Via Fierce Wireless How can Apple and AT&T put a relatively low pricetag of just $199 on the new 3G iPhone? According to research firm iSuppli, the answer is in the low cost of the components. iSuppli estimates the new 3G iPhone will cost just $173 to manufacture, which is significantly lower than rivals such as HTC's Touch Diamond (priced at $785) and Nokia's N96 (priced at $855). iSuppli says that the most expensive component on the 3G iPhone is the 8 gigabytes of NAND flash memory storage, which the firm estimates costs $22.80. The second pricey element is the touchscreen, which costs about $20. In all, the chips and handset components add up to $164. iSuppli tacks on another $9 for assembly for a total of $173. For more: Related stories:
- read this PC World article
AT&T will subsidize 3G iPhone
Photos: 3G iPhone Launched
Wednesday, June 25, 2008
Report: 3G iPhone costs $173 to make
3G Penetration Rate In Europe Hits 11 Percent; Does That Mean It Trails The U.S.?
via moconews
Tuesday, June 24, 2008
Virgin goes unlimited for $80 per month
Unlimited monthly rate plans are all the rage and now the monthly price is creeping lower. Starting July 1, Virgin Mobile USA will have an unlimited plan for $80 per month with no annual contract. Unlimited text and messaging can be added for an extra $10 per month. Currently this is one of the most inexpensive unlimited plans on the market. In February, Verizon Wireless introduced an unlimited calling plan for $99.99 per month. That was matched by AT&T and T-Mobile USA, which added unlimited messaging to that $99.99 price tag. Sprint Nextel meanwhile charges $89.99 for its unlimited plan, which includes unlimited messaging and data.
Sunday, June 22, 2008
A Two-part Rule for Naming Your Startup
What's in a company name? Plenty. It's your first opportunity to brand yourself. Get it right and you'll stand out as clever, useful, and memorable to potential users and investors — even if your product isn't any good. But get it wrong and you'll flame out before your product even gets out of beta. So, what makes Brightmail, PayPal and IronPort great names, but Lycos, Xobni and Vidoop really lousy? It turns out there's a formula for effective naming and it's surprisingly simple. Look at many of the most successful brands and you'll notice they're often compound names, consistently made up of two components:
Our minds are built to make connections, mostly at a subconscious level. When a metaphor is detected, it triggers a process in our brains that associates the metaphor with the next object or reference. This naming system forces the mind to take the cognitive step of associating the metaphor to the product it represents, thus forming a positive association to the brand. And once your brain has woven the connection, it sticks, so there's a great chance your company name won't be forgotten. So when we break down the name Brightmail, we see that "mail" indicates what the product does — they make email — while "bright" is metaphorical, framing their product in a positive light. This same logic applies to PayPal; "pay" is literal, "pal" is metaphorical. Ditto with IronPort, a provider of email and web security products — "iron" is a metaphor for strength and "port" is a literal reference to what the company product protects: network ports. Search company Lycos tried a made-up word, to ill effect. After all, what's a lycos? Xobni makes a cool email service, but someone had to tell me that xobni is "inbox" spelled backwards. Vidoop is just yucky. Reminds me of, well, you know. Of course there are startups that get so far out in front of their competitive fields, or whose products are so exemplary, that names which ought to have been tricky are nevertheless well received. Consider Twitter. If you had asked me a year-and-a-half ago, I'd have said it was a terrible name — all I could think of was "twit." But people's associations with Twitter are good because its communication tool is first-in-class and offers a great experience. I was recently asked to consult with a startup that is considering re-naming itself. It's a good thing, because the name they're using now is totally confusing. It's one of those Google-wannabe made-up words that sounds vaguely Latin, but isn't. Worst of all, it doesn't tell users like me anything about the company's product (they archive web pages). When the company explained the name to me, I got even more confused. In my view, while site archiving is useful (and they do it well), this probably isn't a broad-based enough service to be elevated to the level of a consumer utility, as search or micro-blogging (Twitter) have been. This means their made-up name is unlikely to ever be turned into a verb (like "to google" or "to tweet"). I suggested some new names, based on the two-part formula: Evan Paull is software engineer for Mark Logic and a startup consultant. |
VC Fund Raising Manual - Documentation
via Specific Marketing
Published June 21, 2008 UncategorizedTags: capital, Fund raising, Investment, raising funding, raising VC funding, start-up, VC, VC investment, venture capital, venture capital funding
When you are preparing documents for VC fund-raising, the one piece of advice you will be given by a lot of people is that you need a 'business plan' document that you should send to the VC firm. You are also supposed to have an 'executive summary' that you can send up front.
Don't.
That doesn't mean to say you shouldn't have a business plan, but I suggest you don't email that to a prospective investor. There are several reasons for this:
1) VCs don't read business plans, they are long and boring
2) Neither a business plan nor a business plan summary achieve what you need to achieve at the point of first contact
3) The business plan will start floating round the start-up scene, I have seen many dozens of business plans that were not intended for me
The documents that you should prepare for the fund raising should be alinged with the phases of the fund raising process. In my experience, the following is useful (I will elaborate on a few docs later on):
1) Pre-pitch phase: 2-3 page teaser document
2) Pitch: 15 slide (or so) PowerPoint presentation
3) Due Diligence: Depending on your business, you will need to present the following documents:
Documents related to spending money:
- Financials (past and forecast). Probably prepared in a professional accounting software and exported to either Excel or Word format. If you prepare your financials in Excel, this is fine for a seed stage company.
- Hiring plan associated with the financials (where appropriate)
Documents related to the product, the technology, their development and protection:
- Technology outline (if any). Word document format
- Product outline. Word document format.
- Product development plan. Word document and associated Gantt charts, probably in MS Project
- Patent strategy (if any). Word document.
Documents related to sales and marketing:
- Marketing plan. Probably in PowerPoint format.
- Sales plan. Various formats, but either an export from a CRM system (to Word) or an Excel spreadsheet
Document related to your industry:
- Industry and M&A analysis. PowerPoint format.
4) Legals - after you have signed a term sheet
You should have prepared digital and physical copies of all contracts that the company has signed in the last few years, as well as any previous investment agreements and the articles of association of the company.
General comment:
Prepare all these documents separately. There are many good reasons for keeping them separate.
Different people can create these docs independently without interfering with others.
The content is in relevant formats.
You gain the ability to distribute certain documents specifically to certain people whom you are dealing with during due diligence and legals, but not to others. For example, should the VC hire a technology expert to evaluate your technology, then these people really don't have to see your financials or your sales and marketing strategy. Likewise, when the VC is asking potential customers about your product, then they don't need to see your financials, or technology outline or patent strategy either. Having separate documents allows you to compartmentalize your information and distribute it on a when-needed and need-to-know basis. This reduces the likelihood of leakage somewhat. Also, should a VC abort due diligence, you haven't shown them all your documents, but only a few.
You can also send documents one by one (no VC is going to read all these documents in one go). Also, it gives quite a nice impression when a VC asks you for your [...] plan and you can send over a whopping doc one day later.
