Companies Who Will Buy Companies in 2011

I was recently on a panel about Startup M&A / Startup Exits, and the moderator asked what companies we thought would be highly acquisitive in 2011.

Here are my predictions about companies that will buy lots companies in 2011:

• Google.  Obviously, Google will continue to sweep up many leading technology companies.  I am guessing social, local, and ads will be areas of high activity.
• Facebook.  Facebook will buy a company a month or more.  At a valuation of tens of billions of dollars, a $10 million buy for Facebook is equivalent to less then 1/10th of 1% of the company.  Most of these will be small team buys/asset sales.  There is some possibility FB will go for a $50 million acquisition, which would be quite atypical for them (ignoring FriendFeed, which up until now was a bit of a fluke)
• Salesforce.  With the acquisition of Heroku, Salesforce showed a willingness to bet in a big way on a new direction.  With a market cap closing in on $20 billion and a pile of cash, Salesforce is well positioned to make a bunch of acquisitions.  I am guessing a number of cloud platforms, and social CRM companies, will become part of Salesforce in 2011.
• GroupOn.  GroupOn will continue to take out competitors in other markets via acquisition, as well as build its technical bench via talent buys.  There is also the potential for GroupOn to buy more mobile assets.  In 2010, GroupOn acquired Qpod, Darberry, uBuyiBuy, Atlaspost, Beeconomic and many others.  Expect this trend to continue in 2011.  

Companies that will buy a handfull of companies:

• LinkedIn.  LinkedIn bought ChoiceVendor in 2010, and has sniffed around a number of other potential acquisitions.  I expect LinkedIn to continue to make talent buys.  Intriguingly, I could imagine LinkedIn also swooping in and making a larger ($50-100 million+) acquisition if they saw strategic value in it.  I also expect LinkedIn will buy one of the many contact management and social recruiting platforms that have been emerging during 2010.
• Zynga.  Zynga will continue to buy social gaming assets.
• Amazon.  Amazon acquired ecommerce 1.0 market leaders Zappos and Diapers.com in 2010.  Expect them to continue to pick up assets through 2011.  Interestingly, Amazon tends to buy more of market assets / market share in key markets, rather then do a lot of small team buys like Facebook or Google. This means their acquisitions are often valued on cash flow / income projections, rather then the more semi-random variables such as "number of engineers".
• Yahoo!.  Yahoo! will be active in 2011 and will likely take a more strategic approach to acquisitions (e.g. buying a technology asset) rather then doing pure team buys.
• Cisco.  Cisco was surprisingly quiet in 2010.  They will continue to buy companies in 2011, but maybe at the same pace as 2010 (e.g. 5-6 acquisitions).  Thanks to labboy for the idea on hackernews.
• Apple.  They will probably do a small number of strategic acquisitions.  Apples usually does middling acquisitions in size, but seemed to be willing to bid certain strategic assets higher with e.g. their bidding war with Google over AdMob (Google won) (Thanks to dccb)

Companies that will make their first acquisition ever in 2011.

• Foursquare.  As its valuation will continue to grow with its user base in 2011, Foursquare will likely make one to a small number of team buys.  The company is ramping quickly and will need to balance growth with assimilating its first acquisition, always a tough thing to balance.  However, given all the attention surrounding the company, a number of entrepreneurs will be excited to exit into their arms.
• Square.  Square is rumored to be closing a massive financing round.  This round will give them currency to make a small number of team buys through 2011.  Keith Rabois, their COO, has plenty of experience buying companies on both sides of the table.

Any companies I missed?  List them in the comments section below!

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5 Myths To Building an Awesome Mobile Team

This post originally appeared on TechCrunch as a guest post.  Please note, this post is my personal view only, and does not reflect Twitter's view of the same topic.  I have also added a new first paragraph for context. Thanks to the folks at TechCrunch for publishing it.

When I kickstarted Google's mobile efforts in 2004, Google's mobile team consisted of 1/4 of an engineer dedicated to maintaining an old WAP search server on the brink of collapse. Over the following months, I was involved in all aspects of getting the mobile team up and running. This included setting up a product roadmap, recruiting initial engineers (I poached engineers from other Google teams and hired externally), kicking off contacts and early product discussions with mobile carriers and handset manufacturer's, and was involved in three acquisitions (including what turned into Google Mobile Maps and Android).
----- (start TC post)

In the early days of Google’s mobile team, we needed to navigate a series of misunderstandings most people have about consumer mobile app development, and how to build a great consumer mobile team and product. Given the ridiculous growth of mobile today, many companies I know are trying to start their mobile divisions and they are making the same mistakes over and over. Similarly, many mobile consumer startups are making a series of common mistakes. This post draws on my experience building Google’s early mobile team to point out how to overcome the myths people still believe about making super successful mobile applications.

Myth 1: You need to hire mobile experts.
Reality: Hire great athletes; mobile “experts” will be useless in 6 months

The natural impulse of someone doing mobile development for the first time is to assume that mobile is somehow different from other software development. This leads to the hiring of mobile “experts”, many of whom lack solid consumer product experience. They may have worked on handset design, SMS based services, or for a large carrier. While mobile client development obviously differs from web development (since you can’t just push a bug fix to all devices), it is very similar to any other form of consumer client development.

This means that while people with deep mobile experience may bring knowledge about a specific technology or the limitations of mobile clients, they often lack the deep consumer experience that is actually much more important for the success of your consumer app.

Additionally, any specialist knowledge the expert may have had will be learned organically by your team within 6 months. This means the value of a “mobile” person will diminish dramatically over time. As with all roles, I would advocate hiring great consumer generalists to fill the spot, as they will have a much larger positive impact over time.

a. Don’t hire “mobile engineers”

The first thing people want to do is hire an “iPhone engineer” or “Android developer”. The best mobile engineers I have ever worked with were great generalist engineers who picked up iPhone (variant of C) or Android (Java) development. By focusing on hiring great engineers and having them pick up the programming language and platform (including learning its limitations) you will:

• Expand the pool of potential people you can hire. Grow the team faster!
• Avoid a “specialist” culture at your company. In general, I think it is good to build a culture of great generalists/athletes rather then specialists for your company. You want people who are hungry, brilliant, and adaptable, and who can move between teams and contribute to the next big thing for the company once they jumpstart your mobile efforts.
• Ensure the quality of your team stays high. Your existing engineers should interview the potential mobile hires and test them on general computer science skills.

For example, on the early Google mobile team we had a PhD student from Yale with no industry experience, an expert on enterprise Java from BEA, and a research scientist at Google. These people helped form a formidable core for mobile engineering at Google.

b. Don’t hire “mobile” Product Managers (PMs)

Just as you should hire generalist engineers for your mobile team, you should similarly find a great consumer product manager to run it. The worst hiring mistakes I have seen people make is to hire PMs with telecom or handset backgrounds to run their consumer products. You need people who understand that the phone is primarily a social device—for example, people love to take photos and share them with their friends (see Instagr.am, PicPlz, and PicBounce)—and that the screens are still small, so focusing on a few key features or interactions is key.

Myth 2: Your mobile codebase is different from regular code.
Reality: Its just code. You should treat it as such.

Obviously, developing for a client app that can’t be fixed via a push to AWS has its own challenges. But the mobile codebase should be something any engineer can contribute to at any time—even if it is just to run internal test apps to try out new features.

Similarly, don’t let your team use mobile as an excuse to avoid following good software engineering practice. A good release process can apply anywhere.

Myth 3: You need carrier or handset deals to distribute a mobile product.
Reality: Focus on standard consumer distribution first, not carriers or handset manufacturers.

