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Five Tips For Internet Startup Investors

Original post by Martin Smith via Technorati

“They don’t get it,” Alan Fitzpatrick CEO of mailVU told me over a recent lunch. Alan’s successful Charlotte, North Carolina Internet startup mailVU isn’t getting the investor traction it deserves. Reaction with influential early adopters isn’t a problem. mailVU’s brilliant Web 2.0 viral marketing strategy – give away their B2C tool and focus on selling B2B via content marketing to develop ever increasing awareness – is loved by evangelical early adopters. “We will reach a million users next year,” Alan shared for my Hope, Heroes and Startups profile (coming soon).

It’s so damn complex. If you ever think you have the solution to this, you’re wrong and you’re dangerous.
H. R. McMaster, author of Dereliction of Duty

The web is damn complex too. How can we function in what Hollywood writer William Goldman famously defined as a “nobody knows nothing” world? Caveat sated here are Five Internet Startup Investor Tips to keep in mind before writing big checks:

Tips #1: Certainty Is Not Your Friend So Don’t Seek It
The web functions more like beehives or ant colonies than static business models. Organic things change frequently and in response to billions of stimuli you will never know and can’t discover. Feedback loops are more important than business rules and inflexibility is death. Invest in humble organizations living by Tip #2.

READ 2-5 HERE

August 16, 2011 | Techmeetups

5 Tips on how to Attract Investment for your Lean Startup

Lean start-ups are the type of start-up that’s very attractive to investors. Lean start-ups present themselves as low maintenance ventures that are able to work even with a low number of customers. Releasing your software early, building a solid team and learning about your customers are the ways to gain the type of credibility for your business that will lead to successful fund raising.

The purpose of putting your software on the market early is to demonstrate early results that illustrate the function and value of your virtual product. Getting an early version of your software out there also proves you know how to design and develop it. Show that you’re a true start-up, built up from the ground, by letting your insight into customers evolve into business insight. To do this, focus your processes on innovating and learning.

By performing actions such as releasing software early, team-building and getting to know your customers, you’re acting out the story of your venture right in front of investors’ eyes. Not only telling, but showing your story is crucially important to securing investment. Convince anyone who could be useful to you that your story has a happy ending—that it’s worth the investment.

Communicating your story to a potential investor is also about removing any doubts they might have about getting involved in your enterprise. Before the meeting, make a list of all the objections the investor might have, all the reasons they might have to not get involved in your project. Go through the list and find reasons and arguments to counter each and every objection. Undertaking this process trains you in creating hypotheses that addresses the problems as well as the good bits. If an investor sees an entrepreneur who’s realistic and knows that difficulties might be encountered, they’re more likely to trust that particular entrepreneur with their money, than to trust someone who’s living in Cloud Cuckooland.

By the time you’re in the meeting, you’ll be prepared to eliminate all the reasons why someone wouldn’t want to invest in your company, in your vision and in your story.

Sure, both you and the investor must understand that there are risks involved, but there are risks involved in any venture worth investing in. What you have to do is make the investor see that your start-up is worth taking a risk for more than all the others out there.

It’s not about showing instantly amazing results but about showing that your company is able to keep offering long-term value to the market. This issue of lasting value is important and should reflect your vision as an entrepreneur.

Here are 5 fab tips for attracting investment to your start-up:

Release your software on the market early to show investors you know how to develop software and to give them a taste of your potential.
Build a solid team around your start-up to demonstrate you have all areas of expertise covered.
Get to know your customers so that potential investors will be confident that you can build long-lasting customer relationships.
When you meet with potential investors, explain to them why your start-up is worth the investment.
Prepare counter-arguments to any reasons an investor might give for not wanting to invest in your project.

August 16, 2011 | Techmeetups

AngelList’s Big Four Benefits for Investors

Original post by Ty Danco

Anyone who regularly reads this column knows I love AngelList. It’s the matchmaker service between promising startups and early stage investors which has revolutionized angel and maybe even VC investing. There has been a slew of recent articles on AL, including good ones from Venture Hacks, Venture Beat, andBostInnovation. But while there are a few guides on how to hack AngelList from a startup’s point of view, almost nothing exists for angels looking to get started. Which is where this blog post comes in.