The first two documents are the most important ones, so I will describe them in somewhat more detail below.
Teaser Document
I suggest this a 2-3 page long PDFed Word document. This document has several purposes:
1) to enable you to pitch to a VC
2) to mentally prepare the VC for the pitch
3) to enable the VC to communicate your story within the firm
The content of the teaser document should cover the most important aspects of your company, but not all of them. It should cover:
Product: what is your product, why does it matter
Market: why are you addressing an interesting market
Team: who will make it happen
The ideal thought that a VC should have when reading this document is: "Hmm, very cool, I want to see these guys pitch…" So, don't try to answer all the questions in the document. Leave blanks. You are not trying to convince people to do something. Your purpose is to make them curious. To want to know more. To want to meet you and have the opportunity to find out more.
(By the way: obviously you won't call it 'teaser document', right?)
Pitch Presentation
Endless articles have been written about this one. Have a look at the Stanford Educators Corner, loads of good stuff here, including this one:
As I said before, I have seen 100s of start-up pitches. Some were brilliant, some were disasters, most were somewhere in the middle of the extremes. Your document should cover the same points as your teaser doc, but there is more information in it:
Product: what exactly does it do? What pain does it make go away?
Market: who are the people who will benefit from your product? why is this an interesting market?
Business model: how will you make money? why is this a good model?
Marketing & sales: how will you bring your product to market and how will you sell it? will you have good margins and if so how large are they? what are the costs of sales?
Industry: who are your competitors and how will you compete? are there elements of buyer, supplier or regulatory power that impact you? how are you going to maintain a competitive advantage?
Team: who will make it happen? do you have a good mix of experience and hunger?
Financials: how much money is this going to cost over what period of time? how much revenues do you expect to generate? what are the key variable that will influence your revenue forecasts?
Investment case: is this sector acquisitive? what are the acquisition drivers in your industry? What are the acqusition drivers going to look like say 3 years from now? how do you fit into all of this?
If you can present a case covering the above points on some 15 slides (some 2 slides for each point), you will have done better than most. When I was working at Library House, we asked presenters to cover all the above points in 7 minutes (no more than 12 slides). And yes, it is possible to do that very well.
Overall, the request in the pitch is NOT to get investment. Your simply want to further intrigue the prospective investor. You want them to dig in, to do due diligence on you and work with you during the coming weeks.
As a side note: sometimes you are asked to pitch your company at a public event. In this case, I suggest you don't include all the detail of a one-on-one presentation. This is more of a shorter 'teaser' presentation document in that case.
I will cover how to pitch to a VC in one of the future episodes.
Friday, June 20, 2008
about idea investing
| Posted: 19 Jun 2008 12:34 PM CDT There were a lot of good comments on yesterday's Do you know any idea investors? post. Here's a few of them. Michael Staton says:
Luca says:
Ben says:
     |
| You are subscribed to email updates from Venture Hacks To stop receiving these emails, you may unsubscribe now. | Email Delivery powered by FeedBurner |
| If you prefer to unsubscribe via postal mail, write to: Venture Hacks, c/o FeedBurner, 20 W Kinzie, 9th Floor, Chicago IL USA 60610 | |
Saturday, June 14, 2008
What should I send investors? Part 1: Elevator Pitch.
via VentureHacks/Pmarca
"Summarize the company's business on the back of a business card."
Summary: An introduction captures an investor's attention, but a great elevator pitch gets a meeting. The major components of the pitch are traction, product, and team.
If you're building an interesting company, people will offer to introduce you to investors—it makes them looks good. In Hollywood, content is king; in Silicon Valley, dealflow is king.
So, what should you send investors? Send an elevator pitch and a deck. We'll cover the elevator pitch in this article.
Get a first meeting with an elevator pitch.
A great elevator pitch is more important than your deck and less important than the "introducer". If you don't have an introduction, the elevator pitch is critical to a cold call.
An introduction sells the investor on reading the elevator pitch, which sells the investor on reading the deck, which sells the investor on taking a meeting. Many investors will just skim the deck and take a meeting if the introduction and elevator pitch are good.
An elevator pitch.
Send a brief email that the introducer can forward with a thumbs-up. I crafted this elevator pitch from Marc Andreessen's job listing for Ning:
Subject: Introducing Ning to Blue Shirt Capital
Hi Nivi,
Thanks for offering to introduce us to Blue Shirt Capital. I've attached a short presentation about our company, Ning.
Briefly, Ning lets you create your own social network for anything. For free. In 2 minutes. It's as easy as starting a blog. Try it athttp://ning.com
Ning unlocks the great ideas from people all over the world who want to use this amazing medium in their lives.
We have over 115,000 user-created networks and our page views are growing 10% per week. We previously raised $44M from Legg Mason and others, including myself.
Before Ning, I started Netscape (acquired by AOL for $4.2B) and Opsware (acquired by HP for $1.6B).
I've admired Blue Shirt's investments from afar. We're starting meetings with investors next week and I would love to show Blue Shirt what we're building at Ning.
Best,
Marc Andreessenxyz@ning.com
415.555.1212
Your email should be no longer than this example (which is already too long).
Dissecting the elevator pitch.
Let's dissect this pitch:
Subject: Introducing Ning to Blue Shirt Capital[A useful subject line!]
Hi Nivi,
Thanks for offering to introduce us to Blue Shirt Capital.[Reiterating the social proof of the introducer.]I've attached a short presentation about our company, Ning.[Did you notice the attachment?]
Briefly, Ning lets you create your own social network for anything. For free. In 2 minutes.[What is the product? What does it help the customer do? Who is the customer?]It's as easy as starting a blog. [What's the metaphor?]Try it athttp://ning.com[Link to the product, screencast, or screenshots.]
We built Ning to unlock the great ideas from people all over the world who want to use this amazing medium in their lives. [What's the big problem or opportunity?]
We have over 115,000 user-created networks and our page views are growing 10% per week. [Traction.] We previously raised $44M from Legg Mason and others, including myself. [Social proof and more traction.]
Before Ning, I started Netscape (acquired by AOL for $4.2B) and Opsware (acquired by HP for $1.6B). [Team.]
I've admired Blue Shirt's investments from afar.[Why are you interested in Blue Shirt?]We're starting meetings with investors next week andI would love to show Blue Shirt what we're building at Ning. [Call to action and subtle scarcity.]
Best,
Marc Andreessenxyz@ning.com[Contact information—how thoughtful.]415.555.1212
[OVERALL, TEH EMAIL USEZ GOOD GRAMMAR, PUNCTUASHUN, AN CAPITALIZASHUN, AS WELL AS SHORT PARAGRAFS AN SENTENCEZ.]
See David Cowan's excellent Practicing the Art of Pitchcraft for more examples.
