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A Peek Inside the M&A Playbooks of Technology's Top Acquirers

Fri, 30 Jul 2010 16:25:27 -0400

Publisher - GigaOM
First shared by - robdiana
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Last night a group of M&A gurus from the corporate development teams at top tech acquirers Google, Microsoft, Yahoo, Cisco, Facebook and Twitter gathered to share insights into their business with a group of startups at a fancy-pants Los Altos Hills, Calif. mansion. Though Facebook and Google might have been the most notable active acquirers lately, everyone on the panel said they are out shopping. They each have a bit of a different style, and a bit of a different target startup. Below are the most notable bits from each participant:

The ridonkulous Kelly Porter Mansion, where the event was held

Googles Amin Zoufonoun said that he looks at three types of acquisitions: a proven product and team, an uncertain big bet, or market and tech leadership (like YouTube and DoubleClick). He said recent acquisitions by Google and other companies like Apple point to the fact that mobile is not a core part of the DNA of many tech giants. As for advice, he warned startups that they always underestimate how long it takes to close an acquisition; for Google, deals usually take three to four months. As for areas he's interested in, Zoufonoun said he thinks music is overhyped (an interesting comment given Google is reportedly looking to make a play in this space), and mobile user interfaces are underhyped.

Ciscos Derek Idemoto talked up the value of post-acquisition integration. His company has been incredibly acquisitive, with 140 deals in the last 20-odd years. Idemoto bragged that 75 percent of acquired employees are still at Cisco after four years. He said he thinks video is underhyped, and that he's particularly interested in data. The most, and most relevant data might win, he explained.

Yahoos Taylor Barada, who joined the company a year ago, declared of the original Internet giant, We're back in the game. He said he thinks content discovery is underhyped, and personal measurement tools are an interesting, under-the-radar opportunity. He invited startups to come talk to him as his job's nature is to float across Yahoo's complex business. We like meetings with no real agenda, he said. We're a bit of a service arm to connect teams at Yahoo.

Facebooks Mike Brown (as might be expected!) talked up his company's inclination towards talent acquisitions of small companies that haven't raised much funding. Often entrepreneurs filled with chili powder and vinegar are the best hires as compared to trying to get them to apply for a job through the front door, said Brown. Most interesting, Brown talked about Facebook's particular preference to pay cash (and stock options) instead of stock for companies it acquires. Facebook needs to keep its number of common shareholders under 500 or risk having to file financial statements to the SEC. Brown told startups that their transactions could be more difficult if they have a large number of investors. We can't issue stock in those cases because we can't take on that number of new shareholders, he said. (That's an interesting contrast to the current trend of young startups taking early rounds from large syndicates of angel and sometimes VC investors.)

Microsofts Fritz Lanman said even though his team hasn't done a ton of deals recently, It's not like I've been on holiday for the past year. But he admitted that in a company worth $250 billion, the big value is in the core franchises usually not startup acquisitions. There's a natural ebb and flow between strategy and execution, he said. He encouraged startups to form relationships early and not to oversell themselves. We're a little bit smarter than we look. It shouldn't take us that many meetings to figure out what you're doing.

Twitters Jessica Verrilli said her company is still at an early stage, so she looks at deals that may be very core to its business. Sometimes the best talent happens to be working on something related to Twitter, she said and hiring is right now one of the company's top priorities. Twitter usually offers a combination of stock and cash in its deals. One area she's actively looking at is relevance and discovery, Verilli said.

Moderator Mike Marquez of Code Advisors also asked the participants for a moment of role-playing to say what startups the people sitting next to them should buy. One of most interesting responses was Lanman telling Brown that Facebook should buy Foursquare and Zynga. It's insane that Facebook lets Foursquare exists, he said. Facebook should be so much further in mobile. Local direct marketing is the next $100 to $200 billion opportunity. Meanwhile, Idemoto told Zoufonoun that Google should look into buying content companies as well as Nielsen for its data.

Related content from GigaOM Pro (sub req'd):

Google Buys a Heap of Trouble With Ad Platform Purchase

startups google facebook company interesting google startups facebook company interesting brown deals stock companies acquisitions zoufonoun said

MoneyBall for Startups: Invest BEFORE Product/Market Fit, Double-Down AFTER.

Fri, 30 Jul 2010 12:01:42 -0400

Publisher - Master of 500 Hats
First shared by - robdiana
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My apologies... this is a long piece (~2500 words). Not for the faint of heart. If you want the short story, read the abstract below & 3 core assumptions, then cut to the conclusions at the bottom.

Abstract: VC funds are getting smaller (good), & angel investors are growing (also good), but both need to get smarter & innovate. Startup costs have come down dramatically in the last 5-10 years, and online distribution via Search, Social, Mobile platforms (aka Google, Facebook, Apple) have become mainstream consumer marketing channels. Meanwhile acquisitions are up, but deal sizes are down as mature companies buy startup companies ever earlier in their development cycle.

What does this mean? What opportunities/pitfalls does it present for investors?

Let's start with 2 intial observations about the current market for investors, and for startups.

Assertion #1: Most consumer internet investors (angels, seed funds, big VCs) have no clue what the fuck they're doing. Except for a few brand names, most large funds >$150-250M will die in the next 3-5 years... and that's a good thing. Still, smaller investors will need to innovate and differentiate in order to attract proprietary, quality dealflow and survive.

Recently some very smart folks have been talking about the relative [upside/downside] of being a [small/big] investor in tech, and specifically the changes & challenges going on in venture capital in the last decade. Due to reductions in CapX rqmts & median exit size, it's tough to be a large fund (say, over $250M?) that invests in consumer internet. However, while i agree there is a Moneyball "small-ball-is-beautiful-baby" story going on in venture, that summary is too concise... and it misses a more significant point re: differentiation in investor domain expertise & services (or lack thereof), and the importance of staging follow-on investment based on product/market maturity (more on that later).

IMHO, whether or not your fund is large or small is not the primary issue in consumer internet investing. While my biased belief is $10M-100M seed funds are a lot easier to manage & more entrepreneur-aligned than "traditional" $250-500M+ funds, there will likely be a few winners and LOTS of losers at both ends of the spectrum. Probably more BIG fund losers than small fund losers, but still there are many other factors than fund size that will predict for success or failure.

No, the primary issue is that investors of all shapes and sizes have become incredibly lazy and complacent over the past two decades, measure by both activity and by IRR. Meanwhile, the consumer internet has brought a tsunami of technological & behavioral change which has resulted in stunning reductions in time & cost needed to distribute products and services to the over 2-3B connected people on the planet.

Let's examine that more closely:

The INTERNET has changed life DRAMATICALLY for BILLIONS around the globe -- yet most VCs & lawyers still close deals via fax & snail mail.

Fuck. That. Noise.

Let's cut to the chase, shall we?

Most consumer internet investors, large or small, have no goddamn clue what they are doing. They are getting killed on IRR, and most of them should be put down & put out of their misery... NOW. Their investment thesis is suspect, their domain-specific skills are limited or non-existent, and their desire & ability to innovate is minimal. They are simply collecting fees, waiting for their next tee time.

Well ATTENTION K-MART SHOPPERS -- you, Mister VC 1.0, are about to be DECIMATED... and it's a Schumpeterian Fate that is both deserved and overdue.

