An impromptu Twitter debate arose among Fred Wilson, Dave McClure, Mark Suster, Chris Dixon and others about convertible debt, priced equity rounds, and the nuances of early stage financing. It was such a good discussion that Fred asked that someone Storify it. I’ve done that here and expanded it with some additional references, background info and light commentary.
Category Archives: Invested Interests
10 Entrepreneur Tips Dodge Million-Dollar Mistakes
Ryan Blair book image via Amazon
It’s a well-accepted axiom in the investor community that entrepreneurs learn more from their failures than their successes. Thus a well-explained startup failure often can actually improve your odds of funding in the next go-round. Yet, there is no doubt that the best strategy is to learn from someone else’s mistakes, so you can enjoy the millions that someone else lost in learning.
Certainly there are innumerable possible mistakes to be made, but there is a thread of common ones that I see across the range of all startups. Ryan Blair, a serial entrepreneur who admits to his share of million dollar mistakes, as well as some multi-million dollar successes, sums these up nicely in his book “Nothing to Lose, Everything to Gain:” Read more
Incorporate before pitching to VC’s?
While you will definitely need to be a corporate entity before you can accept funding from any investor (or issue stock options to any employees), the specific corporate status of the venture at this stage is much less important to investors than its functional status. That is, if all you have is a good idea, the reality is that you are highly unlikely to be able to get funding from anyone at all, even if you are a Delaware C corporation with gilt edge stock certificates. But if you have a completed product with traction (such as a million monthly unique visitors with rapidly growing conversion rates to paying customers) you will find investors falling all over themselves to meet you, even if you are operating as a one man show out of a shack on the beach.
I would therefore suggest that you not using “pitching to VCs” as a reason—one way or the other—to consider incorporating. If and when you garner real investment interest, proper corporate structuring will be a pre-condition to any funding.
HOWEVER, there are many other good reasons for establishing the company as a legal entity…and for doing it correctly (which should cost you $2,500 – $5,000). They include structuring the relationship between co-founders, and founders and employees, limiting liability, being able to open a bank account, issuing equity to employees and advisors, etc. etc. I suggest that you find a good attorney specializing in this sort of thing, and take advantage of their almost-universal willingness to give you a free first meeting to determine whether you are at the stage where you should be forming a corporate entity.
*original post can be found on Quora @ : http://www.quora.com/David-S-Rose/answers *
Stealth Mode Entrepreneurs Only Increase the Risk
Image via Facebook.com
Every time I hear about a new startup that is in stealth mode, I wonder what problem they are hiding from whom. Of course they pretend that they are trying to avoid alerting competitors prior to launch, but too often it becomes an excuse to move slowly in a world that’s all about getting to market fast.
I believe stealth makes sense for large companies who can be sued for “pre-announcing” a new product to stall the market or kill a competitor. It also makes legal sense to never disclose the details of your patent application, before the product is ready to ship. But otherwise, startup companies should seek out publicity and the open sharing of information, from day one. Read more
Do Venture Capitalists care how the equity is split among the founders?
People who tell you that VCs won’t look at a company with an even equity split are being silly. That has never once, in my experience, been even a slight hiccup, let alone a dispositive factor in a seed investment.
That said, there is a core of truth in the concept that there always needs to be *some* way to make a decision. That’s why the Senate has the Vice President as the tie breaker, and why boards of directors are almost universally an odd number. Realistically, if a company is jointly governed by two people who have exactly equal say, it is quite possible that if there is a major disagreement the company will implode because it will not be able to take action.
The usual ways around this are to have one person be the CEO with decision-making ability regardless of equity interest, or have an equity split that can’t come out 50/50, or have a board with an outside director (or investor) making an odd number.
*original post can be found on Quora @ : http://www.quora.com/David-S-Rose/answers *
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)
Startup Accelerators are Entrepreneur Boot Camps
David Cohen image via Kathleen Lavine, Denver Business Journal
Business incubators for sharing services were all the rage back in the days of the dot-com bubble (700 for profit, many more non-profit). About that time the bubble burst, causing more than 80% of them to disappear. Now they are coming back, and the best even provide networking, technical leadership, and seed funding, as well as investors waving money at graduates.
Incubators I hear mentioned most often include YCombinator, led by Paul Graham in Silicon Valley, and TechStars, located in Boston, Boulder, New York City, and Seattle. TechStars has several excellent mentors on staff, led by founder and CEO David Cohen. Both provide excellent networking to investors, and on-site technical leadership, which I believe sets them apart. Read more