Wednesday, June 11, 2008
On the Road to An IPO, Jingle Networks Prepares to Launch A Voice Ad Network.
via techcrunch
Erick Schonfeld
Jingle Networks has already captured a six percent market share of directory assistance calls with its 1-800-Free411
At this point I'd call it the Jingle Ad Network. We have advertisers that want to get into more environments, and have technology to serve ads. We are talking to publishers about acquiring enough inventory to be significant. We are starting to sign deals with companies that have large numbers of calls. I imagine it will be a few months yet before we bring anything live, probably later in the third or fourth quarter.
Today, Jingle offers free directory assistance calls in exchange for playing two audio ads, one before the caller asks for the number and one before the number is given. Its Free411 service gets 20 million calls a month. That is 40 million advertising opportunities a month. Not every call can be matched with an ad, but a very large number can. Already, Jingle has more than 150,000 advertisers, many of them local. National advertisers include McDonald's, Earthlink, AMC Theaters, FordDirect, Allstate, Cablevision, Columbia House, Days Inn, Miller Brewing Company, and Travelodge. Its top categories include stores, restaurants, banks, and doctor's offices.
Jingle can use the call volume and ad inventory on Free411 as an anchor for a broader voice ad network. Any information line, movie line, or call center could hook into the ad network to lay ads while people are on hold. Most companies look at their call centers as a cost center. Being able to generate one to two cents per call in revenue would be significant for many companies. And as voice apps take off on the Web, that could present another opportunity, although Garrick says the call volume is not there yet. As with any ad network, it is a numbers game. The more call volume Jingle can fill with ads, the better its economics.
Does this mean, Jingle is preparing for an IPO. Garrick doesn't rule it out. He says:
We expect to become profitable before the end of this year. If we look at the public markets, it won't be until next year.
Jingle is not the first company to try to do this. Already, it faces competition from startup VoodooVox
Of course, there is always the specter of Google, which offers its own free Google411
Monday, June 09, 2008
Angel, VC, or Bootstrap?
Note: I wrote this piece a couple of weeks back, inspired by Greg Linden's blog post (see below). Inc then picked up the piece and asked me not to publish it until it appeared on the Inc website. The article appears on the Inc website today with some minor edits.
Greg Linden was one of the key developers behind Amazon's famous recommendations system -- the system that recommends books, movies, and other products to Amazon customers based on their purchase history. He subsequently went to Stanford and picked up an MBA. In January 2004, he launched a startup named Findory to provide everyone with a personalized online newspaper. You cannot imagine anyone who could be more qualified to make a startup like this a success. Yet Findory shut down in November 2007. In a brilliant post-mortem, Greg says his big mistake was to bootstrap his company while trying to raise funding from venture capital firms; he just couldn't convince them to invest. He should have raised his funding from angel investors instead.
This is an important decision every startup founder has to make -- where to raise their funding. The three viable sources at the very early stages of a company are:
- Friends and family. Yourself, if you can afford it.
- Angel investors. Usually wealthy individuals, but includes outfits such as Y Combinator. (My firm Cambrian Ventures is also in this category, although we are currently not actively seeking investments; we're too busy running our own company Kosmix.)
- Venture Capital (VC).
To understand which option is best for your startup, you need to understand how investors evaluate companies. While investors evaluate companies across a range of criteria, three that stay consistent are: Team, Technology, and Market. Angels and VCs evaluate them in different ways. Here's how.
How Venture Capitalists Evaluate Startups
- Market. Venture Capitalists want to invest in companies that produce meaningful returns in the context of their fund size, which typically is in the hundreds of millions of dollars. To interest a VC firm, a company needs to be attacking a large market opportunity. If you cannot make a credible case that your startup idea will lead to a company with at least $100 million in revenue within 4-5 years, then a VC is not the right fit for you. It's often OK to use consumer traction as a substitute for market opportunity -- many VCs will accept a large and rapidly growing user base as sufficient proof that there is a potentially large market opportunity.
- Team. Venture Capitalists use simple pattern matching to classify teams into two buckets. A founding team is deemed "backable" if it includes one or more seasoned executives from successful or fashionable companies (such as Google) or entrepreneurs whose track record includes a least one past hit. Otherwise the team is considered "non-backable."
- Technology. Venture Capitalists are not always great at evaluating technology. To them, technology is either a risk (the team claims their technology can do X; is that really true?) or an entry barrier (is the technology hard enough to develop to prevent too many competitors from entering the market?) If your startup is developing a nontrivial technology, it helps to have someone on the team who is a recognized expert in the technology area -- either as a founder or as an outside advisor.
Here's the rule of thumb: to qualify for VC financing, you need to pass the Market Opportunity test and at least one of the other two tests. Either you have a backable team, or you have nontrivial technology that can act as an entry barrier.
How Angels Evaluate Startups
There are many kinds of angels, but I recommend picking only one kind: someone who has been a successful entrepreneur and has a deep interest in the market you are attacking or the technology you are developing. Other kinds of angels are usually not very high value. Here's how angels evaluate the three investment criteria:
- Market. It's all right if the market is unproven, but both the team and the angel have to believe that within a few months, the company can reach a point where it can either credibly show a large market opportunity (and thus attract VC funding), or develop technology valuable enough to be acquired by an established company.
- Team. The team needs to include someone the angel knows and respects from a prior life.
- Technology. The technology is something the angel has prior expertise in and is comfortable evaluating without all the dots connected.
Here's the angel rule of thumb: you need to pass any 2 out of the 3 tests (team/technology, technology/market, or team/market). I have funded all 3 of these combinations, resulting in either subsequent VC financing (e.g., Aster Data, Efficient Frontier, TheFind), or quick acquisitions (Transformic, Kaltix -- both acquired by Google).
I've written about the stories behind the Aster Data investment and the Transformic investment previously on my blog. In both cases, notice how my personal relationship with the founders, as well as my passionate belief in the technology, played big roles in the investment decisions.
Friends and Family or Bootstrap
This is the only option if you cannot satisfy the criteria for either VC or angel. But beware of remaining too long in this "bootstrap mode." An outside investor provides a valuable sounding board and prevents the company from becoming an echo chamber for the founder's ideas. An angel or VC can look at things with the perspective that comes from distance. Sometimes an outside investor can force something that's actually good for the founder's career: shut the company down and go do something else. That decision is very hard to make without an outside investor. My advice is to bootstrap until you can clear either the angel or the VC bar, but no longer.
Back now to Greg Linden and Findory. By my reckoning, Findory passes the team and technology tests from an angel's point of view -- if you pick an angel investor who has some passion for personalization technology. The company doesn't pass any of the VC tests. Given this, Greg should definitely have raised angel funding. My guess is that this route would likely have led to a sale of the company to one of many potential suitors: Google, Yahoo, or Microsoft, among many others. Of course, hindsight is always 20/20! I have deep respect for Greg's intellect and passion and wish him better luck in his future endeavors.
For further reading, I highly recommend Paul Graham's excellent article How to Fund a Startup.
useful posts on angel investing
Friday, May 30, 2008
about elevator pitch
(1) The Dyson is simply a bag-less vacuum cleaner that, because it doesn't have a bag, has far more suction than any other vac.