I’ve put down a few the best strategies for angels to get the most out of AngelList—how to broaden your network, improve your deal flow, turbocharge your due diligence, and strengthen your existing angel investments.

I. You’ve Got to Be In It to Win It—Improving Your Deal Flow

Trust me on this, just open an account. It’s an unbelievable gift: there are no fees and no requirements for participation once you get in. Even if you only lurk on AL, being connected will make you a better investor—you’ll be more in tune with what is going on. But first you need to get on: you can register here.

Assuming that you are an accredited angel and you have participated in some deals (if not, you’re better off joining a local angel group to get started), the process is straightforward. Our first hack: get 4 members to endorse you, and you go straight to the head of the line. How do you find out who’s already on? The website is dead simple to explore, and you can search for angels by geography, name, activity level, followers, etc.

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August 11, 2011 | Techmeetups

Don’t Let Investor Negotiations Kill Your Startup

original post by Martin Zwilling via blogs.forbes

Every entrepreneur seeking funding loves the challenge of getting customers and investors excited, but dreads the thought of negotiating the terms of a deal with potential investors. They are naturally reluctant to step out of the friendly and familiar business territory into the unfamiliar battlefield of venture capitalists from which few escape unscathed.

In reality, a financing negotiation is not a single-round winner-take-all game, since a “good” deal requires that both parties walk away satisfied — with a win-win relationship. Brad Feld and Jason Mendelson, in their new book “Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist” emphasize that there are only three things that really matter in this negotiation: achieving a good and fair result, not killing your personal relationship getting there, and understanding the deal that you are striking.

To be an effective negotiator, you first need to quickly identify and adapt to your opponents negotiating style. Feld and Mendelson identify the five most common negotiating styles that you will see on both sides of the table, and talk about how you can best work with each of them:

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August 4, 2011 | Techmeetups

Angel Investors Won’t Swoop Down on Your Startup

Original post by Martin Zwilling via Business Insider

Fundraising is brutal. Actually, according to Paul Graham, “Raising money is the second hardest part of starting a startup. The hardest part is making something people want.” More startups may fail for that reason, but a close second is the difficulty of raising money.

A while back, I outlined “Most Startups Get No Professional Investor Cash” for startups, listing angel investors as alternative #6. I still get a lot of questions on these mysterious and often invisible investors, so here is another attempt to bring them out of the ether.

By definition, an angel investor is not an “institutional investor.” Venture capitalists (VCs) are paid to invest other people’s money, and measured on the rate of return they get. Angels are typically high net worth individuals who are investing their own money, for a wide range of motives.

So “good” angels are ones with motives that are consistent with what you bring to the table. This means they usually invest in people who have the right “chemistry”, and areas of business they already know. They tend to work locally, so they can “touch and feel” their investments.

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July 28, 2011 | Techmeetups

Smaller early-stage bets are better for founders & investors

Orignal post by Venture51

Seed and early-stage rounds are changing for the better. Today’s rounds are smaller in nature than they have been in the past, and that is good for founders and investors.

The size of a seed round typically ranges from $250,000 to $1 million and each one can have anywhere from two to three seed-type firms (or MicroVCs), and between three and ten angel investors. These rounds enable “strategics” to be brought into the early development of the company (which is crucial at this stage of the startup).

Cheaper start-up costs have allowed for smaller early-stage investments. In the 1990s, it might have taken $5 million to start a company. Today, that same company could be launched for $500,000 or less. This has created a new type of investment vehicle that allows smaller funds and angels to invest in and help grow businesses, potentially leading to a better opportunity for larger-scale VCs, or turning these startups into profitable businesses that don’t need follow-on capital. Either way, it’s a good thing.

There’s been a lot of discussion lately about the disruption when it comes to VCs. Perhaps there is some of that, but the real disruption is in more efficient company creation. The smaller initial bets in today’s startups, who now have extended runways because they are capital-efficient and can sustain low burn-rates, allow time for true customer development and rapid product iteration. The result is a better fit between the startup’s product and the market it’s trying to reach.

