
What are you thoughts on this? Maybe you can put on the entrepreneurial side of the table hat for this one?
From Mark:
My view, you always raise the highest quality money you can. If you’re first time and you can’t get the A team but you’re convinced you have a great idea then you look at your lesser options. Only scenario where I wouldn’t take the money is when the terms are so onerous that being successful doesn’t add enough to you as an individual. At that point I tell people to find another idea (or possibly another profession). Thanks for your question.
So, for young entrepreneurs, if you have an opportunity to raise money you probably need to take it. But always weigh the cost. How much are you giving up? Make sure you keep enough of your company that you’re still willing to sell all out (emotionally not, financially) to make it a successful one, you’re going to need that motivation down the very difficult road that you’re now driving.
[This is the second portion of a series on raising seed funding for a web startup. You can find the first post here, where we discussed referrals, short pitches, accountability, and tracking opportunities. Note: I’ve never raised any seed money for a startup. I write these observations to share what I’ve been learning and to motivate myself and the other entrepreneurs in my shoes to get out there and get’r done.]
I won’t take those terms. You know your situation better than I do so any decision about funding must be very specific to the conditions of that startup. Always keep that in mind. However, it’s my opinion that if your a new entrepreneur, you take what you can get. Don’t push for one form vs. another, or hold out for a great named investor. Take something to get you going and/or keep you alive. If you’re important to the business as the entrepreneur (which I assume you are) then you get equity in later rounds, they’ll have too to keep you. People who are good get compensated, end of story. On your second startup you can become particular, negotiate harder, and work with the big name investors.
Giving away shares for cash. A lot of founders and early-stage investor are focused on percentage. This may help in initial deal terms, but this is a short term number. It’s healthy and common for companies to take 2nd, 3rd, and more rounds of funding so percentage won’t ultimately matter. What you need to focus on is price. Investors want to avoid dilution but often mix up percentage dilution with economic dilution. Their percentage might decrease but the value may increase.
Percentage dilution in most contexts is actually rather meaningless, but economic dilution is crucial. The reason is simple. An emerging business which is growing and creating value for itself is able to sell its shares at a higher common share equivalent price than in previous financing rounds. Under this scenario, new investors buy shares at a higher price than existing investors. Existing investors surely suffer percentage dilution, but they also enjoy economic accretion. This is a good thing for existing investors, because although their percentage interest in the emerging business goes down, the value of their economic interest in the company goes up.
Once you throw blood in the water the sharks come. Ok I’m not sure if the analogy is that good but deals will get competitiveve once you have a single term sheet. Momentum becomes critical to prove to your first investor that you’re legit and to show that the deal terms were favorable. Each consecutive term sheet you get makes the next one easier. Remember that pipeline we talked about? Now is the time to hit that hard.
Here’s a voicemail Travis Kalanick left on a 2nd termsheet prospect on a recent *competitive* deal. The recipient of this voicemail called back in 5 minutes, AND ended up being the lead on the deal (notice the urgency while staying true and credible):
Hey , wanted to check in with you regarding . . .things are heating up with a couple other parties and it looks like things could get done pretty quickly from here… wanted to check in with you, see where you’re head’s at on the deal, and see if we there’s a shot we can work together on this one… give me a call back as soon as you can… talk to you soon
Piggy backing is piggy banking. You’ve likely talked to many “small time” investors leading up to this point. They weren’t ready to make the investment at first but now that you’ve landed a term sheet from a likely larger investor there is nothing wrong with letting the small players piggy back the deal. They now have confidence that it’s a legit investment and can just use the same terms as the existing term sheet. $200k can double or triple relatively quickly this way so don’t slow down after 1 or 2 investors agree. The clock is ticking.
Don’t be this guy, what an idiot.
The best entrepreneurs are never finished. Keep selling your idea, keep piling on investors at the original terms, and don’t let the first big guy change his terms just because you’ve added others, fight collusion. A very smart entrepreneur, Travis Kalanick, says that “until the deal is closed, you have at best a 50/50 shot of it happening.” The moment you think you’re done with a deal, watch this video again and save yourself the embarrassment.