(2) Apple's iPod is simply a new kind of walkman that can store and play over 10,000 songs.
(3) Ikea's furniture is all flat-packed for self-assembly, so that it can keep its costs very low, and pass the savings on to you.
The three messages above work because they offer a single, simple benefit - and they're all just a sentence long. And messages as simple as these spread - the first time I heard about Dyson wasn't from an advert, it was from a friend.
It's all very well having a great product or service, but if you can't find a simple way to communicate your idea to the audience you want to buy it, you haven't got a chance of making money.
The mistake many new small business owners make is over-complicating the message. In fact, from my experience, I'd estimate that as few as 1 in 4 of us get it right. As a customer I need to understand straightaway exactly what you can do for me, otherwise you'll lose my interest.
Attention spans are short: when you walk into a supermarket up to 10,000 different products are vying for your attention, whilst the attention span of people browsing the web has been calculated at 9 seconds (around that of a goldfish).
And the key to appealing to this ever-scare resource - customer attention - is to stick to just one clear point. Instead of trying to say everything about your product in one single breath, focus on the single most important benefit, solution or value that your business embodies.
How Tesco became Britain's most profitable retailer
Tesco has stuck like glue to one key formula over the last 12 years: Tesco equals Value.
It started with the blue-and-white striped Tesco value range; and now every TV ad featuring Prunella Scales and Jane Horrocks drives the message home - shop with Tesco and you'll be left with money in your pocket.
Since it started using the value message, Tesco has overtaken market leader Sainsbury's (so dominant in the 80s and early 90s); it now holds over 25% of the grocery market and is Britain's largest and most profitable retailer.
I like the idea of the Elevator Pitch: you're stuck in a lift with Bill Gates (or some other deep-pocketed business leader); you've got just 30 seconds to convince him about your business before the doors open; what do you say?
Clearly you need to keep it simple. You're severely constrained by time, so why dilute your message down further by trying to make more than one point? How do you expect to get your message across if you're pulling Bill in 5 different directions?
No, you need a single hook - a reason for him to take interest and perhaps give you 15 minutes of his time at a later date.
Let's face it – the chances of you or I bumping into Bill Gates in a lift are more than a million to one. I bet he doesn't even take lifts any more for fear of bumping into someone like you or me with a carefully honed elevator pitch ready to roll out.
But the point is still important: the simpler and easier your pitch is to take onboard, the more likely you are to get your point across. You may have different pitches - one for your customers, one for investors, one for new employees - but the principle is the same: stick to just one key point, and drive it home.
So how do you choose your key point? Firstly, as always, start with the audience you're communicating with, whether it be a prospective customer, employee or investor. Put yourself in your listener or reader's shoes.
Now write your Elevator Pitch
It's pen and paper time: thinking from your customer's point-of-view scribble down (in no more than one sentence) the answers to these questions:
(1) What is the single most interesting benefit your business, product or service offers?
(2) What is the most unique or unusual benefit your business, product or service offers?
(3) What is the most innovative benefit your business, product or service offers?
You can be pretty much 100% sure that your focus needs to be on one of the three answers you've written down. Try them out on colleagues, friends, family – and then prospective customers. Which works best?
The Elevator Pitch is a really useful tool – one that I use almost every day. For every new business brick I write I try to focus on a single, actionable point: advice that can be summed up in a sentence, and driven home in an email.
However good what you are trying to sell is; if you can't get it across in the first 30 seconds or the first sentence, you're not going to get it across at all.
Tuesday, May 27, 2008
The Hardest Lessons for Startups to Learn
(This essay is derived from a talk at the 2006 Startup School.)
The startups we've funded so far are pretty quick, but they seem quicker to learn some lessons than others. I think it's because some things about startups are kind of counterintuitive.
We've now invested in enough companies that I've learned a trick for determining which points are the counterintuitive ones: they're the ones I have to keep repeating.
So I'm going to number these points, and maybe with future startups I'll be able to pull off a form of Huffman coding. I'll make them all read this, and then instead of nagging them in detail, I'll just be able to say: number four!
1. Release Early.
The thing I probably repeat most is this recipe for a startup: get a version 1 out fast, then improve it based on users' reactions.
By "release early" I don't mean you should release something full of bugs, but that you should release something minimal. Users hate bugs, but they don't seem to mind a minimal version 1, if there's more coming soon.
There are several reasons it pays to get version 1 done fast. One is that this is simply the right way to write software, whether for a startup or not. I've been repeating that since 1993, and I haven't seen much since to contradict it. I've seen a lot of startups die because they were too slow to release stuff, and none because they were too quick. [1]
One of the things that will surprise you if you build something popular is that you won't know your users. Reddit now has almost half a million unique visitors a month. Who are all those people? They have no idea. No web startup does. And since you don't know your users, it's dangerous to guess what they'll like. Better to release something and let them tell you.
Wufoo took this to heart and released their form-builder before the underlying database. You can't even drive the thing yet, but 83,000 people came to sit in the driver's seat and hold the steering wheel. And Wufoo got valuable feedback from it: Linux users complained they used too much Flash, so they rewrote their software not to. If they'd waited to release everything at once, they wouldn't have discovered this problem till it was more deeply wired in.
Even if you had no users, it would still be important to release quickly, because for a startup the initial release acts as a shakedown cruise. If anything major is broken-- if the idea's no good, for example, or the founders hate one another-- the stress of getting that first version out will expose it. And if you have such problems you want to find them early.
Perhaps the most important reason to release early, though, is that it makes you work harder. When you're working on something that isn't released, problems are intriguing. In something that's out there, problems are alarming. There is a lot more urgency once you release. And I think that's precisely why people put it off. They know they'll have to work a lot harder once they do. [2]
2. Keep Pumping Out Features.
Of course, "release early" has a second component, without which it would be bad advice. If you're going to start with something that doesn't do much, you better improve it fast.
What I find myself repeating is "pump out features." And this rule isn't just for the initial stages. This is something all startups should do for as long as they want to be considered startups.
I don't mean, of course, that you should make your application ever more complex. By "feature" I mean one unit of hacking-- one quantum of making users' lives better.
As with exercise, improvements beget improvements. If you run every day, you'll probably feel like running tomorrow. But if you skip running for a couple weeks, it will be an effort to drag yourself out. So it is with hacking: the more ideas you implement, the more ideas you'll have. You should make your system better at least in some small way every day or two.
This is not just a good way to get development done; it is also a form of marketing. Users love a site that's constantly improving. In fact, users expect a site to improve. Imagine if you visited a site that seemed very good, and then returned two months later and not one thing had changed. Wouldn't it start to seem lame? [3]
They'll like you even better when you improve in response to their comments, because customers are used to companies ignoring them. If you're the rare exception-- a company that actually listens-- you'll generate fanatical loyalty. You won't need to advertise, because your users will do it for you.
