However today he pointed out a great resource for anyone considering a raise. The site includes a link to a series of articles dissecting common terms in term sheets. If you ever wondered about liquidation preferences or what participating preferred shares are and what they get, it is a very good introduction. I won’t say that it nails all of the points and it doesn’t give you up to date market information on common terms (make friends with a good corporate lawyer in your market who does a lot of VC work – you get some hints and they get your business), but it is a great starting point for anyone who might be considering raising money. In fact, reading through all of the terms reminded me why after my last company (where I did a $625k angel series A) I decided NOT to raise money for SystemForge. I’d rather spend the time adding value that bickering over who would get what part of it :->
He makes some good points, but what he is really talking about is the (large) subset of Web 2.0 companies that NEED VC funding. I know plenty of entrepreneurs who in the spirit of 37 Signals are building profitable web based businesses without raising capital (well, maybe a few hundred thousand in seed money).
While it is true that racks full of servers, oceans of bandwidth and hectares of customer service cubes cost money, if you happen to develop a product that is fundamentally profitable, if your business is designed to provide a good cashflow (ideally they pay, then you deliver), and there are no major step functions in your cost base (building a new factory, etc.) then it is quite possible to create a company with millions of dollars in revenues without raising a VC round. The companies that need the VC money are often the ones selling $1 bills for 55c (or giving them away for free) and trying to make it up in volume!!!
Of course, we have all seen that you actually can make money selling $1 bills for 55c or giving them away for free. Whether it is a back end strategy (lose money on initial "sale"), limited time offers, free trials converting to paid subscriptions or creative ways of monetizing eyeballs, user generated content or statistical data provided by your users, so this is not a criticism of such companies. But it is worth remembering that there is still a place for building a company that sells products that people want to buy at a price that is profitable to the business. It isn't the only way to build a company, but it's a lot more certain than VC craps.
It is true, but there is also a reason why investors value experience. Even the smartest people make really dumb mistakes. It is so hard to succeed with a start-up that you can't afford too many dumb mistakes (you'll always make some - but one critical one and you're marketing collateral becomes kitschy collectible Web 2.0 memorabilia) and the best way you can avoid making dumb mistakes is to already have made them before.
I started my first business before I was 22 and while I got away with some pretty ballsy things I probably wouldn't try now, I also made plenty of dumb mistakes. If you're young (lets say under 150 years old :->), no matter how smart you are, you're dumber than you think, so make sure to have lots of other smart people around.
Early stage, unless you've done it before, you probably don't know enough yet to hire the right Board of Directors (what happens if they clash with your Series A lead?!) so start with a Board of Advisers. Typically 3-8 people with deep experience in areas that will fundamentally drive your businesses success.
Best wishes to anyone starting their own company. It is a real risk financially, but I can't think of any better education, and you can start a company for way less than a Stanford MBA would cost:->
I know Adobe’s announced it’s old style $100MM venture fund, but I wonder what would happen if Adobe opened its own Y combinator?!
Imagine putting $5MM aside (for hard costs – plus the use of some Adobe resources) to run an Adobe incubator. Get one or two “general partners” who’ve built and sold a feature (a company that is better suited to being a feature within a larger product line) before and give them a decent salary plus a taste of the upside of the micro-fund. Provide some cheap office space, access to basic legal and accounting services to create and maintain cookie cutter LLCs for holding the IP, and bring in 10-20 companies once or twice a year, providing a grad student lifestyle for 90-180 days (total cash investment maybe $10,000-$25,000 per company) to allow them to create a product and see if they can raise the capital (or even the revenues!) to take it further.
Bring in everyone from the right law firms and the right banks to the right angels and seed stage VCs and only accept submissions from companies using or promoting the use of Adobe technologies in a substantial manner (just using Photoshop for the logo doesn’t count!). Create a single data center and give each company a couple of dedicated servers and shared use of one sys-admin, remote capable VoIP phone system, etc.
Give them a 12 month free, “start-up” license for any and all Adobe technologies they are interested in using and if they don’t hit certain milestones in a certain timeframe, shut them down and the IP reverts to Adobe so they can use it as a starting point for an internal project or give it back to the community to add value to everyone else using Adobe technologies.
Make sure you tie this into the Adobe PR machine and get the founders blogs aggregated to get the word out. I think this would be worth it for the publicity alone. You get 50-100 new Adobe sponsored companies over 5 years for under $5MM, and with a 20-25% cut of the initial venture it wouldn’t take more that 1-3 decent successes out of 50-100 for the fund to break even. If they had a 1 in 10 success rate, the ROI would probably be better than most current funds are likely to achieve over their lifetime.
Seems like a no-brainer to me. Any thoughts anyone?!
Just saw an interesting posting about the attractiveness of seed investing (compared to later stage investing when the IPO market is so tight) and also about some of the issues of investing in a seed stage company and handling conflicts of interests. Definitely worth a skim if you're interested in such things!