I’ve been studying a lot about raising a seed round of funding for a startup. Once your prototype is out and some traction is shown, if you’re going to need capital you gotta work very hard to get it. Here is the first of a multiple (probably 3) part series on the core things I’ve learned about raising a seed round. Note: I’ve never raised any seed money for a startup. I write these observations to share what I’ve been learning and to motivate myself and the other entrepreneurs in my shoes to get out there and get’r done.
Part 1.
Cold calling is for sales people, get a referral. If you have a recommendation from a trusted source you’ll always be in a better position with an investor. Angel networks &/or individuals will always take a referral over a cold call because you’ve already been through one layer of filtering. So, because of this reality it’s super important to always ask for a referral. Even when you meet with someone who might not be a great fit, as long as you think they liked you and would pass on your name in a positive light, hit them up for a referral.
Time your pitch with 1 cup of coffee. You won’t always have the opportunity to pull out a powerpoint deck or spend an entire meal mulling over the details of your plan. You need to have 3-4 different length pitches ready in your head. If you get a change for 10-15 minutes with a high profile investor you need to have a 10 minute pitch and a list of FAQs in your head so that the 15 minutes is a powerful use of your time. The goal is always getting the money but priority number two is the next meeting.
Beggars can’t be choosers, and you’re the beggar. Go to Angel networks, conferences, networking events and always keep your A-game on. Meet with folks who are Angels, who know Angels, who want to be Angels, etc. Give them the short pitch and setup the next meeting with whoever you can.
Use the buddy system, it’s safer. You should have a partner that you’re able to share your experiences with and that will keep you accountable. You need to be able to digest the conversation with a co-founder or close adviser so that you don’t miss any critical pieces of feedback. As you meet with investors they’ll have different concerns and at each subsequent meeting you should be able to completely address their concern from the previous meeting. If they have the same question or concern twice, and you don’t have an answer, shame on you. It’s easy to miss things without someone to keep you aware of the details. Accountability is key.
Never miss an opportunity. After every meeting you should have a list of what you need to do in order for that person to invest at the next meeting. You should have a list like this for every single person or group in your pipeline. This will become important when your first/anchor investor is locked down and you need to bring the sub investors to show momentum. Document everything and know what opportunities are available.
1) VC’s and Angels who blog – so that they communicate what is interesting to them and so that they are more accessible or even appear more accessible to the areas entrepreneurs.
2) An increase in the understanding that failure won’t kill you – in the Valley, as well as in NYC, people understand that successful businesses often come from trial and error. Here in Chicago, with the strong industrial goods trading culture, failure is BAD. We need to get over that.
3) Midwest cities need to stop fighting for control – none of you are as big as the hubs (SF & NYC) so work together so that you can pull resources to create a single, strong, job pool and start to create really solid companies.
Next week I’m speaking in Milwaukee about a startup that I started and how/why it failed. That’s my first step.
The reason why I’d like to see more of these 3 things is because from what I’ve seen through the people that I’ve talked to here in Chicago, there is absolutely no reason that Chicago shouldn’t have as strong of a startup culture as any other ecosystem outside the Valley (like NYC or Boulder). People always ask the question, “can you start a successful tech company or web company outside of Silicon Valley?”
Many of you followed the process of starting, building, then closing SocialDreamium. I’ve been learning and exploring over the past 3 or 4 months and I’m back on the startup bandwagon. I’m cofounding a startup that’s focused on social commerce (announcement soon) and I’ve been working on setting up that company. In the process of this formation there are some detailed questions that needed to be asked and some considerations that are critical in order to answer this question appropriately.
These are common startup questions who’s answers are dispersed around the web but I’ll aggregate much of that information here with resources that I found and some of the learning’s that I’ve acquired. As a disclaimer, don’t take my advice or learning’s as fact, just learn what you can from it, but seek further legal advice if necessary. I have consulted my attorneys in this process, and so should you.
So, as a bit of a background, I’ll address some of the questions and answers that led me to this question. First…
Why a C-corp, not an LLC?
To simplify, and likely over simplify, LLC’s don’t have shares, they have ownership percentages. Percentages get messy in divvying up, and it is also difficult to value the amount that a specific percentage is worth. So it’s much easier to say that 100 shares at $10/share = $1000, rather than saying 1% = X amount. Share values can change quickly, especially when investment is introduced.