This seems obvious too, so why do I have to keep repeating it? I think the problem here is that people get used to how things are. Once a product gets past the stage where it has glaring flaws, you start to get used to it, and gradually whatever features it happens to have become its identity. For example, I doubt many people at Yahoo (or Google for that matter) realized how much better web mail could be till Paul Buchheit showed them.
I think the solution is to assume that anything you've made is far short of what it could be. Force yourself, as a sort of intellectual exercise, to keep thinking of improvements. Ok, sure, what you have is perfect. But if you had to change something, what would it be?
If your product seems finished, there are two possible explanations: (a) it is finished, or (b) you lack imagination. Experience suggests (b) is a thousand times more likely.
3. Make Users Happy.
Improving constantly is an instance of a more general rule: make users happy. One thing all startups have in common is that they can't force anyone to do anything. They can't force anyone to use their software, and they can't force anyone to do deals with them. A startup has to sing for its supper. That's why the successful ones make great things. They have to, or die.
When you're running a startup you feel like a little bit of debris blown about by powerful winds. The most powerful wind is users. They can either catch you and loft you up into the sky, as they did with Google, or leave you flat on the pavement, as they do with most startups. Users are a fickle wind, but more powerful than any other. If they take you up, no competitor can keep you down.
As a little piece of debris, the rational thing for you to do is not to lie flat, but to curl yourself into a shape the wind will catch.
I like the wind metaphor because it reminds you how impersonal the stream of traffic is. The vast majority of people who visit your site will be casual visitors. It's them you have to design your site for. The people who really care will find what they want by themselves.
The median visitor will arrive with their finger poised on the Back button. Think about your own experience: most links you follow lead to something lame. Anyone who has used the web for more than a couple weeks has been trained to click on Back after following a link. So your site has to say "Wait! Don't click on Back. This site isn't lame. Look at this, for example."
There are two things you have to do to make people pause. The most important is to explain, as concisely as possible, what the hell your site is about. How often have you visited a site that seemed to assume you already knew what they did? For example, the corporate site that says the company makes
enterprise content management solutions for business that enable organizations to unify people, content and processes to minimize business risk, accelerate time-to-value and sustain lower total cost of ownership.An established company may get away with such an opaque description, but no startup can. A startup should be able to explain in one or two sentences exactly what it does. [4] And not just to users. You need this for everyone: investors, acquirers, partners, reporters, potential employees, and even current employees. You probably shouldn't even start a company to do something that can't be described compellingly in one or two sentences.
The other thing I repeat is to give people everything you've got, right away. If you have something impressive, try to put it on the front page, because that's the only one most visitors will see. Though indeed there's a paradox here: the more you push the good stuff toward the front, the more likely visitors are to explore further. [5]
In the best case these two suggestions get combined: you tell visitors what your site is about by showing them. One of the standard pieces of advice in fiction writing is "show, don't tell." Don't say that a character's angry; have him grind his teeth, or break his pencil in half. Nothing will explain what your site does so well as using it.
The industry term here is "conversion." The job of your site is to convert casual visitors into users-- whatever your definition of a user is. You can measure this in your growth rate. Either your site is catching on, or it isn't, and you must know which. If you have decent growth, you'll win in the end, no matter how obscure you are now. And if you don't, you need to fix something.
4. Fear the Right Things.
Another thing I find myself saying a lot is "don't worry." Actually, it's more often "don't worry about this; worry about that instead." Startups are right to be paranoid, but they sometimes fear the wrong things.
Most visible disasters are not so alarming as they seem. Disasters are normal in a startup: a founder quits, you discover a patent that covers what you're doing, your servers keep crashing, you run into an insoluble technical problem, you have to change your name, a deal falls through-- these are all par for the course. They won't kill you unless you let them.
Nor will most competitors. A lot of startups worry "what if Google builds something like us?" Actually big companies are not the ones you have to worry about-- not even Google. The people at Google are smart, but no smarter than you; they're not as motivated, because Google is not going to go out of business if this one product fails; and even at Google they have a lot of bureaucracy to slow them down.
What you should fear, as a startup, is not the established players, but other startups you don't know exist yet. They're way more dangerous than Google because, like you, they're cornered animals.
Looking just at existing competitors can give you a false sense of security. You should compete against what someone else could be doing, not just what you can see people doing. A corollary is that you shouldn't relax just because you have no visible competitors yet. No matter what your idea, there's someone else out there working on the same thing.
That's the downside of it being easier to start a startup: more people are doing it. But I disagree with Caterina Fake when she says that makes this a bad time to start a startup. More people are starting startups, but not as many more as could. Most college graduates still think they have to get a job. The average person can't ignore something that's been beaten into their head since they were three just because serving web pages recently got a lot cheaper.
And in any case, competitors are not the biggest threat. Way more startups hose themselves than get crushed by competitors. There are a lot of ways to do it, but the three main ones are internal disputes, inertia, and ignoring users. Each is, by itself, enough to kill you. But if I had to pick the worst, it would be ignoring users. If you want a recipe for a startup that's going to die, here it is: a couple of founders who have some great idea they know everyone is going to love, and that's what they're going to build, no matter what.
Almost everyone's initial plan is broken. If companies stuck to their initial plans, Microsoft would be selling programming languages, and Apple would be selling printed circuit boards. In both cases their customers told them what their business should be-- and they were smart enough to listen.
As Richard Feynman said, the imagination of nature is greater than the imagination of man. You'll find more interesting things by looking at the world than you could ever produce just by thinking. This principle is very powerful. It's why the best abstract painting still falls short of Leonardo, for example. And it applies to startups too. No idea for a product could ever be so clever as the ones you can discover by smashing a beam of prototypes into a beam of users.
5. Commitment Is a Self-Fulfilling Prophecy.
I now have enough experience with startups to be able to say what the most important quality is in a startup founder, and it's not what you might think. The most important quality in a startup founder is determination. Not intelligence-- determination.
This is a little depressing. I'd like to believe Viaweb succeeded because we were smart, not merely determined. A lot of people in the startup world want to believe that. Not just founders, but investors too. They like the idea of inhabiting a world ruled by intelligence. And you can tell they really believe this, because it affects their investment decisions.
Time after time VCs invest in startups founded by eminent professors. This may work in biotech, where a lot of startups simply commercialize existing research, but in software you want to invest in students, not professors. Microsoft, Yahoo, and Google were all founded by people who dropped out of school to do it. What students lack in experience they more than make up in dedication.
Of course, if you want to get rich, it's not enough merely to be determined. You have to be smart too, right? I'd like to think so, but I've had an experience that convinced me otherwise: I spent several years living in New York.
You can lose quite a lot in the brains department and it won't kill you. But lose even a little bit in the commitment department, and that will kill you very rapidly.
Running a startup is like walking on your hands: it's possible, but it requires extraordinary effort. If an ordinary employee were asked to do the things a startup founder has to, he'd be very indignant. Imagine if you were hired at some big company, and in addition to writing software ten times faster than you'd ever had to before, they expected you to answer support calls, administer the servers, design the web site, cold-call customers, find the company office space, and go out and get everyone lunch.