When launching a mobile consumer product, many companies make the mistake of focusing on carrier or handset partners for distribution rather then just putting it out there for users to try.

a. Focusing on carriers means you will build the wrong product.

When dealing with a new consumer app, carriers and handset manufacturers will have all sorts of ideas, some of which may be bad, about how you should change the product before they agree to distribute it. This will likely ruin the consumer experience. They may also ask you to support a wider variety of handsets than makes sense for you to build for. Further, all the time spent negotiating with carriers will also distract you from spending your time building things that will delight users.

b. People naturally spread great consumer products.

Think of all the consumer apps that have widespread use and adoption from scratch (Angry Birds, Foursquare, Gowalla, Bump). None of these launched with any traditional teleco deals.

c. If your app is a big success, carriers will come to you for deals.

If your mobile app is being used (or your desktop app has wide enough distribution), carriers will approach you to add your app to their phones. Think Facebook, Twitter, Google, etc…, as well as, back in the day, IM clients.

Don’t get me wrong—carriers and handset pre-installs can widen your distribution dramatically. However, as a startup or new mobile effort, you should focus on direct-to-consumer distribution first. Only deal with these intensive partnerships once you have proven traction with your core app experience and want to reach out beyond the relatively large population that discovers apps via the app store and friend recommendations.

Myth 4. You must build for all platforms from Day One.
Reality: Start with iPhone or Android only first.

One of the big fears when building a mobile property is that only a subset of the market can be addressed via each platform (iPhone, Android, Blackberry, Symbian, XHTML, SMS). These days, the best consumer apps are launching on iPhone or Android only first. This provides enough distribution/addressable devices to see if the app can gain traction. Once it gets traction, other platforms can be supported. A great example of this is Foursquare, which launched exclusively on iOS and grew from there.

In part you should choose your platform based on your market and distribution approach. iPhone or Android (as well as increasingly HTML5) are good bets for the US, and increasingly, the rest of the world. You should only build XHTML or SMS based apps if you are focused on the low- to mid-range of developing markets.

Myth 5. (Once the app launches) We are mobile geniuses!
Reality: Stay hungry and keep questioning your mobile directions.

Congratulations! You got your mobile app out the door and it is growing 50% month over month. There is an old saying that a rising tide floats all boats. The rapid growth in the overall smartphone market may make your mobile efforts look brilliant due to this ongoing, massive market shift. Make sure to challenge your team’s thinking on their mobile choices, and don’t believe the mantra that “mobile is just different”. Focus on building an awesome consumer experience and you really will end up looking like a genius.

Mobile is a huge opportunity and will be the primary way many services are accessed in the future. Hopefully as you start a new mobile consumer startup, or build a mobile team for your existing web property, with the tips above you can avoid the mistakes people frequently make for mobile app development.

----- (end TC post)
What do you think?  Any other myths to overcome for mobile development and team building?  Let me know in the comments.

You can follow me on Twitter here.

Financing approaches most likely to kill your company (if it is already on the edge)

Too Many Seed Companies Chasing Too Few VCs
Over the last 6-12 months there have been a crapload of seed stage companies that have been funded.  In another 6-18 months these companies will be running out of money, and all will be pitching the same small set of VCs at the same time.  While the number of angels (and the amount they have available) has expanded dramatically, the sames does not hold for venture funds.

What does this mean for your company?
There will be 3 tranches of companies:

• Superstars/Hot Companies.  These are companies that have traction, and/or are perceived as market leaders, and/or are in a hot space (e.g. Foursquare in 2010 or GroupMe recently). VCs will cherrypick these companies and will compete aggressively with one another to fund them.  They will have massive valuations reported in TechCrunch and long comment threads about how the company "suxxxx" and does not deserve such a crazy valuation (remember all the comments every time FB raised a round?).
• Middle of the pack.  These companies will not have had break out traction yet (e.g. will have 50K users), but will have built a  reasonable product and have a "great team".  Some of these companies will be able to raise additional capital, or be able to survive based on cash flow (and may need to cut their teams from e.g. 6 people down to the original 3 founders).  Some of these will end their lives as "large small acquisitions"  - e.g. sell for $5-$20 million depending on timing, technical assets, size of team, and market.
• The dead or talent hires.  These companies will shut down or, best case, will be "acquisitions" where the team is paid a slightly larger then normal hiring bonuses or option packages to join an "acquirer".

Your Funding Structure Today Impacts Whether You Are Middle of The Pack or Dead Tomorrow
The line between "Middle of the pack" and "Dead" will be a fine one.  One of the characteristics that may tip companies from Middle of the pack into Dead is the existing cap table/financing structure of the company.

Worst Financing Structure to Have:  Equity round, high price, with multiple VCs

• Multiple VCs.  Having multiple VCs in the round is going to lead to very bad signaling characteristics for you if your company is only doing so-so.  
• These same VCs who a few months earlier were competing with Superangels to get into your round will suddenly realize you did not grow into the hot company they were hoping ("We love you and the team", they will say "This is strictly a business decision.  We are big fans of yours but can not invest any more")
• They are used to doing $5 million investments.  The $100K they invested to you does not impact their fund economics.  And the opportunity cost of partner time is too high.  They will not do a follow on round with you (as they can invest the same $3-10 million in a company with real hockey stick traction instead).
• All the other VCs you pitch will ask why non of the 3 VCs who invested in you are driving the round.  They will call said existing investors who will say "we love the team, but they just don't have the traction we are looking for".
• This will kill your ability to raise money unless you are a "Hot Company".  Goodbye company!
• High priced equity round.  The second worst thing to having too many VCs in your round and the associated signaling risk, is to have a high priced equity round. 
• Doing a down round (raising at a lower valuation then your last round) often invokes a lot of dilution due to the equity financing deal terms.  You may go from owning 30% of the company each as a founder to a few %, depending on the terms and the next round you do.
• This will kill your incentives as founders and early employees.  Do you really want to work 14 hours a day for so little of the company?  
• Have you read your equity financing docs closely?  Do you really understand all the terms? Make sure you read the section about down rounds closely.
• People with low equity valuations will be fine.  If you raised at a $2 million valuation, the next bump up does not need to be huge to de considered a success.

Best Financing Structure to Have:  Convertible note, no VCs (i.e. only superangels and individuals)

• No VCs in the round.  The fact you did not include VCs (despite their promises of all the value they will add) means you have no signaling risk.
• Convertible note.  Many recent convertible notes are structured with a cap but no discount rate.  This means if you have a convertible note with a $6 million cap, but you raise a round at a $3m pre-money valuation, the note will convert at the $3m valuation.  As an entrepreneur you get diluted more then expected, but no ratchet is triggered, and no big penalty is paid.

Obviously, what financing structure you have is secondary to whether the company hits it out of the park or not.  If your company is doing awesome, or is perceived as such, your existing cap table becomes pretty unimportant.  However, if things are only going so-so, your past financing events can impact things a lot.

What do you think?  What besides past financings can tip a company from being "middle of the road and fundable" to "walking dead"?

You can follow me on Twitter here.

6 Startup Ideas Every Nerd Has

Over the years I have spent a lot of time brainstorming startup ideas with people who are (asymptotically) as nerdy as me.  For some reasons, every time I brainstorm with a new set of people, the following ideas come up.  This suggests that either all nerds think alike, or alternatively, that they are unsolved problems that someone, someday, somewhere, may actually come up with a variant that hits big.

