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May 18, 2008

When To Raise Money

Fundraising_image This was one of the key questions we had to address in a panel during last week's Red Herring 100 Conference in San Jose. While it's not an easy question to answer, the reply simply isn't just "when you need money". In fact, being contrarian is a good strategy when it comes to fund-raising. For example, Fund-raising in emergency mode only exacerbates the negotiation position.

While there are numerous variables that come into play in answering this question, such as if the markets are on the rise or not, certain factors play an important role regardless of market conditions. If possible, raising money from a position of strong momentum  significantly helps achieve a better outcome. For instance:

  1. Coordinating the fund-raising effort to coincide with a major technical break-through, closing a key business deal or distribution partnership, making or identifying a major hire, where the positive momentum you're creating could clearly benefit from the newly raised funds.
  2. To use Seth Godin's popular Passion-Pop chart, the cusp of either the passion or the pop curve, when traffic starts getting really viral, would be an ideal time When_raise_pop_2 as well.

March 19, 2007

US Government Plans To Incentivize Angels

The Wall Street Journal (WSJ) reported about proposed legislation today which would give angel investors (individuals with a net worth north of $1 million who invest in early stage companies) a 25% tax credit on investments in start-ups up to $500,000 on the condition that they make at least 2 investments in that year for up to $250,000 in each business.

This idea might have a positive impact in Silicon Valley, especially if scarcer liquidity options put pressure on early stage investing in the next year or two.

According to the Center for Venture Research at the University of New Hampshire, US angels and VCs invested about $23 billion and $22 billion in about 50,000 and 3,000 deals, respectively in 2005. One can argue that those initial higher risk investments allowed for the riskier ideas that had merit to potentially prosper and at least reach a maturity stage where they could be further funded by established VCs increasing the chances of success further.

The point of angel investing is to support a company financially when the risk is biggest. One of the functions of angel investors that's as important as their financial support, is their knowledge and advice. Both have a positive impact in making great ideas a reality. The proposed legislation can only help by making it more attractive for angel investors to invest in early stage companies and increasing total angel investment for promising start-ups.

March 09, 2007

Highlights from D Day @ Y Combinator

12 start-ups presented at Y Combinator yesterday - majority of them built their concepts in less than 10 weeks. It was an impressive group of founders who collectively did a tremendous job of demonstrating their companies. While the development level differed among the presenters, all companies could show at least a private beta or some relevant proof of concept. Kudos to Paul Graham, Jessica Livingston and the rest of the Y Combinator team for an awesome job on selecting these companies and the wonderful organization.

My personal favorites are:

Zenter
Online presentation site that actually works smoothly and *fast*. They added super cool features like being able to add graphics, use *any* font from the web for any text in the presentation, or easily insert images from the web without leaving the online draft. It also allows people to collaborate on a presentation. Needless to say it works with existing powerpoint presentations. Unlike powerpoint, interactivity with the audience is possible via real-time surveys that can measure the listeners response to a multiple choice question in real-time and add it to the current slide. The competition from the established players is not to be underestimated but Zenter seems to be ahead of anyone else in this space.

Weebly
If you have ever wished for a really easy-to-use WYSIWYG website creator/editor that works online, fast, isn't limited to dumbed-down templates with just a handful of pages, look no further: Weebly has done it. They've also really streamlined the code, so the action looks swift. Their site includes neat features like integrating Google Maps to a website, which can be updated easily. While one can argue that the price for such convenience is zero - I disagree - I think in combination with some nice ISP/hosting features bundled in - this could be an unbeatable service, users might happily pay for.

Octopart

If you ever tried searching for electronics parts, you probably realize it can be incredibly difficult to sort between suppliers, while trying to keep track of the part numbers, prices, etc. Enter Octopart's vertical search engine which makes searching for parts a breeze. Results include major suppliers, prices,  available stock, product specs and more. It's fast, it's targeting an under-served niche, it focuses on search terms that are virtually all commercial and it's fast.

Other notables included:

  • Virtualmin (Web based virtual hosting)
  • Writewith (Collaborative online word processing)
  • Auctomatic (online selling utility for eBay power sellers)

More detailed reviews of all the participants can be found on TechCrunch.

January 17, 2007

Q&A About Early Stage Fund Raising - I

The questions I hear most often from founders and entreprenuers are:

1. When to raise funds ?
2. How do I find the right investor(s) ?

I'm sure there have been much written about both topics - but in general, the more an entrepreneur can bootstrap the company to at least show a proof of concept or even better a working prototype, along with a well thought out business plan, the higher the possibility of getting funds, possibly from more qualified investors. Sometimes, outside fundraising might not even be necessary and the company can be bootstrapped - but most often some capital infusion is needed for scale.

There's nothing preventing founders from raising capital with nothing but just brilliant resumes and glowing records of past experience, but it just doesn't come close to approaching potential investors with an actual demonstration of the idea or concept.

I would encourage potential entrepreneurs to wait as long as possible before raising capital. Even more important, have a plan of action and time-frame as to how to best leverage that capital to scale the business when funds are raised. Choose investors who thoroughly understand the underlying business, have great, related contacts, think highly enough of the concept to actually suggest some constructive ideas when presented with your business plan and demo.

Think carefully if the situation is truly mutually beneficial. Do the investors add value and in return get decent terms to compensate for the risks they're taking ? Will these investors really play an active role and contribute to the success of your company ?

The market dynamics always work in favor of the best prepared: the investors with the best track record who have cultivated the strongest relationships with their companies and contacts will attract a premium while founders that manage to combine a great idea with a solid team and articulate business plan will be able to dictate stronger terms from investors.

While these points might be painfully obvious, most people that start companies initially get lost in the excitement of their idea or product itself and neglect the importance of:

- building out their teams (or identifying potential hires) with complimentary skills and with the ability to get things done (on time).
- writing a business plan (even if an outline) with actionable milestones, a defensible differentiation strategy, a revenue or business model (ie how will this venture produce revenues) and how to fend off potential competitors [remember you will have to face these issues regardless of whether to raise capital or not, so you better have solid answers for them]

Next comes the questions of how to best raise the funds - ie what are some common instruments used in early stage funding and how to approach negotiating terms with potential investors. More on that in the next post...

 

In the meantime, I would highly encourage everyone interested in this topic to read the great blogpost yesterday by Charles Moldow on "Are you sure you want our money ?" 

Let me know your feedback.

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