And to do all this not in the calm, womb-like atmosphere of a big company, but against a backdrop of constant disasters. That's the part that really demands determination. In a startup, there's always some disaster happening. So if you're the least bit inclined to find an excuse to quit, there's always one right there.
But if you lack commitment, chances are it will have been hurting you long before you actually quit. Everyone who deals with startups knows how important commitment is, so if they sense you're ambivalent, they won't give you much attention. If you lack commitment, you'll just find that for some mysterious reason good things happen to your competitors but not to you. If you lack commitment, it will seem to you that you're unlucky.
Whereas if you're determined to stick around, people will pay attention to you, because odds are they'll have to deal with you later. You're a local, not just a tourist, so everyone has to come to terms with you.
At Y Combinator we sometimes mistakenly fund teams who have the attitude that they're going to give this startup thing a shot for three months, and if something great happens, they'll stick with it-- "something great" meaning either that someone wants to buy them or invest millions of dollars in them. But if this is your attitude, "something great" is very unlikely to happen to you, because both acquirers and investors judge you by your level of commitment.
If an acquirer thinks you're going to stick around no matter what, they'll be more likely to buy you, because if they don't and you stick around, you'll probably grow, your price will go up, and they'll be left wishing they'd bought you earlier. Ditto for investors. What really motivates investors, even big VCs, is not the hope of good returns, but the fear of missing out. [6] So if you make it clear you're going to succeed no matter what, and the only reason you need them is to make it happen a little faster, you're much more likely to get money.
You can't fake this. The only way to convince everyone that you're ready to fight to the death is actually to be ready to.
You have to be the right kind of determined, though. I carefully chose the word determined rather than stubborn, because stubbornness is a disastrous quality in a startup. You have to be determined, but flexible, like a running back. A successful running back doesn't just put his head down and try to run through people. He improvises: if someone appears in front of him, he runs around them; if someone tries to grab him, he spins out of their grip; he'll even run in the wrong direction briefly if that will help. The one thing he'll never do is stand still. [7]
6. There Is Always Room.
I was talking recently to a startup founder about whether it might be good to add a social component to their software. He said he didn't think so, because the whole social thing was tapped out. Really? So in a hundred years the only social networking sites will be the Facebook, MySpace, Flickr, and Del.icio.us? Not likely.
There is always room for new stuff. At every point in history, even the darkest bits of the dark ages, people were discovering things that made everyone say "why didn't anyone think of that before?" We know this continued to be true up till 2004, when the Facebook was founded-- though strictly speaking someone else did think of that.
The reason we don't see the opportunities all around us is that we adjust to however things are, and assume that's how things have to be. For example, it would seem crazy to most people to try to make a better search engine than Google. Surely that field, at least, is tapped out. Really? In a hundred years-- or even twenty-- are people still going to search for information using something like the current Google? Even Google probably doesn't think that.
In particular, I don't think there's any limit to the number of startups. Sometimes you hear people saying "All these guys starting startups now are going to be disappointed. How many little startups are Google and Yahoo going to buy, after all?" That sounds cleverly skeptical, but I can prove it's mistaken. No one proposes that there's some limit to the number of people who can be employed in an economy consisting of big, slow-moving companies with a couple thousand people each. Why should there be any limit to the number who could be employed by small, fast-moving companies with ten each? It seems to me the only limit would be the number of people who want to work that hard.
The limit on the number of startups is not the number that can get acquired by Google and Yahoo-- though it seems even that should be unlimited, if the startups were actually worth buying-- but the amount of wealth that can be created. And I don't think there's any limit on that, except cosmological ones.
So for all practical purposes, there is no limit to the number of startups. Startups make wealth, which means they make things people want, and if there's a limit on the number of things people want, we are nowhere near it. I still don't even have a flying car.
7. Don't Get Your Hopes Up.
This is another one I've been repeating since long before Y Combinator. It was practically the corporate motto at Viaweb.
Startup founders are naturally optimistic. They wouldn't do it otherwise. But you should treat your optimism the way you'd treat the core of a nuclear reactor: as a source of power that's also very dangerous. You have to build a shield around it, or it will fry you.
The shielding of a reactor is not uniform; the reactor would be useless if it were. It's pierced in a few places to let pipes in. An optimism shield has to be pierced too. I think the place to draw the line is between what you expect of yourself, and what you expect of other people. It's ok to be optimistic about what you can do, but assume the worst about machines and other people.
This is particularly necessary in a startup, because you tend to be pushing the limits of whatever you're doing. So things don't happen in the smooth, predictable way they do in the rest of the world. Things change suddenly, and usually for the worse.
Shielding your optimism is nowhere more important than with deals. If your startup is doing a deal, just assume it's not going to happen. The VCs who say they're going to invest in you aren't. The company that says they're going to buy you isn't. The big customer who wants to use your system in their whole company won't. Then if things work out you can be pleasantly surprised.
The reason I warn startups not to get their hopes up is not to save them from being disappointed when things fall through. It's for a more practical reason: to prevent them from leaning their company against something that's going to fall over, taking them with it.
For example, if someone says they want to invest in you, there's a natural tendency to stop looking for other investors. That's why people proposing deals seem so positive: they want you to stop looking. And you want to stop too, because doing deals is a pain. Raising money, in particular, is a huge time sink. So you have to consciously force yourself to keep looking.
Even if you ultimately do the first deal, it will be to your advantage to have kept looking, because you'll get better terms. Deals are dynamic; unless you're negotiating with someone unusually honest, there's not a single point where you shake hands and the deal's done. There are usually a lot of subsidiary questions to be cleared up after the handshake, and if the other side senses weakness-- if they sense you need this deal-- they will be very tempted to screw you in the details.
VCs and corp dev guys are professional negotiators. They're trained to take advantage of weakness. [8] So while they're often nice guys, they just can't help it. And as pros they do this more than you. So don't even try to bluff them. The only way a startup can have any leverage in a deal is genuinely not to need it. And if you don't believe in a deal, you'll be less likely to depend on it.
So I want to plant a hypnotic suggestion in your heads: when you hear someone say the words "we want to invest in you" or "we want to acquire you," I want the following phrase to appear automatically in your head: don't get your hopes up. Just continue running your company as if this deal didn't exist. Nothing is more likely to make it close.
The way to succeed in a startup is to focus on the goal of getting lots of users, and keep walking swiftly toward it while investors and acquirers scurry alongside trying to wave money in your face.
Speed, not Money
The way I've described it, starting a startup sounds pretty stressful. It is. When I talk to the founders of the companies we've funded, they all say the same thing: I knew it would be hard, but I didn't realize it would be this hard.
So why do it? It would be worth enduring a lot of pain and stress to do something grand or heroic, but just to make money? Is making money really that important?
No, not really. It seems ridiculous to me when people take business too seriously. I regard making money as a boring errand to be got out of the way as soon as possible. There is nothing grand or heroic about starting a startup per se.