So, here is the list of 6 startup ideas every nerd eventually thinks of (but never seem to quite work):

1. A "Better" Dating Site.

• When you spend all your time coding, you can't help but hope there are more efficient ways to meet the opposite sex.
• Most variants of these end up being ideas guys would love (you can see ALL the girls, and THEY need to reach out to YOU), but that girls would never use.
• Popular subvariant:  A tool that scans all the bars in the area so you can see the girl/guy ratio (or, more recently, "a mobile checkin service where guys can report guy/girl ratios".  Or, "lets scrape Facebook events and Foursquare for this data").

2. A Giant, Purposeless, Unfocused Machine Learning System.

• Popular subvariant: We have built this awesome recommendation engine/collaborative filtering technology we will license to sites across the web to improve buying behavior on their site, and we will take a % cut of the uplift in their revenue
• Popular subvariant:  Hey!  Lets apply it to music!

3. Social Travel

• TripAdvisor sucks!  Let's have people write travel recommendations for specific sub niches (off the beaten path, traveling with a dog, cheap travel, etc).  
• Popular subvarient: You can also ping your friends on Twitter and Facebook to ask them to write reviews for you! (Have your friends ever really wanted to write anything for you other then a snarky comment on your latest profile pix?)

4. The Future Success of My Friends Fund Idea

• Subvariant 1: What if we all promised to put in 10% of our future earnings into a fund?  If just one of us does well, we will all be rich! (AKA if one of my friends makes it big, I can retire on their hard work!)
• Subvariant 2:  Lets approach students at the top schools and offer to fund college in exchange for X% of their future earnings!

5. Craig's List Killer

• "Lets start by adding a better search interface on top of Craig's List, then make it more social, then drain all their inventory onto our own site.  Aren't they a non-profit or something?  I doubt they would ever block us!"

6. Gaming Mechanics Applied To X Vertical

• "We are totally going to revolutionize the music/energy/healthcare/social news/forestry/plastic surgery industry by adding gaming mechanics to it.  People freaking love badges - Foursquare proved that".

Any other ideas you see come up repeatedly?  Leave them in the comments section.

You can follow me on Twitter here.

The Benefits Of Thinking Small

In previous posts I wrote about visionary entrepreneurs, and how to constantly ask how you can 10X your business.  However, many startups fail because the founding team thinks *too big* from day one, and doesn't take the time to really define the short term, immediate value their product or business provides.

In this post, I write about the opposite of thinking big - thinking small.  I point out why thinking small may be one of the most powerful things you can do as an entrepreneur.

The Biggest Companies Today Started By "Thinking Small"
Think of the top internet services you use - I am guessing all of them started as "niche" products:

• Facebook. 
• Then: An invitation-only social network for college students during a time when MySpace, Friendster, Multiply, Orkut, etc. all existed. 
• Now: identity management on the web.
• Twitter. 
• Then: Group SMS. 
• Now: Primary information network on the web.
• Zynga. 
• Then: Poker app when everyone knew that RockYou/Slide style apps were the future of the FB platform. 
• Now: Massive, highly profitable social gaming company.
• Google. 
• Then: a search engine when 10 other search engines existed and companies like Yahoo! were actively outsourcing search since it did not have a good monetization model (brand ads were the key).  However, they always wanted to "Organize all the world's information and make it universally accessible and useful".  So they thought big from day 1.
• Now: The primary search switchboard for the internet with multiple indices (search, local/maps, books, video (YouTube), email, Android phone O/S, etc.)
• With Google in particular, they are executing on the original "big vision" they had.  However, they had the discipline to start with one core product (web search) and expanded from there.

Starting Small Keeps You Focused On What Is Important
Too many entrepreneurs start with a grand premise that is impossible to execute from day one, and distracts from building a useful product.

Imagine if Facebook had said from day 1 "we are identity management for the web".  What would have been a potential outcome of this mindset?

• Facebook would have started as an open social network which anyone could join (vs the exclusive, school by school network everyone wanted to join.).  I am guessing no one would have joined it.
• They would have immediately built Facebook connect.  After all, they are identity management on the web...  But no one would use it as they had no members.  This would have been a big waste of engineering time and a distraction for the company.
• They would have hired big company VPs of Eng, HR, Product, and BD to be ready to "scale" to the massive opportunity at hand.  These people would have promptly destroyed any cultural components the company had and screwed up its roadmap.

It Is OK To Build Something That Does Not Scale From Day 1
A common VC question is "how does this scale?".  Ultimately, to build a large, long-term business you need to be able to take an approach and scale it.  However, it is OK to start with something that is manual and hands on.  The key is to have something that can be systematized and replicated over and over eventually.

Examples: Yelp needed to crack the code on getting a small group of people contributing reviews in SF before they could roll out the Yelp model to new cities.  Ditto with GroupOn and local sales.  Facebook with schools.  Zynga learning game mechanics within individual games and then rolling them out across multiple games.

If You Want To Build Something Big, You Should Have A Path To Greatness
Now, while it is crucial to think small and to build something that does not scale, you should always keep in mind the long term path for your business or product.   This path (and the end goal the path itself leads too) may continuously change as you learn more and as circumstances dictate.  However, you should constantly be thinking how to make what you have even bigger than what it is.

A great example of this is Facebook transitioning from schools, to .coms, to an open social network.  They needed to keep opening up to more users as they saturated their smaller markets.  This forced them to keep moving towards a bigger and bigger objective - online identity management - even if this was not the original goal of the service.

By thinking small, they eventually were able to think very big indeed.

Implications: Why The YC Model Works
This post was originally inspired by a question on Quora about whether the YC model can generate big successes, despite its emphasis on "small markets" and "low risk" products.  As I point out above, thinking small if often the key to building something truly huge.

Any other benefits or drawbacks to "thinking small"?  Let me know in the comments section.

You can follow me on Twitter here.

Breaking Apart the Startup in the Cloud - A Dramatic Shift in Company Building

Sequoia Made 15 PC Investments Early On

Don Valentine, legendary Sequoia  founder and investor (Apple, EA, Cisco, etc.) mentioned that when PCs came to the forefront Sequoia made 15 investments in all the other subsystems, components, and peripherals that needed to exist for the PC to be a success.  In other words, due to the new market, lots and lots of great companies were created in parallel.

A Huge Shift - Startups Who Will Break Up a Business Into Hosted Services

A similar shift is now happening as multiple services move to the cloud, and in parallel every major company has a set of web services they need to provide their customers.  Things that many websites do not consider core are being outsourced to a new breed of startup.  These startups take one main service that most companies don't want to build themselves, and provides it to any company that needs it.

SaaSification of Your Startup

This is accelerating as more and more components that businesses used to run themselves are being broken into SaaS services.  Startups can benefit from it as now not only can you use open source software to build your stack quickly, but you can also outsource many of the components needed to actually run your business, customer service (e.g. Zendesk), and even IT ops (e.g. PagerDuty) day to day.  

You can call this the "SaaSification of the startup", and I am sure this will increasingly hit large entreprises as well.

We are still early days for these sorts of services, and this is a very big opportunity area for entrepreneurs (as both inventors and users of this new type of software).

Example Services:

• PagerDuty:  IT Ops alerting and workflow
• Optimizely, MixPanel, KissMetrics: A/B testing, web analytics
• ZenDesk: Customer feedback and support 
• WuFoo: Online form builder
• SurveyMonkey: Customer surveys
• Zuora and Chargify: Billing systems, Payment collection
• JobVite: Recruiting pipeline management

These services make it easier and faster for a startup to get up and running, and in parallel are potentially great businesses for an entrepreneur to found in their own right.

Any other services you think will be especially promising?  Add them in the comments section!

You can follow me on Twitter here.

Are You A Visionary Entrepreneur?

