The Funded

I have been following The Funded blog for a number of months now. At first, I thought it was an amusing little web site. Like a Yelp just for VC's. The whole notion of making a generic web site a vertical is compelling, for more than one reason. But is this niche VC bitch site really serving its community? Does it help? Is it relevant? Does anyone care?

I classify The Funded entrepreneurs in two camps:

• Camp 1: Serial, successful with a track record.
• Camp 2: Not so much.

Camp 1 is generally forgiving and kissing ass because they are looking forward to another financing and want to make nice.

Camp 2 are pissed off because they want what Camp 1 has (had or is going to soon have).

So, what up with VC's? Well, I classify them too:

Camp 1: Tier 1 don't care. They have enough deal flow and believe that nothing original ever comes from noobs. VC's have their network and are used to being hated.

Camp 2: The rest of the VC's haven't had better than a 10% IRR anyway and are always sucking up to Tier 1 for crumbs. They don't care either. They are happy being 6th on the deal team.

So, what's the point of The Funded? You tell me.

Excuse me...I am not too old to be funded!

• Don’t Finance Anyone Over 27
  

Click on the above link to the NY Times article.

The environment for today’s entrepreneurs is far different in a number of ways from the boom of the late ’90s.

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Amazing...never thought it would happen but it is official, there is age discrimination in Silicon Valley and that's a fact. I hear it over and over. But people are genuinely afraid to mention it, talk about it or blog about it. True, it's their money (they actually think it's their money) so they can make any decision they want. But really, are the over 30 crowd all washed up? Are we out of ideas? Do we really not get that information super highway thing? Is it true we can't be trusted over 30? Or, are we all looking for the senior special at Denny's and a price break at the movies? Give me a break.

I'm researching this and asking anyone and everyone to collaborate on this BS. I want to write about first or even second-hand experiences with this topic. Hell, I'll take gossip. Please make this post a collaborative effort so don't just make comments. Send me your stories, and if you want, your name and a photo. This is for the over 30 crowd. The ones with experience, access, resources, ideas, capital, energy, track record, references other than a professor and an RA and a mind of our own...or is that what they are afraid of?

The venture community, at least my sampling, worries me. They all seem to have the same mindset and web 1.0 comes to my mind. Sure the environment is different, the exit strategies are less explosive and harmful, but still, not a lot of original thinking. I posted Pink Floyd's the wall from YouTube™ because this is how I see them. Start at about 2:00 min remaining and you will see my point. Even more interesting, the Wall was filmed in 1982, about the average age of the average founder of the average technology start up backed by the average VC...at least in the Valley.

Click on the following two articles for more information:

• Is 30 too old to Start a Company
• Mid Life Entrepreneur Crisis

Financing Strategies

Just knowing that you need capital for your business isn't enough. Knowing who you are will make life easier.

For example, say you're a Web 2.0 company and need $10 million to launch your business. Seed of $1 million and a proposed Series A of $9 million. That's a nice strategy, seems intelligent, designed to mitigate risk and increase valuation along the way. But wait, a Web 2.0 company is supposed to be able to seed, launch and begin aggregating users on say $200,000. Why, because most Web 2.0 companies are not particularly well conceived, well founded, or well, gonna make it. Seems the venture community all walks the same talk...show me it works, aggregate… then the money.

Well that's intelligent too, from a VC's perspective. Series A is the old Mezzanine round and Seed is the old Series A. Wait, then what comes before seed? FFCC (friends, family and credit cards). For a Web 2.0 that’s about $25,000 to 50,000, probably enough to develop a web site that has limited opportunity to succeed. If the entrepreneur is smart and very, very lucky, s/he will use free new media like Blogs, message boards, YouTube, a pitch on Vator, myspace, etc., then maybe they will attract users long enough to get a "traction" card. This traction card will be the ticket to a seed round of perhaps $500,000. You will live or die on this.

However, what if you think you’re not a Web 2.0 company and are really something else? In this case, you may have to find alternatives to the early-stage VC because they will not seed, or Series A without validation, period. And, if you need more than $50,000 to launch, then angels or project financing is the only practical solution.

Not every technology business can be started on a shoestring. Not every new Internet company will be founded by programmers that can build an Alpha site and launch a business for $25,000. What if there were bigger ideas, the ones that may actually stand on their own and not be part of the gaggle of potential Google acquisitions?