Ten years ago, most companies were products searching for markets. That’s just how they were built and investors fueled that way of thinking with large capital infusions. Was it the entrepreneur’s fault or the fault of the investors? It doesn’t really matter. What matters is that we learned a few lessons and this approach laid the foundation of pipes and infrastructure of the Internet as we know it today. Now there are a billion or more people on the web, making the Internet nearly ubiquitous

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July 21, 2011 | Techmeetups

How the cloud changed venture capitalism

Original post by Mark Suster via blogs.reuters

In this three-part series I will explore the ways that the venture capital industry has changed over the past five years that I would argue are a direct result of changes in the software industry, not the other way around. Specifically, Amazon has changed our entire industry in profound ways often not attributed strongly enough to them.

I believe the changes to the industry will be lasting rather than temporal change. Venture capital is in the process of its own creative destruction with new market entrants and new models of innovation at the precise moment that our industry itself is contracting.

I will argue that when the dust settles, although we will have fewer firms, each type will end up more focused on traditional stage segments that cater to the core competencies of that firm. The trend of funding anything from the first $25,000 to funding $50 million at a billion-plus valuation is unlikely to last as the skills and style to be effective at all stages are diverse enough to warrant focus.

I will argue that LPs who invest in VC funds will also need to adjust a bit as well.

Rewind

When I built my first company in 1999 it cost $2.5 million in infrastructure just to get started and another $2.5 million in team costs to code, launch, manage, market and sell our software. So it’s not surprising that typical “A rounds” of venture capital were $5 to $10 million. We had to buy Oracle database licenses, UNIX servers, a Sun Solaris operating system, Web servers, load balancers, EMC storage, disk mirrors for redundancy and had to commit to a year-long hosting agreement at places such as Exodus.

Open-Source Software and Horizontal Computing

The first major change in our industry was imperceptible to us as an industry. It was driven by the introduction of open-source software, most notably what was called the LAMP stack. Linux (instead of UNIX), Apache (Web server software), MySQL (instead of Oracle) and PHP. Of course there were variants – we preferred PostGres to MySQL and many people used other programing languages than PHP.

Open source became a movement – a mentality. Suddenly infrastructure software was nearly free. We paid 10 percent of the normal costs for the software and that money was for software support. A 90 percent disruption in cost spawns innovation – believe me.

We also benefited economically from a move to “horizontal computing.” What this meant was that rather than buying really expensive UNIX servers (and multiple machines in order to handle redundancy) we could buy cheap, replaceable servers for compute resources.

As our needs grew we could just add more cheap boxes and as boxes failed we could just chuck them out. We had to learn how to be better at “load balancing and replication” – meaning how we managed data across all the boxes since they weren’t centralized on one box.

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July 20, 2011 | Techmeetups

How to Raise Investment Capital – According to VC Jeff Clavier

Orignal post by Marshall Kirkpatrick via ReadWriteWeb

Jeff Clavier was the first tech investor I ever met; he was introduced to me years ago by some hip engineers in a bar as “one of the few cool VCs.” Years later Clavier’s name now comes up all the time when one of his portfolio companies finds success; his exits include Mint, Tapulous, and UserPlane, other investments include Mashery (a ReadWriteWeb sponsor), Rapleaf, Fitbit, bitly, GroupOn, Twitter and many more.

Clavier spoke last week at the International Startup Festival in Montreal on the topic of raising money – with a special emphasis on the numbers that a startup should keep an eye on. My notes from his very informative presentation are below.

Clavier began his presentation at the beginning of a company’s lifecycle, asking how many co-founders a startup ought to have. He says that one is too lonely, two is good and three is a great number if they can combine their skills to cover design, development and distribution.

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July 20, 2011 | Techmeetups

Crowd Fund your Way to a Lean Start-Up

Just as the crowdsourcing of information has become part of the everyday fabric of many a business, the practice of crowd funding is taking off in a big way. Entrepreneurs everywhere are increasingly looking towards third party platforms to raise initial funds for their venture in a democratic, collaborative fashion. This explosion in the popularity of this type of crowd financing can be put down to a number of factors, including the rising power of social media and online communities and the evolution of online payment processes.