HURRY UP & DIE ALREADY, U FRIGGIN' PATHETIC DINOSAURS.

indeed: most VCs are Dinosaurs, and the World Wide Web is an Asteroid that hit the planet in a slow-motion cataclysmic explosion 15 years ago. It may take another 5 years for the ash clouds & nuclear winter of Browsers, Search Engines, Social Networks, & Mobile Devices to kill all the T-Rexes, but it's a done deal. The marsupials are taking over, and in 10 years there will be a lot more investors that look like Jeff Clavier, First Round Capital, Y-Combinator, TechStars, Betaworks, & Founder Collective than any Sand Hill VC (funny how all the innovation is from non-valley investors, isn't it?).

Now let's take a look at changes that have occurred, and how to adapt as a Lean Investor 2.0:

Assertion #2: There is tremendous opportunity in building revenue-focused consumer internet startups for $1-5M that a) attain some level of commercial viability, b) acquire customers predictably using online distribution channels (Search, Social, Mobile), and c) can later be sold for $25-$250M.

Historically, Venture Capital has been about the use of large, risky, CapX spending to accomplish two primary & typically expensive goals:

1) Build Product.

2) Acquire Customers.

Now in the past, PRODUCT has meant building a variety of expensive things (big iron, disk drives, personal computers, packaged software, computer chips, designer drugs, network routers, browsers, search engines, social networks, etc) with lots of people over periods of years. We're talking 50-100+ people spending 3-7 years building shit, with no offsetting revenue for quite some time. That's a lot of headcount and expense before you even get to your first customer.

And to make that even worse, many of the VC-funded startup companies target CUSTOMERS have been large, enterprise companies in tech and/or government entities with looooooong sales cycles requiring expensive, direct, dedicated sales force... that also cost shitloads of time & money. Or large mass-marketing sales & marketing campaigns conducted via expensive print, radio, & television marketing. And the sales cycle was annual, requiring ongoing efforts to hit quarterly or annual sales targets via license revenue and maintenance support and upgrades.

Finally, many of these companies were being built/financed to go public over a series of many years and multiple capital raises where the amount of ownership by the entrepreneur was quite small (usually single-digit %'s) and the target exits were huge, hundred-million if not billion-dollar outcomes.

Fast Forward to Twenty-Ten, and let's take a look at these fundamentals, with a specific lens on the consumer market & internet startups:

PRODUCT now typically means a website or service, run on low-/no-cost open source software, hosted in the cloud on low-cost servers, developed in a few months (or a WEEKEND!) by a small team of 1-5 developers, who continuously test & iterate in real-time with online customers

MARKETing now typically means using a variety of online distribution channels via paid & organic search (SEM/SEO) on Google, viral/social amplification on new media platforms & social networks like Facebook, Twitter, & YouTube, and the quickly-growing mobile platforms of Apple iPhone & Google Android. With the exception of search, most of these distribution channels didn't exist 5 years ago, yet they now easily reach over 100M-500M+ users, with very low cost and measurable marketing campaigns such that even a small team can reach billions of people globally.

REVENUE can now be collected easily via a variety of online payment, transactional e-commerce, digital goods, subscription billing, lead generation, CPM/CPC/CPA advertising. Many people buy things online now, and many companies are even bought for usage & users ahead of revenue. In other words: Brothers Are Gettin' Paid, Yo. Cash Money, G. It's aaaaalll goooooood, mah nizzle.

So to summarize: PRODUCT development cycles are shorter, required materials & resources are free or low-cost, development teams are smaller, and new services mashup & build on top of old services that already deliver terrific value in the cloud via features, data, network effects, & APIs. MARKETing costs are lower, due to a variety of broadly-available, low-cost, online distribution channels, which can be used in more measurable and predictable ways than ever before. high-bandwidth to the home means video and other data-intensive media are commonly available to anyone with cable or satellite TV. REVENUE can be generated simply & continuously, via direct business models & online payment methods that are becoming mainstream all over the world... such as mobile payments even in the remotest, poorest economies.

Finally, as more tech & internet companies mature and become profitable, they in turn are a larger source of exits & liquidity as they attempt to acquire startups with innovative technology & desirable products & services. By utilizing their larger customer base as a way to leverage distribution, they can acquire smaller companies who want low-cost ways to access new customers. However, as more of these companies mature & compete for acquisitions, many startups are getting bought up earlier in their lifecycle at smaller dollar amounts than if they had to grow to IPO-required size. And as even non-technology companies attempt to acquire innovation & expertise in online services, more but smaller exits is a likely ongoing trend.

Okay, so that's a lot of crystal-ball gazing into the near-future, but now let's take a look at some emerging best-practices & fundamentals for investing in Consumer Internet startups.

Assertion #3: Startup investment can be staged in 3 distinct phases with explicit goals & outcomes:

1) PRODUCT = Customer Problem/Solution Discovery (MVP), User Experience / Usability

2) MARKET = Market Sizing, Campaign Testing, Customer Acquisition Cost(s) & Conversion

3) REVENUE = Expand Revenue and/or Market Share, Optimize for *PROFITABLE* Revenue.

Largely, this is about applying techniques in Customer Development (Steve Blank) and The Lean Startup (Eric Ries) to investing, and in particular how to research, improve, & identify Product/Market Fit (Sean Ellis, Marc Andreesen), otherwise known as "TRACTION", before and after you invest.

This is really the key to my investment thesis: Invest BEFORE product/market fit, measure/test to see if the team is finding it, and if so, then exercise your pro-rata follow-on investment opportunity AFTER they have achieved product/market fit. It's sort of like counting cards at the blackjack table while betting low, then when you're more than halfway thru the deck and you see it's loaded with face cards & ten, then you start increasing your betting & doubling-down.

Let's face it -- most venture investors are sheep. We like unfair advantages. We want to know that there is already customers, revenue, and that elusive thing called TRACTION. Unfortunately, if it's obvious that there is already customers, revenue, and TRACTION then there will likely be a LOT of other investors at the trough, the competition will be fierce, and as a result the price to invest will be high.

So how can you invest at low-cost, then figure out when to follow-on to increase your value?

it's pretty simple, actually.

INVEST EARLY at LOW COST in people you think are smart and have built some promising products. understand if they know how to iterate and use customer feedback to improve their product and/or marketing. learn how to understand conversion metrics for their business & customer value.

then IF you see the metrics improving & customer / business value increasing... then DOUBLE-DOWN.

however this happens in 3 distinct stages:

1) PRODUCT: Discover a [large enough] customer segment with a meaningful problem / strong desire, and develop a functional solution for them to use (Minimum Viable Product aka MVP). I also call this when ACTIVATION happens. You should also make sure the user experience is compelling enough for them to use it more than once (RETENTION).

2) MARKET: Test for scalable distribution channels that allow you to acquire large # of customers at cost less than what you will generate (ideally, at <20-50% of annual revenue so you have some cushion). You may also find you have to go back to #1 and change some things, or discover entirely different marketing campaigns & concepts to get to scale. If you're lucky you may even discover a way to get your users to spread the word for you (word-of-mouth and/or viral features).

3) REVENUE: hopefully your MVP is already obviously valuable enough that people will pay something non-zero for it. regardless, the test is now to test & optimize for product/market(ing) combinations that generate cash-flow positive outcomes at scale, over short periods of time (or longer periods if you have financing structure to merit). i tend to prefer business models with low complexity, such as direct transactional or e-commerce models, subscription billing models, or lead-gen / affiliate models.

Ideally you'd like to be able to invest in a functional product AFTER the entrepreneur has already got it working, but sometimes they aren't there yet, and often they will have to pivot regardless in order to find an interesting segment that scales & is profitable. Still, i'd like to think most entrepreneurs who understand their customer can build a functional MVP in 3-6 months, for <$100K. Sometimes it takes longer / more capital, but most times it doesn't. If they look like they figure it out, double-down.