Also, LLCs are a product of state laws and it is those laws that often make it impossible (or difficult) to do an IPO of an LLC. When VC’s invest they are looking for that company to do 1 of 2 things, be acquired, or go public, this is called an exit. If IPO’s (going public) are difficult or impossible, it makes perfects sense that VC’s would discourage this structure.
If there is one thing that I do plenty of at GE, it’s present. Whether this be over the phone or in person telling a story in a business setting is a skill that one should continue to foster and treasure everything you learn. Along with presenting, the skill of building powerful Powerpoint presentations in order to communicate a project status, present a business case, and sometime request funding for a project is key. I’ve never pitched VC’s or Angel investors for funding on a startup, although I may soon :), but I have learned a thing or two about requesting cash using a solid slide deck and good story.
Recently, I’ve been studying methods on pitching for startup venture funding and have looked through many example decks and I’ve created this list of tips for getting funding in either the corporate or startup worlds. Believe it or not, I find many similarities between the two. I’d love your feedback on which tips have worked for you or which tips you disagree with.
People think that winning an awards show like The Crunchies makes them a success…false. Along those lines, SO many people consider getting a solid round of venture funding a success…false again.
Why or how is it that a company can be successful without making money (or, creating value)? If you sell your company to Google or Oracle or whoever, then you’re a success. You’ve created an entity that creates value enough for another entity to spend $$$ for what you’ve created. Similarly, if you create an entity that creates value enough so that consumers or other businesses purchase your product, and the money you make from that sale can cover the costs to create that product, then you’re a success. This is business success, very simple.
The notion of winning a venture round = business success, is still being carried over from the dot-com bubble of 2001 and the sooner it dies the better off entrepreneurs and VC’s will be.
Think back to pre-Facebook and pre-MySpace days…even pre-Friendster… Nobody understood the idea of a web friend or a social network. Then those companies came on the scene, people understood them and began to find value in them. Then the niche social networks came, the good ones provide great value for those involved and the ones that don’t sit stagnant.
Then micro-blogging came along in the for of Twitter and Pownce. People didn’t understand why they would answer the question of “What are you doing?” to the public. But, when they did the popularity and the value of Twitter skyrocketed. Now just as before with social networks there are community based and customized micro-blogging platforms. The good ones provide great value for those involved and the ones who don’t sit stagnant. No surprise.
Recently, my friend Scott Scheper launched the customized community driven VentureDig micro-blogging platform. The site is focused on increasing communication between venture capitalists and entrepreneurs.
VentureDig is the first micro-blogging platform that focuses on ventures and venture capital.
You can think of VentureDig as Twitter for entrepreneurs, venture capitalists, angel investors or anyone desiring to learn about the next big thing.
The concept behind VentureDig is really quite simple: pitch a venture that you find to be awesome! Something you dig! Something you like so much, that you decide to share it with all of your friends.
This can be anything–a certain website you like, a blog you like, an iPhone app you like, a facebook app you like–virtually anything.
The only thing is, you have to tell everyone why it’s worth checking out in less than 140 characters.
This site has serious potential to be an open and honest live forum for investors and entrepreneurs to interact in a balanced fashion. Similar to TheFunded.com this sites goal is to create that mutually beneficial discourse betwenen the two parties instead of the ‘vulture capital bashing’ that could potentially occur.VC’s need entrepreneurs and many times entrepreneurs need VC’s to get their companies growing…why not start that relationship at VentureDig? VentureDig has launched into beta and was built on an open-source microblog platform written by gaboink.net.
As these community based microblogging platforms pop up, as they undoubtedly will, don’t join all of them. You’ll waste your time because similar to social networks you only have so many units of utility from microblogging. As you spread those units acrooss differencet platforms you begin to lose value from the fairly quickly. But, if venture capital and startup entrepreneurship is of interest as it is for me I highly encourage you to check out VentureDig.com.
The VC internet investments have officially slowed down! This chart shows that they are down 16% in Q3.