I think of all the entrepreneurs I have been helping out over the last year or so, 3 stand out as what I would characterize as "Visionary Entrepreneurs".  These are people with a singular vision for what they want to accomplish.  They view their product or company as the vehicle by which they can fulfill a messianic mission to change the world.

Impact of a visionary founder

Many startups can and will succeed without a visionary founder, but the likelihood of either a very big success (or huge flameout) goes up dramatically with a visionary founder.  Visionary founders want to accomplish a big vision, so will keep doubling down on their business despite obstacles, buy out offers, and internal team issues.  Visionary founders are on a mission to change the world via their product or business, and they will do whatever it takes to accomplish that vision.

Characteristics of a visionary entrepreneur

• Want to change the world.  The goal of a visionary founder is not to make money, impress girls (Facebook movie notwithstanding), or to shmooze with famous people.  What they do want to do is either scratch a big itch they have, or to dramatically change the world (or both).  
• There is a singular vision the entrepreneur is following, and they will get other people on board to focus on this singular vision.
• This means the visionary founder won't go for an early (or late) exit.  It is not about money, it is about impact.
• This means they may be maniacal about the product or service, and unwilling to relent in their pursuit of a vision.  This means not everyone will like them.
• Examples: Larry and Sergei from Google always talked about wanting to index all the world's info.  Mark Zuckerberg (I am guessing potentially with influence from Sean Parker) from Facebook wanted to connect the world.
• Willingness to take big risks.  Given their focus on a singular vision, visionary founders will take risks other people won't take in order to make their business work.  They will max out their credit cards and sleep on their friends living room floor in order to keep working on their business.  This is one reason younger people are often more likely to be visionary entrepreneurs (they have less to lose, so it is easier to risk what you don't have - see below :)
• Example.  Fred Smith, the founder of FedEx not only put his inheritance into FedEx, but also famously took the last cash the company had and went and gambled it in Las Vegas in order to meet payroll.
• Question the basics, an experimental attitude towards everything.  Visionary entrepreneurs often question the basics.  They ask why things are done a certain way and often try to blaze new paths not only for their product or service, but also in the fundamental ways their business run.  They will experiment with things that more experienced people will take as a standard that should not be mucked with.  This experimental attitude helps drive the creativity and innovation in the organization, although also carries the risk of distracting the organization inappropriately.
• Examples.  Facebook making an engineer head of HR (Chris Cox) rather then hiring an HR person for this role.  Google building its own computers and networking equipment.  Richard Branson starting an airline (a notoriously bad business) with the Virgin music brand.  Fred Smith from FedEx having pilots help unload FedEx delivery planes.
• Fast learners.  Given that they question the basics of everything, visionary entrepreneurs can often be perceived as naive or inexperienced.  In many cases they are.  But they ramp quickly and gather information from a lot of sources to drive their success.
• Youthful.  Most visionary entrepreneurs start businesses when they are very young.  They have a vision and they go for it.  They do not talk about getting a job at Google to "learn how to build products".  They go and build a product in their college dorm.  They are also able to live on close to nothing and the relative opportunity cost of starting a company is small.  They don't have as much experience and the baggage that comes with it, so are willing to experiment aggressively.
• Examples:  Founders of Facebook, Google, Dell, Virgin, Apple, Microsoft all dropped out of school.
• Good storytellers and recruiters.  Visionary founders constantly are roping people in to their vision and their company.  They set a big goal people can rally around and attract great talent due to the strength of their personality and vision.  This does *not* mean they have to be the smoothest, most charming people alive.  Rather, the magnetism of their commitment and the enormity of their goal often serves as a way to get people excited enough to join up with them.  They don't talk about getting to "1 million users", they talk about reaching 5 billion.
• Examples.  When Larry Page of Google was hiring Eric Schmidt as CEO (when Google was just 100 or so people), he told Eric he wanted to build a $100 billion company.  Eric asked "$100 billion market cap?" and Larry replied "No, $100 billion revenue".  At the time Google was still focused on enterprise search as its (in hindsight tiny) revenue source.  Steve Jobs famously recruited John Sculley from Pepsi to be CEO of Apple by asking him "Do you want to sell sugar water for the rest of your life or do you want to change the world?"

Any other traits visionary founders have?  Any examples or anecdotes I missed?  Please leave them in the comments section.

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Investor - Want an Equity Seed Round? Pay For The Legal Fees

I know a number of investors who would prefer investing in an equity round over a capped convertible note for a seed round. (note, this post largely refers to seed financings)

Reasons investors prefer equity rounds include:

1. Protective provisions and shareholder rights.  There are a set of terms that protect the investor that are negotiated into equity rounds that frequently don't exist in notes.
2. Taxation.  If the company sells, there is different tax treatment to this investment if the note converts into equity upon acquisition then if the investor held equity the whole time.
3. Sets the tone for the next round.  Often, some of the terms in an equity seed round will set the terms for follow on equity rounds.  This is often good for both entrepreneur and investor if the terms are set properly up front, decreasing the potential negotiation for future rounds.

The reasons entrepreneurs like convertible notes:

1. Time - they are faster.  A convertible note ends up being 10 pages total between the note + purchase agreement, vs a thick stack of equity financing docs.
2. Expense - they cost less.  (a) The entrepreneurs legal fees cost 2-3X more for an equity finaning then a convertible note, due to the increase complexity of an equity financing (and the legal time it takes to negotiate).  (b) For some reason the entrepreneur is asked to pay the legal fees for the investors in an equity financing.  Not sure if this strikes anyone else as ridiculous.  This means an equity financing can end up costing $35-$50K.  If you are raising $500K in seed, this means up to 10% of the cash raised for the business goes to pay legal fees.
3. Terms.  See protective provisions above.

I find the fact that the company is asked to pay for the investor's legal fees in a seed equity financing to be kind of ridiculous.  This should be treated as a cost of business on both sides, and each should pay their own legal fees.

Thoughts?  Leave a comment in the comment section below.

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Your Lawyer and 3 Other People You Should *Not* Give Equity To

The Hidden Costs of Handing Out Equity

Giving people equity has a number of hidden costs which may include everything from having to get them to sign off on an acquisition (depending on how it is structured, you may need 100% shareholder approval) to them having a variety of shareholder rights which may allow them to become a pain in the butt.

As an entrepreneur, I would suggest giving options/equity only to people that will be working full time at the company, and to your investors.  

4 People To *Not* Give Equity

Here are 4 people founders often give equity to, even though they shouldn't.

1. Your lawyer.  Many lawyers will ask you to give them equity in exchange for deferring fees.  You should say no.  They will still defer fees.  If you really want the lawyer and they are unwilling to relent, give them the option to invest e.g. $25K in your next round of financing.  If they still say no, find another lawyer.  There are plenty of good ones out there.
2. Your landlord.  Some co-working spaces are willing to allow you to defer rent with the deferred cash going into your financing round.  Space is cheap.  Equity is precious.  If you really need an early space to work besides your living room, ask a friend with a startup to crash there.  Or, look for a super cheap sublease on Craig's List.  Or meet at a coffee house and work from there.
3. Contractors.  Unless the person will make or break your company, I typically advise against giving a contractor equity.  There are alternative ways to structure contracting work.  This one is less set in stone, but the basic question is - do you really want someone who spent 2 months with your company to own a piece of it?  There is a reason companies have vesting cliffs.
4. Your accountant.  Not sure why anyone would do this.

People You May Want To Give Equity To

1. Your family.  It is most tax efficient to grant stock to loved ones early, or to set up a trust in their name.

What do you think?  Let me know in the comments section.

