Wednesday, July 15, 2009

Notes from bizSessions 1.0 event: VC FTW or WTF? Funding models for cash-starved times

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bizSessions 1.0: VC FTW or WTF? or Funding models for cash-starved times
Tuesday, July 14, 2009 at Mighty in San Francisco

This was the first event from bizSessions, co-produced by SF New Tech and geekSessions. Here's the description from the event listing on eventbrite:

A discussion about funding models in current cash starved times.

Boot strapping, Angel money, VC funding, micro funds, ramen profitability- when, why and how you should choose each. How are companies, entrepreneurs and investors evolving after the lessons learned in the past decade? Are social platforms, outsourcing , App stores and new distribution models enabling startups to reach critical mass without major venture capital and changing the funding game as we know it?


Speakers:
Jonathan Abrams — Founder, Socializr
Igor Shoifot – COO, Fotki
Kent Goldman — Principal, First Round Capital
Ping Li – Partner, Accel Ventures

Here are notes on key points I took away from each speaker's presentation.

Jonathan Abrams — Founder, Socializr
Jonathan has been the founder of 3 startups, including Friendster and Socializr. He started Friendster in 2002, out of an apartment writing code by himself. It started with no funding, then had small angel funding. The site had revenue and millions of users before there was more funding. He said things changed after the venture money, specifically that the cost structure of the company change "drastically". His current startup, Socializr, is in lean and mean mode and is venture backed but by a small amount.
  • It's a cheap time for startups
  • Too much of a premium is placed on raising venture capital
  • Avoid raising too much money too soon
  • A lean startup can use: open source, cloud computing, agile product development, developing the minimal viable product
  • The lean startup may become the mainstream way of doing things
  • It's common for startups to raise money early and then find out they didn't have the right product
  • There are dynamics involved with investments - understand the numbers, math, structure
  • Read blogs like Venture Hacks

Igor Shoifot – COO, Fotki
Igor is one of 3 founders of fotki.com, a profitable self-funded photo site. It was started in 1998 and now has 1.4 million members. They did not take any angel or venture investments.
  • One approach: build technology cheap, scalable, reliable; then build apps, community, viral growth; finally think sales, marketing, distribution channels
  • If / when becoming VC funded, certain things could become a lot more important
  • Typical VC approach would focus on hypergrowth, while a business model could be a distraction from growth
  • Create a low cost foundation
  • Follow power users and $
  • Let users play, pay
  • Focus on growth that brings $
  • Fight where you can win
  • Don't put all eggs in one basket
  • Constantly tweak
  • Don't let big opportunities slip away
  • Be ready to scale
  • Close fisted but open minded
  • They were reasonably open minded when approached about licensing their platform

Kent Goldman — Principal, First Round Capital
  • Challenge existing / traditional funding models
  • Traditional model: small seed round, followed by Series A and Series B rounds, then go long for big exit (multi-million dollar M&A, or IPO)
  • Financing rounds approximate value creation by company
  • Gaps are dilution and loss of optionality caused by over-funding
  • First Round Capital's philosophy: validate hypothesis, de-risk the hypothesis, or disprove it (that's OK, nothing to be ashamed of, it's almost celebrated in Silicon Valley)
  • Fail fast (less time and money)
  • If your company is going well, generally you will be able to find funding; if not, sometimes best to figure out what to do next
  • When you raise money, you should know how to use the dollars
  • VCs expand scope of professional help around your company (act as recruiter, business development, kick open doors)
  • Cost of building a company has fallen greatly
  • Question how capital efficient you are being
  • Validity of assumptions may be as important as idea itself
  • Raise as little capital as possible

Ping Li – Partner, Accel Ventures
  • Have to take long term view of VC industry - roughly 11 year cycle
  • Companies are getting built with real value, seeing customer needs
  • Now is the early part of the phase, preparing for time when there are exits
  • It's a trade-off between enterprise and consumer drivers, the trend goes back and forth
  • "Technology constipation" - so much creation in the 90s, took a long time to absorb it all
  • The challenge is not investments, it's exits
  • This is the best time to be investing - can be patient, it's time of real R&D
  • Historically, companies built in darkest of times have eventually been rewarded
  • There is finally consolidation in VC industry, but top firms still aggressive
  • A negative of VC industry is over-funding of a particular category, chasing one category is not good for anyone
  • Venture capital is not a sign of success, not every company should do it
  • Business model drives funding strategy, never the other way around
  • Putting money in is easiest part of job, you can get capital anywhere - not as important as finding a partner to extend capabilities of the company
  • Get to know firm, partners over period of time - develop a relationship, ask hard questions
  • VC industry in period of transition: time to exit was 4-5 years, now it is 8-9 years
  • Hire to the critical path, hire less than you think you need
  • Startups are fantastic at overachieving

Overall the event provided great insight into the current state of the VC industry, different approaches for funding, and what's important when starting a company. The speakers provided some really good different perspectives, bringing various backgrounds on the financial approaches to launching and growing a startup.


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