Next, you'd like to be able to improve the user experience and engagement / retention, get them to increase their love for the product. If you can do this well enough, your customers will become your marketing... at very low cost. Even if you can't get to strong word-of-mouth or viral marketing, you can still hopefully reduce customer acquisition cost by getting incremental social amplification. Regardless, your job is to discover SOME kind of scalable distribution channel that seems like it COULD be optimized to a point where it's cash-flow positive at some point in the future. Hopefully this doesn't take more than $1-2M and 6-12 months to figure out. But most of this spend should be on MARKETING channels & testing, NOT on adding more features... you can pivot to discover new customer use cases, but DO NOT keep adding features. in fact, you might want to remove them (see KILL A FEATURE). If it looks like you've got scalable distribution, even if not quite break-even, then double-down.

Finally, now that you have functional product (hopefully AWESOME product with strong activation / retention / referral metrics), and you have some ideas on scalable distribution that converts to non-zero revenue events (or proxy events such as long usage or referral / affiliate / lead-gen behavior, advertising CPM/CPC/CPA), now you need to tune to get to profitability within some finite period of time that you can finance and/or stretch to achieve. This is where it can sometimes get quite expensive, and it could take years to get to profitability for some businesses, but i'd like to think that my startups can figure this out in $1-5M and 1-2 years. Again, if it looks like you can get there, then double-down.

In summary, you should be thinking about stages for risk-reduction & company value creation that look like this:

1) Product: $0-100K, 3-6 months to develop basic MVP that's functional & useful for at least a few customers. Get to small product/market fit.

2) Market: $100K-$2M, 6-12 months to test marketing & distribution channels, understand scalability & customer acquisition cost, conversion to some non-zero revenue event. Get to large product/market fit.

3) Revenue: $1-5M, 6-24 months to optimize product/market fit and get to cash-flow positive.

I might edit this a little bit, as i'm in a rush to finish publishing and get back to other projects, but i think this has captured most of what i wanted to say for now.

Appreciate feedback & commentary on anything that doesn't make sense, could be improved, or can be streamlined.

product market revenue cost customer product revenue market cost customer marketing distribution investors years internet companies customers large small online consumer startups channels invest social services acquire test months search smaller discover functional models expensive sales value capital investment funds double mobile startup fund quite think variety figure scalable hopefully getting venture cash features business development product market market fit consumer internet distribution channels scalable distribution online distribution user experience customer acquisition marketing campaigns internet startups social networks acquisition cost cash flow non zero flow positive lead gen zero revenue online payment functional product cpm cpc companies mature customers revenue business models cpc cpa social amplification subscription billing acquire customers startups assertion internet investors seed funds startup companies marketing channels search social social mobile mobile platforms venture capital primary issue search engines engines social typically means browsers search years ago fund losers investment thesis small team online distribution channels customer acquisition cost cash flow positive non zero revenue consumer internet startups engines social networks consumer internet investors browsers search engines search engines social search social mobile

Lead Investors, Dipshit Companies, and Funding Every Entrepreneur

Fri, 30 Jul 2010 07:05:25 -0400

Publisher - A VC
First shared by - robdiana
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Sounds like a great conversation yesterday at Y Combinator's AngelConf in Silicon Valley. Anthony Ha of Venturebeat had a couple posts on it that I just read, one on Paul Graham's comments, and another on Ron Conway and Mike Arrington's comments. I would have enjoyed being part of that discussion so I'll join in now.

I second Ron Conway's hope that "any entrepreneur that has the guts to start a company gets funded." That is my kind of thinking. We need more entrepreneurship, not less. So I'm with Ron 100% on this. Of course getting funded does not means 10s of millions of dollars of funding for every entrepreneur. It means enough funding to actually build something and see if the idea and the team has the right stuff to build a company. Then market forces should take over and determine what ideas and teams get more funding and which ones should close the doors and think about what is next for them.

Mike Arrington expressed the contrary opinion, apparently held by many VCs (not me), that this mini explosion in angel investing is creating a bunch of "dipshit companies." I don't know what a dipshit company is. I haven't seen one. If you listen to the chatter on the Techcrunch comment threads, you will see that people think Twitter and Foursquare are dipshit companies. Fine. Many great companies have been built on a wall of derision and I personally think those two are going to join that list of laughed at great companies (and maybe already have). My point is you just don't know what is a crazy idea and what is a brilliant idea. And you don't know what is a great team and what is a weak team. Of course, we have our opinions on that. We make those judgment calls every day. But we are often wrong. VCs are wrong more often than they are right. It is good for VCs if 10x or 100x companies get angel funding. That is more opportunity for us.

Paul Graham rightly points out that that there is a "larger trend where founders have more power than investors." I've been saying that on this blog for a long time. And I also agree that founders are determining the financing structures that make the most sense for them. But I do not agree with Paul's opinion that the notion of a "lead investor" is going away and that is good for entrepreneurs.

This may just be me being defensive and protective of my chosen role. I am a lead investor. It is what I do. I don't follow very well. I like to get behind an entrepreneur and company and help them raise capital, hire a team, and build the business. And I think the entrepreneur needs a lead investor to play this role. Obviously they should pick a lead investor that will not "screw them over" and sadly too many times lead investors do just that. But there are many high quality VCs out there and thanks to the power of blogging and social media and the web, you can find out who they are and who to avoid.

Roger Ehrenberg had a great post on this yesterday. He says:

Coming to the table as a two- or three-headed syndicate beast without a clear leader is a big, big mistake. How many VCs like investing into situations where there is management by committee? Answer: zero. Why should syndicate-building be any different?

Just like the entrepreneur needs to run the business, he or she should find an investor to run the investor group. I am someone who does that so if you are looking for a lead investor for your company come talk to me. If you don't want a lead investor, then don't knock on my door because I don't know any other way to be.

investor lead companies entrepreneur company investor lead entrepreneur companies funding company dipshit think team lead investor dipshit companies mike arrington entrepreneur needs ron conway paul graham lead investors

How Y Combinator Is Remaking Silicon Valley in Its Image

Fri, 30 Jul 2010 02:10:25 -0400

Publisher - GigaOM
First shared by - Proto
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Y Combinator put on a tour de force Thursday. After five impressive years' worth of molding fresh batches of startups, it packed 150-odd people with money into a room and schooled them in the art of giving its companies funding. The incubator's second Angelconf, held at its headquarters in Mountain View, Calif. today, packed the room with people with an interest in breaking into the frothy angel investing space a mix of people from recently successful tech startups as well as those from outside the industry.

Y Combinator founder Paul Graham

In the Y Combinator world, as formulated by co-founder Paul Graham, the young, visionary, technical startup founder is king. And after YC graduates' oversubscribed funding rounds, promising products, and increasingly frequent acquisitions by Google and Facebook, Silicon Valley seems eager to remake itself in Y Combinator's image.

Archangel Ron Conway, who said he's put money into 500 companies over the last 12 years, kicked off the day with an optimistic and generous recruiting speech: He said he believes every entrepreneur who has the guts to start a company should get funding, and added I believe the more angels we have in Silicon Valley the better.

Conway, along with well-known angels such as Ariel Poler, Mitch Kapor and Naval Ravikant, spoke of the joy of enabling smart and passionate founders to build great things. You listen to those people tell you what it's going to be like in the future, said Conway, speaking of early meetings with the founders of Google, Facebook and Twitter. I'm completely addicted to it.