You can follow me on Twitter here.

10X Your Business

Often when I meet with a startup I will ask them to put aside their existing product/distribution roadmap for a minute and brainstorm around a simple question -

Question 1: "What circumstances would lead to a 10X increase in the value of your product or business?"

Most product and distribution roadmaps are incremental.  Do x, then y, then z, each of which has a linear increase in the value of the product or company.  I think it is good to periodically get out of that way of thinking and ask what sorts of deals, adoptions, or customers would completely change the game for the company.   These things should be at least borderline realistic - i.e. if you devoted a small set of resources, the stars aligned perfectly, and luck went the right way, it might, just might, work out.  But you will never know if you can make something amazing happen if you don't think audaciously and actually devote some small subset of resources to just go for it.

As an entrepreneur or business manager, you should periodically ask yourself, what can create a big step function in company or user value?  And then you need to figure out, how can I execute that 10X step?

Question 2: "What can you realistically *do* to accomplish the circumstances that will 10X your company?"

• Can you dedicate a person to fly out and camp out for the next 6 months until you close that company-making deal?
• Can you spend all your funding on acquiring users and manufacture a network effect?
• Can you lobby for a partnership in a company's home headquarter's newspaper or turn their users into a lobby for you on Twitter and Facebook in order to make an impossible deal possible?

Examples of things that 10X'd Companies:

• AOL/Apple deal in the 1980s.  In the 1980s, Steve Case was on the marketing team at Quantum Computer Services (later renamed AOL).  The QCS management sent Case to stake out Apple offices and asked him to not come back until they had an Apple deal.  It took many months of living out of a hotel room, but Case eventually sealed the deal.
• PayPal paying $10 a user.  PayPal raised tens of millions of dollars of funding but its users base was not growing as quickly as they would have liked.  Rather then sitting on the money and waiting for something organic to happen, PayPal's leadership decided to make a bold bet - spend a large portion of the funds they raised ($10s of millions) buying users in order to bootstrap a network effect.  The company went on to go public before being acquired by eBay.
• Microsoft/IBM deal.  Microsoft famously told IBM they had an operating system when they didn't in order to win IBM's business.  They then scrambled to find an OS they could quickly license from another software developer.  A number of lessor entrepreneurs would have said "sorry, we can't help you".  Of course, within a few years the OS franchise became the foundation of Microsoft's meteoric rise.
• Google/Yahoo! deal.  Yahoo! outsourced search to Google and allowed Google branding on the Yahoo! homepage.  This lead to two outcomes: (a) Google had a massive spike in both traffic and data that is could use for analytics and to refine its search engine (b) The Google branding on the Yahoo! site caused non-early adopters to become aware of Google as a brand and drove significant traffic directly to the Google site.  Since Yahoo! paid Google for the service, it also partially funded Google as a business.
• Zynga raising a crapload of cash for media buying and "overpaying" for social gaming startups.  When Zynga got started there were dozens of other social gaming startups.  Zynga changed the game for itself by realizing scale is what would cause it to win.  Zynga raised large amounts of money to buy scale - both via media buying (ads) as well as via buying lots of small startups for more then its competitors would pay (by projecting the future value of the assets, vs current value).  One of these acquisitions turned into Farmville, their core franchise.  All the other startups that could as easily have been Zynga?   99% of them are acquired for small change or are dead.

What are other examples of companies making unexpected 10X moves?  Let me know in the comments.

Related post you might find interesting: Is your startup a cash or equity business?

You can follow me on Twitter here.

Put Your Investors To Work For You

So you found the right mix of angels for your round, successful navigated around venture economics, and all the other issues associated with fund raising.

At this point, many entrepreneurs don't take proper advantage of all the value added investors they spent so much time and trouble courting.  I.e. what is the point of having one of the super angels in your round if you don't make use of her/his help and expertise?

At Mixer Labs (a company I started that was acquired by Twitter in December), I was always pleasantly surprised by how much value meeting with our various investors brought.  Just as you have an engineering team or a UX team, you should think of your investors as your investment team and find ways for them to work for you.  Below are some tips for making the most of your investment team:

• Investors are there to help you (not for you to "update" them).  Some entrepreneurs spend way too much time meeting with each individual angel to give 1 way updates.  If you have 12 investors, and are meeting with each of them monthly it means you are wasting too much time on investor communication instead of focusing on your startup.  This obviously is not good.
• Figure out which investors can help with what.  Some investors are much better at (or more interested in) talking about the product.  Others can help with hiring, setting company culture, business development or the like.  Ask your angels what they are good at, and what they can help with.  When the time comes to close your first employee, negotiate that business deal, or figure out the best channels by which to buy traffic, contact the right angel or investor and ask them for help.  
• Updates should be phrased in ways that let your investors know how they can help you.   Rather then meet with all your investors regularly, the best way to keep them up to date is to send an occasional email update.  These updates could simply be "Hey, we launched our alpha, sign up here and give feedback" or for later stage companies can be monthly or quarterly emails (e.g. tied to board meetings) with an update on the business.  With each update, I would suggest having the 3-5 key asks you want from your investors.  E.g. is there a company you need an introduction to?  Some feedback on a part of the product?  A key hire you are looking for?  Ask explicitly for help with this at the beginning of the email.
• Mini board/advisory board.  If you don't have a board, you can use 1-2 of your favorite angels as a lightweight version.  I.e. you can ask them to meet at some regular interval (e.g. every 6 weeks) to discuss some key things that are on your mind regarding the business.  You can make these slides light, but it is still worth emailing the content a few days in advance so the angels can think through the key issues.  Come prepared as you would for a board meeting - what are the top 1-3 things that are on your mind and how can they help you think these issues through?  Is it the product?  Hiring?  Distribution?  Sales cycle?  Work with your key investors to work through this.
• Side note: You can also do this with people who are not investors - e.g. key industry people that you know/respect who can help.  In this case they can either be formal advisors or people who come in more for a one off discussion of a key topic they know a ton about.
• Semi-annual investors all-hands.  One thing we did at Mixer Lab was to get all our investors into one room to discuss our key issues.  This is similar to the mini-board meeting described above, except we invited everyone to it.
• This led to great group brainstorming, as various investors bounced ideas off of us and each other.
• A side benefit is the angels get to network with one another, which they enjoyed.
• Calendar reaching out to key investors.  When you are working heads down on your startup, you often forget to tap into your network for help.  Put a reminder on your calendar to reach out to key investors on key topics with some regularity.  You can always skip actually contacting them, but it is good to be reminded.
• Don't be shy.  Don't worry about asking your investors for specific help.  It could be an intro to a company they know, to help close an employee, or to meet to discuss the terms of a deal you are working on.  You should be up front and ask for help where its needed - that is what they are there for.

Our investors were extremely helpful throughout our early days as a company.  Even then, I don't think we utilized them as effectively as we could have.   Hopefully the tips above will allow you to make the most of your investment team.

Any other ideas on how to make the best use of your investment team?  Please add your thoughts in the comments section.

You can follow me on Twitter here.

Are You An Alcoholic Yet? Or, The Great Startup Rollercoaster

This post has appeared as a guest blog on FounderDating, which brings together entrepreneurs with different skill sets to start innovative new companies.

Startups are by their nature extremely stressful.  At a large company, the company itself has momentum.  With a few exceptions, if one person (or team of people) were to suddenly disappear, the company will continue to coast for (potentially) multiple years before the effects may become evident

Thought experiment - imagine if the (multi hundred person (?)) Microsoft Office product and engineering team suddenly disappeared (kidnapped by aliens?).  The sales team could keep pushing the existing product for many years without customers noticing.  Microsoft could still generate ridiculous amounts of cash off of the product, with no one actually working on it.

