Alan Meckler, CEO of Jupiter Media will be the keynote for the Early Stage Summit a great investor/startup conference we’re hosting on October 2nd. If you haven’t applied to attend yet, I suggest you do, the event is filling up fast.
So I’ve been pitch on a pile of “new” incubator type models for building companies lately. This led me to think through the venture process and my conclusion, though i may very well be wrong and I just thought of this so it’s not fully fleshed out, but i think that the general structure of venture funds today is wrong - at least for web tech. I mean the costs of building these companies are very low and the values to get from selling them are pretty low so I think it needs a new approach.
Yes, people are doing this now but it should be formalized.
I think the following are the stages of a company life cycle:
1) Choose the flower (plan the idea) = Limited to no cash required
2) Plant the seeds (get a product launched) = under 50k
3) Water The Plants (supporting cash for marketing, tweaking, 1 full time employee)
4) Sprouting (founders come on board full time and it takes the shape of a real company) = 250-750k
5) Flowers Grow (growth phase) = 500k - 2MM
6) Bloom (combination of Series A/B/C leading to an exit) = $X
There really isn’t a need for Series A, B & C anymore. Yes you can do it but there isn’t a need. The Bloom phase is essentially when you build a real sales force and get bit with the giant hosting bill but what more do you really need cash for in most internet plays today? Not much.
If I was starting a fund I would be in one of two places
1) Incubation Phase: Help people build a business model and get live. Up to 50k investments.
2) Development Phase: 50-500k - building the official team = you are a company now
3) Secondary Financing: 500k+ = most money goes to marketing and strategic deals
That’s my new 3 phases of VC.
Curious what everyone thinks…
There a number of ways to finance ventures. Here is my quick and dirty analysis of each funding mechanism.
Self Funded - you are in control and own it but unless you are discplined and have experience, entrepreneurs tend to lose their head in the clouds. This is great if you are an expert and experienced already - if not get to the point where you can sustain professional help fast - or you too will need professional help.
Partners - Partners are great as they can counter each other but two partners with no experience does not equal one with experience. Partners where one is at a higher level or more dedicated is bad. Most partnerships break up. They are only good with two experienced people on the same level.
Dumb Money Angel: This is the guy that runs the carwash. This is great if you know what you are doing. If you too are clueless - besides for being lucky at finding financing - you are going to waste his money. So the question is if you have a conscience or not? Many a fund managers can’t sleep when they lose OPM.
Smart Money Angels: This is generally the best way to start a company, esp. if smart money is from the industry you are targeting. Usually you’ll get a fair valuation and validation on your concept and expert help achieving your goals and be able to leverage their network. It’s a win-win all around.
Tier 1 VC: This is good if you need a LOT of cash and is second best to smart money angels. Names like Softbank, Seq, DFJ etc… are great. These leads will take a lot of equity, rip you to shreds on due diligence but be fair and add value. If you can get them to invest that means something.
Tier 3 VC / Vulture Capital: Tier 2/3 VC = people playing VC’s that aren’t in it for building real value. Vulture Capital is selfish money that screws entrepreneurs (short term approach since our industry is small and word gets around). If you take on this capital, have a great friggin lawyer and make sure you are protected. Always ask for references of successful exits and failures from your investor and see what happened. Do your research. These guys will take 95% of your company if you are not careful.
Debt Financing: Take it if you can get it. It can be free. Mortgaging your house is self financing and not debt financing. Debt is actual real debt. Debt can kill a company as fast as it can help though so watch your ass. Sometimes you can get a mix of debt & equity. If you are careful this is great - if you are not careful you will give away your whole company. Why? Equity/Debt hybrids usually have a convertible clause where if you don’t pay it back in X debt converts to equity - you lose control and your equity is worthless. Then again if you can’t pay it back - your equity probably is worthless anyway.
Reverse Merger Financing: This can great (access to debt, liquidity, stock to acquire companies and incentivize employees) or horrible (work with shady people who stick you with nasty convertible debt and consulting fees and then convert the debt into equity, take control and kick you out. This is shady finance though can be extremely productive if you are careful - or it will destroy your business and make mortal enemies of the people pulling the strings.
As for me - I’m a serial entrepreneur, run BootStrapper.com, have self funded a couple ventures, taken on partners and broken up hard, run a seed capital group and am involved in some interesting ventures now.
Most people looking for funding want to go the MD of a VC fund. They want to track down the big fish. They will go to a panel discussion and go after the guys on the panel and try to shake their hand, pass off a card and beg for money. However, I beg to differ.
I would like to offer a different approach.
Meet the Associates in the crowd, the people that work for the guys and gals on stage.
Here’s why: They are the gatekeepers.
Who do you think reads your pitches and plans first?
Also, who do you think is hungrier?
Should the fund fail, there’s a good chance, the MD has X millions in the bank and associate has far less. Who is more motivated for success.
Let me go further. The MD already has proven himself (or at least convinced instititutional investors he’s a big swinging dick), the Associate is trying to impress the MD and bring in deals to prove his or her worth.
Often times, the Associate may be just as much in awe and want to impress the MD as you are.
So would you rather have an Associate that is in your corner, believing in your deal and pressing his or her bosses to fund it or be another spec on the radar for the MD, and possibly even an annoyance to talk to?
Influence the influencers, make friends with the gatekeepers and doors will open. Even if you know the king, that doesn’t mean you can get a meeting without first going through his consigliere.
Think about it …
1) Make sure you understand what you are getting into.
2) Test your own logic and ask yourself the tough questions
3) You’re qualifying yourself by putting time into it to make sure you are serious about the commitment and not trying to run half ass with a crazy idea
3) Repeat
4) DO IT YOURSELF and It doesn’t matter if you don’t spell check…this is so you understand your own vision and goals
So you want to know how to raise capital. I’ll tell you. It’s very simple. Don’t try to raise it. First build yourself a product to demo, then get a few customers to show proof of concept. Then money will either come to you or most likely it’s not as big an idea as you thought.
Remember folks, investors are greedy Alpha Dogs. They SEEK Alpha. If you’re idea isn’t good enough to be sought then don’t. Of course there are exceptions and you still need to pitch and try. But the basic lesson here is this: people something good and you can find money.
Now say you have a great product…how do you position it for capital. Positioning is just as important as the idea.
1) Have a coherent pitch. Elevator pitch, 60 seconds or less.
2) Have someone who has raised capital before help you with an executive summary AND a power point deck. Hire someone if you have to. The business plan is secondary as are the financials. Rarely will your plan ever be read in full and no matter what’s in your finanancials no (smart) investor will believe them. Investors want a business plan to see that you can make one though.
3) Have testimonials
4) Have good people around you
5) NETWORK YOUR ASS OFF, be friends offer favors to other people and eventually you’ll find what you need or the right partner that can take you there. Ask your lawyer, accountant, finance geek and fellow entrepreneurs. If you have a good idea, you will get referrals. If its a bad idea you’ll be told “i don’t know anyone”.If you can’t get referrals the odds are its a bad idea
There’s an exception: some ideas are not fundable…but that’s a story for another day…