Be All You Can Be

The angels' testimonials depicted a world of investing that anyone could break into with the right mix of smarts, humility and luck. Five years ago, I was a washed up enterprise software guy from Austin, Texas, said Mike Maples of Floodgate, now one of the most active and influential superangels. After he moved to Silicon Valley and spent 90 days sharing meals with the smartest people he could get meetings with, Maples landed his first investment in Odeo, the company that eventually gave birth to Twitter. And it all flowed from there.

Even Greg McAdoo, of the legendary VC firm Sequoia Capital (which is closely affiliated with Y Combinator) fluffed the egos of would-be angels, saying two-thirds of his firm's early stage investments include angels. He encouraged angel investors to contact him, take him out for coffee, and talk about the industry or potential deals early on in the process. (While McAdoo said he would pick up the tab for this hypothetical coffee date, he wasn't quite so generous as to give out his email address, instead inviting those present to get introduced to him by a Sequoia portfolio company founder.)

Engineering a New Kind of Funding

Graham took the session in a practical direction, proposing that the seed funding deal of the future would take on a new structure to better suit startup founders. The way of the future, Graham said of funding rounds, is no fixed amount, no fixed closing date, and no lead. He said the best Y Combinator companies are already taking funding on a rolling basis, because it requires less reliance on a lead investor, takes less time out of product development, and gives investors less room to drag things along or collude.

The meta-trend is founders are going to be more powerful than investors, said Graham. If you want to know what the future of investing is going to be like, think what would the founders want it to be like.

Startup lawyer John Bautista, a partner at Orrick who works on many Y Combinator deals, attested that he's already seeing many startups closing rolling funding rounds, and that these convertible debt deals are structured favorably to angels, giving them the right to earn a return on their shares if the company is sold or update their terms if more money is raised later.

Are Talent Acquisitions Evil?

Thankfully, Y Combinator is not a cult, and it brought in Michael Arrington of TechCrunch as a counterpoint early in its program to rant about dipsh*t Y Combinator companies that sell out early, denying the world and investors the chance to be true game-changers. For good measure, he called out superangels for being complacent with their small successes and making companies like Facebook stronger through talent acquisitions.

But Arrington left shortly after his talk, giving 10 more angel investing believers such as Maples and Aydin Senkut the chance to convert the wannabe angels gathered. Paul Buchheit, the creator of Gmail who himself was brought to Facebook with its talent acquisition of his company FriendFeed, said in response to Arrington's critique, Talent acquisitions are very controversial, but all of [the ones I've invested in] got a 2, 3 4 or even 5x return. I can live with that. Besides, acquisitions of young companies tend to be better for everyone involved, as compared to later-stage deals, said Geoff Ralston, who recently sold Lala to Apple. Integrations of billion-dollar companies almost never work, he said.

Loopt CEO Sam Altman, speaking on behalf of his Y Combinator peers, got the last word. He warned the angels-in-training: It's important that you pick the winners, but it's absolutely necessary that the winners pick you.

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Y Combinator's Paul Graham: Say goodbye to traditional venture rounds

Thu, 29 Jul 2010 19:45:33 -0400

Publisher - VentureBeat
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Y Combinator cofounder Paul Graham today offered an overview of how he has seen the angel and startup world evolve in the last year. Among other trends, he argued that the traditionally structured venture round is becoming irrelevant.

Speaking at AngelConf, the angel investing event hosted at Y Combinator's office in Mountain View, Calif., Graham compared the traditional venture model to the classic children's book Are You My Mother? Startup entrepreneurs raising funding are like baby birds, asking every venture capitalist, Are you my lead investor?

Now, however, more venture rounds aren't really being led by a single investor, and they don't have an official close date or amount, Graham said. There may be an official lead investor, but they're the lead in name only, and don't dominate the process like they used to. This benefits the startups because the lead investor has less power to screw them over. Even if well-intentioned the startup isn't held back by if the lead isn't moving fast enough to raise money. And rather than distracting itself with intense fundraising, a startup can keep raising money in the background as needed.

Graham said this is part of a larger trend where founders have more power than investors, a trend that incubator Y Combinator has been based on since the beginning. Entrepreneurs who have had difficult dealings with VCs may be skeptical that this power shift is really occurring, and even Graham acknowledged that the fundraising model the described isn't happening for every startup yet. But that's how the best ones are raising money.

If the best startups are doing this, what do you care what the other ones are doing? he said.

Companies: Y Combinator

People: Paul Graham

graham y startup lead venture graham startup venture lead investor combinator lead investor paul graham raising money graham said venture rounds traditional venture

15 Developer/Hacker Women to Follow on Twitter

Wed, 28 Jul 2010 19:01:28 -0400

Publisher - Mashable!
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This series is supported by Rackspace, the better way to do hosting. Learn more about Rackspace's hosting solutions here.

Everyone should know at least one woman who can code her way out of a wet paper bag.

While women developers, computer programmers and hackers of all stripes are by far outnumbered by men in their field, they're hardly nonexistent. They blog, they tweet, and they do fantastic work to keep the Internet afloat. We've chosen to highlight 15 reader-recommended tech women here; if you know of others who should be on our radar specifically women with coding skills please do let us know about them in the comments section.

Some of the women on our list are Internet famous. Some, less so for now at least. Some have worked at big tech companies like Google and Apple and Adobe. Some are startup employees or fly solo. Some are hardcore hackers, some are web design-focused. We've even got a hardware geek on our list.

With a big hat-tip to all our friends on Twitter who recommended these women, here are 15 technically skilled women (in no particular order) to follow.

1. Pamela Fox

Pamela Fox is a graduate from the University of Southern California Computer Science Department, where she earned both her bachelor's and master's degrees with minors in 3D animation and linguistics. She lives in Sydney, Australia and works for Google as a Wave API Developer Advocate.

2. Jeri Ellsworth

This woman is a self-taught computer chip designer and expert electrical and mechanical engineer. She taught herself to program as a kid by reading Commodore 64 manuals. Ellsworth lives in Oregon, works as a consultant, and has a serious penchant for pinball machines, of which she owns 60 or so.

3. Emily Chang

Emily Chang lives in San Francisco and works at Ideacodes, a web dev/design shop she co-founded with husband Max Kiesler. She's a nationally recognized expert in user experience and interaction design. In addition to her Twitter account, we also recommend her personal blog.

4. Hilary Mason

This data-loving lady is a computer science professor with a thing for machine learning. Mason does research at Johnson & Wales University and also works as a scientist for Bit.ly. She occasionally posts code on her personal website.

5. Danese Cooper

Danese Cooper is the Wikimedia Foundation's CTO. She's also a huge open-source advocate; in fact, she's affectionately known as The Open Source Diva in certain circles. She worked for the Peace Corps, on the floor of a stock exchange, and even at a law firm before making the move to tech, where she began at Apple in 1991.

6. Leah Culver

Leah Culver is a software engineer specializing in web apps and Django development. In 2007, she co-founded Pownce, a social networking site, and sold it in late 2008. These days, she's a freelancer in San Francisco, where she cranks out applications and speaks on a number of topics relevant to web devs and designers. Culver is also an open-source advocate; we recommend checking out her blog.

7. Amanda Wixted

Amanda Wixted is a game programmer and an iPhone tech lead at Zynga. In fact, she's the one responsible for FarmVille for iPhone. Before she went to Zynga, she was a lead programmer for Pac-Man and Ms. Pac-Man for iPhone. And how's this for street cred: Each of the iPhone games Wixted has worked on has been in the Top 10 Free Apps in the App Store.

