Articles by Tim Berry

The Startups Weekend Phenomenon and Angel Investors

Actual, fundable, serious startups in a single weekend? No. Real? Great learning experience? And worth doing? Yes.

Last Sunday night I judged nine pitches from nine groups that started from scratch just two days before, late Friday afternoon. They had some good ideas, good pictures, a prototype or two, some good video … and an entertaining event.

Startup Weekend startupweekend.org

I’m posting this here for two audiences: angel investors and founders (including would-be and wanna-be founders) of startups.

I was one of four judges, all of us members of local angel investment groups working with the gust.com platform. In two hours we had pitches and questions and answers. Then we met for 30 minutes and chose a winner. This was in Corvallis, OR, for the Willamette Valley.

This isn’t exactly news. It was a Startup Weekend as conceived and licensed by the organization at startupweekend.org, supported by the Kauffmann Foundation, Google, Microsoft, Amazon.com, and others (my company was a sponsor of this local one). You probably already heard of it. I had, and I’d been invited to speak or judge before, but hadn’t been able to actually do it until now. The Startup Weekend organization has run 970 of these weekends in 108 countries and is doing about seven or so every month now.

It’s a good reminder about what it takes to start a business. The whole thing started Friday with a vote on the better ideas. They formed teams, worked Friday night, Saturday, and Sunday. They ended up with market validation, execution, and what seemed like a lot of progress in very little time. Several of the pitches looked like interesting prospects that could happen.

It was a lot of fun, good for the local startup community, and good for the 75 (or so) people who spent all weekend doing it.

Pivotal Moments

Is the Startups Buzz Dimming?

Is the bloom off of the startups rose? Two days ago the New York Times published this story about investors getting pickier.

Investors pickier on startups

I think the NYTimes’ headline is slightly off from the story’s content. It’s not that much about a rocky recent past; it’s more about money being too easy in the recent past, and now, as a natural result, things get tighter because “easy” money doesn’t always mean enough of the due diligence and thought to make good deals.

This is what I hear from my own sources. I had a conversation over the weekend, before either of us had seen the NYTimes story, about startups going down, even giving back investors’ money. The gist of it was that money had been too easy.

Despite its headline, the story quotes several people along those lines, For example:

Earlier, entrepreneurs didn’t need a real monetization strategy,” said Brian O’Malley, an early investor at Battery Ventures. “They could punt on revenue indefinitely because their investment dollars were their revenue. They could fund their start-ups with funding versus customers.

And this one:

Part of the problem is simple math. Angel investors seed businesses with small sums, often less than $1.5 million. But to grow a business, entrepreneurs eventually have to solicit financing from the venture capitalists who invest on behalf of endowments, pension funds, foundations and the like. And while the number of angels eager to write checks has increased, the number of active venture capitalists has decreased.

And my favorite, indicating a classic reality check:

The realities of building an enduring business are starting to sink in. “It has never been easier to start a company, and never harder to build one,” said David Lee, a venture capitalist at SV Angel, an early-stage investment firm.

One group that doesn’t lose, in this scenario, is the subset of startups funded in 2012 that have launched successfully and are doing well. The view is always better from the eyes of a head standing up above the rest of the crowd.

What do you think?

Industry Experts

The Experience vs. Education Curve in Startups

Years ago I came across the idea that in entrepreneurship, education and experience contribute to likelihood of success roughly like you see in the chart here. The underlying assumption is that a lot of education makes up for very little experience, and vice-versa. And this is in the context of startups, investment, and entrepreneurship.

education vs. experience I’ve drawn it here MBA style, with a line on two axes, pretty much the way I first saw it, with a smooth curve from one extreme to the other. It’s almost symmetrical in this drawing, and would be even more so if I had better tools (who wants to devise an equation? I just drew it.) The idea is some sort of a conceptual break-even point between the two factors.

