Founder’s Stock Is Gold, If You Know The Rules

Image via Flickr by BullionVault

Image via Flickr by BullionVault

In reality, so-called “Founder’s” shares are simply common stock, issued at the time of startup incorporation, for a very low price, and normally allocated to the multiple initial players commensurate with their investment or role. But that’s only the beginning of the story.

These shares are allocated and committed, but not really issued and owned (vested) until later. Typically, vesting in startups occurs monthly over 4 years, starting with the first 25% of such shares vesting only after the employee has remained with the company for at least 12 months (one year “cliff”). Vesting always stops when an employee leaves the company. Read more

What does it feel like to invest in a failed startup as an angel investor?

It’s not great…but it IS part of the business.

  • If you are an angel investor, the only way to do it is to take things very seriously.
  • If you take angel investing seriously, you should aim to develop a portfolio of at least 30-40 investments over 5-10 years of active investing.
  • If you invest in 40 startups, 20 of them (absolute minimum!) are going to fail.
  • If you can’t psychologically take the complete failure of at least one company (let alone 20 or more), then you shouldn’t be angel investing in the first place. Read more

Why Startups Face Increasing Competition In Raising Series As And Bs

By Tomasz Tunguz, Partner at Redpoint Ventures

Has it become harder to raise money? is a question I hear all the time. On one hand, the total dollars invested by VCs is relatively flat at just under $30B per year, according to the NVCA. On the other hand, the stories of difficulty raising series As and Bs have become a steady drumbeat.

To get some sense of the patterns, I analyzed 917 companies from seed through Series B over the past 14 years, using Crunchbase data. I’ve divided the companies into cohorts by the year they raised their seed investment. Click on the charts to view interactive ones.

The chart shows the narrow funnel seed stage companies must pass through to raise a series A. There are three observations we can make from the chart. First, the number of seed investments in the Crunchbase data has increased by 4x in 4 years. Some of this growth is better data recording, but I suspect the majority of the growth is driven by increased seed investments. Second, the total number of Series As has also increased, but it’s hard to say whether that’s data accuracy or ground-truth. Third, the total number of Series Bs is remaining relatively constant, even for the newer cohorts, like the 2012 class.

Across all these cohorts, the mean success rate to raise an A after a Seed is 27%, to raise a B after an A is 35%, and the whole way through the funnel, Seed to B, is 11.5%. Said another way, only 12% of companies who raise a Seed will raise a B.

If you’re wondering how these trends have changed over time, this next chart will answer that question for you. The x-axis shows calendar year and the y-axis shows the % of companies that raised a round. The blue line shows the percentage of companies raising an A after a seed; the orange line shows the percent of post-Series A companies raising a B; the green line shows the percent of post-Seed companies who have run the gauntlet successfully to raise a Series B. The secular decline in all of these ratios screams of increased competition.

According to analysis by my partner Jamie Davidson on typical periods between financings peaks around 9 months so the follow on rates for Series Bs should be accurate up until the 2011 class, which gives these startups more than 2 years to raise their B. Data from 2012 and 2013 will show lower success rates because most of these companies won’t be mature enough to be in the market for a B.

Despite the noisy data, it’s reasonable to conclude the financing market has become more competitive, driven by an increase in the total number of startups raising seed capital and a relatively constant inflow of capital into venture capital.

 

Originally posted by Tomasz Tunguz on his blog, www.tomtunguz.com. Tomasz Tunguz is a Partner at Redpoint Ventures where he works with Axial, Looker, Electric Imp, Expensify, ThredUp, Quantifind and Erply. 

How To Size Your Marketing Budget For Funding

Image via Flickr.com

Image via Flickr.com

It’s not uncommon for me to see a startup business plan “mission” to be the “premier brand” for their product, yet their marketing budget in the financials is trivial. This combination will almost certainly get your plan tossed by potential investors, who understand all too well the need and cost for marketing in today’s environment.

When questioned, founders usually mention word-of-mouth, viral marketing, and a top quality product. These founders need a reality check on what recognized brand names have spent to reach that threshold, and how long it is likely to take. Viral marketing costs real money these days, which usually means adding at least an extra zero to budget estimates. Read more

Working with Startups what do Law Firms and Attorneys contribute?

While it sounds tautological, the most important thing a law firm brings to the startup table is…a knowledge of the law surrounding everything having to do with founding, financing and operating a startup!

But while obvious, that doesn’t make it any less important. There are an enormous number of laws that cover the world of business, and those go up almost exponentially once you start dealing with fundraising/financing. Many times I have seen startups skimp on legal expenses in the early days, only to learn the very costly lesson that a lot of work had to be done over again, and in some cases even jeopardized the company’s very existence. The peace of mind that comes from knowing that a firm like WSGR or White & Williams has your back is extraordinarily liberating. Trust me. Read more

What measures do VC’s take to mitigate conflicts of interest between investments?

The best way for a VC to mitigate conflicts between portfolio companies is to avoid investing in direct competitors in the first place! While this can be a bit difficult for seed funds with very large portfolios and limited direct day-to-day involvement, most larger funds are careful to avoid directly competitive investments. The reason for this is simple: why have part of your investment in one company be used for the sole purpose of fighting against part of your investment in another one? Read more