8. Sarah Allen

Sarah Allen has helped to develop such products as After Effects, Shockwave, Flash video and OpenLaszlo, a development framework for web apps. Formerly an employee at Apple, Adobe and Macromedia (pre-dotcom crash), she now acts as CTO of mobile startup Mightyverse, does some consulting on the side, and reaches out to women in the Ruby on Rails developer community. You can keep up with Allen's goings-on via her blog.

9. Jenn Lukas

Jenn Lukas says she loves three things in life: Coffee, kittens and XHTML. Judging from her website, we'd guess that unicorns are a close fourth. She's done web design projects for such big names as ESPN, Johns Hopkins University, United Healthcare, ABC Sports and Microsoft. Lukas lives in Philadelphia and works at Happy Cog, a web design and UX consultancy.

10. Nicole Sullivan

As a performance engineer and international evangelist for Yahoo, Nicole Sullivan does as much communication and research as she does actual app building. She's an engaging, readable, and regular blogger, and a CSS expert to boot. Sullivan lives in Menlo Park, California.

11. Laura Thomson

Laura Thomson is an Internet engineer, a self-applied job title we don't see thrown around too often. But given her position as a senior software engineer at Mozilla, makers of Firefox, we can't argue with the description. She's a FOSS (Free and Open Source Software) advocate, and she wrote the book on PHP and MySQL web development. She's an Australian who lives in Maryland.

12. Marissa Mayer

Marissa Mayer was one of the first 20 engineers at Google; in fact, she was hired in the same month that Google got its first round of funding. Currently, she's the company's VP of search product and user experience, which means she basically green-lights every product that gets released to the general public, including Gmail, Google Earth, Google Maps and many other apps and features.

13. Sara Chipps

This software developer is one of the minds behind Girl Develop IT, a low-cost program for women who want to learn how to code. Chipps posts regularly on her personal blog, including code samples, and she's particularly skilled in .NET development. She lives in New Jersey and works on contract.

14. Alison Gianotto

Alison Gianotto has been blogging for 15 years, give or take that means she started out before blogging was called blogging. She co-authored a few books on PHP/MySQL, too. Gianotto is currently working in New York City as the director of information architecture at a creative agency.

15. Gina Trapani

Gina Trapani is a programmer, but she's perhaps best-known for founding Lifehacker, a blog that we at Mashable like to read, ourselves. She tapered off her Lifehacker leadership in January 2009 and recently wrote a thorough guide to Google Wave. She's currently developing ThinkTank, a web-based platform for crowdsourcing insights via social networks like Twitter, Facebook and Buzz. Trapani resides in San Diego, California.

BONUS: Women Developer Lists on Twitter

Fifteen geeky, nerdy, technically talented women not enough for you? Check out these Twitter Lists of women developers and engineers:

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Follow the leader?

Wed, 28 Jul 2010 14:31:12 -0400

Publisher - Redeye VC
First shared by - Avi
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Whenever First Round Capital holds a party, we sometimes get emails from a few of our guests asking if they can bring another person with them. Maybe a VC friend of ours wants to bring another partner with him. Maybe it's an entrepreneur who wants to bring a new executive hire. Maybe it's someone who works at Facebook and wants to bring a co-worker. Unless we're dealing with a venue that has a limited space, we typically are fine with the extra guests. It's a great way to expand our network and meet new, interesting people. The few times we weren't able to accommodate those requests typically were due to hard constraints (either budgetary or the size of the venue). And when we don't have room, we tell that to the person who asked and they typically are very understanding.

I just read my friend, Roger Ehrenberg's, latest blog post on syndicating seed rounds and totally agree with his main conclusion (that rounds tend to work best if there is a lead investor to represent the interests of the syndicate). But the most meaningful part of Roger's post, in my opinion, is when he writes about how a syndicate gets chosen. Specifically, he writes: One can have a reasoned discussion concerning capacity, etc., but fundamentally if an entrepreneur wants a particular investor in I am going to make room period.' I could not agree more. I think that the entrepreneur should be the decider on the syndicate not the lead investor. The lead investor should help establish terms, provide feedback and input on potential co-investors, and bring other investors to the table if asked/needed but the lead investor should not force a syndicate on the entrepreneur.

If I'd react badly to a guest trying to force me to let another guest into my party for a few hours (ie, the only way I'll come is if you let this stranger in), I can only imagine how badly I'd react if I was an entrepreneur that was forced to spend the next 5+ years with someone I don't want. In my view the lead investor should offer feedback and offer introductions but ultimately should follow the founder's lead on syndicate composition. If the founder wants certain angels to participate done. If the founder thinks that a certain fund could add value done.

Just like I think that financing rounds should be based on company math (as opposed to venture math), I think the syndication decision belongs with the founder (as opposed to the investor). The founder should be free to choose the investors that increase the company's odds of success. And building a syndicate is the entrepreneur's opportunity to figure out who the founder wants to spend time with, who the founder respects, and who the founder thinks can help the company the most.

Oftentimes the first strategic discussion that a lead investor gets to collaborate with a founder on is the discussion around the syndicate. And while I'd clearly expect a reasoned conversation to occur, I believe that an early stage investor is funding a company because they believe in the entrepreneur's ability to make strategic decisions and to optimize for success. And ultimately, it should be the investor who follows the founder's lead when it comes to syndicate composition (and not the other way around).

founder investor syndicate lead entrepreneur founder investor lead syndicate entrepreneur company lead investor founder thinks syndicate composition

Booth Babes Don't Wear Glasses

Wed, 28 Jul 2010 10:30:23 -0400

Publisher - devcentral.f5.com
First shared by - StephenFoskett
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Go ahead, take the booth babe out of the picture. The assumptions and pre-conceived notions held by many in IT will still be there. The front line in any booth is assumed to be staffed by both male and female talent or employees that are not necessarily very technical. Period. Whether they're male or female, that screening line isn't going to be able to describe in detail, for example, the anatomy of an SSL handshake. Go ahead, ask. Ask a man, ask a woman. Doesn't matter. Front line booth staff are almost unilaterally there to screen and direct. They exist to welcome you to the booth, scan your badge, and to help you get to the right person if you're interested in a discussion. They are there because they are outgoing and friendly and enjoy engaging with people, for which those of us who are hiding in the booth and are not outgoing are grateful.

booth ask female front male booth

Cable is Hot, Hot, Hot (Except for 'Mad Men,' Which Remains Cool)

Tue, 27 Jul 2010 21:11:35 -0400

Publisher - TV Squad
First shared by - TimYonkers
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Filed under: TV News, Summer TV

Cable TV is hot, hot, hot this summer.

Bravo, USA and the History Channel just posted their best-ever months for July, thanks to a slew of new hit shows, according to TV By the Numbers. The only show seemingly not feeling the summer heat: AMC's critically acclaimed 'Mad Men.'

We're guessing that viewers are preferring to stay home and watch basic cable than fork out $10 and upwards for the latest movie, but hey, maybe watching Bethenny Frankel get married and have a baby is just more enjoyable than any of this year's crop of summer movies.

Bravo is sailing high, thanks to 'Bethenny Getting Married,' a spin-off of 'The Real Housewives of New York;' It was cable's No. 1 entertainment show with 2.26 million viewers on July 8.

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Why You Need To Pay Special Attention To Your Early-Adopting Customers

Tue, 27 Jul 2010 11:15:50 -0400

Publisher - War Room
First shared by - robdiana
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Yesterday I wrote about the benefits of using social proof and authority in raising venture capital. If you didn't read that yet it might be worth having a quick skim as a primer.