I think it makes sense in a broad view, but my experience — as angel investor lately, as entrepreneur before that, and startup dabbler still — makes me think it should be skewed. This is my opinion, based on (how nice) education and experience. And this relates to how I look at startups as potential investments for the angel group I’m in (WAC) :

There’s no amount of education that has much likelihood of success with no experience whatsoever. The curve should move slightly up and to the left.
I believe the sweet spot on the curve is in the middle.
My own experience with an MBA degree — which I got later than most, already 30+, but also before I started my own business, and was a co-founder of one that went public — was that the MBA gave me a general overview that made entrepreneurship easier.
However, through several decades of working in this area, I’ve come to think that most MBAs need to temper all those analytical skills with real-world experience before they can really make progress. So an MBA five years out of biz school tends to be way more valuable than one who just graduated. Then again, I have an obvious bias.
I’ve seen very little evidence that an undergraduate business degree increases likelihood of startup success more than a good undergraduate degree in science, math, engineering, or — yes, I’ll stand by this one — even liberal arts. In fact, I’ve seen a lot of evidence for the latter: that any other degree is a better indicator than a business degree.

However, one big caveat: I’m guilty in the above of one-size-fits-all thinking. The huge bias towards my way of doing things. So take all of this as just one opinion.

Do you agree? What are your thoughts? I posted it here because the discussion intrigues me, not because I think I’m right.

Pivotal Moments

On Why We’re Pivoting from Mobile-first to Web-first

Consider this (emphasis is mine):

Ads are the Internet’s tax on users who want free apps and websites. Allmost all free apps and services have ads. Ad-supported companies are akin to the government in the sense that they are both really good at finding ways to charge you without it seemingly coming out of your pocket. Many people’s taxes are taken automatically out of their payroll, so they don’t think of that money as being theirs to begin with. Similarly, we feel like everything that we don’t directly pay money for on the Internet is free, but that is simply not true.

That quote’s from Vibhu Norby, in Why We’re Pivoting from Mobile-first to Web-first. He goes on:

Unlike taxes, however, ad-based services target lower-income and lower-education audiences because that’s where they make all of their money … What’s the cost to the user? The cost is the loss of privacy, and future opportunities for the user that they’ve lost as a result. Those opportunities can cost tens or hundreds of thousands of dollars as well as future happiness.

Is this a business decision based on ground-level fundamental ethics? What’s good for people or bad for people? No, not exactly. It’s about chances of success:

We want to place our chips where we believe we have the best chance of succeeding based on our theories and data. For us, mobile is not that place, which is why our new product is going to be launching web-first in the next couple months, with mobile as a companion app. We are taking a big bet on the web and the Internet in general, as you’ll see by how it functions. We are also going revenue-first because we believe in privacy and we’re willing to trade a smaller, slower-growing audience for it. Our new product will cost you money, so you can be assured that it doesn’t cost you something else.

Vibhu’s post makes very good reading. Fundamentals: web vs. mobile, ad-supported vs. free.

Invested Interests

Users Guide to Startup Advisors

What’s an advisor to a startup deal? Technically, advisor is one of those bucket terms that means anything and everything, depending on context. Those names and faces and backgrounds that turn up in pitches and business plans might be deep and important relationships, somebody with options or equity who is going to be helping for the long term; or meaningless fluff, somebody who agreed once to have his or her name appear, but really does nothing.

When advisors come up in a pitch, I immediately ask how advisors are compensated and what they really do.

