Archive for the ‘Networking’ Category

The Unfamiliar State of Funding a Startup

March 8, 2012

I work with a lot of startup companies, and am currently involved with three that share the same characteristics: pre-product, pre-revenue, and at the very beginning of fundraising. And I’m having the same conversation with all three. It goes like this:

  1. The cost of getting a company to scale and even to profitability has dropped dramatically in the past ten years.
  2. The nature of venture capital has shifted from an early stage focus to late stage or even growth equity investing.
  3. Angels and experienced high net worth folks have stepped in to fill the role VCs served for early stage investing.
  4. A viable fundraising strategy can default to a path that doesn’t assume VCs participate at all, or perhaps only towards the end.

Let me expand on each of these points.

COST OF GETTING TO SCALE – THE RISE OF THE MACHINES

There are a lot of factors at work here, to the benefit of entrepreneurs. The rise in cloud computing means that fixed infrastructure expense has largely been eliminated from the business plan, and this will only get better (Amazon just announced it’s 19th price decrease in six years). Virtual teams + Google Docs drive OPEX down even further unburdening you from lease costs.

The shift to “inbound marketing” – social media, blogs, SEO, viral – can drive large volumes of traffic at significantly lower costs (60% less or more) than traditional “outbound methods – and at higher conversion and retention rates. It takes a lot less of your marketing budget to reach and acquire users. With the shift to freemium and subscription business models you can also let your most active users decide for themselves to pay for your services through in-app messaging and offers – significantly reducing the cost of sales.

I call this the “Rise of the Machines” because metrics and machine-driven resources/methods do much of the heavy lifting at a fraction of the cost of human-intensive alternatives. Josh Kopleman surveyed his portfolio and found “…that companies today are 3 times more likely to get to $250K in revenue during an eighteen month period than they were six years ago. ”

VENTURE CAPITAL IS DEAD – LONG LIVE VENTURE CAPITAL

The money that VCs invest comes from “institutional investors” – pension funds, endowments, insurance companies – and these institutions allocate their investments across a wide range of “asset classes” to manage and diversify risk. They tend to make these allocations based on ten year return performance averages, and beginning in 2009 (as my partners and I found out with unfortunate timing) the ten year return for the VC asset class went negative.

That’s for tough the VC industry overall, but if you look at the top 20-25 firms, the ten year return is quite good. So what institutions did was stop putting money in general into the VC asset class, and only put money into the big, established firms. This caused fund sizes to swell (Accel’s most recent fund was $1.35B+ comprised of $475M “early stage” + $875M “growth equity” funds), which incents those firms to put larger and larger investments to work in each deal (to justify their partners’ time).

So at a macro level, investment into VC funds dried up for all but the top firms (reducing the total number of VC funds) and poured into the top firms, shifting their focus to larger investments in later stage firms.

ANGELS BECOME ANGELS ALMOST LITERALLY

At the same time early stage VCs moved out of the market, a wave of experienced tech executives who had made fortunes building internet companies became very active investors. They brought more than deep pockets, they brought valuable insight and experience and even better – intensive, engaged roles with the companies they funded.

And along the way, incubators emerged as mini-factories where angels could become involved with lots of companies and let the law of large numbers help them there. Overall, angels are investing 40% more than they were even a year ago – now over $700K per round, and there are concerns there’s a bubble happening with incubators. But the headlines are, angels have stepped into early stage investing at a scale and role traditionally reserved for VCs.

STARTUP FUNDRAISING HAS NEVER BEEN BETTER, AND WORSE

What this means for startups is you can get your business to scale with ten times less money that you needed 10-15 years ago. $3M – $5M. If you plan well and are well connected you can do this with individual investors who add a ton of value and will roll up their sleeves to help out. The real benefit is you can also find individuals who share the same expectations you have for the outcome of the business. A 5X return on $3M may be the right outcome for the business and for investors who define success as a financial return coupled with a durable business that solves a problem they care about.

It also means you can liberate yourself from having to map your business and outcome to the trajectory that many of the larger VC firms need their investments to align with – they need billion dollar exits to generate the billion dollar returns they committed to their institutional investors.

Don’t get me wrong here. VCs are an important and valuable catalyst to the technology sector and the economy – and many are out there doing what they’ve always done to identify the next great disruptive business. And for your business, a VC can be the exact right fit either at the beginning or once you’ve gotten to scale.

It’s just that now VCs are playing a different role than they have in the past, and for startups this means it’s a brand new, unfamiliar, day out there.

Offsite complete, re-entry, hiatus

September 3, 2009

Well, my adventure came to a rather fitting and comfortable close on Monday August 24th, at about 10:45 in the morning, when I arrived at the Onion Valley trailhead, and met my longtime friend, Miles, who graciously spirited me away to one of his relatives’ condos at Mammoth Mountain, so I could take a well deserved, and very much needed hot shower.  We then spent the next eight or so hours catching up as we made our way back to San Francisco, where I caught a flight back home on Tuesday morning.