In contrast, at a startup as the entrepreneur if you stop pushing, everything immediately comes to a halt.

There are times when you need to push much harder then others to get over a hump that reminds me of activation energy from chemistry.   Early on these events can be exhilarating, but with time some of these high anxiety / workload moments can really wear you out. They may include things like:

• Hiring the first employee
• Raising money
• Getting the first N users
• Acquisition talks
• Getting sued
• Pivoting
• Getting N users for the new pivot product
• Figuring out a business model
• Etc. etc.

As a friend of mine put it, if a year into your startup you are not an alcoholic, you must be doing something wrong.

So how to deal with all the stress?  At Mixer Labs (a company I started that was acquired recently by Twitter) I tried to do the following:

• Make it fun for everyone.  Startups are hard work.  Find key things to celebrate - e.g. for Cinco De Mayo we bought a pinata.  We created our own day off in April called Numa Numa day.  We did team hikes.  We worked from a pub (with wifi) and drank Guinness every few weeks on Friday afternoons.  We rented out a ski cabin in Tahoe for a week and did half days snowboarding and half days working.  Everyone on the team was working really hard, so we wanted to make sure we found simple, cash conservative ways to reward everyone while also creating a fun environment for ourselves.
• Change context to decompress.  After a while, working 7 days a week is exhausting.  Make sure to take a weekend off to go to another city with your significant other.  Or, go see friends and do a long walk.  Changing context (even e.g. walking through San Francisco Chinatown if you are in SF) will help you take a break from the constant focus and worrying entrepreneurs face.
• Do your best to maintain key relationships.  I had to cancel a pre-planned family trip with my girlfriend in order to work.  She was super understanding (she is amazing in general!), but the startup lifestyle can really stress relationships.  Try to find ways to connect with loved ones on a regular basis as their support will help get you through tough times - and will help with decompression!  Buy your girlfriend flowers or take your boyfriend to Sausalito.  Find a way to connect and be with one another.  
• Get sleep.  This is self explanatory.  Try going without caffeine for 30 days - it will make a BIG difference and force you to sleep when tired.
• Exercise.  This will help you decompress and clear the mind.
• Have a hobby.  This may be hard if you are working maniacal hours.  However, even something you do 20 minutes a day can have a huge positive impact.  By making progress on something other then the startup, you can feel like good things are happening in life even if work is especially tough.

Startups are stressful but very rewarding.  If you don't find ways to cope with the stress you will burn out or blow up and the work environment will deteriorate rapidly.

What do you think?  Any ideas for how to decompress or deal with startup stress besides alcoholism?  Let me know in the comments section.

You can follow me on Twitter here.

The Fundingpocalypse: Your Mom Wants To Angel Invest!

You know how your mom or great uncle with the car dealership really wanted to buy Yahoo! stock in 2000 so they could "get in on this thing called the Internet all the kids are talking about"?  You know how that marked the height of a funding bubble?

I spoke over the weekend with an angel I know.  He has been getting random phone calls from people who "want to learn to angel invest".  These are people who have never started a company or worked at a startup (well, maybe Google when it was a few thousand people).  They seem to have no real interest in company formation other then they know a bunch of people talking about how great it is to be an angel.

I think it is a clear sign of the fundingpocalypse.  Yes folks, there is an early stage funding frenzy right now.

You can follow me on Twitter here.

Party Rounds: How The Crappy Economy, Y Combinator, Angel List, and Super Angels Have Changed Fundraising

In a prior post, I discuss how Party Rounds differ from Led Rounds, and how to raise a Party Round.  In this post I explain what is driving Party Rounds and discuss their implications for entrepreneurs, angels, and VCs.

In the last 12 months two big shifts have happened:

1. Seed valuations for many companies have gone up dramatically (e.g. 50-100%)
2. More and more seed rounds do not have a lead investor.  I.e. the terms are being set by the entrepreneur as part of a "Party Round" (a term first used by Rafael Corrales).  

As I explain below, this shift is one with implications to angels, VCs, and entrepreneurs.  This shift has been in part driven by Y Combinator, AngelList, the rise of super angels and the changing economy/lack of good investment opportunities.  

Why Are Party Rounds Suddenly So Common?
Two years ago, it was rare to have an entrepreneur set his or her own terms.  The following things have changed:

• More Angels.  There are more angels actively investing in private companies today than at any other time I have seen.   This is driven by three things:
• Y Combinator.  Y Combinator has been holding days such as Angelcon to educate people about angel investing and to connect them to super angels or others who have good advice and insights on investing to pass on.   Y Combinator also invites a wide range of angels to demo days, where they have a chance to interact with and invest in startups they potentially would never have met.  This opens up a whole new pool of capital and expertise for the angel investing world and I think this is a very positive trend for the overall entrepreneurial ecosystem.  With increased angel demand, entrepreneur supply is worth more.
• AngelList.  AngelList has further democratized fund raising.  By tapping into a broad network of angels for every potential investment, AngelList similarly makes it easier for entrepreneurs to raise more money from a wider range of people then they could have previously reached.
• "Its the Economy, Stupid".  A lot of rich people don't have a good place to put their money that will provide a great return.  The stock market has been flat to down over the last N years, bond yields are poor, and there is not a good place to park cash (this is increasingly true for pension funds etc. as well as even overall venture returns are poor).  This means that angel investing is a way for people with a lot of money to deploy capital with the hope of a better return.  (Thanks to George Zachary from CRV for pointing this out).
• Super Angel Funds.  Super Angels investment strategies typically support Party Round emergence as -
• Many super angels won't take many board seats (some exceptions exist, e.g. First Round Capital, Harrison Metal, and Floodgate have all taken board seats in a number of instances - they also tend to invest much larger amounts in fewer companies then the average micro VC / super angel).  The reason is that if most super angels make 20-30 investments a year and have e.g. 50+ active investments, the individual super angels don't have time to sit on any boards.
• Smaller capital deployments.  One class of super angels invests $50-$250K per round.  This means 3-4 super angels and 10-15 regular angels can invest in a $750K round.   No one has enough skin in the game or individual bargaining power to set terms.
• Lots of capital suddenly in the market.  Super Angels have recently raised a crap load of capital to invest.  I can think of $X00 million in funds that have closed recently - all this capital needs to go somewhere.
• VCs acting as super angels.  In order to get option value on a broader set of companies, some VC funds are investing like super angels in seed rounds.  VCs are even less valuation sensitive then super angels for seed investments in which they invest small amounts (e.g. $100K), which means valuations can be driven even higher and even more capital is available for the same deals.

The net takeaway is that there is not just more money chasing the same deals, but rather, there is more money that (a) won't lead rounds or ask for a lead or board seat and (b) in some cases (e.g. new angels flooding in) doesn't understand angel economics in a very sophisticated way (i.e. most of these people will lose money in the next few years).

Implications of Party Rounds For Entrepreneurs, Angels, VCs

Implications for Entrepreneurs:  Net positive.

• Upside:  More capital = more negotiating leverage = better deal terms and control for the entrepreneur.
• Downsides: 
• All the capital flooding in means some not-so-great companies are getting funded.  Rather than get locked in to a bad idea via successful fund raising, some entrepreneurs' time may be better spent on other products or ideas.  This is especially true for the oversubscribed company that raised $1 million instead of $500K and ends up spinning it wheels for 6-12 months longer than it otherwise would have (the flip of this is it gives more time to pivot as well).
• The increasing number of less sophisticated angels may mean more hand holding / time spent managing an investor who is on over his or her head - do your diligence and only take money from people ready to lose it investing in your company.
• High valuations in seed rounds may negatively impact future fundraising dynamics.
  In 18-24 months lots of companies are going to go under as their existing investors don't have the capital or where-with-all to re-up for the company.