And here’s how I feel about the answers I get:

Free advisors are likely to be as valuable as free advice. Yes there are exceptions to that rule, like family and long-time business relationships, but most of the time no compensation means no thought, no effort, no real contribution. Everybody’s busy. I see way too many deals bragging about advisors who are just lending their name to the business plan, as a favor to a former student or friend of a friend. I don’t believe they’re going to make calls, dig into details to offer real advice, or get dirty. And it hurts the credibility of founders when they show off names that don’t really mean anything.
Advisors with small equity shares are good, and advisors with options are as good or even better. These are people who probably will return calls, and make calls, and pitch in to help.
Advisors with options or equity should be long-term people who will stay with the company from startup to exit. Equity is forever. Options can become equity. Nobody should ever be on the capital table for what they did once in the past. Everybody’s busy, but options motivate people to help.
I dislike professionals as advisors. Attorneys and accountants, for example, are better as professional friends than as advisors with equity or options. Their business model values fees, not equity. So the advisee companies get the last quarter hour of the last day. And having a vendor own shares means fewer shares for the investors and management team. When a web designer is the advisor I wonder what that means down the road as the startup grows. Free web design forever? Why is the web designer not a regular team member. Why are they holding back?
Advisors can have too much equity. There’s no exact rule but when an advisor who isn’t really working with the company regularly ought not to have even a whole percentage point of equity.

Advice is easy to get. Help, contributions, real discussions, digging into the details, making calls, returning calls, opening doors, and getting things done, that can be really valuable.

And on both sides, investor and startup, we need to figure out what advisor really means.

Industry Experts

Founders Learn One Day at a Time Like Everybody Else

I like this a lot. The executive summary:

Dropbox Co-Founder Drew Houston believes false mythologies about tech company founders do a disservice to aspiring entrepreneurs. While many people think all tech founders start with world conquering visions, says Houston, the reality is that founders learn one day at a time just like everyone else.

This less-than-two-minute video comes from Stanford’s Ecorner, its online entrepreneurship center, which is a great resource.

If you don’t see the video embedded here, you can click here to see it on the original source.

Invested Interests

Investors are Aiming for the Big Win, Not the Mean or Average

True story: many long years ago I had founders’ stock in a video game company. At one point they were just a few weeks from going public, but that’s not the point of this story. It was about a “hit” business, meaning a business in which you had to have a lot of products in play to get one of the big hits that paid for the rest of the disappointments. Video games in the early 1980s were such a business.

Books became a hit business in the 1990s when the retail chains took over from smaller stores. I followed that business as an author looking at royalties. The average book sale dwindled. The publishers that survived did so on by riding a big hit that paid for all the rest.

I tell those stories because angel investment is a hit business too. Statistics notwithstanding (my apologies to Rob Wiltbank, the world expert on angel investment statistics), it’s a business in which the rare big hit pays for all the failures. I was making that point in a post on my blog called Size Matters when I wrote:

private investors generally want very high returns. They need to believe that every $30K put into your business will pay them back $1 million or so in 3 years and $3 million or so in 5-10 years. They know that only 1 of every 10 investments (or so) will be successful, so they need to believe each one has a chance to return 100 times or more the initial investment.

Where do those numbers come from? I was fleshing out the story. There’s nothing scientific there.

I like the comment added by Anthony Testi, who questioned my story. He said what I was suggesting was too high:

Say an investor invests $30K into 10 companies, for a total of $300K. Now ( I am about to use some nice round numbers ) because of the risks, significant returns are needed say ~24% or using the rule of 72 the money doubled every 3 years. Since CD rates ( They say CDs are risk free, but what is risk free? ) are now in the low (low ) single digits interest rates, a 24% return is a great, or what I would call a “very high return.” But that takes the $300K to $600K in 3 years, not ~$1,000K. To reach $1,000K an expected returns of ~72% per year is needed, e.g. $1,200K in 3 years. 24% is very high, but 72% seems to me off the scale high.

Yes, but then factor in the uncertainty. The actual return isn’t what we hope, and much less what the founders promise. Instead, it’s what the real world gives us, after the fact. And we invest up front, not after the fact. All of which, plus Anthony’s thoughtful comment, reminded me about the idea of the hits in angel investment paying for all the failures. We don’t aim for an average investment or a suitable return. We aim for the big win. Anthony’s right that doubling our money would be sufficient, if we knew that would happen. But the average investment never happens. So we aim high.

(Image: shutterstock.com)

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Tim Berry