Venture Capital

Marc Andressen writes:

Startups that have a credible potential to be sold or go public for a 10x gain on invested capital within 4 to 6 years of the date of funding should consider raising venture capital.

Most other startups should not raise venture capital. This includes: startups where the founders want to stay private and independent for a long time; startups where there’s no inherent leverage in the business model that could result in a 10x gain in 4 to 6 years; and startups working on projects with a longer fuse than 4 to 6 years.

Notably, there are many fine businesses in the world — many of them highly profitable, and very satisfying to run — that do not have leverage in their model that makes them suitable for venture capital investment.

Hackers and Investors

Paul Graham writes:

The world of investors is a foreign one to most hackerspartly because investors are so unlike hackers, and partly because they tend to operate in secret. I’ve been dealing with this world for many years, both as a founder and an investor, and I still don’t fully understand it.

In this essay I’m going to list some of the more surprising things I’ve learned about investors. Some I only learned in the past year.

Assumption-driven Entrepreneurship

Alex Krupp writes:

Much better to wait until you’ve discovered something new about human nature. Something that makes your assumptions more accurate for more people, more of the time, in more places. Something more useful. Something more actionable.

Call it assumption-driven entrepreneurship.

The best part is that theories are invisible so they can’t easily be found and copied. Your theory of human nature is your hidden sustainable competitive advantage. Make sure you have one. And use it wisely.

Thinking Big

Knowledge@Wharton has an excellent interview with Subroto Bagchi:

There is a mistaken notion that every start-up [begins its existence in] a garage, and a [garage-sized firm] doesn’t have to have a process. More start-ups remain at that size and then they go off the scene, because they fail to embrace process. Even if you start small — and you have to start small — you can pretend that, “You know what? I’m a Fortune 500 company, and I need to front-load my organization with the right process.” This is because process is not about a framework that will bind you up; process is like plumbing. It’s like infrastructure.

Let us imagine that you want to someday build a skyscraper. You have to pre-think what plumbing must go into the skyscraper. It cannot be an afterthought. The plumbing you require for building a skyscraper is very different from the plumbing that you require for a two-bedroom house. You don’t build the plumbing for a two-bedroom house today and say, “As I build another floor, and then another floor, I will add to the plumbing.” No. That doesn’t work. So you have to pretend that, “I am a skyscraper.” The inlet and outlet for the skyscraper is going to be very different. So pretending [or imagining] is a very, very important thing.

Entrepreneurs and Age

Fred Wilson writes:

I have two meetings this week with guys in their early to mid 40s that are two of the best entrepreneurs I’ve ever worked with. Both are asking me the same thing – “what should I do next?”

There are questions of motivations, work/life balance, not needing the money, looking for a big idea, etc.

One of them asked me – do you know any 45 year old entrepreneurs?

Yes I do. But only one of the entrepreneurs in our current portfolio is older than 45. And he’ll probably be starting companies until he dies. It’s what he does.

But the facts are pretty eye opening. Nine of our eleven entrepreneurs are in their 30s. One is in his 20s, and one is in his 50s.

That says to me that prime time entrepreneurship is 30s. And its possibly getting younger as web technology meets youth culture.

Well, I will be 40 in August – and have been an entrepreneur for 15 years. Am I past my prime or does the best lie ahead? Only time will tell.

Incubator as Co-operative

GigaOM writes about HitForge:

HitForge is an entrepreneur cooperative composed of independent small teams, where people can apply with their ideas, join the team, and see their idea go from idea to product in a few weeks, largely with help of an offshore engineering team.

If it works, then the product is turned into a company. If it doesnt work, the product is killed, and the team moves onto something new. HitForge is out of a few thousand dollars. The team whose product got killed still gets to share in the hits that come out of the cooperative, Ravikant says.