Implications for VCs:  Net Positive

• Upside: Despite all the press about super angels vs VCs, all this capital sweeping into the seed stages is good for the venture community.  I cannot think of a single major internet company that has not needed to raise multiple rounds of funding - which is where the VCs come in.  All this activity means in 12-24 months VCs will be able to cherry pick the very best companies for series A/B investment.   The others will likely wilt on the vine.
• Downside: The valuation inflation in the seed rounds will lead to inflated expectations by entrepreneurs for their Series A.  It will be interesting to see how this will play out once bargaining power shifts back to investors in later rounds (since there is a small set of collusive players in the traditional venture world).

Implications for Angels:  Net negative (but they don't realize it yet)

• Upside:  Angels who are not as well networked now have more access to companies and investments.
• Downsides:  
• Party Rounds are hurting angel economics.   Seed rounds are starting to hit low series A valuations - but with seed level risk.  A lot of small fry angels will likely lose quite a bit of money in the coming years - or their return on investment will be lower then it would have been without the Party Round dynamics.
• Party Rounds also means angels are less likely to have an investor take a board seat to work with the startup on key issues.
• Many Party Rounds are being done as capped notes.  This means if the company raises at a valuation lower then the cap then the angel will convert at the low market cap - even though they took on all the early risk.  Even worse, if the company gets acquired and there is straight conversion with acquisition, the angel will *lose* money on the exit (as opposed to an equity financing, where the angel will often get their money back).

I leave you with this quote from Keith Rabois, which has interesting implications for the above:

"The companies I have traditionally seen do best over the long term had lead investors for their seed rounds" - Keith Rabois

What do you think?
a) What other trends are feeding all the Party Rounds?
b) Is this a good or bad thing for entrepreneurs, angels and VCs?

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Party Rounds: How To Get a High Valuation For Your Seed Startup

A major shift has happened in the last year - entrepreneurs have gone from led seed rounds to "Party Rounds".  This shift has non-trivial implications for the venture industry which I will explain in another blog post (in which I will also explain what is causing more and more party rounds to occur).

This blog is focused on:

(a) The difference between a Led Round and a Party Round

(b) How you raise a Party Round

Led Rounds (Old Model) vs Party Rounds (New Model)

• Led round.  (The old model)
• Who sets the terms:  A single investor sets the terms of the round in negotiation with the entrepreneur.  Usually the investor is one of the larger $ amounts in the round or a professional investor.  Other investors then co-invest on these terms, often after being pulled in by the lead investor or the entrepreneur (the "syndicate").
• Board seats.  The lead investor may or may not take a board seat depending on what they and the entrepreneur decide.
• Representing the investors.  The lead often represents the overall set of investors in the round.  So if e.g. the entrepreneur wants to sell the business, she may often discuss it with the lead investor rather then having to tie in to all investors.
• Party Round.  (The emerging model)
• Who sets the terms: The entrepreneur sets the terms, often by bringing on smaller investors with no leverage first to get early commitments for the round.  
• Board seats.  Board seats are usually not given out.
• Representing the investors.  There is typically no one investor who represents the overall investor pool.  Or, a "Brand name" investor will tell the entrepreneur what investors in general may want.
• Valuation: Party round valuations are often 50-100% higher then led rounds.  This is due to the fact that no single investor invests enough to have the leverage to negotiate down the terms.  Similarly, the way a Party Round comes together often precludes the ability to any one investor to negotiate or set the terms (see below).
• The net impact of this is that an entrepreneur who before would have raised at a $1.5-4 million valuation is now raising at a $3-6 million pre-money valuation.

How to Raise a Party Round and Get a Better Valuation

In the not-so-distant past, there were a handful of major angels or funds who would lead rounds.  An entrepreneur would have to negotiate terms such as valuation with this small set of potential leads.  Once a lead fell into place, other investors would follow on into the deal.  The small number of potential leads meant that:

• There was higher likelihood of collusion amongst investors in setting price - people were more likely to know who the entrepreneur was also talking to
• Entrepreneurs had fewer options from which to raise capital - which meant they had less leverage over market cap or other deal terms

Today, it is increasingly typical that the entrepreneur raises a round without a lead investor.  Furthermore, the entrepreneur can get much better terms (e.g. a much higher valuation) in a Party Round as follows:

• The entrepreneur finds 3-5 smaller angels willing to put in money on terms set by the entrepreneur.  
• These angels are typically ones who traditionally have not had much deal flow, or do not invest professionally, or alternatively, are investing more for status/to give back than for financial return.   This means they are less valuation sensitive in many cases.
• These investors do not have the leverage (or in some cases the interest) to negotiate a better deal. 
• These angels may still be value added money, or e.g. previous entrepreneurs known by more prominent angels (so they may still provide social proof beyond just the money committed).
• The entrepreneur uses the money committed by smaller angels to set terms with larger angels.  
• By raising from these 3-6 lesser known angels, the entrepreneur raising the round now has say $200K out of $500K in capital committed for the round.  The entrepreneur can now go to professional investors / super angels (who normally would have had more leverage) and say "I have set terms and have a big chunk of capital committed.  If you want to invest, you need to do so on these terms".
• Many institutional angels have a model in which they make 30+ investments a year.  Part of their premise is by investing in a large portfolio of company, they will hit the 1 company that will return the fund many times over (e.g. the next Facebook or Google).  The super angels do not want to miss out on a hot opportunity, so may be less likely to negotiate at this point.
• Wrap up the round.  
• Once one or two prominent angels agree to the terms, many of the others (both large and small) will follow.   The round is now closed and in many cases overcommitted, causing the entrepreneur who planned say $500K to raise $1 million for their seed.

I will discuss why Party Round have emerged, as well as the pluses and minuses of these rounds in another post.

Thoughts?  Do you think Party Rounds are good or bad for the entrepreneur?  For the investors?  For the tech community?

You can follow me on Twitter here.

20 Questions To Ask Yourself Before Raising Money

As I mentioned in a previous post, some startups may raise money for stupid reasons.  Below are a set of questions I think any entrepreneur should ask herself/himself before raising a round.

Why Are You Raising A Round?  What Implications Will Raising A Round Have To You, The Entrepreneur?

1. Why are you raising money?  It is for vanity purposes or does your business really need it?

2. What would you use the money for?  Is the nature of the business ultimately cash intensive?  (Be creative - are there marketing, inventory, or other costs you are not taking into account?)  Calculate what money is actually needed (do a simple spreadsheet of costs and revenue projected out and see how long it takes to burn the money with various scenarios).

3. What are your goals as founders?   How will raising money impact these goals?

4. How do you maintain control of the company?

5. How much of the company will you end up with after N round of financing?  Calculate this in a spreadsheet.  Then run through scenarios - how much will your stake in the company be worth at the end of the day?  (VCs often say "if we grow the pie, we all win", but if you do the math of dilution vs market cap, that isn't always true for the entrepreneur).

6. How will raising this money impact future options for the company? (e.g. will a "Strategic" investment from Burger King decrease your ability to work with McDonalds?  Will the big venture round block your ability to sell for $50 million if that is your goal?)

How Much Money Do You Actually Need?  What Next Milestone Will The Funding Get You To?