Crowd funding is a great way of fund raising without the pressures and baggage associated with equity investment. How does it work? You register and advertise your project or business on a public, online funding platform such as Kickstarter, IndieGogo or 40Billion and ask the site’s visitors and/or your own online audience to become part of what you’re creating by donating towards the total amount of funds needed to develop the company. This new method of collaboration not only raises funds for your venture, but gives you exposure and allows you to build and engage with a loyal customer base.

These funding platforms also give you the opportunity to demonstrate how much you’re willing to give back. You reward contributors to your funds with perks and gifts of your choice, allowing you to reflect what your business is about through the perks it gives out to its supporters.

The advantage of using a third party platform is that they have the resources to help you promote your campaign and they do so, using tools such as social media, the press, newsletters and blogs. Make full use of a website like IndieGogo to set a funding goal and track information. Kickstarter allows you to make a video promoting your project and features a video a day on its blog. With 40Billion you can schedule online presentations in order to pitch your business idea to potential funders who are watching and listening in real-time.

Both IndieGogo and Kickstarter are popular platforms for tech projects and businesses, whilst 40Billion is specifically targeted towards helping small business raise funds. On IndieGogo, recent tech ventures include a website builder for mobile and web, open source social networking, a ‘fire-fighter’ social media website and an open source content management system for musicians and other artists. Kickstarter recently featured a graphical programming project for physical computing devices, an iPhone 4 quick change camera lens system, an open source linear bearing system and a remote control helicopter for Apple’s various portable devices. The type of ventures featured on 40Billion come from a range of industries, including I.T. and technology.

Note that fees apply with these companies. With IndieGogo, there’s a 4% fee on the money raised once you meet your funding goal and there are also third party processing fees. Kickstarter charges a 5% fee on fully-raised funds and a 3-5% processing fee. . It’s free to initially set up a ‘Gift & Donations’ account on 40Billion, which allows people to donate funds to your start-up. The first month is also free, but after that it’s $9.99 a month. However, these fees are worth considering the opportunity these websites open up to you. With Kickstarter, you need a US bank account to start a project but Kickstarter is working on changing that in the future.

Having an external resource such as one of these funding platforms is the perfect set-up for a lean start-up that doesn’t have the capacity to run this sort of fund raising campaign exclusively from in-house. If crowdsourcing is the future, then crowd funding definitely is too.

July 20, 2011 | Techmeetups

How Much Money Should a Startup Have in the Bank?

Orignal post by Jason Calacanis via launch

One question I get all the time from fellow entrepreneurs is “How much money should I have in the bank?”

In the startup industry we call this “runway,” and you’ll frequently hear management teams discuss how much runway they have in terms of months. Another name for the capital you have in the bank is “dry powder,” as in dry gunpowder your soldiers can use to kill and maim your enemies — and win the war.

tartups should have 18 months of runway.

Under 18 months you’ll be distracted.

Over 18 months you might get distracted.

What Is Runway and Why It’s Important

Your runway in months is amount of capital you have in the bank divided by the amount of money you burn (or lose) each month.

For example, when I started Mahalo.com we were burning around $500K a month. With $20M in the bank, that means we had a whopping 40 months of runway. This is not typical. Mahalo was very well funded.

I did this because I thought that human-powered search, which we’ve since abandoned for video-based learning, would take a lot of capital and time to figure out.

It turns out I was more right than I could have ever known because, frankly, no one has figured out human-powered search, and raising that much capital allowed me to pivot the current business.

That’s what ruway does for you: it gives you time to figure it out.

[ Also, I was very hot in 2007, having come off the sale of Weblogs Inc. only 18 months after starting it. So I raised twice as much as I needed (hey, hate the game, not the player!). ]

Now, I still really believe in human-powered search — especially given the horrifically unfair and poorly executed Google Panda update that’s made Google’s search results worse — but I’m self-aware enough to know that I was five or 10 years too early.

Mahalo last raised money in — wait for it — 2007. In other words, we’ve been able to work for four years without worrying about raising money. We’ve still got over 18 months of runway, and at any point we could slow down our growth and be profitable (not that you want to do that when you’re swinging for the fences like we are). We could also raise more money if we needed it.

Having options is critical for entrepreneurs.

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July 19, 2011 | Techmeetups