Includes links at the bottom to additional articles from Matt Marshall at VentureBeat and Fred Wilson of Union Square.
It is an interesting counterpoint to the fact that recently a lot of CEOs have been complaining that it has been getting increasingly difficult to raise less than $2-5MM because increasing fund sizes mean that most VCs can't waste their time on a $1MM investment.
Typically seed stage investing is great if you have an idea and a prototype but you don't have revenues or a team that has done this before. The valuations are much lower, but the risks are much higher and the poor VCs have to wade through a lot more junk to find even vaguely fundable plays. But with the cost of building a profitable web business dropping every day, I'm not a big fan of taking money too early.
A rule of thumb I use that is false, but gives the right sense is that if you think you need funding to build your web/software business, you probably don't have the skills to build the business. It is amazing how far you can get with evenings, weekends, IOUs, credit cards, FFF (friends, family and fools!), outsourcing, crowdsourcing, opensourcing, white box servers and maybe a few friendly suppliers who will give you good payment terms. It is quite feasible to get a product to market to prove a concept with real eyeballs and clients for between $50,000 and $250,000 and while a lot of plays then need funding if they are ad revenue or eyeball based (which despite the crash IS still a valid approach for the right business), you really should be able to get to that point without funding.
I think early money is a great accelerant for a proven A or B level team that knows how to use it, has done this before and just needs to get to market ASAP, but if you haven't raised seed before, I would think very carefully before raising it as I almost see that as a warning sign in itself.
Also, as Guy Kawasaki pointed out in a great article on bootstrapping (from his book "Art of the Start"):
"Someone once told me that the probability of an entrepreneur getting venture capital is the same as getting struck by lightning while standing at the bottom of a swimming pool on a sunny day. This may be too optimistic."
Thats why we have chosen a play that we can bootstrap, that was profitable from day one, that is sufficiently valuable that people pay for and that provides a recurring revenue stream. If you get funding, you have quite a lot of flexibility in how you commercialize your success. Unless you KNOW you're going to get funded, I'd suggest choosing a play and a commercialization strategy that will allow you to build the business with or without capital.
FWIW, if Adobe Ventures are smart, they're probably going to be looking to take second chair with more established venture funds, so I'd personally start by getting some kind of expression of interest from a Valley VC (you might get away with a Boston VC given Adobes presence there, Austin, NYC or the rest of the country will probably be a tougher sell) and then getting Adobe to match. I haven't looked at their plan, but I'm guessing they need to put $2MM-$5MM in the first round so you might want to go for a $4-5MM co-led round ($2-3MM from each of two VCs) with a $8-15MM post money give or take depending on your team and level of commercialization.
[UPDATE] Just thinking through the intent of the Adobe fund and the relatively small fund size and realized that while most VC's aren't interested in sub $2-5MM series A's these days, the Adobe fund might do seed stage investment (typically $500M-$1MM) or at least put that kind of money into a $1MM-$2MM round.
They're going to have to be really careful to either have the right resources in-house or to see if they can come to terms with established seed round investors as VC's are moving away from small rounds for a reason - they are a lot of work. But as a strategic fund, a smaller investment in a larger number of companies would probably make more sense. It will also be interesting to see if they're looking to put aside enough money to stay active in later rounds or whether they're really just trying to make start ups using Adobe technologies more attractive and to rely on connections with other funding sources to help with any later rounds.
OK, here were my comments on Teds post.
(i) NDA - No competent VC will sign an NDA and asking them to is a major "clueless" factor. The fact is that no matter how amazing and unique you think your confabulator XX2.0 is, 20 other people are working on one now and if you don't know the names of one or two of them you'll be seen as doubly clueless. Unless you really are a rocket scientist or molecular biologist, it's execution and experience a VC will be backing - not your unique "nobody ever thought of that before" idea.
(ii) Exit Strategy - There clearly needs to be an exit strategy within the lifetime of the fund (typically 5-8 years)- no VC is looking for an annuity. That said, most companies won't have three credible exit strategies. Mention a credible exit strategy at the end of the pitch or in response to questions, but don't focus on it too much. VCs want someone who understand the importance of an exit strategy, but they also want someone who's building a business, not just a "play" so too much focus on exit can be counterproductive in the pitch.
(iii) Be a First Mover - Who cares? Fast followers with proven management will probably be given the resources to steamroller the first movers with a better concept and a weaker team and VC. It is nice to be ahead of the pack, but as long as you're not doing a web video start up now, you're fine. Rule of thumb: if you've read about a space, anywhere other than an obscure blog you've missed the window.
Pitching, negotiations and due diligence for an early stage round can occasionally be done in a few weeks, but unless you’re a rock star in a hot space or with some good friends it’s usually a 6-9 month slog during which time it is hard to keep your focus on the business. However, to me one of the biggest issues with raising capital is “the portfolio problem”.