Social proof is defined as looking for others to guide our decisions and is also one of the most important techniques in acquiring customers in your company. Many of you have read or at least know the primary thesis of Crossing the Chasm the seminal book on marketing your products to mainstream consumers by Geoffrey Moore. It influenced a generation of tech marketers.

The book popularized the technology adoption lifecycle curve that originally came out of Iowa State University shown below. We all intuitively know this curve now but we don't all market effectively to it. Chris Dixon alluded heavily to it in his brilliant post on Techies and Normals. People who are innovators or early adopters like to be at the cutting edge. We like to use new product and gain benefits before our peers. We are evangelists. We check-in when we go to restaurants when everybody else is wondering when we're going to put away our F***ing iPhones or Blackberries. We have to be first (this image is worth a click, I promise).

In short, innovators and early adopters have faith that there will be benefits to using products that are unproven and, even if they don't, they enjoy the process of using new stuff. This applies to business users as much as to consumers. Sometimes these markets never appeal to normals (Chris Dixon's definition) and other times it needs to be more effectively marketed to normals.

So the early part of a technology company is about finding your hard core group of early adopters and making them passionate about your products. You need to give them back stage passes to your company. You need to give them advance notice of your product development or better yet let them help influence your direction. Sure, they need a little social proof. If they hear that Robert Scoble, Michael Arrington or Jason Calacanis loves your product they're more likely to give it a try.

This is what drove early adoption at Twitter, FourSquare, Quora and is now driving people obsessively at FlipBoard. I must be an early adopter rather than an innovator because I DO NOT have my knickers in a twist to get on FlipBoard. It looks cool, but I can wait.

But here's the thing the early & late majority will never come without social proof. These are the people who want to see ROI studies (business), read NY Times reviews by David Pogue or WSJ reviews by Walt Mossberg (consumer). And the key to understand how to market to these people is to understand the point made in the book Yes by Robert Cialdini. Regarding social proof he says,

Earlier we described the importance of testimonials in trying to sway others' opinions in your direction. The results of this experiment [the one on hotels listed in my previous post] suggest that the more similar the person giving the testimonial is to the new target audience, the more persuasive the message becomes You should begin not with the testimonial you're most proud of, but with the one whose circumstances are most comparable to your audiences.

This is where heroes come in. Heroes are those every day users of your product who are not overly senior in ranks but are in charge of implementing your solution within their company. If they're consumers they're just everyday people like you and me.

Salesforce.come is brilliant at marketing heroes and I think Marc learned it in turn from Oracle. We would take every day users from our customer base and make them heroes. Here are some examples of heroes in action:

A testimonial / quote from a hero on the banner on the home page of your website with their image and a link to a case study on how they used the product
Speaking at a city tour in which Salesforce.com sales reps and executive management were present. Heroes told our success stories, not us.
Leading breakout sessions at our annual conference DreamForce
Speaking to industry analysts at Gartner Group, Aberdeen, IDC, Yankee Group, etc.
Taking reference calls from prospects considering using our products

Marketing heroes is brilliant and you should find ways to implement in your organization. On the one hand the early & late majority are more apt to listen to the benefits of your products from their peers through social proof than from any corporate bumpf you can produce to convince them of the benefits of your product.

On the other hand, what better way to build strong relationships with your company's strongest supporters? How often do every day employees get to appear on the home page of a major website, speak at a conference or get to talk with market analysts? You're elevating them in ways their own organizations probably do not. And in turn you get not only strong endorsements but even more loyal future supporters.

Think about this what is more powerful a VC who tells you how great he/she is or when you read your peers reviews on The Funded?

And heroes work on the consumer side, too. Ever notice all those iPad billboards are just ordinary users like you and me sitting on a couch using a product that they know you're going to love? OK, I know Apples has an unfair advantage but the emotion they're going after is social proof. People like you use this product. It's easy. It's what they do when their sitting on their couch watching TV. Everybody is doing it.

How are you going to cultivate and gain the support of your company's heroes? How will you work with your heroes to gain more early adopters or to market the early majority more effectively? We already know from Cialdini that this is even more important than your putting a link to a press article, yet how much time do you spend trying to market these to everybody?

Mark Suster is a partner at GRP Partners and a former entrepreneur. This post was originally published on Mark's blog, Both Sides of the Table; it is republished here with permission.

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AngelList Boulder and Some Thoughts on Seed Investing

Tue, 27 Jul 2010 07:45:28 -0400

Publisher - Feld Thoughts
First shared by - robdiana
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I got a note from Nivi, the creator of AngelList, over the weekend saying that he'd put up a special page for angel investors in Boulder. He's looking for the local Boulder angels to add their names to the list. Gang let's get em up if you are an angel investor and based in the Boulder area, sign up!

There's been an enormous about of blog and news chatter about angel investors, especially seed investors and the emergence of super angel / micro VCs, in the past few months. I'm a huge fan and supporter of the super angel / micro VC phenomenon and have watched with delight as it has built momentum.

However, in the past few weeks I've started to see a rant start to emerge that I'll simplify as VCs suck as seed investors the only path to happiness are angels or super angels or micro VCs. This rant bugs me as I think it's incorrect and isn't very helpful to entrepreneurs. While I know many VCs that I would categorize as terrible seed investors, I know plenty that are excellent seed investors. And while I know many angels who are terrific seed investors, I also know some who are abysmal.

The thing that started to bug me last week wasn't the discussions about the characteristics of what makes a VC a bad seed investor, but that the comments, including some from super angels, were becoming generalizations that all VCs were bad seed investors. As I read through them, they started feeling like statements of hey entrepreneur, trust me, I'm just trying to save you from Mr. Evil VC and here's the answer, the answer is me.

As a VC who has been a very active angel investor (I've made over 75 angel investments), an active seed investor as a VC (I just counted and 7 of the 25 investments we've made out of Foundry Group since we started our fund in Q4 2007 are seed investments), a co-founder of a mentorship-driven seed stage investment program (TechStars), and an investor in several super angel / micro VC funds, I believe both angels and VCs can be excellent seed investors.

There is a lot more transparency than there ever has been, the structural dynamics of early stage investing are moving around a lot, and entrepreneurs have more clarity on their choices, ways to figure out who is good and who is bad, and ways to get access to great choices than ever before. Fred Wilson wrote two excellent posts on this over the weekend titled Angel vs. VC and The AngelList as well as an earlier post titled Some Thoughts On The Seed Fund Phenomenon. Until last week I didn't feel like I had a ton to add to the discussion, but I felt like it was time to weigh in as I saw the tone shifting to VCs are bad seed investors.

While I completely agree with the phrase many VCs are bad seed investors especially around VCs simply trying to create option value for themselves or the issues around signaling risk, I felt like there wasn't enough discussion about why and when VCs were effective seed investors. So I thought I'd take some of this on over the next few weeks. Hopefully my perspective and examples will be additive to the conversation and helpful to early stage entrepreneurs, especially first time ones.

In the mean time, if you are a Boulder angel (or seed) investor and you are still reading, sign up on AngelList already!

seed investors angel vcs vc seed investors angel investor angels boulder super started micro angellist seed investors bad seed seed investor super angel angel micro angel investor early stage investors especially excellent seed micro vcs super angels angel investors super angel micro bad seed investors excellent seed investors

Comment Spam and False Positives

Tue, 27 Jul 2010 07:40:32 -0400

Publisher - A VC
First shared by - robdiana
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Every successful social media system I have ever been involved with has to tackle the problem of spam. It is one of signs that you are successful. When the spammers start targeting you, it is a sign you have arrived.