So why do I spend so much time thinking about startups? I'll tell you why. Economically, a startup is best seen not as a way to get rich, but as a way to work faster. You have to make a living, and a startup is a way to get that done quickly, instead of letting it drag on through your whole life. [9]
We take it for granted most of the time, but human life is fairly miraculous. It is also palpably short. You're given this marvellous thing, and then poof, it's taken away. You can see why people invent gods to explain it. But even to people who don't believe in gods, life commands respect. There are times in most of our lives when the days go by in a blur, and almost everyone has a sense, when this happens, of wasting something precious. As Ben Franklin said, if you love life, don't waste time, because time is what life is made of.
So no, there's nothing particularly grand about making money. That's not what makes startups worth the trouble. What's important about startups is the speed. By compressing the dull but necessary task of making a living into the smallest possible time, you show respect for life, and there is something grand about that.
Notes
[1] Startups can die from releasing something full of bugs, and not fixing them fast enough, but I don't know of any that died from releasing something stable but minimal very early, then promptly improving it.
[2] I know this is why I haven't released Arc. The moment I do, I'll have people nagging me for features.
[3] A web site is different from a book or movie or desktop application in this respect. Users judge a site not as a single snapshot, but as an animation with multiple frames. Of the two, I'd say the rate of improvement is more important to users than where you currently are.
[4] It should not always tell this to users, however. For example, MySpace is basically a replacement mall for mallrats. But it was wiser for them, initially, to pretend that the site was about bands.
[5] Similarly, don't make users register to try your site. Maybe what you have is so valuable that visitors should gladly register to get at it. But they've been trained to expect the opposite. Most of the things they've tried on the web have sucked-- and probably especially those that made them register.
[6] VCs have rational reasons for behaving this way. They don't make their money (if they make money) off their median investments. In a typical fund, half the companies fail, most of the rest generate mediocre returns, and one or two "make the fund" by succeeding spectacularly. So if they miss just a few of the most promising opportunities, it could hose the whole fund.
[7] The attitude of a running back doesn't translate to soccer. Though it looks great when a forward dribbles past multiple defenders, a player who persists in trying such things will do worse in the long term than one who passes.
[8] The reason Y Combinator never negotiates valuations is that we're not professional negotiators, and don't want to turn into them.
[9] There are two ways to do work you love: (a) to make money, then work on what you love, or (b) to get a job where you get paid to work on stuff you love. In practice the first phases of both consist mostly of unedifying schleps, and in (b) the second phase is less secure.
Thanks to Sam Altman, Trevor Blackwell, Beau Hartshorne, Jessica Livingston, and Robert Morris for reading drafts of this.
Monday, May 26, 2008
history of bubbles
Tulip bubble – 1630's tulip's sold for more than houses!
South Sea Bubble – 1720
Bull market of 1920's - resulted in the great depression
Japanese asset price bubble – Commercial real estate selling for US$1.5m per square meter!
Real estate bubble every 10 years or so… You've just lived through one!
Tech wreck (dot com)– Companies with negative cash flow valued over 1 billion!
Sub prime / hedge fund bubble 2008 - We're yet to see all of this…
Green Marketing bubble ? – This one's coming watch out!
Mobile advertising: from big to huge
Spending on mobile advertising will be highest in the Far East/China region, followed by Western Europe and North America. Juniper said that successful mobile advertising campaigns will use a number of channels, and predicted that nascent channels such as MMS and idle-screen advertising attracting a combined annual adspend of more than $1 billion within five years.
F|R Crib Sheet: The Term Sheet Glossary
Let's start with the basics of valuation. The three biggest questions I get are: How much is my company is worth? How much of my company will I have to give up? How is that calculated? Three valuation terms you need to know are:
1. Pre-money valuation: Investors will assign a valuation to the company and its shares before they even think about dropping a dime on it. Your "pre-money valuation" is what your company is worth before the VC deal happens.
If the pre-money valuation is $10 million and there are 4 million shares outstanding, the investors are offering to pay $2.50 a share for the company.
2. Post-money valuation: This is what your company is worth after the deal. If the investors then put in $5 million, the post-money valuation will be $15 million and the investors will own one-third of the company.
3. Fully diluted capitalization: This is how that 4 million share number is calculated. It's not necessarily obvious. You may have issued 3 million shares to your co-founders and early employees. However you'll need to issue more shares (in the form of stock options) to future employees, so you budget for those by creating a share pool consisting of 1 million shares. The 1 million shares have not been issued, but they are treated as if they've been issued when the valuation is calculated. Thus, 3 million issued and outstanding shares plus 1 million reserve shares set aside for future stock options grants equals 4 million fully diluted shares.
Once you have a command of the valuation being placed on your company, you'll need to comprehend the many other preferred rights you'll be asked to give your investors in exchange for their money. This will matter when you get to a liquidation event, because not all shareholders will get paid equally.
4. Preferred stock: Founders and employees of companies get common stock, which gives them bare ownership rights. Investors get stock with rights that are in some way superior to those of common stock; we call this preferred stock. At a minimum, preferred stock gets its money out first, so if there isn't enough to go around, preferred has dibs and common gets the scraps.
5. Liquidation preference: This is the right to "get out" (get paid) first if the company is sold, merged or otherwise liquidated. What someone is paid usually starts as the amount invested per share ($2.50, in our example).
6. Liquidation multiple: Investors may ask to be paid a premium on their liquidation preference, meaning the company may have to pay back $5 for every $2.50 invested, before common stockholders get anything. That's a liquidation multiple.
7. Participating and non-participating preferences: A liquidity event produces the potential for a "double dip" for the preferred shareholders. They get paid once in their liquidation preference, and then have the option to get paid again as if they are common shareholders. There are two buckets of money: After the liquidation preference is paid, whatever money is left over gets distributed among common shareholders and those preferred shareholders who wish to "participate." Non-participating preferred holders take their preference payment, then let the common stockholders take what remains.
So, if the company from our example is bought for $20 million, the preferreds will get their $5 million back (this is without a liquidation multiple) before the remaining $15 million goes to common shareholders. And if they're "participating preferreds," they'll get a share in the remaining $15 million, too. Bottom line: You want non-participating preferreds if you're a founder!
Bear in mind: liquidation multiples and participating preferreds are most common in high-risk, troubled company situations. If your VCs are using these terms, be careful.
8. Right of first refusal: Investors want to make sure (i) a company's shares stay within a small group, (ii) that they get an advantageous crack at additional financing rounds. They'll ask for a clause in your investment documents saying that before you can sell additional shares, you must first let the company and/or the investors buy them at the price offered by the third party.
9. Co-sale right: This further locks things up by saying that if for some reason both the company and the current investor pass on the next round, the current investor can still benefit by selling his shares to a third party, alongside the founder.
10. Participation right: This says that the investor has the right to invest in any new offerings the company conducts.
These are some of the key terms that appear in VC term sheets. I'll add to this crib sheet over time, so: What terms do you need help understanding?