Startups Need to Control Their Own Destiny

Ed Sim writes: “Big companies move slowly and often change their minds. A relationship with a big company will surely take time and cost you money whether in upfront dollars or expenditures on resources. And while we would all love to build our business off the back’s of other brands and distribution, at the end of the day, in order to create a big winner, it is imperative for startups to control their own destiny. This means that your business has to be able to grow organically and not have its fate fully dependent on its partners. What this means is that first and foremost you have to have a killer product, one that people love, can’t live without, and share with others. In this new world of mashups, open APIs, and widgets, startups can easily get distribution. Getting customers and revenue is a different story altogether. Remember, distribution doesn’t matter if people don’t use your product or service so start with the basics and figure out how to make your product a must have that someone will pay for.”

Sharing New Ideas

David Beisel writes:

Information about new startups and trends affecting them is near ubiquitous given the rise of influential and well-read blogs, as well as the mainstream press and conferences. And based on these visible and salient market trends, smart people tend to be led to the same conclusions about wherein lies the opportunity. If a large objective market opportunity exists, it would be unusual for it to go entirely missed by those with experience in the space. However, not everyone sees it that way entrepreneurs, bloggers, and others sometimes privately/publicly accuse and dismiss other groups of copycat tactics.

This copycat threat leaves entrepreneurs hesitating about spreading knowledge about their startup endeavors, especially early on. Yes, there is certainly risk in this perspective and there is a logical set of reasoning for operating in stealth mode, as I wrote about a couple of years ago (my opinion is that the best course of action isnt a binary approach, but rather a nuanced one.) But I believe the risk of another someone literally copying an entrepreneurs startup idea is largely overperceived and overweighted. Generally-speaking, isnt it better to bang your drum about your idea with better hopes to attract co-founders, employees, advisors, capital, and other important continents to make your company successful?

VCs and Entrepreneurs

Dave Winer writes:

Even after you get an offer from a VC, very carefully find out if their vision of the company agrees with yours. If it doesn’t there’s a pretty good chance you’re either going to end up working for the wrong company (the one that agrees with the VC’s vision) or out on the street looking for a job, with your idea tied up in a company whose vision you don’t agree with.

I’ve seen this happen too many times — the entrepreneur feels his or her vision has been ratified because the money has come in, but the VC was thinking something else. The VC often wins this struggle. Better to figure this out before you become partners.

Vikas Goel and eSys

Inc has an inspiring story of how Vikas Goel built eSys.

Goel is the 36-year-old CEO of a Singapore-based company called eSys Technologies, which he founded in 2000. Born in India, he had arrived in Singapore in 1996 with no capital and no contacts. Four years later, he launched eSys with one employee and a part-time staff member working in a one-room office. On the surface, his timing could hardly have been worse, since right about then the bottom dropped out of his chosen line of business, the distribution of computer components.

But where others saw potential disaster, Goel saw opportunity. And by 2005, the company had sales approaching $2 billion, 112 offices in 33 countries, and four manufacturing plants where its employees assembled the products it had begun to sell under its own brand name, including a PC that went for about $250 at retail. Goel had accomplished this, moreover, without taking on any long-term debt or bringing in any outside investors–and while operating with a gross margin of as little as 3 percent.

From Tribal Mode into an Organisation

David Beisel writes:

In the early days of a startup, its always all hands on deck. There are a set of founders or founder(s) with an early team, and the roles of who does what and when is often decided by whoever has free bandwidth to address it. These individuals apply their skillsets to whatever needs to be taken care of today with little (if any) thought to process. Results are paramount. Accordingly, peoples roles become fluid and partially interchangeable. They get things done in small ad hoc groups or tribes that form and dissolve in lock step with the necessary tasks at hand. And thats a good thing in those very early days, its imperative that the organization is nimble and flexible to react to the marketplace as it commences in building both a product and a corresponding business model.

At some point, however, a startup team needs to evolve from building a small-team endeavor into building a company with a strong organizational structure. A number of events could serve as a catalyst for this transition: a round of institutional investment, the introduction of a new senior person on the team, or significant growth in the number of people within the company. But maturing from a tribal mode into a healthy functioning organization is often a very challenging process.

Non-Startups

Paul Graham writes about the reasons why people do not do a startup.