Investors need to manage risk. They have a fiduciary responsibility to their investors. Moreover, they all remember Web 1.0…so caution is a part of their DNA now. But, I think they are missing out by being too safe. Seems to me that an investment strategy that sprinkles a few hundred thousand on a bunch of ideas that may actually work enough to either be sold to a portfolio company and exit at a 2X or a larger media company at a 5X+ is too safe and boring. If I were a VC, I’d manage my portfolio differently. Perhaps a few sprinkles here and there, but I would not follow the herd. I would look for the big idea, the one that needs more capital and doesn’t have “traction” and won’t until $10 million or more has been spent. Big ideas are what made the valley. If all they do is look for little bitty web 2.0 companies to sprinkle a couple of hundred grand on and then sell, then where is the next BIG ASS company going to come from? Not from Silicon Valley, that’s for sure.

So here’s the tip: If you are a Web 2.0 fine, have fun, but you will need $25 to $50 thousand and a boat load of registered users and some idea of how to monetize that before you are ready to present to early-stage VC’s.

If you are not a Web 2.0 start up, think big. Look for strategic partners/investors and either project finance or raise a very large amount of money from investors that understand your business. If you look for seed at a VC, you will be wasting your time. Know who you are before you start.

I'd rather raise $50 million than $1 million

Gez, this angel financing thing is grueling. Not that this is a surprise, since I've been raising capital for nearly 25 years. But, it's not always been from small investors. And, I'm not really complaining. I am blogging...not complaining.

It is true though. Raising $50 million from institutional investors is easier than raising $1 million from small private investors. Why? Funds are required to invest and need to talk to guys like me. Angel investors don't. Having said that, the informal angel marketplace is huge and plays a big role in our economy. By the way, our economy is run by small business.

They're just hard to find and generally not in a hurry to write a check. But they do write checks and it is a numbers game.

Howard Shultz, the Chairman of Starbucks, said that he presented to over 278 angel investors when he was starting out. 217 said no. So, on one of my projects, I've only presented to 75, then the Holiday's got in the way and slowed that down. I figure I have 142 more to go before I'm done! If I do 5 a week it will only take me 28.4 weeks, or slightly more than 1/2 a year. No worries. If it's that good of an idea, that market will wait, right?

So, here's a big thank you to America's small investors that accept risk and believe in the possible. No risk, no reward right? So give back and fund an entrepreneur today. It's just money. After all, money is a renewable resource... time and opportunity aren't. One a day is all I ask!

Yet Another Broken Business Model

Gotta love business and corporate finance. Something’s always broken or needs to be reinvented. So, I have an idea for one. Just last night we had a spirited discussion on angel financing. We talked about all those “matching” web sites and “business plan positing” web sites, formal angel groups and presenting to a caputed audience for $3,000?? Gez, if a start up had $3,000 they would be fools to spend that shot-gunning their intellectual property at one of those old-school forums. You can almost launch a web business on $3,000 these days.

So, as we took on the world’s problems one at a time, we did spend some extra time lambasting the angel financing process as we currently view it. Since we all have experience starting companies and raising seed (angel) capital, there was some basis to our ranting…and raving.

I could post a very long message, add charts and graphs, but suffice to say that it is my opinion that many “formal” angel groups should just x%$*&@ retire. The new model should leverage technology and particularly digital media. Like a YouTube for angel investing. Maybe AngelTube – Finance yourself!

Really, there is a model to explore here that could actually work. And, no wine or food is required! If you have ever been a presenter at one of these angel rituals, you know what I mean.

Here is what I am thinking. Combine the best attributes of a fundless sponsor with YouTube-type technology, the speed of Google’s search, the urgency of a ripe pear, the review process of Amazon.com and this model could speed badly needed capital (did I say badly needed capital?) to professionally screened and evaluated yet promising start up companies nationwide.

One event I attended with a client was just miserable. I asked an “angel” in the group of 30 or so middle-aged businessmen and women about their funding process and timing. Their process for evaluating investments was really, really interesting…and creative too! Worse, was their timing for a close. This fellow said their last deal took 120 days to close. OMG! 120 days is a lifetime to a start up trying to pay their phone bill that is 45 days late. Now, a Series A financing should take 90-120 days…not a $250,000 seed round. This is what I call “failure to communicate” and a broken, out-dated model for speeding badly needed capital to promising young companies. I may just do something about this.