Thursday, May 08, 2008
Angel Financing
via FalsePrecision
In a few months Lijit Networks will be two years old. We started the company in a fairly common way, finding employees that wanted that "ground zero" experience, having the seed of a good idea, and finding Angel Investors that would invest and keep the idea alive long enough to germinate. It wasn't easy but we got it done. A question I get a lot from new entrepreneurs is "how do you find Angel Investors?"
Many young startup entrepreneurs tend to look at Angel Investors as a group of people with more money than sense (which sometimes is true) but generally not. They give no thought to the motivations of their Angels, what their Angels should get from the relationship, or simply why the Angel should be interested in investing. Like anything, understanding your audience is half the battle. Don't trivialize your Angels Investment by rationalizing the money isn't important to them; I find that $25K is important to everyone.
I have been on both sides of the Angel Investment table. Lijit was Angel funded for the first year of its life. We raised approximately $900K from a combination of friends, family and seed professional investors. On the flip side I have made several Angel investments in other local companies – with varying success. Based on this sample set plus other random data I have collected along the way, I have established a basic way to look at Angel Financing.
Types of Angel Investors:
The Family Investor: The Family Investor is likely not really a classic Angel Investor at all but rather a supportive family member that "knows you". Their motivation is likely out of support (sometimes guilt), but their basic investment thesis is they trust you. For me these are the worst type of investor because you likely have intimate knowledge of their financial situation and whether or not they 'should' be investing. Likely, they have no inherent feel if your idea is good or not, but may have changed your diaper at one time or another and have overcome that experience to hand you a check for $25K or $50K. Personally, I like this category of investor the least because the investment is totally emotional and personal – and that sucks in business. But based on the financial situation of the individuals involved and the relationships this can work ok if everyone comes into the situation with their eyes open, but go out of your way to make sure.
The Relationship Investor: The Relationship Investor is probably one or more co-workers from a previous gig or business friends you have known for a while. They may or may not understand what your new company is doing but they have had a track record working with you. They want to be supportive, but are looking for a return. You won't lose them as friends if things go bad, but the investment for them is likely not 'trivial'. In my experience these are good Angels to have, again as long as their eyes are open going in. These people can also be wildly supportive of you in terms of finding employees and other resources.
The Idea Investor: The Idea Investor is probably very familiar with the space your company is targeting. These are in some ways the very best types of Angels because to some degree they validate your idea. There investment is based on the Idea and there is little emotion around the table (always good). If you can get them onboard they can open doors into partner relationships and just generally good advice. You will spend most of your time convincing the Idea Investor that you and team are the right people to attack this problem (as they likely don't have a strong relationship with you or the team). Often an influential Idea Investor makes a good early board member for the company.
The Once Removed Investor: The Once Removed Investor is likely connected through a personal or professional relationship with either the Relationship Investor or the Idea Investor. They likely don't know you, and they likely don't have a clue if your idea is good or bad but they have translated the trust in the investment to the person they know. This is a great way to get additional Angel Investors onboard, but without a solid Relationship Investor or Idea Investor it just isn't going to happen.
I personally have never seen an Angel Financing come together without some mix of the first three investor types plus a few Once Removed Investors. Be warned that the Once Removed category of investors will also supply the softest money in the upcoming financing. Simply put - as you verify amounts before close, the Once Removed guys are the ones that tend to "go away" or "get smaller" as the deal progresses. A friend of mine that has successfully financed several companies gave me the rule of thumb that most investors will end up being about half of what they initially committed to. This is definitely true of Once Removed Investors; I once had a $400K guy turn into $50K guy, and $50K was like pulling teeth.
Finally, there is a concept I refer to tongue-in-cheek as the Arc Angel. An Arc Angel is a Relationship Investor or Idea Investor that has a track record of success making other Angels (and perhaps non Angels) money. These people are valuable as they can be very influential attracting quality Once Removed Investors. If you can find this person and get them excited about your deal, do it.
The bottom line on Angels, spend your time looking for solid Relationship Investors or Idea Investors, they are the ones that will get you over the hump. Bring a few Family Investors along for the ride if they won't get sick on the Rollercoaster and hope that you can mix in a good set of Once Removed Investors.
Size of Investment
Next, you have to consider the size of the investment. Money never goes as far as you think it will. My experience is you need to raise between $500K and a $1M to do almost anything. Using Angel Investors to achieve this goal you are likely looking at investments all over the board but usually in the $25K to $100K range. You may have a few smaller and a few larger but in my mind you have to target having no more than 10 to 15 total investors in an Angel round. It's just too hard to herd the cats when the group gets larger than this.
Pre-Money Valuation
A friend of mine with much more experience then myself told me, Angels should get a good deal. They are putting money in at a time when presumably no one else will and they are taking a huge risk. I can't tell you how many people have said, "Yeah, but its only $25K and they have lots of money". That's total bullshit; show me someone who lights $25K on fire for no reason.
Having been on both sides of these kinds of deals, I totally agree that Angel Investing is very high risk and the road ahead as an Angel is fraught with investment disaster. Lots of wonky things can happen to the Angels when VC's come into the company including investment preferences that take away the Angel Chocolaty goodness. I have also, unbelievably, had meetings with entrepreneurs where they are indignant I won't accept their pre-money valuation on their imaginary business. I always tell them the same thing, if my money is so unimportant, do it with yours. If you feel compelled to twist the valuation screws do it in the A round with the professional investors.
Investment Mechanism
There was a period of time where nearly every startup was doing convertible financings. This is where as an Angel you invest as if the investment is a debt type financing but can convert to an equity investment based on some outcome or the will of one party or the other. I tend to think these deals kind of suck. They are usually setup to attract money fast, and often in the case of the entrepreneur are empowering some kind of fantasy that the investment could be paid off based on success of the company and he won't need to give any equity away. As an investor that's the last thing I want because that just turns my investment into a very high risk bank account. The only time I saw this work well was a company that had plenty of investors around the table and incented them to invest early to get the company jump started faster. Early investors got some warrants to make it worth their while to have their money show up to the party sooner (and deal with the risk of being the first money in). Just skip this stuff, get all your Angels aligned, do one close, and make it a pure equity round. If you aren't ready to sell equity in your idea, finance it yourself.
Liquidity
With the exception of possible investors in the Family category, Angels are not in it to finance your dream indefinably. You would not think it to be the case, but I have had several conversations with people approaching me for Angel investments who simply could not articulate how I would ever get any money back. They were so focused on getting money from people they forgot 'they are an investment', and investments have terms. Almost without exception, I don't want to own your dream, I want to make money and have a little fun along the way. If you never sell the company, I never realize a gain.
Conclusion
There are probably 5 more posts I can do on this subject but my goal was simply to put together a primer on this subject. So many people approach me not understanding the dynamics of early stage financing. Brad Feld has written good stuff in this area on his blog as well as some quality stuff on AskTheVC. Use these resources to understand the numbers, but don't forget to understand the motivations.