Over the years Disqus has had to fight comment spam and they've done a pretty good job of it. Their spam filters catch most of the comment spam. Occasionally one gets through and I manually delete it, most often via email with a reply with just the word "delete" in it (without the quotes).

In the past month, I've noticed a significant uptick in the amount of comment spam being targeted at the AVC comment threads. More is coming in and more is getting through. I asked the Disqus team about this a few weeks ago and they told me they are seeing a significant uptick in spam across all of their communities and they are dedicating additional development resources to fighting it.

One of the costs of tightening up the spam filters is you get false positives. And thanks to Harry Demott, I noticed this morning that a bunch of legit comments by AVC regulars had been marked as spam. I just went in and manually approved those comments and notified Disqus of this issue. I suspect they tightened something up in the past week a bit too much.

If you have been having trouble getting a comment to post in the past few days, this is likely the source of the issue. If it continues to happen, please let me know via email. I will make sure to visit the spam page in my Disqus moderation panel regularly for the next few days to make sure this isn't continuing to happen. And I am confident that Disqus will get this fixed in short order.

spam comment disqus few past spam comment disqus comment spam significant uptick via email spam filters false positives

Angels or VCs ... or Bank Loans?

Tue, 27 Jul 2010 07:15:47 -0400

Publisher - ReadWriteWeb
First shared by - robdiana
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On Sunday, VC Fred Wilson answered a commenter's question, "When should a startup seek angel versus early-stage VC investment?"

Wilson writes, "I believe entrepreneurs should seek angel money when their product is not yet complete, is not in the market and thus they cannot demonstrate real market traction to investors." Angels, he argues, are fairly "hands-off" investors and will allow a company more space to develop and refine their product. Investing in an idea is risky for anyone, but "selling a VC on a concept on a whiteboard is a very hard sale."

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If you have the opportunity to take money from angels or VCs, take both, recommends Wilson. If you have to choose, he says, choose VC funding.

And while Wilson's responses seem simple enough, questions of funding and financing are never quite so cut and dry. Many entrepreneurs struggle with making the right connections to get the right introductions to investors. This can be particularly true in communities outside the major tech startup zones.

Utah-based FundingUniverse hopes to offer help for first-time entrepreneurs by matching them with funding sources, both investors and banks. The latter is particularly important, says Brent Davis, Director of the firm's Arizona division, as the vast majority of the companies he sees - upwards of 95% he calculates - aren't really ready for angel investment and are better suited for loans.

For a fee, FundingUniverse analyzes businesses to assess their readiness for investment or loans. The pay-to-pitch model has been lambasted for creating more barriers to funding. But FundingUniverse says that the pitch events it sponsors are free for entrepreneurs and investors.

FundingUniverse has locations in Arizona, Utah, Colorado, and Maryland, and according to Davis hopes to help cultivate thriving startup communities outside of Silicon Valley.

Discuss

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Pulse Is Now Alive And Kicking On Android

Mon, 26 Jul 2010 15:45:57 -0400

Publisher - TechCrunch
First shared by - RaynerApe
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Back in May, we first wrote about Pulse, an innovative and pretty news reading app for the iPad created by a couple of Stanford grads. Just about a month later, it hit for the iPhone as well. Today, they're wasting little time graduating beyond the iUniverse with the launch of Pulse for Android.

Pulse is essentially a better-looking and more intuitive way to read your favorite RSS feeds. That's because the experience is visual and touch-based, rather than being a bunch of text you click on. The fact that it uses RSS also differentiates Pulse from its new rival Flipboard, which pulls in actual content rather than RSS in a way that may be legally murky. You may recall that Pulse was taken down from the App Store shortly after its iPad launch after the New York Times complained about the use of their content. This was especially odd since just 24 hours earlier, no less than Apple CEO Steve Jobs praised Pulse on stage during his WWDC keynote. But (and perhaps because of that) Pulse was quickly reinstated, and has stuck around with no problems since then.

So what do users of Pulse on Android get? As you can see in the video below, the same experience users get on the iPhone and iPad get and that's saying something considering how most apps ported over tend to lose something along the way. It's easy to add and remove content sources. Reading is smooth and seamless. And sharing is simple. Also, in the video below, the app isn't shown on just the latest and greatest Android device, it's running on five different Android devices, we're told.

What may be most amazing about Pulse is that this is their (Alphonso Labs') third platform release in under three months and they've done this with a team of just three full-time people (and one intern). Also, the group has yet to take any Angel/VC money though I suspect that may change sooner rather than later.

Pulse is available right now in the Android Market for $1.99. You can find it by searching for Pulse or by clicking here if you're on your Android device. To commemorate the Android launch, Pulse is also lowering the price of its iPhone app to $1.99 for this week.

CrunchBase Information

Alphonso Labs

Android

Information provided by CrunchBase

pulse android app ipad iphone pulse android rather than android device video below

It's a Bootstrappa's Paradise!

Mon, 26 Jul 2010 12:30:49 -0400

Publisher - SmoothSpan Blog » It’s a Bootstrappa’s Paradise!
First shared by - robdiana
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I had lunch with an old friend recently who does Angel investing. As sometimes happens, I launched into our lunchtime discussion with a bit of controversy by suggesting that I wasn't too sure what the value of Angel was for many companies. After a bit of calibration on where I was coming from, we quickly converged to agreement. Any company that takes Angel is on the road to being a VC funded company. Companies that are never going to be good VC opportunities therefore shouldn't take Angel. Angel is not really a VC-Lite substitute, its more VC-Seed. This post isn't really about Angels, it's about the interplay of Capital, Startup Ideas, and Entrepreneurs. To succeed, you have to understand how to balance all three along one of the successful paths. Leaving the path will very likely make your venture unsuccessful for lack of capital.

The VC World has gone through a fascinating transition over time. I've done 5 startups now, and not one of them could've started up in the way they did today. The reason is that with few exceptions, it's no longer possible to get funded with a slideshow and a team. Ironically, as VC's were deciding that its much cheaper to start companies, they apparently decided that this makes it possible for companies to start themselves via bootstrapping. Yes, there are seeds and super-seeds, but even these typically require a product and some semblance of customers to get funded. Talking to entrepreneurs, it's also not clear that the equity dilution and the terms offered them are better than the old days. In many ways they are worse, because they're very tilted towards forcing a VC's preferred outcome: creation of at least $1 billion in value.

What are the ramifications of all this for entrepreneurs?

The VC Utility Curve: You'd Better Have a Billion Dollar Idea

First, I am not one of those who wants to argue that VC is bad and should be avoided at all cost. There are plenty of them out there, but so far as I can tell, no more now than there ever were. I've made a lot of money working with VC's, I understand how that world works, and I frankly don't have a problem with it.

Keep in mind the VC's are in business to deliver a return to their Investors. They're going to conduct that business in whatever way they need to in order to deliver that result, just as any entrepreneur will do what it takes to keep their startup alive and hopefully thriving. In their world, the VC's get a few very large returns and a lot of no return at all. The big ones furnish the overall return and offset the failures of the others. What this means is that entrepreneurs can often experience a difference in goals and utility curves. For those that slept through the economics classes in college (actually, I found it pretty boring myself), a utility curve shows your willingness to accept risk in exchange for potential rewards. For the entrepreneur, this means keeping in mind that their VC's are willing to accept a lot of risk for an extremely large reward. Sounds like the entrepreneur's ideal, right? Well let's assume that the reward is selling a company for over $40M just 10 months after its founding. Let's further suggest that there are VC's who will look at that and decide that well it is truly life changing money for the founders, it just isn't interesting to them. They would want to keep playing the hand. BTW, if your investors are ready to bail at an early stage, it likely means they think something is about to go badly for you, not that they think it is a great price.