The trip was just spectacular.  No disappointments really, of any kind.  An enormous number of small and large pleasant surprises along the way, and a steady stream of incredibly kind and generous people I met along the trail.  I ended up doing about what I had set out to do, mileage-wise (170+ miles, 60,000+ feet of climbing and descending), but had to adjust both the beginning of the trip (started a few days later than I had planned) and the end (decided not to do the 28 miles in two days to Shepherd’s Pass, and left the trail at Kearsarge Pass instead).

I began the trip with two close friends from high school (Ernie and Duane), and was able to end the trip meeting three other close friends from high school and college (Brian, Steve, and Mark)…all of whom I’ve been backpacking with in much of this same country for many years.  And in between I had plenty of time on my own, some days not seeing a single person on the trail, and camping at some lakes where I was the only person there – and perhaps for many miles around.  But I was never lonely, or lacking for something wonderful to look at, think about, or explore.

Two people I met really made warm and lasting impressions.  The first was Patt, the 81 year-old woman who ran the Muir Trail Ranch backpacker resupply station, and whose heart was both huge and warm.  She was charmed with what my thirteen year-old, Ben, wrote on the outside of my resupply package (actually a 5 gallon plastic bucket):  “By opening this bucket, you hereby agree to buy your thirteen year-old son a kitten”.  Ben loves cats, and she and I had a nice long laugh about his wit and seemingly foolproof plan.  Ben, sorry, that contract was not binding in California.

The second was a 20 year-old Cal Poly junior, Ryan, who I crossed paths with for two days, as he was on his way to attempting the entire John Muir Trail (all 221 miles), in nine days.  Ryan has maturity and ambition beyond his years, and carried a good dose of humility as well.  He had failed to do this same adventure in June, went home, figured out what had gone wrong, and came back to do it again.  Meaningful failure in action.  He posted a comment here on my blog when he returned, letting me know he did in fact finish in nine days.

I collected a set of photos and made an online slide show of my trip (using some slick web technology from our company, Smilebox), and it should be on this side of not too long and hopefully not boring:

Click to play this Smilebox slideshow: JMT slide show
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Thanks to so many of you for your encouragement and support.  I am deeply grateful I had this opportunity, and appreciated as well as valued every moment I was in the Sierras.

And as some of you may have noticed, I have changed the masthead photo, to one I took of Upper Kearsarge Lake on August 24, in the early morning.  A fitting photo, and it will be nice to have this frame my blog for the coming year.

It’s been a challenging “re-entry” process getting back up to speed on life at home and work, and I wanted this post to also let you know that I will be taking a hiatus from posting here, to focus attention on these areas.  I hope to resume again later in the fall.

Seattle 2.0 Awards – Be Selfish

March 17, 2009

There are a lot of conferences in Seattle right now, and that’s a good sign – it means there’s a lot going on here in the technology sector; it means there’s enough “there” there to justify lots of organizations vying for our collective attention. 

But there are few organizations that focus just on the startup landscape, and the ecosystem that sustains and grows it, from within which we all build our businesses.

Seattle 2.0 is one of the groups that’s focused on startups.  It’s emerged organically like a startup, and it’s filling a void and meeting the needs of a defined target market:  people starting up and growing technology companies in Seattle.

It’s an organization that helps bring people together, helps foster the sharing information.  It helps shine a light on the startup “experience” – a term which was viscerally defined for me by John Jarve of Menlo Ventures as ‘the disaster that doesn’t kill you’.  Yes, experiences get shared, and that just speeds the process of company formation and growth.  A really good thing for us here.

But why should you care about the Seattle 2.0 Awards on May 7?  Well, because you should be selfish, it’s all about you and your startup for four really good reasons: 

  1. Seattle is a startup geography that matters.  We can debate the magnitude, but directionally it’s true.  We’ve created separation from Boston and Austin, and it’s now us and Silicon Valley.  You should want this to accelerate, to create a better talent pool to hire from, better ideas to exchange.  Better everything for you and for us. 
  2. VCs from the valley email me links to the Startup Index because they track it to be on top of the company formation and growth activity of our steadily strengthening technology sector.  You want them here, it’ll help you reduce risk and speed your company development.  More visibility overall, more visibility for you.  You want to be at these awards so you can meet them, you can both learn from each other.
  3. Events like this foster a network effect that’s critical to generating growth through friction-free information exchange.  It’s not just getting people together, it’s getting them together in the right context, with the right tone that enables the sharing of ideas.  Sharing ideas only strengthens them.  Get strong!
  4. And the awards matter precisely because it’s not really important who wins them, it’s the process that brings us all together that matters.  It’s asking you to nominate candidates, talking about them with your friends and colleagues, and then showing up at the event

So, you should go to this event, celebrate all the hard work and determination of the companies and people nominated for the awards.  But most importantly, go there to meet the other people like yourself, who are also working their butts off trying to get a company off the ground.  Go there to meet people who are eager for guidance, experience, or encouragement along the way. 

By the way, I have no vested interest, here.  I don’t know anyone at the Seattle 2.0 organization.  Never spoken to anyone over there.  I emailed them about my blog, and they were kind enough to list it, but that’s the sum total of my involvement with them.  They’re just there getting us all together, just letting the information flow.  And I like that.

I plan to be there, and I hope to run into some of you there too.  Register here