As stated in hundreds of blog posts, the slow down in the economy will undoubted affect the startup world, but just how much is still unknown. There are many things that startups can focus on in order to improve there chances. There are also a few important things that future startups can focus on in order to get funding, namely, profits. Startups are finding that they need to sell something in order to get funding. In times of tight economic conditions people stop spending time or money on things are aren’t needed or at least useful. To me it sounds like only useful startups will get funding. Probably a good thing.
Imagine you bet on baseball. The Padres are playing the Yankees and your betting the Padres to win. Not a very safe bet, but the returns are awesome when the Padres come through (assume that happened 1 in 10 times). Then a huge steroids bust occurs, 3 Yankee starting pitchers get canned, and only 1 Padres starter. Now, lets also assume the returns on your bet for the Padres to win stay the same. This means that although the steroid bust affects the Yankees more than it affects the Padres, you still get the same return on your bet. The risk in betting on the Padres decreased relative to the risk of betting on the Yanks. If the relative risk of betting on the Padres decreased, wouldn’t you now bet more of your total investment dollars on the Padres? If you’re smart you would.
You following me yet? Let me break it down…
Yankees bet = Wall St. investment; Padres bet = Startup (VC/Angel) investment; Steroid bust = Financial Crisis
We all understand that there is a serious steroid bust going down in todays financial markets but there will always be investment money out there looking for its best available player. If a Wall St. bet becomes a lot more risky and a startup bet becomes just a bit more risky then the startup bet will get much MORE ATTENTION. This is the case because of risk relativity and the fact that smart investment money always looks at every option before being invested. For VCs this is great because the large players who still have investable funds after this financial debacle shakes out will be the recipients of large amounts of investable capital.
Nate Westheimer, or innonate blogged yesterday about the risk associated with startup investments. He pontificated upon this idea that if startup investment risk is not increasing at the same rate that more traditional investment vehicles are (such as money markets or even saving accounts) then investing in startups (VC) becomes a safer and safer investment.
All this then begs the question: What’s risky?
Is it less risky to put your money in startups vs in a savings account? On balance, no, but ask that to a Washington Mutual customer and they may hesitate a little before asking.
Are you better off extending a line of credit to an existing company than taking equity in a zero-revenue prototype? Again, on balance, probably not — but for more and more financiers, the early stage investment will be more on par with their appetite for risk and reward.
Mash up the shifting landscape of risk and reward with the openning of the early stage investment game (look at the path Angelsoft is on) and the continuing lowering of early stage barriers, and one of the most significant results of the market could be a tetonic shift of what “risk” looks like in the early stage investment game.
In 2001 the pop of the bubble in Silicon Valley brought Wall St. tumbling down. Will This pop on Wall St return the favor to Silicon Valley? The super investment savvy in NYC and beyond probably have a pretty good take on what the hell is going on with the financial crisis. What’s most interesting to many of us is how will it affect VCs and start-ups? There are a wide range of opinions even amongst the top dogs of the industry, some think it won’t be bad, some think it will be a “startup depression”.
Here are my summaries and thoughts on many of the opinions I’ve followed over the past few weeks. I’ve tried something new and color coded the first few words to get a scorecard on how things are/will be fore startups & VC.
-Big banks will/have disappeared and small banks who are more willing to work on a small scale projects to find quality investments will fund VCs and startups
-The IPO space is already crawling or stopped. Now as large firms lose capital the M&A space will join the IPO space at a stand still.
-Web and technology markets are probably 2 of the only bright spots in today’s global economy. This is what will bring us out of such a mess. Transparency into these markets will only exist with improvements in technology.
-If the IPO drought continues, eventually LPs will realize the VC model/system is not working properly and it will be much tougher for VCs to get that money. This will make funds smaller and thus less startups will be funded.
-In the “slumping market” VC will become introspective focusing on current portfolio much more than finding new investments.
-Funds that have already been raised by VCs can no longer be counted on. As the LPs are losing money elsewhere in the markets one of the first investments they will renig on are those that are promised but not paid, VC firms.
-this will hurt small funds first
-this will hurt LPs relationships with VCs so the big ones will be safer
-Startups who have VC backing already should be fine but will have to prove themselves to stay on the fun. Startups without VC funding will have to learn the (some what lost) art of bootstrapping. ALL STARTUPS will have to get lean, focus, find PROFIT$ now.