Okay, so let's get beyond VC motivations (make sure you understand that Utility Curve thingey and pack it away in the back of your brain!), and talk about companies. Let's just assume that the practical ramification of the Utility Curve idea is that unless your idea can be a Billion Dollar idea (he says in best imitation of Dr Evil), you're not VC material. And if you're not VC material, you're also not Angel material. The latter have all the same issues that lead to their own Utility Curve problems, they just don't have as deep a pockets or a name brand firm, so they get involved earlier in order to have a place at the table. After all, Venture Returns are not great historically, but to this day they're not so terrible relative to the stock market.

Mind you, the Angel will be much more tempted by the early acquisition exit, but until that presents itself, you need to operate like they are helping you down the road to getting VC.

Okay, one more nuance for entrepreneurs. In the old days (geez, I hate saying that, but 5 startups later, I've got some war stories), VC's used to sort opportunities into features, products, and markets. Time was, they wanted to invest in markets much more than products, and never in features. Sounds funny to think of something a company builds as a feature, but there are many startups that have built features. The problem is that whatever they are a feature of may wake up one day and decide they want to own that market. VC's that ignored the rule learned, much to their chagrin, that despite great traction, when a company like Twitter starts to take the reins of its ecosystem, a few feature companies lose their value very suddenly.

Think of the feature-product-market hierarchy as another way of seeking the Billion Dollar Idea. Hard for a feature to be worth a Billion, perhaps even impossible. Easier for a Product, but still not a lay-up. Uncovering an entirely new Market, though, is usually worth a Billion. Part of the Entrepreneur's task is therefore to look at what they've got very objectively and figure out how to make it a Market. Never mind that you initially built a Feature. Can you apply that Feature to making a Market in some way? Why is your Big Idea not just an add-on to someone else's Big Market and Big Product Suite?

To some extent it is a game. All things can be bought. Larry Ellison doesn't worry that Oracle isn't far along on SaaS because he can buy every public SaaS company without too much trouble. So the other thing is not to be too dogmatic about the definitions. Markets turn into Products, and Products into Features if you don't move fast enough. That's called Consolidation. VC's view Consolidation as inevitable. Your job is not to talk them out of it, it is to convince them why you have the most valuable gem in the Consolidation Crown, and perhaps even why you'll be the one doing the Consolidation first. At the least, convince them why your idea is a Must Buy because there can be no alternatives.

Bootstrapping: When You Don't Have a Billion Dollar Idea

To a lot of entrepreneurs who have a Good Idea (notice I didn't say a Big Idea), and just want to get on with it, the description I've given of the VC funded world sounds pretty scary. There's a big agenda there and a lot of the bullet points weren't even things the entrepreneur wanted to deal with. That's okay. As one very successful VC told me, a lot of companies shouldn't go for VC. Sometimes we lose perspective in Silicon Valley. Everything is not Venture Capital funded. In fact, the vast majority of small business gets by without a dime of VC. So again, ask yourself whether you really have the next Google-sized Big Idea, or whether you're more comfortable with your very Good Idea.

A Boostrapped Good Idea goes something like this. You get together with 2 or 3 other people (the number usually seems to be about that many). You work for a year to build your product. During this time you starve, either for money, because you aren't getting paid, or for time, because you are doing it after hours while your Day Job feeds your family. You really can't afford to starve for more than that year, so that puts some boundaries around what you can tackle. At the end of the year, the idea has to be immediately monetizable. You'll spend the second year also starving, while you tune up your marketing, get the word out, and possible correct flaws in the product. By the end of the second year, if all goes well, you're ready to quit your Day Job and never look back. There is actually a long list of companies that have followed exactly this plan and wound up very happy about it.

Speaking of happy bootstrapping, Valley peeps often refer to these Good Ideas as Lifestyle Businesses. They say it like it's a Bad Thing. What's the worst that can happen with a Lifestyle Business. You work really hard for substandard pay and ultimately fail. Wait. That happens in VC deals too. Hmmm. What's a happy scenario? You work really hard and build up your business until it is doing $20M a year and doubling each year with 12 employees. You own 100% of it, you have no debt or equity out (except to partners and employees who are in the same boat as you), you're the master of your destiny, and you are loving life. $20M a year goes long way with 12 employees. So don't say, Lifestyle Business like it's a Bad Thing. It could be the best thing that ever happened to you. OTOH, that's still not Jet Money, so if you absolutely positively must have that Gulfstream, you better get back to looking for a Big Idea.

There Really is No Middle Ground

Here is the other strange thing about this brave new startup world: there really is no Middle Ground. Not only could none of the startups I've been in get funded the way they did back in the day, many of them were just not Big Ideas. There is a vast gulf between your $20M very-happy-thank-you-very-much bootstrap and the Billion Dollar Big Idea. I can point to all sorts of interesting software companies that made it to maybe $100 million in revenues, but that are in that vast middle ground. It turns out that those are untenable ideas in the current climate. That's not good enough, and if you get a chance to build such a company, it will be because the investors thought it was a much Bigger Idea. You will be surprised to find out they think you fell short, even though you may even have gone public. Don't ask me how I know.

So ignore the Middle Ground. Don't try to put lipstick on that pig and sell it as a Big Idea. Make sure you at least think you really do have a Big Idea. Otherwise, Bootstrap a Good Idea.

All Roads Lead to the Bootstrappa's Paradise

In the end, starting a company these days is a Bootstrappa's Paradise. If you are a Bootstrapper, you will have never seen a better alignment of forces in your favor:

- Software is cheaper to build.

- Subscription models are alive and well, and an annuity is a much happier thing to bet your Boostrappa's time on than a few big checks followed by crickets chirping.

- It isn't just software that is cheaper. If your audience is online, you can reach them with less cost and effort than ever before.

- People who are not Bootstrappers can't get capital to compete with you nearly as easily. They have to at least find a few token Bootstrappers to build a product and line up customers.

- People with VC have to avoid the niches. Those are not Billion Dollar Big Ideas. But niches are a happy place for a pure Bootstrapper. Niches exist all the way up to $1 Billion and are there for the taking, if you have what it takes.

- If you do have a Big Idea, you can get it to the stage where it is fundable much more easily than those who can't bootstrap. Time was a successful exec from a Big Company with a name and a slide show could land a big VC check and go after your market without ever having to starve. I won't say that no longer happens, but it is a whole lot less common.

Not everyone can be a Bootstrapper. Some days I wonder how long the Bootstrappa's Paradise will last, because its hard on the deal flow for VC's. I read with interest a RWWeb post suggesting that start-ups created by people out of work are at an all time low. The numbers are pretty startling. Out of curiosity, I took the liberty of superimposing VC returns against the dip:

It's interesting that the return spike follows almost exactly the right lag after company founding. Yes, Virginia, portfolios are a beautiful thing, and when you're betting on the Billion Dollar Plus end of the utility curve, they benefit from having a lot more bets available to choose from. Meanwhile, despite a lot more unemployed, a lot fewer of them are choosing to start businesses.

Bootstrappers: start now with little competition, and (hopefully) with a rising economy for some tailwind. I'll be doing a series of posts on Boostrapping because, it's a Bootstrappa's Paradise.

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