1. Too young
2. Too inexperienced
3. Not determined enough
4. Not smart enough
5. Know nothing about business
6. No cofounder
7. No idea
8. No room for more startups
9. Family to support
10. Independently wealthy
11. Not ready for commitment
12. Need for structure
13. Fear of uncertainty
14. Don’t realize what you’re avoiding
15. Parents want you to be a doctor
16. A job is the default

Tim Draper Advice for Entrepreneurs

Via Paul Kedrosky:

What is your advice for a startup looking for venture capital funding?

A: Run your company. The money can help accelerate it but don’t wait for the funding to get started. The best companies get their first money from customers, not VCs. An investor can tell whether an entrepreneur is exploring a theoretical business idea or dedicated to the business. To an investor, make your company look like it is a train leaving the station.

Seed Investing

Fred Wilson writes why seed investing is less risky than later stage investing:

My basic point is in seed/early stage investing you ante a little, see your cards, decide if you want to invest more in your hand, see some more cards, etc, etc. You get to stage your risk capital as the investment shows itself to you over a number of years. You can manage all kinds of risk this way; management risk, valuation risk, technology risk; and market risk. Classic later stage investors want to be in the last venture round and in that scenario, you are putting all your chips on the table before you’ve really seen your cards.

Later stage investors can’t impact the development of the company. They have to accept the direction that has been put in place before they came in. We typically invest in pre-revenue companies. Usually they have the technology platform in place and in most cases, they have launched something with some success. But getting the business model and market entry strategy (the angle of attack) right is key.

Experimentation and Failure

Josh Kopelman writes:

The truth is that early stage ventures are all about experimentation and iteration. As soon as it’s written, every business plan is wrong. Good entrepreneurs recognize this, and tend to build agile teams that can quickly respond to early market information in order to identify a real business model and minimize risk.

A necessary side effect of all this experimentation is that most startups will ultimately fail. While the mythical “90% failure rate” has been disproven, I would venture to guess that for technology based startups the failure rate is still extremely high. That’s just the nature of the early stage venture world, and ideally it allows the entrepreneurs involved to apply their hard-earned lessons towards more productive ventures. Or, as Jeremy Liew aptly put it: “Companies die, founders and employees learn from the experience and move on, and hopefully start more companies. I for one would love to see the second acts from the teams that are newly freed up.”

Founders at Work Book

Paul Kedrosky writes:

I’m often asked what single book I’d recommend startup founders read. Until now, I didn’t have a good answer, but now I do: the recently-released “Founders at Work” is great. It is the best read for startup CEOs (now and future) I have come across in ages.

Mind you, the book is no strategy tome, nor a motivational text, nor even a guide to getting money out of adrift VCs. Instead it’s just painfully honest revelations, some good, some bad, and all in interview form, from the founders/creators of companies/products like Adobe, Apple, Flickr, Gmail, Hotmail, Paypal, Excite, and so on.

I could choose from myriad examples, but I’d rather you just read it. The “I quit” moments; the struggle to find what you’re really going to do after the thing that you started to do doesn’t work; the predictable battles with VCs (and the dish from some founders about a few famous VCs); and on and on, all of these are the reasons to buy the book.

Incubation

Sramana Mitra writes:

The entrepreneur is the real soul of a venture.

We already have the VCs in India in droves. All I am suggesting now, is to layer in the Dave Chens with experience in different domains, around the Sramana Mitras who perhaps have the Niagran passion, the Himalayan ambition, but are simply not ready yet.

Get them ready in this round, and they will become Serial Entrepreneurs, doing venture after venture after venture.

Learning from Failure

Business 2.0 writes: “From Dogster to Google, Web companies are finding that mistakes can be shortcuts to success.”

Where old-economy giants once boasted of running “zero-defects” operations, today’s successful Internet businesses embrace defects as a way to get things right. Some management consultants even advise their clients to “get good” at screwing up.

“Failure is the enemy of efficiency, but it’s the best way to learn,” says Robert E. Gunther, a business consultant for Decision Strategies International in Conshohocken, Pa. Gunther encourages clients to make “deliberate mistakes” to learn faster.