7. What are the implications 6-12 months out of raising e.g. for a seed round $250K vs $500K vs $1 million?  (worth thinking through this very tactical point)

8. What milestone will the funding get you to?  Will this milestone lead to either (a) breakeven or (b) another round of financing where the value of your company is at least 2-3X higher then the previous round?  If the answer is "no", then you need to raise more money, cut costs, or do something different.

9. How do you avoid being over/undercapitalized based on the above (this is more important for larger rounds - e.g. big series A, B, C etc.)

10, How are other companies in the industry capitalized and what implications if any does this have for you? (sometimes this is misleading - e.g. look at all the facebook app companies that raised $ that are now languishing.  The flip of it is if your business is dependent on buying e.g. a lot of traffic, and your competitor raises a warchest to media buy, they could soak up your marketing channels)

11. Did you add 50% padding to the number you came up with to ensure you don't run out of money?

12. What is the macro-economic climate?  Is the economy growing/shrinking and what will it be doing in 6 months?  A view into this can strongly impact whether your company can raise money on better or worse terms in the future (or raise money at all, if the venture markets freeze as they do at the beginning of every recession).

Who Should You Raise Money From?
13. Are you a cash or equity business?

14. Are you goals impacted by venture economics?

15. What are future financing approaches you would be willing to consider?  When will this capital be needed?

16. What sorts of value do you expect the angels or investors to bring besides just cash?  Can you get this value otherwise (E.g. advisors)?

17. Are there alternative sources of funding you have not considered?  (Venture Debt, employees helping to cover costs, having customers pay you for development, etc. - blog post coming on this shortly).

What Do Potential Investors Want?

18. What do your investors or potential investors want?  What are their motivations and why are they getting involved?

19. What would you be willing to give up in order to raise the money?  Equally important - what is your walk-away point (BATNA) at which you would not raise money from these investors?

20. What is their reputation and how have they helped companies in the past?  How have they acted when other companies they invested in hit rough times, or got bought?

Any other questions I should add to the list?  Let me know in the comments section.

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Angels vs Superangels - What is the difference?

There has been a lot of noise in the press lately about "Superangels" and how they are a potential disruptor to the early stage venture funds (see also TechCrunch article).  This blog focuses on angels vs superangels and how the two work together. 

Definition Of A Super Angel - Someone With An Institutional Fund
• Small institutional funds. Super angels are in part characterized by the fact that most of them are effectively small venture funds who have raised money from limited partners. By "small" I mean fund sizes typically in the ~$5 million to ~$70 million range (these numbers are inexact, and depend on the number of partners in the fund).  This contrasts to "angels", who are investing their own money.  This means angels and superangels may have different underlying motivations in some cases.
• Partnership structure.  Many super angel funds started off as 1 person investing their own money (e.g. Maples, Aydin, Jeff Clavier) and morphed into a broader partnership as money was raised for an institutional fund.  
• Motivations for investing.  Ultimately, super angels will be judged by their LPs on financial return.  Given their smaller fund sizes, super angels are less beholden to VC economics so they have more alignment with entrepreneurs than traditional VCs.  Many super angels also invest to give back / help out the next generation of entrepreneurs or for other reasons (see angels, below).   However, it should be noted that super angels are not charitable organizations who exist to serve entrepreneurs - they do have LPs counting on them to generate a great ROI, and this is ultimately what they will be judged on.
• Investment size. Super angels will each invest anywhere from $50K to a million or so in funding in a given round.  There is a bit of a split between those typically investing $100K-$250K per round, and those that typically invest $500K-$1 million.
• Board seats. Many of them *may* take a board seat (and *may* step down with a "full" venture round where the VCs take over the investor seat).
• Value add. They often are very good at providing introductions, strategic advice, etc.  See my blog post on the 7 types of angel investors for more on types of angel value-add. Many super angels are as entrepreneur friendly as they claim, but I have seen at least one act in a negative manner towards entrepreneurs repeatedly.
• Upstream of VCs or co-invest in Series A/seed. Super angels may often act upstream of, our co-invest with, VCs, although they may sometimes compete with traditional VCs for a seed round.  I have seen many many instances of super angels co-investing with VCs in series A.  Taking a round from superangels will typically help your odds of getting a top tier VC into your series A, rather then hurt it (as recent press articles incorrectly suggest).
• Lead rounds. The super angels often will help pull together a broader syndicate for the entrepreneur if useful.
• List of super angel funds.  This list is not comprehensive and is in no particular order.  If I forgot someone - please let me know and I will add them.  Floodgate (Mike Maples and Ann Miura-Ko),  Harrison Metal (Michael Dearing & Erik Rannala ), HitForge (Naval Ravikant), SoftTech (Jeff Clavier), Lowercase Capital (Chris Sacca), Manu Kumar,  Felicis Ventures (Aydin Senkut), SVAngel (Ron Conway and team), First Round Capital, 500 Startups (Dave McClure), Founder's Collective (Chris Dixon et al), betaworks.  

Definition Of An "Angel" - Someone Investing Money On Their Own Behalf

• Invest their own money. Your plain old vanilla angel is someone typically investing their own money.  
• Motivations for investing.  Angels can vary quite a bit in the reasons they want to invest in a company.  Their primary motivation for investing may be financially driven, ego driven (i.e. instead of collecting sports cars or pokemon cards, they collect startups), or to give back to the community / help out the next wave of entrepreneurs (these angels are often the best ones).  
• Investment size.  Angels will usually invest anywhere from $10K to a few million dollars depending on their personal wealth and agenda.  A typical amount to expect from an angel is $10K-$100K with $25K-50K being seen as pretty standard.
• Board seats.  Traditional angels will rarely take a board seat unless they are either deploying a large amount of capital (with "large" as defined as large relative to the overall round or "large" as defined relative to the angel's personal net worth.).  Anecdotally, it seems that people who have worked as VCs before, or who spend most of their time these days on their investments rather then having an operating role, seem more likely to take board seats with their angel investments.  Some angels may be brought in as a board member to fill the "independent" board member spot when a venture round happens.
• Value add. There is a very wide variance in angel value add.  While superangels are investing professionally for a living, angels are doing it for other reasons.  Some angels are amazingly helpful (think Reid Hoffman or Marc Andressen before they became full fledged VCs).  Others are spectacularly unqualified to invest and may be doing so because they have excess cash (trust funds, early employee at major company, your local family dentist) or excess time (ditto).  Screen both your angels and super angels carefully! :)
• May invest in all rounds/financing types.  Since angels are investing their own money, they often have more leeway in what sorts of companies they can invest in and at what rounds (series A, B, C, etc.).
• Lead rounds.  A handful of especially wealthy or plugged in angels will lead rounds and in some cases have a fund in which they are the only LP.  It is unclear if they should be classified as super angels or not, but they include e.g. Mitch Kapor, Ram Shriram, Russ Siegelman, Marc Benioff, Youniversity Ventures (Keith Rabois, Jawed Karim, and Kevin Hartz) and others.
• List of angels.  See Angel List for a good cross section of angels.

How Angels and Super Angels Work Together
Within Silicon Valley, angels will often refer deals to super angels, and super angels will often pull in angels to fill in rounds.  Typically the angel/super angel networks are tight knit with the two types of investors working together.  Outside of Silicon Valley, you are more likely to run into angel investors who are not very savvy about starting a business but have access to capital.  These investors (finance guys, trust fund babies, etc.) can often be quite destructive to startups as investors and will be the topic of a future post.


Whether you are dealing with an angel or superangel, you should still chose the types of angels in your round carefully, as well as decide whether to let a venture fund invest.


Any angels or super angels I should have pointed out?  Let me know in the comments section below.


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