-Strong startups will continue to get funded. The cream of the crop will rise to the top because VC are being more careful. Survive and Thrive!
In an article from PE Week, that many VC’s have discussed recently, the argument was made that the bubble of 01 prepared VC firms to be ready for this type of financial crisis. VC firms don’t seem to be largely affected by the recent financial crisis and many are confused why. A few of the arguments of why VC’s were not affected (which I’ll go into detail on each in a future post) are that VC’s are long term investors so short term credit doesn’t affect them, or that LPs are huge and diversified so there is still money to be invested with VC firms, among others. Here are 4 strong arguments about how and why VC’s were prepared for the 08 financial crisis by the tech bubble of 01:
1. Better Money Management: Milestones matter to VCs. Ask any entrepreneur, and you’ll find it’s likely he or she are getting money in tranches based on deliverables. Most tranches go through, even when milestones aren’t met, but the process allows VCs a better way of keeping track of the progress of their portfolio companies. VCs are less likely to write mega checks in the early stages, many have raised the bar of proof points needed to get a big round. Money is also more likely to go to things that directly drive valuation increases as a smaller percentage of any round is going to PCs, servers and bandwidth.
2. New Sales Models: It used to be about “Big Game Hunting” and multimillion dollar site licenses. It’s a model that was great for vendors: get all the money up front, then worry about delivering the product. But Software as a Service permanently transformed the way IT was sold. Now new installations are cheaper and can be scaled slowly. It’s a model that’s been adopted by IT appliance and PC companies as well. So when Datamonitor finds that IT budgets aren’t going to rise in 2009 Datamonitor Survey , there’s less reason to freak out. Most IT buyers have already planned their spend out: it’ll be re-upping on the services they’re already subscribed to.
3. Decreased Addiction to Advertising: The banner ad was a big part of any dotcom business model. When advertising budgets fell, hundreds of online businesses shriveled on the vine. Now, online businesses look less to online advertising for real revenue. Google Adwords had a big hand in that. Suddenly it was a lot easier to install advertising on your site, but it was also less lucrative. Nobody ever got rich putting up Google Ads, but at least using the service saves companies from having to hire expensive advertising sales people. The addiction to advertising has been broken and many companies are looking for other ways to make real value online.
4. Moderate Exit Expectations: If you’re not looking to flip a startup to the public market, what do you care that Wall Street’s investment banks are falling like dominos? Had this same crisis had happened 10 years ago, you can bet VCs would be pulling their hair out. But when there are already no IPOs, it’s hard for the public market to get worse. When exit expectations are more reasonable, it’s easier to keep cash burn in check. Startups are less likely to build out sales teams, for example, planning perhaps to later plug in to an existing sales organization via aquisition.
This is the keynote at the Web2.0 Expo in New York this week given by Fred Wilson. It is extremely cumulative and shows super potential for NYC going forward. Fred – great work on this presentation and Jeremy great work on the slides!
Hi. I'm Ryan Graves and this is my personal blog. I'm an entrepreneur living in Chicago, working in San Francisco, and am from San Diego. My wife blogs too, and I <3 my family.
![Reblog this post [with Zemanta]](http://img.zemanta.com/reblog_e.png?x-id=10203ecc-cd41-4803-8397-d94bad4e540f)
![Reblog this post [with Zemanta]](http://img.zemanta.com/reblog_c.png?x-id=463417d4-195e-4917-bd43-c84934487c4e)
![Reblog this post [with Zemanta]](http://img.zemanta.com/reblog_c.png?x-id=a0cedd37-ced1-419a-a157-9399ab4486ea)
![Reblog this post [with Zemanta]](http://img.zemanta.com/reblog_c.png?x-id=83607fa9-dda3-48f0-ab3f-c26c17b79e07)
![Reblog this post [with Zemanta]](http://img.zemanta.com/reblog_c.png?x-id=601be99f-be46-4485-8964-06b662378e89)
![Reblog this post [with Zemanta]](http://img.zemanta.com/reblog_e.png?x-id=d956d4c6-69fa-473d-9ac7-29ad836441ae)
![Reblog this post [with Zemanta]](http://img.zemanta.com/reblog_e.png?x-id=3676f104-d76c-47fe-97e8-9bc6e5b24c05)
